Agilysys, Inc.
Q4 2022 Earnings Call Transcript

Published: 17 May 2022

[Operator:]

Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2022 Fourth Quarter Conference Call. As a reminder, today's conference may be recorded. I would now like to turn the conference over to Jessica Hennessy, Senior Director of Corporate Strategy and Investor Relations at Agilysys. Ma'am, you may begin.

[Jessica Hennessy:]

Thank you, Towanda, and good afternoon, everybody. Thank you for joining the Agilysys fiscal 2022 fourth 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. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial guidance. Although, the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially. Important factors that could cause actual results to vary materially from these forward-looking statements include the continued effects of the COVID-19 pandemic and other global economic factors on our business, global supply chain challenges and our ability to manage through them, and the risks set forth in the company's reports on Form 10-K and 10-Q and other reports filed with the Securities and Exchange Commission. I would also like to note that any references to record or best ever financial and business levels during this call refer only for the time period after Agilysys made the transformation to an entirely hospitality-focused software solutions company in fiscal year 2014. With that, I'd now like to turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilysys. Ramesh, please go ahead.

[Ramesh Srinivasan:]

Thank you, Jess. Good evening. Welcome to our fiscal 2022 fourth quarter and full year earnings call. Joining Jess and me on the call today in our Atlanta headquarters is Dave Wood, our CFO. All the details of the results we are about to cover should be understood keeping in mind the following context. We tend to think of our current business as made up of seven major market verticals. APAC and EMEA are two regional verticals. And in the US, hotel chains, cruise ships, gaming casinos, multi-amenity resorts, and managed food services. Three of those verticals

[Dave Wood:]

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. Fourth quarter fiscal 2022 revenue was a quarterly record of $46.6 million, a 28.1% increase from total net revenue of $36.3 million in the comparable prior year period. All three product lines increased compared to the prior year period with product revenue up 60%, mostly due to strong sales within the quarter. Professional services was up 35.4% over the prior year, as we continue to return to a more normal implementation schedule. Recurring revenue was also up 16%, with subscription up 32.8% over the prior year period. Throughout the year, total sales improved back to almost pre-COVID levels compared to fiscal 2020 sales with subscription sales at record levels. Subscription sales in fiscal 2022 were 47% higher than the prior record in fiscal year 2021. We currently have a backlog of product and professional services significantly higher than our prior year exit and remains at healthy levels to achieve our fiscal year 2023 plan. The improved sales activity, we have seen during fiscal year 2022, left us with an exit total backlog, 38% higher than our prior year FY 2021 exit with all three product lines significantly increased. As a result of the continued momentum in our business, we are pleased to see 18.6% total annual revenue growth year-over-year with all three product lines increasing over the prior fiscal year, despite certain aspects of our business continuing to be negatively impacted throughout the beginning of fiscal 2022. Product revenue increased 34.6% over the prior fiscal year, professional services increased 26.6% over the prior fiscal year, and recurring revenue during fiscal 2022 was up 11.7% over the prior fiscal year. Total recurring revenue represented 57.1% of total net revenue for the fourth fiscal quarter and 60.8% for the full year compared to 63.1% and 64.6% of total net revenue in the fourth quarter and full year fiscal 2021. Increased revenue from professional services implementations and product revenue coming back into the business drove the change in the revenue mix and the drop in recurring as a percentage of total revenue compared to the prior fiscal year. We are also happy with our continued subscription revenue growth, which grew 32.8% during the fourth quarter of fiscal 2022 and 28% for the full fiscal year, despite tough industry circumstances in a few of our business verticals and delays in professional services implementations during the first three quarters of the fiscal year. Subscription revenue comprised around 48% of total recurring revenue compared to 42% of total recurring revenue in the fourth quarter of fiscal 2021. Add-on software modules in the fiscal year 2022 comprised 11% of subscription revenue compared to 5% in the prior fiscal year. Add-on software module sales contributed over $1 million in subscription ARR for the eighth quarter in a row. Moving down the income statement, gross profit was $27.7 million compared to $23.5 million in the fourth quarter of fiscal 2021. Gross profit margin decreased to 59.5% compared to 64.6% in the fourth quarter of fiscal 2021. The gross profit margin decrease was primarily due to product and professional services revenue coming back closer to normal levels compared to Q4 of fiscal 2021. For the fiscal year, gross profit margin was 62.4% compared to 65.2% in the prior year period for the same reasons previously mentioned. All three of our product lines remain at or above pre-COVID margin levels. Combined, the three main operating expense line items, product development, sales and marketing, and general and administrative expenses, excluding stock-based compensation were 45.7% of revenue this quarter, which is the lowest in the past five years. This continues to be a good reflection of the steady progress we are making with our operating leverage. Our operating income for the fourth quarter of $1.5 million, net income of $1.5 million, and gain per diluted share of $0.06, all compared favorably to the prior year's fourth quarter loss of $24.8 million, $24.7 million, and $1.05 per diluted share. Adjusted net income normalizing for certain non-cash and non-recurring charges of $6.1 million compares favorably to adjusted net income of $5.2 million in the prior year fourth quarter and adjusted diluted earnings per share of $0.24 compares favorably to $0.21. For the 2022 fourth quarter, adjusted EBITDA was $7.5 million compared to $7.1 million in the year ago quarter and for the full year of fiscal 2022, adjusted EBITDA was $27.3 million compared to $26.7 million. We are pleased with our profitability levels with adjusted EBITDA coming in at 16.8% of revenue for fiscal 2022. Moving to the balance sheet and cash flow statement. Cash and marketable securities as of March 31, 2022 was $97 million, compared to $99.2 million on March 31, 2021. The primary reason for the cash balance decrease despite our profitability was the all-cash ResortSuite acquisition as well as our increased inventory stocking levels. As it relates to free cash flow, I am pleased to see an increase for the full fiscal year. Free cash flow in the quarter was $6.5 million, compared to $13 million in the prior year quarter and $27.3 million for the full fiscal year, compared to $27 million in the prior year. For our fiscal year 2023, we expect revenue to be in the $190 million to $195 million range, inclusive of subscription revenue growth of approximately 30%. The operating expense for product development, sales and marketing and G&A should remain relatively consistent with current operating ranges with a slight increase in sales and marketing. This results in adjusted EBITDA north of 15% of total revenue for the full fiscal year. In closing, we are pleased with our 2022 financial results and the ability to grow the business despite some of our regions and customers still recovering from the effects of COVID and other economic factors. With that, I will now turn the call back over to Ramesh.

[Ramesh Srinivasan:]

Thank you, Dave. We operate in a huge total addressable market, relative to our current sites. We've done the hard work during the past years of making our products cloud-native and world-class. Our high levels of caring customer service continues to be a differentiator in the marketplace. We remain one of the less than handful of technology vendors, who can provide end-to-end solutions to empower hospitality teams to deliver exceptional integrated guest experiences. Terrie O'Hanlon, a seasoned enterprise software marketing veteran, who has made a huge difference to, many world-class technology companies, joined us recently, as our Chief Marketing Officer. We are making good progress with increasing our sales and marketing strengths. A seasoned hospitality sales veteran, Andrea Bips , joined us last week, as our new Head of the US Hotels & Resorts sales team. Our win-loss ratio and average deal sizes continue to be high. We are hopeful of a complete recovery in hospitality across Asia and Europe during the coming months. The hotel chain and cruise ship verticals are already showing good signs of recovery and could exceed 2019 levels, before the end of this calendar year. How well we are doing in the gaming and resort verticals is good proof for how well we can do in the future when the results of our successful and continuing product innovation efforts meet good business environments, which have compelling needs to keep up with modern technology demands of both their employees and their guests. Even within US managed food services, we are having good success, expanding our business levels within the health care and higher education portions of this vertical. In the business and industry portion of US managed food services, our recent mobility-driven innovations are well set to meet the changing needs of customers. Basic business parameters like free cash flow remain healthy. We remain committed to continued, disciplined, profitable revenue growth. All things considered, we have solid good reasons to be bullish about our future. This is the beginning of a new and exciting era in our history. We've successfully worked through difficult circumstances during the past couple of years, without sacrificing product innovation and customer service progress in any way. We are extremely grateful to our hard and smart working colleagues for their continued dedication to Agilysys and their extraordinary accomplishments during the past few years. This journey is only getting started. With that, Towanda, can we open up the call for questions, please?

[Operator:]

Thank you. Our first question comes from the line of Matt VanVliet with BTIG. Your line is open.

[Matt VanVliet:]

Yes. Good afternoon. And thanks for taking my question. I guess, first, on the PMS side, you mentioned one big new logo win and maybe some inclusion on some of the other expansion deals. Maybe, as you think about the -- especially in the US on the hotel side of things, are you having more conversations? How is the overall kind of activity been, especially as business travel seems to be starting to come back in a greater volume, and just maybe how much demand is out there from your hotel customers?

[Ramesh Srinivasan:]

Both -- from all three, Matt, hotel, resorts and the gaming customers, there are definitely increased conversations about PMS. We are working through many sizable big-sized sales opportunities on the PMS side of the equation, and they are being worked through the process. So our progress with our modernized PMS solutions Stay PMS, which is cloud only modernized V1, the Visual One product, we've installed three major resorts with the modernized version, which can work both on-prem and cloud and LMS continues to be the preferred solution for many of the big hotel properties. So, good progress with PMS. I would say, not only in hotel, but with resorts and gaming customers as well. And there are a couple of very encouraging big opportunities that we are talking with at the moment.

[Matt VanVliet:]

All right. That's great. Thank you. And then, Ramesh, as you look at both Europe and Asia, I guess, where do you feel like you're at in terms of the recovery, either relative to where they were prior or maybe what you saw in different components of the US market? And kind of what gives you confidence that those two regions will ultimately come back sooner than later?

[Ramesh Srinivasan:]

Asia, we have two issues there. One is, many countries have gone on and off closing the borders, opening the borders and that's gone back and forth. With the exception of China now, the other countries are pretty much have been opened up, Singapore, New Zealand, Australia, and the rest of the countries, the Malaysia are all in various stages of full to complete opening now. And our issue with Asia for the last couple of years have been -- there have been pretty significant opportunities that we have been in conversations with, but the deals tend to get stalled, because you can't expect these customers to make decisions when they are facing such uncertain business environment, which is understandable. So that's one issue we have in Asia. The other issue is, we don't have much name recognition there. In the sense, we have not had major presence in Asia before. So what we have done in the last few months, six months or so is we now have a full-fledged sales team across all the country, across all the regions there. So we are well represented sales-wise. We have worked hard to improve our name recognition and the more they see product demos, the more impressed they get. So that part of the equation, we are beginning to resolve quite well, but the environment has to improve there in all the countries. So that's the issue with Asia. Europe is a much better environment. Things are doing much better there, working through a lot more opportunities, not just in the main Europe, but also in the Middle Eastern region, where we are beginning to establish a presence there in Dubai to work on a whole lot of Middle East opportunities we have. So that is opening up quite well. There, it is a matter of just getting our name established there as a reasonable alternative for one or two vendors who have dominated that space for quite a while. And the more they see our product demos, the more we are able to be successful with that. So I would say, I think Europe will recover for us faster than Asia will, but Asia is also showing promising signs of recovery with all the countries opening up their borders to international tours.

[Matt VanVliet:]

All right, wonderful. Thank you.

[Ramesh Srinivasan:]

Thank you, Matt.

[Operator:]

Thank you. Our next question comes from the line of George Sutton with Craig Hallum. Your line is open.

[George Sutton:]

Thank you. Ramesh, great quarter. I'm curious, since we're coming out of a fiscal year, I know there are some year-end incentives for folks to sell by the end of the year. How much influence was that? And obviously, given the backlog coming out, it doesn't look like you pulled much out of backlog to achieve these very good numbers. So, I'm just curious if there were any one-time kind of impacts.

[Ramesh Srinivasan:]

Hi, George. The quick answer is no, George. There was no particular one-time thing that happened towards the end of the year. If you break up our sales during fiscal 2022, it was pretty even across Q1, Q2, Q3 and Q4. If you divide it by four, it was almost the same sort of number that we centered around our sales. So there was no special onetime effect that happened during Q4. All I will tell you is, it is steadily improving. The business environment is improving. Our products are improving, so sales is looking better and better as we go along. But there was no special pickup at the end of the fiscal year. We didn't notice any special pickup. In fact, Q4 was not our best sales quarter compared to a couple of previous quarters, but they were more or less all in range. So that is one. So there are no major incentives that drove this number And like you said, the backlog pretty much remains the same. 98% is, let's just assume it's 100%. It's almost the same as we ended the previous quarter with and what is more crucial George is close to -- it's about 38%, 40% more than we ended the previous fiscal year with. So when you look at our backlog now product, services and recurring revenue, and you compare where we were on April 1 this year, with April 1 last year, we had about 38% ahead backlog-wise. So there was no particular pulling in or increased sales during the quarter or anything like that, George. It is just gradual improvement that finally hit the kind of pace that we were expecting a quarter or two before.

[George Sutton:]

Got you. You and I have talked for a long time and I think we agree, you have very good product relative to your competitors. The challenge has been getting more advance. Can you just give us an update on the number of advance you think you're getting now versus previously?

[Ramesh Srinivasan:]

Yes, George. So, two things. We've always been known for good feature sets and products, but one additional attribute we did not have for quite a while, was modern technology. Our marketing tagline now pretty much says 'The Trusted Solutions'. We were always there, but modern technology was absent. So, now that modern technology has been added to that, our competitive strength has increased dramatically. So that is one aspect to it. The other aspect is these add-on modules. So, we have a whole bunch of add-on modules that add value to point of sale and to property management system. And there are very few vendors, you can count them in one hand, and you will still have a couple of fingers remaining in the count, who can provide end-to-end, starting from the booking engine direct channel website all the way to the end. There are very few vendors who are bothered to do that kind of integrated solutions, and that's a tremendous competitive advantage for us now. So, that increasing deal size because the customer comes to look at two products and end up buying seven is really propelling our sales efforts now. And not only that, it is attracting more customers to come to us because they've all dealt with these integration issues for a while, even though you provide world-class APIs, you still have to integrate the products and they now prefer the solution now because it comes integrated and it's a lot easier to deal with one vendor. So, I would say both those factors, George. One is the fact it's modern technology as well now and two is the fact, we provide end-to-end solutions. Both of them together are giving us a very noticeably increased competitive advantage now.

[George Sutton:]

Perfect. Nice job.

[Ramesh Srinivasan:]

Thank you, George.

[Operator:]

Thank you. Our next question comes from the line of Nehal Chokshi with Northland. Your line is open.

[Nehal Chokshi:]

Yes. Thank you. Congrats on a great quarter. What type of bookings growth needs to be achieved in order to achieve the impressive 30% subscription growth guidance that you're providing ?

[Ramesh Srinivasan:]

Nehal, you have to speak up a bit, a little bit slower, a little bit louder, please. We didn't catch that question. Sorry.

[Nehal Chokshi:]

Hold on, one sec. Okay. Hopefully, you can hear me better now?

[Ramesh Srinivasan:]

Perfect. Much better.

[Nehal Chokshi:]

Okay. What type of bookings growth needs to be achieved throughout fiscal year 2023 in order to achieve the impressive 30% subscription growth guidance, given that you can probably drain some of your backlog here?

[Dave Wood:]

Yes, I think from a subscription growth on bookings, I mean, it's just really the continued momentum we're seeing. I mean, if you think about from a sales rep standpoint, we increased our sales rep in the fiscal year by almost 40% and we're increasing our sales reps again in fiscal year 2023 by almost 20%. And most of them are starting to contribute to bookings. They have -- we have a lot more products to sell. And most of those products, people are choosing subscription base. So, I think you'll see the continued momentum in the same way it's been in the last couple of quarters.

[Ramesh Srinivasan:]

And Nehal, we are not expecting any dramatic increases in bookings to justify the subscription revenue growth of 30%, and also in terms of the revenue growth of 20% that we are guiding to, approximately 20%. We're not expecting any dramatic increases in booking in order to achieve that. Now Nehal last year, fiscal 2022 was our best year with respect to recurring bookings, and much of it was subscription revenue. So we had a terrific year in fiscal 2022 with respect to subscription bookings. And we are expecting reasonable growth as we go along. We are not expecting any dramatic bookings growth in order to achieve the subscription revenue growth of 30%. We are fairly confident we will achieve those numbers.

[Nehal Chokshi:]

Got it. I guess, what I'm trying to drive at those is that given what appears to be some pretty strong bookings growth in fiscal year 2022 and elevated backlog, you don't need to achieve even 20% bookings growth to hit the overall number or 30% bookings growth to hit the subscription guidance. A, is that correct? And how much less do you need to go in order to just hit that level?

[Ramesh Srinivasan:]

Yes, you are correct. We don't need any bookings growth to that kind of extent. We just need bookings growth to grow consistent, right? Like it has been growing now, but it does not need to be something as dramatic as 25% or 30% growth. And like you said, the backlog is very helpful. And last year, we had an excellent year with respect to recurring bookings, especially subscription sales. So as long as that momentum generally keeps up and keeps going steadily, we will be in good shape with our subscription revenue of 30% growth.

[Nehal Chokshi:]

Okay. And then just to be clear, the reason why backlog isn't coming down more substantially is because you are still resource constrained, or is it that your customers are resource constrained?

[Dave Wood:]

No. I mean the backlog is mostly increasing just because of general sales momentum, right? We haven't flushed the backlog. We've seen actually in Q4, if you look at our services number, a lot of the customer restraint have lessened. So it's really just general sales momentum that the backlog is increasing.

[Nehal Chokshi:]

Okay, great. And then can you give some color as far as how a property management system done relative point of sale for especially within the subscription line?

[Ramesh Srinivasan:]

Property management systems relative to our history, right? In fact, I said PMS and additional modules have had a dramatic increase this year of something like more than 50% as well as subscription sales goes. So property management system has had a good year relative to its past. But still it is lesser compared to point of sale because that is still our dominant product. But property management systems are becoming more and more important. Like we said, 21 new customers, six of them chose a core PMS product that is at the higher level of where we have been before. And what is promising about property management systems is that we are working through a few pretty big-sized opportunities, and we are hoping one of them -- at least one or two of them come through quickly. So PMS has tremendous momentum, but we are still only scratching the surface there.

[Nehal Chokshi:]

Great. Congrats.

[Ramesh Srinivasan:]

Thank you.

[Operator:]

Thank you. I’m showing no further questions in the queue. I would now like to turn the call back over to Ramesh for closing remarks.

[Ramesh Srinivasan:]

Thank you, Towanda. Thank you for joining us on the call today and for your continued interest in Agilysys. We look forward to discussing our fiscal 2023 first quarter results with you in a couple of months from now, somewhere near the end of July. Until then, please enjoy a terrific summer. Stay healthy and well. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.