Agilysys, Inc.
Q2 2020 Earnings Call Transcript

Published: 25 Oct 2019

[Operator:]

Good day ladies and gentlemen, and welcome to the Agilysys, Fiscal 2020 Second Quarter Conference Call. As a reminder, today’s conference may be recorded. I would now like to turn the conference over to Mr. David Wood, Vice President of Corporate Strategy and Investor Relations at Agilysys. You may begin.

[David Wood:]

Thank you Sarah and good afternoon everybody. Thank you for joining the Agilysys, fiscal 2020 second quarter conference call. We will get started in just a minute with management’s comments, but before doing so, let me read the safe harbor language.Today’s conference call contains forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as anticipate, intend, plan, goal, believe, estimate, expect, future, likely, may, should, will and other similar references to other periods.Examples of forward-looking statements include among others our guidance related to revenue, adjusted EBITDA and free cash flow, and statements we make regarding revenue, recurring revenue and subscription revenue growth, continued sales and business momentum, and increasing investments and resources in R&D, SaaS operations, professional services and customer support.Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in the circumstances that are difficult to predict and many of which are outside of our control.Our actual results and financial conditions may differ materially from those indicated in the forward-looking statements. Therefore you should not rely on any of these forward-looking statements.Important factors that could cause our actual results and financial conditions to differ materially from those indicated in the forward-looking statements today include among others, our ability to maintain operational efficiencies and meet customer demand for products and solutions, and the risks described in today’s news announcement and in the company’s filings within the Securities and Exchange Commission, including the company’s reports on Form 10-K and Form 10-Q.Any forward-looking statement made by us in today’s conference call is based solely on information currently available to us and speaks only as of the date on which it was made. We undertake no obligation to publicly update any forward-looking statements that may have been made from time-to-time, whether as a result of new information, future developments or otherwise.Today’s call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today’s press release, as well as on the company’s website.With that, I’d now like to turn the call over to Mr. Ramesh Srinivasan, President and Chief Executive Officer of Agilysys. Ramesh, please go ahead.

[Ramesh Srinivasan:]

Thank you Dave and good afternoon everyone. Welcome to our fiscal 2020 second quarter earnings call. Joining me on the call today is Tony Pritchett, our CFO.We are pleased to report that we completed yet another strong quarter, highlighted by revenue of $40.7 million, a 19% increase over Q2 of last year, with increases across all three of our revenue lines

[Tony Pritchett:]

Thanks Ramesh. We are pleased with the results for the fiscal 2020 second quarter both as it relates to the quarter itself, as well as with the trend that the results show. We continue to see improvements across many facets of the business and in our financial results that reflect the success we are achieving. We are confident the success will continue.Looking at our financial results, second quarter of fiscal 2020 revenue was a record $40.7 million or 19% higher than total net revenue of $34.2 million in the prior year period. As Ramesh highlighted, this represents our eighth consecutive quarter of sequential revenue growth, our sixth consecutive quarter of record revenue and our fifth consecutive quarter of double digit year-over-year revenue improvement.We are pleased to see that growth came from all three of our revenue line items, including record revenue across support, maintenance and subscription services revenue, as well as for professional services revenue. The increase in our top line was driven by a 35.4% increase in product revenue to $11.9 million, a 7.8% increase in recurring revenue to a record $20.3 million and a 29.5% increase in professional services revenue to a record $8.5 million.I want to highlight that the 7.8% recurring revenue growth includes subscription revenue growth of 16% for the quarter. Subscription revenue comprised approximately 36.1% of total recurring revenue, compared to 33.6% of total recurring revenue in the second quarter of fiscal 2019.Total recurring revenue represented 49.9% of total net revenue for the fiscal second quarter compared to 55.1% of total net revenue in the second quarter of fiscal 2019. It’s important to keep in mind that the strong selling momentum we have generated which Ramesh discussed earlier, is not only driving our product and professional services revenue growth but also have a high correlation to future performance for our total recurring and subscription revenue growth. As such, this trend provides us with added confidence that both total recurring and subscription revenues will see increased growth in future quarters.Following our comments from our Q1 call, we continue to expect total recurring revenue to grow, and for subscription revenue growth to outpace the rate of total recurring revenue growth, and we continue to expect subscription revenue to grow faster than 20% for the entire year as we have discussed previously.With regard to endpoints, we currently service approximately 274,000 rooms and have approximately 57,000 terminals, reflecting an increase of 2% and 12% respectively, compared to Q2 of last year.Moving down the income statement, total gross profit was $20.2 million, representing a 13.9% increase from $17.7 million in the second quarter of fiscal 2019. The increase in gross profit is the result of growth across our three revenue line items.Gross profit margin was 49.6% compared to 51.9% in the second quarter of fiscal 2019. Total gross profit margin is down slightly compared to last year, due to the acceleration of selling momentum as mentioned earlier, which results in converting products and professional services contracts to revenue in the near term. This should lead to better than originally expected recurring revenue growth rates in the coming quarters.We have also hired some additional people for our support team, as well as adding some people and infrastructure around our SaaS operations, which puts temporary pressure on our recurring gross profit margins. One important fact to note is that even though total gross profit margins are down compared to last year, gross profit margins for product and professional services are both up compared to last year and we continue to expect on an annual basis for total gross profit margins to expand slightly from last year.Moving on to operating expenses, excluding charges for legal settlements and restructuring, severance and other charges, the second quarter saw 9.3% increase in operating expenses to $23 million compared to $21.1 million in the prior year period. This increase is in line with our operating plan to increase cost at a slower pace than we increase revenue.Combined our three main operating expense line items, product development expenses, sales and marketing expenses and general and administrative expenses were 53% of revenue this quarter compared to 58% of revenue during Q2 of fiscal 2019, and the increase in those same operating expense lines combined was only 10% while revenue increased 19%.There is still much work to be done and many more opportunities to grow. As such, and as Ramesh pointed out, we will continue to invest in the business, including in R&D, SaaS operations, customer services and support, while maintaining our focus to increase the cost well below the pace of revenue growth.Operating loss of $2.9 million for the second quarter is an improvement compared to an operating loss of $3.8 million for the second quarter of fiscal 2019, and net loss for the second quarter was $2.9 million or $0.13 per diluted share, favorably comparing to a loss of $3.8 million or $0.16 per diluted share for the second quarter of fiscal 2019.Moving to the balance sheet, cash and marketable securities as of September 30, 2019 was $38.9 million compared to $40.8 million at March 31, 2019, and compared to $32.9 million at September 30, 2018. As we previously stated, we expected the first half of the fiscal year to pose a drag on cash due to the timing of collections, as well as the payment of annual bonuses. This loss will be offset in the second half of the fiscal year.One important fact to note, during the previous five second quarters, we have lost several million dollars of cash or more. This is the first time since July 2013 when we sold the Retail Solutions Group and received the cash for that transaction, that we have increased our cash balance during the second fiscal quarter of the year.During the fiscal 2020 first quarter, we recorded a right of use asset of $13.4 million and operating lease liabilities of $15.7 million, split between current and long-term liabilities. These balances are the result of our implementation of ASC 842, the new lease accounting standard that became effective for us in the first quarter of this fiscal year. This new accounting standard requires companies to record liabilities, which were previously off-balance sheet obligations and the associated assets onto the balance sheet. There is no impact to the income statement classification of rent expense or depreciation expense for us.As it relates to our cash flow, we reported net cash provided by operating activities of $3.1 million compared to $1.4 million of net cash used for the three months ended September 30, 2018. Free cash flow also showed a significant improvement from an outflow of $2 million in the second quarter of fiscal 2019 to an inflow of $1.8 million during the second quarter of fiscal 2020. Through the first six months of fiscal 2020, free cash flow has improved by approximately $5.5 million compared to the first half of fiscal 2019.For the fiscal 2020 second quarter, adjusted EBITDA was $3 million compared to adjusted EBITDA of $2.6 million in the year ago quarter. We continue to carry approximately $218 million of NOL carry-forwards with a full valuation allowance on our books that will enable us to remain liable for taxes only in certain foreign jurisdictions, as well as minimal state taxes for the foreseeable future. Our NOLs will expire between fiscal years 2031 and 2038.As it relates to our guidance, given the continued improvement across our business, we are confident in raising our guidance for fiscal 2020 year-over-year revenue growth from 11% to 14% compared to full year fiscal 2019 revenue of approximately $141 million. We continue to expect an approximate 25% improvement in adjusted EBITDA in fiscal 2020 compared to fiscal 2019, adjusted EBITDA of approximately $10 million.The reason we are not raising adjusted EBITDA guidance is that given the increased business momentum we are currently enjoying in the global hospitality marketplace, we have made the decision to slightly increase our investments in SaaS operations, in preparation for future increases in subscription based services, as well as in R&D professional services and customer support resources. Please keep in mind that fiscal 2019 adjusted EBITDA of $10.3 million had the benefit of about $2.2 million of capitalized software costs, which did not occur in fiscal 2020.Growing adjusted EBITDA by 25% between fiscal 2019 and fiscal 2020 is actually the equivalent of growing adjusted EBITDA by 60% if we remove the $2.2 million capitalization benefit in the prior year.Growing revenue by 14% and adjusted EBITDA by around 60% after normalizing for software development capitalization costs reflects the significant operating leverage we continue to work with as we manage expense-related investments carefully to continue to support future profitable revenue growth. And regarding free cash flow, we continue to expect fiscal 2020 free cash flow will be significantly more than the $1.7 million of free cash flow generated in fiscal 2019.In closing, our business is improving as reflected in the consistent progress across multiple quarters and we are confident that we’ll continue to do so. We have spent much of the past couple of years working toward building a company to deliver world-class solutions and service that is second to none, and we hope you can see the results of our efforts coming through in our financial results.We’ve been laser-focused on improving this company and the great set of products we have and feel our efforts are beginning to pay off. Going forward, we will continue to stay focused, work hard and work every day toward making our hospitality industry customers happy and successful.With that, I’d now like to turn the call over to the operator for questions. Sarah?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Tyler Wood with Northland Securities. Your line is now open.

[Tyler Wood:]

Hey, I’ll ask a question on the gaming side of the business. How big do you think the opportunity is there outside of Las Vegas and how are you approaching that market differently, and how far along are those customers been – their transformation to – what were they using previously? Is it a competitive displacement or were they using something homegrown? Thank you.

[Ramesh Srinivasan:]

Yeah, hi Tyler. So the opportunity in gaming continues to be good for us and its good both in Las Vegas and outside, and a good portion of the opportunity is outside Las Vegas. So we generally do well in gaming – in the gaming casino industry and that is true for both, within Las Vegas and outside Las Vegas, and a significant portion of the opportunity is outside Las Vegas as well.And the two things, the two reasons why our gaming business will continue to improve

[Tyler Wood:]

Thank you, that’s helpful. And one more, any progress during the quarter on the international opportunity worth mentioning, and then could you just remind us what sales resources do you have internationally? Thank you.

[Ramesh Srinivasan:]

Yeah, thanks Tyler. Yeah, the international opportunities continue to make good progress and like I described in the earnings call, the major cruise ship customer that we are beginning to make great progress with is an international customer, and we are also making good progress with a major hotel chain that is our customer, both domestic and in international.And outside of these two major customers we continue to make good progress in both the APAC region and the EMEA region and we do have future plans to look at Mexico, and the rest of Latin America as well. So international is going to be a major growth area for us. And the number of salespeople there, I don’t know the exact number Tyler, but it is sufficient to cover the area. And we are always open to increasing our sales staff as the market demands.So currently we are more focused on sales productivity. We are giving them more products to sell and as and when it is required, we will increase our sales staff there, but currently our coverage is very good, both APAC and EMEA.

[Tyler Wood:]

Alright, thank you.

[Ramesh Srinivasan:]

Thanks Tyler.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Allen Klee with National Securities. Your line is now open.

[Allen Klee:]

Yes, hi. Can you just give us an update on the – and I apologize if you mentioned this and I missed it, the Indian Development Center in terms of number of people and the products and modules and things that are getting added from there? Thank you.

[Ramesh Srinivasan:]

Yeah, hi Allen. Thank you for the question. Our India Development Center, IDC, our original capacity for a number of sources was about 670 or so and so far we have about 570 resources there.

[Allen Klee:]

Do you have a sense of where you want that to be kind of percentage wise by the end of the year and…

[Ramesh Srinivasan:]

Are you talking to us, Allen? Hi, Allen. Yeah, so as far as India Development Center is concerned, our capacity is about 670 and we have about 570 resources and we continue to hire there, and recently we have taken up, we have leased some extra space at our IDC as well.Now in terms of products and modules, all our products, all our modules are developed across U.S. and India. So we don’t have any demarcation of certain modules and products that are done in the U.S. and certain that are done in India. All our products have teams both in the U.S. and in India. So everything that we described in our call so far is done both in the U.S. and in India.You said something else like the – grew organic growth in light of the legacy business was and if we could think about what series this was, if it was last year for both of them?

[Allen Klee:]

You said something else like the – grew organic growth in light of the legacy business was and if we could think about what series this was, if it was last year for both of them?Okay, thank you very much.

[Ramesh Srinivasan:]

Thanks Allen.

[Operator:]

Thank you. This concludes today’s question-and-answer session. I would now like to turn the call back over to Ramesh for closing remarks.

[Ramesh Srinivasan:]

Thank you, Sarah. Thank you all for joining us on the call today and for your continued interest and support. Agilysys continues to be well positioned to increase shareholder value. There is a great value creation opportunity we are determined to make good on for our employees, customers and shareholders.I want to also take this opportunity to give a special thanks to our 1,000 plus team members across the globe, who are working hard every day to make Agilysys a world-class company, and to our customers who trust us with their investments now more than ever before.Our best wishes to all for a joyful and safe holiday season. We look forward to our next earnings call in late January. Talk to you then. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.