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

Thank you, Sheri, and good afternoon everybody. Thank you for joining the Agilysys' fiscal 2020 third 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 second half provision of the Private Securities Litigation Reform Act of 1995 including statements regarding our financial guidance and continued business momentum.

Although, the Company believes 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 differ materially from these and the forward-looking statements are set forth in the Company's reports on form 10-K and 10-Q, and other reports filed with the Securities and Exchange Commission. 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..

Thank you, Dave, and good afternoon everyone. Welcome to our fiscal 2020 third quarter earnings call. Joining Dave and me on the call today is Tony Pritchett, our CFO.

We're pleased to report that we completed yet another strong quarter, highlighted by revenue of $42 million, a 17% increase over Q3 of last year with record revenue across all three received lines, recurring revenue, product revenue and professional services revenue.

With respect of overall quarterly revenue, this is the ninth consecutive sequential revenue increase, seventh consecutive record revenue, and sixth consecutive double-digit year-over-year revenue increase quarter. Recurring revenue was a $21 million, led by a 28% year-over-year growth in subscription revenue.

Our customer's satisfaction levels continue to improve. As a result, customer churn as a percentage of recurring revenue continues to decline significantly year-over-year as of being the case the past couple of years.

That improving metric continues to validate our organizational improvement across all aspects of our business especially in product development, professional services and customer support. Professional services revenue for Q3 fiscal 2020 was a record $8.9 million. This was our second consecutive record revenue quarter in professional services.

As we mentioned in our last call, professional services is a good measure of how busy we are with various software implementations all across the globe and is therefore a good leading indicative of the overall strength of our business, especially our future growth of recurring revenue.

Due to changing customer preferences, an increasing number of new customer software implementations involve subscription revenue arrangements. Our selling momentum continues to be strong with our global selling success in Q3 fiscal 2020 being one of our best ever.

Please note, we used the word sales, selling and bookings to mean new product and services sale arrangements with customers, while revenue is of course recognized revenue. In many other places, the word sales and revenue tend to be used interchangeably, while it means different things for us.

For us, sales this quarter will partially effect the current quarter revenue and also contribute towards building future recurring revenue, product revenue and services revenue backlog. With the exception of one quarter, way back in fiscal 2016 which contained a couple of significant deals.

The last five quarters have been our five best selling quarters ever. This has helped build our revenue backlog significantly, making our revenue growth increasingly more consistent and predictable.

In addition, the last six quarter through Q3 of this fiscal year have been our sixth best subscription booking quarters on record, which offers well for our continued subscription revenue growth. During Q3 fiscal 2020, we added 18 new customers to our family. Our international momentum continues to grow.

Q3 this fiscal year was a record sales quarter for us in the APAC region and was our second best overall international sales quarter. To a large extent, our current sales and revenue growth is still being led by our market leading point-of-sale, POS solutions, InfoGenesis and ‎rGuest Buy Kiosk.

Alongside, our star performer InfoGenesis which for the most part handles POS staff facing software solutions, rGuest Buy Kiosk which handle the growing demand for guest facing kiosks and other functionality requirements continues to build momentum in the market place with increasing instances of competitive systems being replaced in employee cafeterias in multiple, large and prestigious workplace campuses all across the U.S.

While our POS solutions by themselves are good enough to drive our revenue and profitability level further forward at a significant pace for the foreseeable future, we continue to improve our property management systems, PMS offerings. Several of our new logo wins during Q3 fiscal 2020 included PMS software solutions as well.

We've also had good success during the past couple of years, building a set of emerging products, which are ancillary software modules which work in conjunction with and add strength to the core POS and PMS products.

Especially on the PMS side of equation, there is a major industry need for well integrated solutions which can bring together the world of core PMS with modules like direct channel web based booking systems, mobile check in, check out, kiosk check in, check out, guest loyalty management, service optimization to better manage various hospitality tasks and operations, and spa, golf and other guest activities management software.

We have several customers sites as already implemented such modules integrated with the core PMS products also provided by us, resulting in significant improvements in operational efficiency, guest experience and guest satisfaction. While there are many completing POS vendors in the marketplace today, there are far fewer major PMS providers.

And a number of providers who are actually trying to create a fully integrated model of PMS ancillary module is even fewer. Customers are increasingly inclined to use as few vendors as possible to get such integrated software solutions from and that's a trend which is favorable to our product and strategy direction.

We have now sold close to 100 deals containing a huge one of these emerging product modules with about half of them coming just in the past six months.

Thanks to these additional software products, our average deal size is increasing and more crucial than that our competitive advantage is increasing with no comparable competing vendors as intensely focused as we are in providing end to end software solutions and delivering a fully integrated technology platform to serve the full breadth of hospitality operators and their evolving guests engagement ecosystem.

Customers in the industry have starved for such progress and are steadily rewarding us for being the partner they can depend on for both day to day rate execution and industry leading innovation. With respect to U.S.

domestic markets during Q3 fiscal 2020 in the gaming vertical, Fortune Bay Resort Casino located in Minnesota, and the Grand River Casino & Resort located in South Dakota invested in both our PMS and POS solutions, along with a couple of other software models, while the Sky Dancer Casino & Resort recently purchased our rGuest Stay PMS solution to run their lodging operations.

In addition, we significantly expanded our POS business partnership with one of our largest gaming customers during the quarter.

In addition to our historical strength in the gaming, hotel resorts and cruises, and traditional managed food service verticals, during the last couple of quarters, we've also made good breakthroughs into renewed areas of focus in managed food service, higher education and healthcare.

During Q3 fiscal 2020, we had new customer wins in the segment including Longwood University, Virginia, and another health care facility in Texas.

Backed by a stable management team with senior executives, who have all been with us for a while now, all of them wonderful team players who are passionate about the Company and the huge potential we have before us. We continue to make good progress with all the business initiatives we started on a couple three years ago.

We started this fiscal year with annual revenue guidance of 11% growth over the prior year, $141 million level then increased it during our last call to 14%, which we now are increasing to 16%. We continue to expect this significant revenue growth to also be accompanied by a strong adjusted EBITDA profitability year-over-year growth of 25%.

Our adjusted EBITDA for Q3 fiscal 2020 was $3.2 million, which is close to record levels. Encouraged by our successes during the past couple of years, we continue to increase our R&D resource strength to drive home our widening competitive advantage without any significant increase in R&D costs as a percentage of revenue.

Our R&D teams are currently about 730 personnel strong compared to about 230 at the beginning of calendar 2017.

This increase has afforded us the ability to strengthen and modernize our core products quicker and more effectively, while also increasing innovation levels, creating well integrated, additional high value software models, which face much less competition in the marketplace, and it's helping us focus on our long-term, top-line and bottom-line growth strategies.

In summary, they are hitting our stride operationally as a small company with a big realistic vision and the resources necessary to execute and innovate consistently well. We understand well the nuances and operational realities of discipline profitable revenue growth.

There is a high demand in the growing hospitality industry, we are currently and intensely focused on for the kind of integrated software solutions, we continue to create and enhance. We are beginning to see the results of having a solid good team in place, which is well positioned to significantly outperform the competition with great innovation.

We look forward to talking to all of you again in about four months from now, when we will be reporting our fiscal 2020 fourth quarter and in the fiscal year. With that, let me have over the call to our CFO, Tony Pritchett for more colors on our financial results and future outlook.

Tony?.

Thanks Ramesh. We're happy that our business momentum continued into the fiscal 2020 third quarter. We're hitting our stride with respect to the plan was set out on three years ago, obtaining this company into a consistently profitable top-line growth company.

The fact that this quarter was our sixth consecutive quarter of double-digit year-over-year revenue growth with strong adjusted EBITDA to back it up is solid evidence of that.

We are focused on delivering the best most reliable products to our customers and supporting our customers ever changing business needs, and we are confident that this will continue to drive our success.

Looking at our financial results, third quarter fiscal 2020 revenue was a record $42 million, or 17% higher than total net revenue of $36 million in the prior year period. This quarter's $42 million in revenue is made up of record revenue in all three revenue categories of our income statement the fact that we're understandably proud of.

The increase in our top-line was driven by an 18.5% increase in product revenue to $12.1 million, and 8.4% increase in recurring revenue to $21 million, and a 38.2% increase in professional services revenue to $8.9 million. I want to highlight that the 8.4% recurring revenue growth includes subscription revenue growth of 28% for the quarter.

Subscription revenue comprised approximately 38% of total recurring revenue, compared to 32% of total recurring revenue in the second quarter of fiscal 2019. Total recurring revenue represented 49.9% of total net revenue for the fiscal third quarter, compared to 53.7% of total net revenue in the third quarter of fiscal 2019.

It is important to keep in mind that this dropped in recurring revenue as a percent of total revenue is not a negative fact for our business. This is a representation of strong business momentum and selling success. Our product revenue remains consistently strong, growing sequentially, as well as year-over-year.

And increasing professional services revenue is a leading indicator of future growth for our total recurring and subscription revenue. We continue to build the subscription revenue growth rates on an annual basis will remain above 20%. The trailing 12-month growth rate is just over 22%.

With regard to endpoints, we currently service approximately 274,000 rooms and approximately 61,000 point-of-sale endpoints, reflecting an increase of 1% and 15% respectively, compared to Q3 of last year.

Moving down the income statement, total gross profit was $21.1 million, representing a 13% increase from $18.6 million in the third quarter of fiscal 2019. The increase in gross profit is the results of growth across our three revenue line items. Gross profit margin was 50.2% compare to 51.8% in the third 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 product and professional services contracts to revenue in the near-term.

As indicated by our increased top line guidance from 14% to 16%, total revenue is a little better than expected this year. This acceleration of revenue growth starts with product and professional services revenue is that is the flow of revenue with our deals. Product revenue is recognized first shortly after contract signature.

Professional services revenue is next, as we implement the systems we now deliver, and then recurring revenue begins.

As our selling momentum continues and with revenue growing faster than expected, our gross profit margins are going to be less than plans since product revenue and professional services revenue had lower margins then our consolidated results.

As such, we announced that gross profit margins for fiscal 2020 to be slightly less than those of fiscal 2019.

Moving on operating expenses, excluding charges for legal settlements and restructuring severance and other charges, the third quarter was a 5.7% increase in operating expenses to $23.7 million that compares to $22.5 million in the prior year period.

This increase is in-line with our operating plan to increase costs 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 59% of revenue during Q3 of this fiscal 2019. The increase in the same operating expense lines combined was only 5% while revenue increased to 17%.

There's still much work to be done and many more opportunities to grow. As such, we will continue to invest in the business including an R&D, SaaS operations, customer services and support, while maintaining our focus to increase costs well below the pace of revenue growth.

Operating loss of $2.7 million for the third quarter is an improvement compared to an operating loss of $3.9 million for the third quarter of fiscal 2019. Net loss for the third quarter was $2.6 million or $0.11 per diluted share, favorably comparing to a loss of $4 million or $0.18 per diluted share for the third quarter of fiscal 2019.

You will note that we have included the non-GAAP measures, adjusted net income and adjusted basic and diluted earnings per share in our earnings release this quarter.

We feel that considering income before these non-cash and non-recurring charges results in an EPS measure that is a meaningful representation of earnings available to common shareholders on an ongoing basis.

It is important to remember that our amortization expense, which is significant now, starts to taper off starting in fiscal 2022, our fiscal year after next.

Less than half of our current run rate of amortization will remain in fiscal 2022 and then less than 10% will remain in fiscal 2024 Moving to the balance sheet, cash and marketable securities as of December 31, 2019 was $41.9 million, compared to $40.8 million at March 31, 2019 and compared to $37 million at December 31, 2018.

As it relates to our cash flow, we reported net cash provided by operating activities of $5.3 million during the third quarter, compared to $1.7 million of net cash provided during Q3 of fiscal 2019, a $3.6 million improvement. Our free cash flow for the nine months ended December 31, 2019 is $4.3 million better than the comparable prior year.

These cash flow results indicate that we are on track for our expectations of significantly improved free cash flow this year over last. During the fiscal 2020 first quarter, we've recorded a right of used asset on our balance sheet within current assets and an operating lease liability, which is 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. For the fiscal 2020 third quarter, adjusted EBITDA was $3.2 million compared to adjusted EBITDA of $2.1 million in the year ago quarter.

We continue to carry approximately $220 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 that are subject to expiration expire between fiscal years 2031 and 2030.

As it relates to our guidance, given the continued improvements across our business, we are confident in raising our guidance for fiscal 2020 year-over-year revenue growth from 14% to 16%, 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 about $10 million.

The reason we are again not raising adjusted EBITDA guidance is that, given the increased business momentum we are currently enjoying, we have made some continued investments and accelerating our R&D, professional services and customer support strength.

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 from the prior year.

That 60% improvement on revenue growth of 16%, 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. We're excited about what the future holds for Agilysys and the hospitality industry.

Customers repeatedly confirms to us that they're hungry for a world-class vendor that can provide a fully-integrated suite of solutions, and they equally confirm they are impressed with how we continue to innovate and progress towards that challenge.

We are executing well against our strategic plans, a plan that was set out three years ago and remains materially the same to this day. Our financial results were strong this quarter, but more importantly, the longer term financial trends we have reported are strong and we feel the business is set up well for the future.

We will continue to focus, work hard and deliver the products and services our customers want. With that, I would now like to turn the call over to the operator for questions..

[Operator Instructions] Our first question comes from George Sutton with Craig-Hallum..

I'm curious, when we do due diligence and talk to existing and potential customers, what we find is a competitor systems being replaced is a fairly slow process; and you mentioned this quarter, you actually saw a fair of that.

I'm curious is there certain functionality or foreign types that are the appeal that's causing that change to be made?.

Hi, George, thank you for joining the call. The competitive replacements picking up, we've been noticing that trend for quite a few quarters now. I would say for the last four or five quarters, the rate at which we've been replacing major competitive systems because that is what we keep track of replacing.

Major competitive system has really picked up and they don't necessarily take too much time George. There have been cases where a customer has contacted us and they have gone live with our product like a couple of months later.

Now some of the things that trigger that is there could be a competitor system for whom a hardware refreshers coming up, on the POS side. And while you're spending that kind of money on that refresh, they start thinking why don't we go look for a system. That could be one.

The other thing that very often happens is they want certain enhancements done to help their business and very often a lot of those vendors just don't have the engineering breadth and wherewithal to get those changes done quickly.

They will want an interface created with another system that they have bought that many competing vendors just don't do and that becomes a compelling event for them to change the system. And their business could expand for which the other vendor may not be able to keep up.

I don't think these decisions take too much time, George, based on our experience. But there are cases where, let's say, they're marginally like another system. But they're quite happy with their current system, but they would really like to have a competing system, that could take time.

They might wait for a year or so before they really make that decision. But when there are compelling events and there are many, especially with many vendors not doing great customer support, these kinds of things do tend to happen a lot faster than probably what your sample sizes show..

And your product strength and your professional services strength which has been a consistent thing for us to see, can you give us a sense on, is that something we should continue to expect for a period of time? Are we going to start to see the subscription side of it that really start to show that that benefit?.

Yes, the product and services strength that you're seeing will lead to recurring revenue and subscription revenue strength. So like how Tony described in his prepared remarks, what comes first is product revenue.

So, as part of the sale given the nature of our POS business, a certain amount of hardware comes with it, a certain amount of services revenue comes with it, that's the first thing that happens. And then as we go implement and the customer wants more activities from us, the services revenue picks up.

And that's a good indicator of the fact we are doing a lot of implementations now. We are taking -- we're replacing a lot of companies and systems, and we are doing a lot of new product installs of customers who already have other products. So, as a services activity picks up, as we've seen in the last six months, that leads to recurring revenue.

So, those customers go live and the recurring revenue you should expect will pick up, and it just so happens that more and more of our customers are preferring subscription-based arrangements. We don't force them into that. We want to be customer centric and we try to do what the customer wants us to do.

It just so happens more and more customers want software solutions based in the cloud and subscription based arrangements. So as you see, the product revenue is a good indicator that our business is doing well. We are doing a lot of sales, selling out.

Services revenue is a good indicator that we are doing a lot of implementations and in turn that will lead to recurring revenue in the future. And it just so happens. A good portion of the implementations we're doing happened to be SaaS subscription basis..

Lastly, if I could, Tony, it may be helpful because I've had a few client questions the last few days on the potential virus impact on your PMS business.

Obviously, I understand the model, but I'm not sure most people understand what limited impact you might see, if travel were reduced?.

Yes. So, limited impact on our business but before that George, we do have employees in the Shenzhen and Hong Kong area. So, we are very concerned about this because employee well being comes number one for us, and we care about all our global employees a lot.

So, we are very concerned about our employees in Shenzhen and Hong Kong, and to a certain extent Singapore as well. And Malaysia, we have a number of employees there. So, we are very concerned about their well being, and so far so good, they have not been affected. We are nowhere close to the affected region.

So, we are closely monitoring it and keeping a tab on that. And we are taking very safe decisions as far as travel and everything is concerned. So, that's the employee part of the answer, which is our number one concern now.

As far as business is concerned, we have more than 4,000 properties all over the world who are currently using a system property sites, of which only 20 are in China at the moment. Our China is an initial business for us now. We have a lot of growth potential there, but we have traditionally historically not had a major presence there.

So, we only have 20 properties live there. And there are about 20 other new opportunities that we are working on, many properties of them belong to one or two big hotel chains that we are working with. So, it is possible that those deals get postponed due for travel and other restrictions.

So, when you think about possible revenue impact may be a $500,000 revenue impact in Q4 and on this fiscal year is possible for us. It is not significant at the moment, but we are watching it carefully. It is not a major part of our business process..

[Operator Instructions] Our next question comes from Tyler Wood with Northland Securities..

First, on for Ramesh, you've talked about increasing success selling modules into your existing customers.

Maybe can you drill down a little bit more into that? What specific modules are you seeing, having the most impact there? And then going forward, what do you see being the most important modules for driving growth?.

Yes, so, good to talk to you, Tyler. Thank you for joining the call. So, the modules, let's break them up into POS and PMS separately.

So, as far as POS is concerned, the two main flagship products that we have our InfoGenesis, which is more staffing solutions; and rGuest Express Kiosk, which is more guest facing kiosk, where the guests can sell help where they can order food items directly from a kiosk, and it just speeds up a lot of cues and other things in employee cafeterias.

Now, there we have an additional product called on-demand, which helps you order the food from either your desktop. So imagine you're in the 15th floor of a building and its 11:30 in the morning, and you're getting ready to order lunch, you can order it from your desktop or you can order it from your phone as well, from your smartphone.

So, you're sitting in the hotel room, you can order food items from the phone. And it will even give you details of exactly how many minutes they can sell you the food, depending on what kind of pressures there is in the kitchen.

So that on-demand product is an additional software module, which is a good margin module for us, that many of our POS customers are considering and a few of them have already purchased.

On the PMS side of the business, on the hotel management system, property management system side of the business, there are a number of products that are already getting good traction in the industry. Like one of them is a direct channel web booking system.

So, customers have always wanted a web booking system that is PMS aware that can differentiate you from being a platinum player versus a silver player. Customers are always wanted that because most web booking systems that are out there involve commissions and they are not PMS aware. So that is one module.

That has already gone live with about five or six customers already. Then the other one is mobile check-in, check-out. So as if you don't need to go to reception counter, stand in a queue, right from your smartphone, you can get a digital key and you can directly walk to your room, or you can do other check-in, check-out facilities.

Instead of going to reception counter, you can also walk to a kiosk. So a couple of customers, a couple of big customers have already gone live with them. Then we introduced a product called rGuest Service, which basically optimizes all the tasks and operations in the hotel.

So if you are running a hotel, there are a lot of things happening in the hotel, a lot of tasks including housekeeping tasks that you are assigned to various people. And if somebody doesn't react quickly, it should automatically get escalated to a supervisor. So that products completely automats all that and it integrates well with PMS and POS.

So, there's a number of software modules like that that we are creating now that is adding strength to POS and PMS.

And very often when you go to our competing vendors, they will point you to a third-party company that will do that module, quite for us the advantages because of our R&D strength, we can do it ourselves and it's also much better integrated with all our core products..

And I guess going back to the competitive displacements question. You've mentioned kind of factors I could get people to switches, POS refresh.

Is there any kind of developments you see on the horizon, be it pay a table or something like that, that would a new feature, that could sort of spur people into having a refresh those?.

Yes. So, Tyler, I can't give you one magic bullet like you create one module and suddenly picks a scale over. All these additional modules, right, including pay-at-table, which one of our biggest gaming customers went live with recently and that is an additional thing, the support now. You keep adding all these modules.

You keep modernizing your core product. You keep adding more functionality to your core product. And somewhere along the line, the scale tilts in your favor. And with each customer, how much weight does it take to tilt a scale varies. I can't give you one magic module that now that we have that everybody has to go to work. It doesn't happen that way.

We keep adding these competitive advantage trends. And for different customers, that tilting of the scale happens at different times, right, or for different reasons. Like there is no one magic module that's going to create it. But as we keep doing all this R&D innovation work, it keeps tilting more and more towards our phase..

Our next question comes from Ishfaque Faruk with Sidoti..

Gone that guys on the great results. A couple of questions from me. Ramesh, you said you guys got around 18 new customers this quarter.

Can you give a sense for how many of those had added PMS solutions?.

I think out of the 18 new logos, new customers we won, I think the PMS number is four, if I'm not mistaken. Once we finish this college park, I'll -- Tony and Dave will confirm that number for you, but I think the number is four..

And Ramesh, you also said that you're seeing your average deal size increasing would reduce churn in terms of more competition.

Can you give a sense of like how much you've seen maybe your average deal size is growing relatively maybe on a year-over-year basis?.

No, Ishfaque, I don't think -- the three separate things that you mentioned, Ishfaque, average deal size has to do with the fact that when you go sell a product now there are three other modules we can sell in that same deal, which very often the customer picks up.

And we don't measure it exactly my average deal size, but we do keep track of how many of our deals more than 50k per and how many of our deals are less than 50k per. And the number -- the value of these deals now selling about 50k per deal have increased. It's now at record levels.

That's much we continue, but we can't give you an exact number on that. Customers churn that you mentioned is an entirely different matter, right. That is a matter of regaining the customers we have. And that is because we service the customer better, now we support them better.

And customers normally stay with you when they see you innovating and moving the products forward. So more and more our customer retention is world class levels now, our customer churn is going down. And then new customer, this is of course is an entirely different matter that we already talked about..

Okay. And last one from me. Tony, I think you mentioned that your R&D group went up to as much as a 738, I believe.

Do you guys expect that to flatten out at some point? Or you expect that to move a little higher?.

Ishfaque, we do expect the R&D team to continue growing on an absolute headcount basis. The R&D team will continue to expand from the 730 number that we mentioned.

The way to think about R&D from a financial modeling perspective though, is that, this fiscal year you should be R&D pretty close on an annual basis as a percentage of revenue for last year. It's in the 27%, 28% of revenue range. That's a pretty reasonable number to expect going forward for the near-term.

Looking into next year, we don't expect any major shifts in that as a percentage of revenue. In out years, past next year, you'd like to start seeing that number tick down as a percentage of revenue. But yes, we'll continue to expand the team as far as headcount goes.

But again, we do that smartly as revenue increases and as the business support the need. And again, percentage of revenue is really where we focus from that perspective..

Our next question comes from Allen Klee with National Securities..

My questions on the PMS side, the growth there has been relatively modest for a while now and I'm just trying to understand what has to change to accelerate that? And how do you think about the timing of what it would take to get that to double digits? Thank you..

Yes. Allen. Good question, Alan. Hey, good to talk to you. Yes, the PMS side of it is, is actually less than modest side. So, that is the core worry that is the biggest elephant in the room for us. And we are improving the products, those products are getting better. Now what you see in the room count that Tony gives you is after implementation.

So for example, the four or so customers we have signed this quarter, we have not yet implemented them. They have not yet gone live. So, they will act to the room count in the next quarter, the room count we give you is not a sole room count but an implemented room count. So that will improve over time.

But to answer your question, there is still more product work to be done, right, in fact Ishfaque's question about R&D expanding, we are expanding our R&D will continue to do so for the foreseeable future while keeping it as a percentage of revenue at the same or levels below where we are today.

But we still have some more product work to finish on the PMS side, before we have the kind of competitive advantage that we currently have with the POS side of the business.

In the meanwhile, we are also adding all these additional software modules, which when the core product work gets done will put us in a very, very good spot where our competitive advantage in PMS will also be as big as it is in POS today. So, growing the PMS side of our business has a lot of our focus now Allen.

And in terms of taking are revenue and shareholder value and all that to great levels, PMS will start contributing in the next few quarters..

And then in the guidance, it was mentioned that you're keeping your EBITDA guidance and you would mentioned that that's due to reinvesting some of the higher revenue.

Could you maybe give some details of what that's being reinvested in?.

Yes. So, Allen as we mentioned, I mean, it's a consistent message last quarter and this quarter as well, where we've seen some opportunity this year is to invest in our SaaS infrastructure. We've seen a lot of growth with our SaaS implementations, and we obviously have a lot of new products coming on.

So, there's some SaaS infrastructure investments that we've done as well as the R&D team as we've talked the decent amount about already. And then, with customer facing services personnel and support personnel, there's been some additional headcount added there as well, just to support -- continue to support our customers as well as we can.

So, we can help address all of their issues, post implementation and any support all the go-live that are happening. But as you can see, our professional services revenue is growing, that comes from the services team that we've built. And that's where most of the investment that we've talked about admission and that we've invested this fiscal year..

And also Allen, as Tony mentioned in his prepared remarks, even though, we're saying that adjusted EBITDA is growing by 25% this year from 10 million also it was last year. If you remove the 2.2 million software capitalization advantage FY '19 had, it's actually a 60% increase in EBITDA 60.

So why you grow revenue by 16% that we are guiding to now, growing EBITDA by 60% is quite significant operating leverage. We don't want to overdo that because we want to make sure that focuses on growing the top-line as well. So, we have balancing that out about as best as we can..

And then last question on professional services, which has been growing very fast.

Can you help us understand like how, if you win it win some business, the timing that it takes to implement? And are you uncomfortable with how long it takes and you get paid up front for that? Or is there an issue of paid? Or is that an area that you think that you have to put more resources into? Thank you very much..

So, as far as the payment goes Allen, for professional services, just as a general rule, all of our one-time items that are in a contract. As a general rule, we usually collect 60% of that upfront. That's pretty standard in the industry and generally, that's what we experience as well.

Of course, there are certain customers that there's exceptions made for that, et cetera. But generally speaking, 50% of our one-time items upfront and that include professional services.

Now, as far as the timing goes of getting installations done, the way to think about that is usually -- and again, this is a broad generalization, but usually we can sign a contract.

This quarter, the product revenue would come in this quarter, the professional services would come in a quarter after that, and then the recurring revenue would start coming in a quarter after that. If you're looking at -- generally speaking, it's about a three month lead time from contract signature to implementation. We're pretty happy with that.

It's a pretty good balance at this point. And we've got the ability to get customers implemented faster, if they need that. Some customers push out implementations longer than that. So, it's a pretty good balance from that perspective. We're happy with the level that we've got now.

Now, as revenue grows as professional services revenue grows, certainly we're going to have to increase the size of the services team. But we feel like profession services margins in the range they're at today, high-40s, mid-to-high-20s, is reasonable to expect going forward.

So, we don't expect those margins to come down because we have to add people..

Actually, can I sneak in one more question? I know you're having your user conference next week.

And I was just wondering, kind of what you think that is going to be kind of the focus or there may be something new that you think is important to happen there?.

Yes, there's -- Allen, there's no special one-time thing you are expecting in terms of any major announcement or anything like that.

So all our customers getting together in the user conference is mostly to give them an update of all the product improvements that have happened in the past 12 months and all the product roadmap, the future improvements that are coming in the next 12 months.

Now why that is important for us is that a lot of our customers use either only one of our products or maybe they use two of our products, and now we have a lot more modules and products to offer. So for example, the POS customer it is important, they understand how much advancements we made in the PMS area and vice versa.

And if there is already a PMS customer, they should know all the other modules that we have to offer. And the advantages, there will be another customer there, who is actually use that module and who can tell them the kind of return on investment they are getting out of those modules.

So there's a lot of shared knowledge among the customers that normally works out very well for us. And also in terms of some of the challenges that they have, they can share with each other as to how the challenge for one of those customers has got sorted out. So that's a major part of it.

And we have breakout sessions where we also do training programs, where customers want to get more in-depth training on the products. So, we do that as well. So, it's an excellent gathering of hundreds of customer users.

And it also helps us improve our relationships with them, give them both resources update and there is a company is growing, and share with them all those details. So, it's a very powerful event for us that we do once a year that brings our customer base together, and that is a big part of our business growth for us.

But no particular, there is no major announcement or anything we are planning at that time. It's a fairly routine once a year even for us..

Thank you. I'm showing no further questions at this time. I will now turn the call back over to Ramesh for any further remarks..

Thank you, Sheri. 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. This is a terrific 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 very special thanks to our 1,200 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. Thank you..

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