Thank you for standing by, and welcome to the Agilysys Fiscal Year 2023 Fourth Quarter and Full Year Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded.

And now, I'd like to introduce your host for today's program, Jessica Hennessy, Senior Director of Corporate Strategy and Investor Relations at Agilysys. Please go ahead..

Thank you, Jonathan, and good afternoon, everybody. Thank you for joining the Agilysys' fourth quarter and full fiscal year 2023 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 effects of global economic factors on our business, our ability to continue profitable growth, our ability to expand our room counts under management and the risk set forth in the company's reports on Form 10-K and 10-Q and other reports filed within the Securities and Exchange Commission.

As a reminder, any references to record financial and business levels during this call refer only to 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..

one, product in terms of hardware and software perpetual licenses already sold, but yet to be delivered to customers; two, recurring revenue, including subscription revenue, with respect to implementations already signed for by customers but yet to be implemented; and three, signed services engagements remaining to be worked on.

The overall combined backlog levels entering fiscal 2024 is about 36% higher than the levels we saw entering fiscal 2023. Our sales engine has been operating at increasing record levels we have not seen before, and our implementation engine has not yet fully caught up with this higher pace.

While not all the reasons for certain implementation challenges delaying revenue recognition are on us, we are working diligently to improve our implementation management processes and increase capacity. We are working through a higher proportion of bigger, more complex multiproduct installations.

Some of the reasons for the backlog build up also have to do with multi-property site implementations, where installation at the initial sites have been completed with other sites to follow soon. The Marriott PMS project is not included in any of these backlog numbers.

While we are happy with the increased visibility and certainty, such levels of product, recurring revenue and services backlog give us, we are working on making sure all our execution engines become well balanced and the backlog remains at healthy levels.

Regarding the Marriott PMS project, our portion of the required product enhancements and services deliverables are progressing well, and are more or less on schedule give or take a few weeks here and there. An initial tranche of product enhancement deliverables was completed and delivered during March.

Delivery of the remaining tranches will continue throughout fiscal 2024, driving increases in recognized services revenue. There are many parts to this transformational multiyear project Marriott has undertaken, involving several of their vendor partners.

This project for us involves the rollout of PMS across the majority of the thousands of Marriott select service, premium and luxury properties in U.S. and Canada. As things stand now, this rollout is expected to begin early fiscal 2026.

We continue to expect to approximately triple our current PMS install base of about 300,000 rooms during the next three to four years, driven by the Marriott project and our increasing PMF sales successes across other prospective customers. One other quick note to answer a question we've been asked a few times recently.

The Marriott PMS project will not cause any distraction or challenges with respect to the rest of our business growth plans.

We have a dedicated team of product development personnel, who are a subset within one of the three major PMS products we are currently selling and supporting, along with a dedicated team of services personnel, who are now focused entirely on the Marriott project deliverables.

We already have and continue to expand the resource capacity of product development services and other teams as needed for this project and for other customer projects.

Apart from the Marriott dedicated teams, all our personnel are focused on other products, including other PMS products, services, support and activities that have nothing to do with the Marriott project.

Please be assured that most of our personnel are focused on growing our business with the rest of the non-Marriott hospitality universe and executing well on all aspects of our business and on all growth opportunities. All things considered, we expect fiscal 2024 annual revenue to grow by about 16% to 19%, that is one-six and one-nine.

We expect fiscal 2024 annual revenue to grow by about 16% to 19% and be in the range of $230 million and $235 million, driven among other factors by year-over-year subscription revenue growth of 25%. Between product and professional services revenue lines, we expect services revenue to grow year-over-year by a higher percentage.

We expect adjusted EBITDA levels for full year fiscal 2024 to decrease 13, one-three, to 13%.

We have a compelling need to make additional cost investments this fiscal year across cloud management, network and other infrastructure, product development, services, support, sales and marketing to ensure we bring to fruition the significant subscription and other revenue growth opportunities for beyond this fiscal year we are currently working on.

Many aspects of this expansion have already happened and others are in the process of happening. Recent expansion of sales teams across various regions has given sales capacity levels we feel happy and comfortable with going into the fiscal year. We are expanding marketing spend wherever appropriate.

In addition, there are various cost elements like audit fees, internal events and participation in trade shows, which tend to happen during the first two quarters of the fiscal year and do not generally apply to the second half. We also expect revenue levels to steadily increase sequentially quarter-over-quarter throughout the year.

Taking into account all these factors, we expect profitability levels, meaning adjusted EBITDA by revenue percentages, to be low during Q1 and Q2, even possibly as low as high-single digit percentages and increase each quarter as revenue increases and cost levels stabilize to end up with an annual total level of 13%.

With that, let me hand the call over to Dave for further color on our financial and operational results..

Thank you, Ramesh. Taking a look at our financial results beginning with the income statement. Fourth quarter fiscal 2023 revenue was a quarterly record of $52.9 million, a 13.6% increase from total net revenue of $46.6 million in the comparable prior-year period.

One-time revenue consisting of product and professional services was up 7.8% over the prior-year quarter while recurring revenue was up 18% over the prior-year quarter. Fiscal year 2023 was a record sales year with subscription sales 18% higher than the previous record set in fiscal 2022.

We currently have a backlog of one-time in recurring revenue significantly higher than our prior year exit and amount that remains at healthy levels to achieve our fiscal year 2024 plan.

The improved sales activities we have seen during fiscal year 2023 left us with an exit total backlog 36% higher than our prior year FY '22 exit backlog with all three product lines significantly increased.

As a result of the continued momentum in our business, we are pleased to see 21.8% total revenue growth year-over-year to a record $198.1 million, with all three product lines increasing over the prior fiscal year.

Products revenue increased 21.4%, professional services revenue increased 30.4%, and recurring revenue was up 19.5% during fiscal 2023, all compared to fiscal year 2022.

Total recurring revenue represented 59.3% of total net revenue for the fiscal fourth quarter, and 59.7% for the full year, compared to 57.1% and 60.8% of total net revenues in the fourth quarter and full year of fiscal 2022, respectively.

Recurring revenue as a percentage of total revenue remained around the same level as fiscal 2022 despite a 25.3% increase in one-time revenue during fiscal 2023.

As a percentage of total revenue, we expect recurring revenue in FY '24 to remain the same or decrease slightly as the revenue mix shifts more towards professional service revenue given the upcoming implementation projects for larger customers, with corresponding subscription revenue growth happening in subsequent fiscal years.

Subscription revenue grew 23.9% year-over-year during the fourth quarter of fiscal 2023 and 27.5% for the full fiscal year. Subscription revenue now comprises 50.6% of total recurring revenue compared to 48.1% of total recurring revenue during the fourth quarter of fiscal 2022.

This is the first time subscription revenue has become more than 50% of total recurring revenue in a quarter. Subscription revenue increased by only $800,000 sequentially, largely due to longer installation cycles involved in certain implementation projects.

Subscription backlog increased throughout FY '23 and is now 20% higher than FY '22 subscription exit backlog, mainly due to sales continuing to outpace installations. Moving down the income statement. Gross profit was $32.2 million compared to $27.7 million in the fourth quarter of fiscal 2022.

Gross profit margin was 60.8% compared to 59.5% in the fourth quarter of fiscal 2022. For the fiscal year, gross margin was 61% compared to 62.4% in fiscal 2022. The decrease in gross margin is mostly due to higher one-time revenue levels.

Product mix with expected increases in professional services revenue continue to impact gross margin percentages during fiscal 2024.

Combined the three main operating expense lines, product development, sales and marketing and general and administrative expenses excluding stock-based compensation, were 45.5% of revenue during Q4 of fiscal 2023 compared to 43.4% of revenue in the prior-year quarter and in line with the FY '23 plan.

Product development has remained about the same at 21.7% this quarter compared to 21.7% of revenue in the comparable prior-year period.

General and administrative expenses have reduced from 13.2% to 12.7% of revenue, while sales and marketing has increased from 8.5% of revenue to 11.1% of revenue due to our recent additional business growth related investments.

For the full fiscal year, combined the three main operating expense line items, product development, sales and marketing and general and administrative expenses excluding stock-based compensation, were 45.8% of revenue during fiscal 2023, compared to 45.7% of revenue in fiscal 2022 despite the additional investments in sales and marketing.

Operating income for the fourth quarter of $3.4 million, net income of $3.6 million and gain per diluted share of $0.14 all compared favorably to the prior year's fourth quarter gain of $1.5 million, $1.5 million and $0.06.

Adjusted net income normalizing for certain non-cash and non-recurring charges of $6.9 million compares favorably to adjusted net income of $6.2 million in the prior-year fourth quarter. And adjusted diluted earnings per share of $0.26 compares favorably to $0.24.

For the 2023 fourth quarter, adjusted EBITDA was $8.1 million compared to $7.5 million in the year-ago quarter. And for the full fiscal year 2023, adjusted EBITDA was a record $30.3 million compared to $27.3 million last fiscal year.

We are pleased to see our profitability levels being in line with our fiscal year 2023 plan, with adjusted EBITDA coming in at 15.3% of revenue. Moving to the balance sheet and cash flow statements. Cash and marketable securities as of March 31, 2023, was $112.8 million compared to $97 million on March 31, 2022.

We remain comfortable with our current cash [indiscernible]. As it relates to free cash flow, I'm pleased to see an increase for the full fiscal year.

Free cash flow in the quarter was $13.2 million compared to $6.5 million in the prior-year quarter, and $27.2 million for the full fiscal year compared to $27.3 million in the prior year, despite an additional $6 million in capital expenditures, largely related to our Las Vegas office relocation and other infrastructural improvements.

For fiscal year 2024, we expect revenue to be in the $230 million to $235 million range, with subscription growth of 25%.

As we stated on the last call, adjusted EBITDA will come down a couple of points as a percentage of revenue from our current levels as we invest in specific large projects and other growth initiatives prior to subscription revenue and profitability coming in future fiscal years.

As such, we expect adjusted EBITDA to be 13% of total revenue for the full fiscal year.

However, consistent with the last few years, adjusted EBITDA as a percentage of revenue will increase throughout the year with Q1 potentially as low as the high-single digits and continue to grow through the fiscal year as the majority of the investments are already underway.

In closing, we are pleased with our FY '23 financial results and the solid business fundamentals, which should set us up well for future revenue growth and sustain profitability. With that, I will now turn the call back over to Ramesh..

Thank you, Dave. In summary, we are pleased with the results and the progress our business continues to make with respect to financial metrics, [the] (ph) uncomplicated cleanliness and the high transparency of such metrics and the increasing competitive products and services strength in the hospitality software solutions marketplace.

Once again, I'm proud to be a member of a team that executed well to meet the high end of increased revenue guidance levels and other commitments made during fiscal 2023.

We have every reason to believe that this team, which for the most part has remained together for five-plus years across various tough external circumstances and consistently delivered solid good results, is only getting started now.

Our current sales win/loss ratio levels have increased our confidence levels and we are walking with a pep in our step now during sales meetings. It's also good to go into the new fiscal year with record levels of already sold, but yet to be shipped and/or implemented product services and recurring revenue backlog.

From our vantage point, technology investment decisions at the middle to upper end of the hospitality enterprise software market where we are operating in do not seem to be as impacted by current or estimated future economic conditions as much as or anywhere close to what we seem to be seeing in SMB and other lower-end markets.

The hospitality industry segments we are serving remain hungry for innovation that will make operations easier for their staff and give them the necessary tools to improve guest experience. That compelling need should overcome any short- or medium-term macroeconomic challenges for world-class technology providers like us.

Also, there are not too many such world-class providers serving this industry now who are focused on both a high rate of product innovation and a steadfast focus on world-class customer service.

We've invested considerable time, resources and successful efforts over the past few years to be one of those vendor partners and have a realistic expectation of playing a far bigger role in the technology direction and future of this industry. With that, Jonathan, can you please open up the call for Q&A. Thank you..

Certainly. One moment for our first question. And our first question comes from the line of Matthew VanVliet from BTIG. Your question, please..

Yes, good afternoon. Thanks for taking the question.

I guess as you look at the HRC group there, especially on the hotel side, what can you help us with in terms of the build of the pipeline, maybe any new deals that have come through just sort of on the back end of the Marriott announcement, maybe pulled forward some deals that were taking longer or some new interest that was brought in as that deal got announced and people maybe took a little more notice of what you've done on the product development side?.

Yes, hi, Matt. So, on the HRC side after this Marriott announcement came out, it's given us credibility as far as our PMS products are concerned. Because over the last few years, we have practically reengineered and rewritten two of our three major PMS products and modernize the other one.

But it was largely not that well known outside, so we did not get included in that many PMS RFPs before. Now we are being included in most major PMS RFPs. Now that does not guarantee that just because of the announcement, we will each of them -- we will win each of them. But in general, our win/loss ratios are good now, are at very impressive levels.

So, once we get included and customers -- prospective customers take the trouble to look at the products, we have a high probability of winning a deal. So I would say our participation in PMS deals has increased since the announcement, but I wouldn't put too much on it, Matt.

I wouldn't start believing that just because you have one announcement, everybody is suddenly going to switch to your system. It doesn't work that way. But it has definitely helped improve our PMS momentum and our PMS sales are showing steady increases sequentially month-over-month, quarter-over-quarter..

All right, very helpful.

And then I guess as we look at the continued rollout of the Marriott project, can you help us think about sort of the -- I guess, the timing or the shape of the revenue curve associated with that project that you're now embedding in your '24 guidance? And then any additional updates on maybe timing of when the subscription portion might actually start to hit the income statement here? Thanks..

Yes, Matt. So, this is a complex multiyear project that our customer Marriott has undertaken. So, I don't think there is any point putting pressure on ourselves to exactly predict how such large projects will go.

But like we said in our prepared remarks, our portion of the PMS deliverables where we have a bunch of product enhancement deliverables with an exact plan that is going to go on throughout fiscal 2024.

And also the services group is working on -- planning out and working on all the conversion activities that will have to happen once the rollout starts. So, all that activity during fiscal 2024 should provide a positive push to our services revenue.

But as far as when the subscription revenue will start and when the rollout will start, like we said, our current estimate is it should start rolling out beginning of fiscal 2026, early fiscal 2026 is what our current expectation. But there are many moving parts to this project.

I just would not month-to-month, quarter-to-quarter try to estimate exactly when it will start. It's a major opportunity that is going to drive major revenue growth for us. But the starting point is going to be yet to be determined. But we generally expect it to be towards the beginning of fiscal 2026 when the rollout will start..

All right, great. Thank you for taking my questions..

Thanks, Matt..

Thank you. One moment for our next question. And our next question comes from the line of George Sutton from Craig-Hallum. Your question please..

Ramesh, you mentioned a compelling need to increase expenses and listed a pretty long group of things that you are going to be increasing, cloud network, sales and marketing support, et cetera.

So can you just give us a little better picture on whether we should be surprised by this ramp, or is something changed that made you realize that you needed to accelerate some of these other things? Just wanted to get a better sense..

Yes, sure. So, a lot of our deliverables, especially for this one major project that we are talking about, are due to happen during fiscal 2024, that is during next 12 months and it already started a month or two before.

So for the one particular PMS product that they have chosen, we are going through a pretty massive expansion of the product development team working on that particular project. So that's a pretty major expansion we have to go through.

Now even outside of this project, there are a number of reasonably big-sized deals that we have signed during the last quarter, which was a record quarter by a fair distance for our sales wise.

So, there is expansion of the services and support teams that will have to happen in order to prepare ourselves for the delivery of these major projects that are going to come down the line.

And when we say we are going to triple the number of rooms that we are supporting with our PMS project, and currently a lot of the PMS rooms are on-premise, and tripling it and most of it moving to the cloud involves quite an expansion of how we manage the cloud, the kind of network infrastructure we need and all that, which we think is better for us to do right now a little bit early before the subscription revenue will start kicking in later.

So a lot of the sales success, especially this one major customer signing with us, has required an expansion of what we do and we had to do that early.

We had to do that early in the fiscal year, which should all -- most of it should get done in Q1, and after that, we think the cost will stabilize and of course revenue will keep increasing quarter-over-quarter. That's what we are trying to express with our numbers..

Got you. Just questions on two of the segments. You mentioned, and used the adjective great when you were referring to managed food services, which I don't think I've heard in a long time, so I just want to make sure I was fully aware of the changes that have occurred there.

And then, referring to APAC, you said it remains challenged, but you do expect a good sales year next year. And we're seeing kind of the Chinese revenge travel right now that we've already seen come from the U.S. And I guess I would have anticipated a little bit better progress in APAC..

Yes. So let's start with managed food service providers. But that business has really continued to improve once the recovery from the pandemic started happening, especially in healthcare and higher education segments there.

Our POS products, thanks to all the reengineering and all the innovation that has gone on there with us during the past few years, our POS product is a lot more competitive now for those FSM deals. We call it FSM, it's managed food service providers. In those FSM deals, we are a lot more competitive now.

And as you know, the FSM market is controlled by about five or six major providers and we are becoming increasingly visible even to the ones where we have not played a major part so far. That is -- so when I say our FSM business is really improving, it's got a lot to do with the general climate improving around people coming back to work.

It is not improved as much in business and industry, but a higher education and healthcare, we continue to do very well and our products are becoming more and more impressive for the such customers. So that's what I would attribute the improvement in FSM for us. Now as far as APAC is concerned, it's been a tough story for us as APAC.

Initially, we didn't have -- for many years, we didn't have the products that could be competitive there. Then we got the product work done and then pandemic hit. And the pandemic affected the APAC countries a lot more, we think, than the other places in the world, then the recovery started.

So there are many customers there who are looking at the products now and we are in the midst of many sales opportunities. But at least what we have found is the decision making processes are more hesitant and they take a longer time. So the recovery did not reach us fully during fiscal 2023, but we expect fiscal 2024 to be much better.

So from your own estimate of how well the APAC market is doing, George, I think it's probably six to nine months behind that estimate that you are making..

Got you. Thanks for the details..

Thanks, George..

Thank you. One moment for our next question. And our next question comes from the line of Nehal Chokshi from Northland Capital Markets. Your question, please..

Yes. Thank you, and congratulations on what sounds like an amazing sales quarter. In your revenue guidance, sounds like you're going to be implementation limited and therefore backlog will be probably increasing.

So, is it safe to say that you expect sales activity to exceed in terms of the year-over-year growth, exceed the revenue growth that you're guiding to?.

So, Nehal, I think you're asking about the backlog as it relates to our revenue growth. I mean, we expect the sales momentum and the backlog to continue to increase incrementally. The revenue guidance really is based on -- think of it as one-time revenue increasing about 20% largely due to more professional services revenue for the large projects.

And then like we said in the call, most of our recurring revenue growth at this point is subscription revenue at a 25% increase year-over-year. And the backlog should -- with the current sales momentum should remain healthy and continue to increase incrementally..

Got it. That's very helpful. And then, you guys have provided some new metrics on product numbers [commissioned] (ph) within the quarter and the year, I think.

Can you just help parse that in terms of what does that mean in terms of products per deal and how that compares to the year-ago period?.

I think -- we are having a little bit of trouble hearing you Nehal, but I think your question is about the products per deal, right? So in general, I would say, Nehal, across all our sales efforts, our deal sizes have increased significantly.

You compare us to, say, fiscal 2020 before the pandemic, you compare the deal sizes then with the deal sizes now every successful sales effort, our deal sizes increased considerably, because there are just more products involved. What used to be a one or two product sale is now involves multiple products.

So in general our deal sizes have increased significantly and that, of course, helps the overall sales numbers and upcoming revenue numbers..

Okay, great. Thank you..

Thanks, Nehal..

Thank you. One moment for our next question. And our next question comes from the line of Brian Schwartz from Oppenheimer..

Yes, hi. Thanks for taking my questions this afternoon.

Ramesh, following up on that last answer about seeing an increase in deal sizes, if we unpack the backlog growth that you're experiencing with the sales execution, is it possible to parse which is a higher contributor to that momentum, the volume of deals that are getting done, or the bigger deal sizes that you're seeing?.

Hi, Brian. Welcome to Agilysys. I don't want to give you a cop out answer, Brian, but it is a bit of both, but let me just unpack that a bit. The number of new -- so we basically divide our sales into multiple buckets, let's call it. One is the sales we get from existing customers, where they continue to invest in the existing products that they have.

That has increased for us. Customers are investing more in the current products they already have. But let's leave that aside for a second. That has contributed to increase in sales, but let's leave that aside for a second. As far as new customers are concerned, we refer to it as new logos inside, but it's basically new customers.

I would say the volume there has not increased much, but the deal sizes have definitely increased. So, when you compare the number of new customers we signed quarter-over-quarter, that I would say is around the same kind of number of deals we signed, but each deal is a lot bigger for us now.

And that to a certain extent contributes to our backlog increasing, because those installations take more time than they used to take before. Part of it is the customer realizing that they have signed for so many products that there is a lot of things they have to do internally to get prepared for it across all their departments.

And for us, it's a more complex install because it involves more products. So as far as new customers are concerned, my answer to your question would be the volume of deals remain the same, but the deal sizes have increased per deal signed. So that's one. As far as new sites are concerned, which is where current customers add new properties.

So they're already our customer. They already have us installed in, say, tens or hundreds of properties, and they continue to add more properties using our product. There I would say the volume and the deal sizes are about sort of the same like it has been for quite a few years.

Now the next category is new products, which is a certain property already has some of our products and they are buying more products from us. We call it new product. There, both the volume and the deal sizes have increased significantly.

There are more instances of properties that are using one or two of our products, buying more products from us, and when they buy, they buy a lot more products from us than what they used to before. So that's how I would break it down.

Existing customers, existing products, our sales has expanded, and that is really helping sales numbers because current customers are happier with us and are investing more. That is one. New customers, the volume of deals hasn't increased much, but the deal sizes have increased.

New sites, I would say both the volume and the deal size are about what they have been for many quarters. But new products, where current properties buy new products, both the volume and the deal sizes have increased significantly. That's sort of how I would break it down, Brian..

Thank you for that color, Ramesh, on the bookings. I appreciate that. Very helpful. David, one follow-up question for you. Just again on the revenue guidance, just thinking of the puts and takes of the construction of that guidance and again the delta between that kind of what we're seeing in the backlog growth and the revenue growth.

Beyond the implementations needing a catch up or the delay in the revenue recognition for the work, is there -- are there any other one-offs that we should consider beyond just conservatism in general given the environment out there? Thank you..

No real one-offs. I mean, like we've talked about on the call, services revenue will exceed top-line revenue growth, largely because of large customer implementations and subscription revenue coming in, in subsequent years.

So, really I mean, we're kind of consistent in the 25% or so subscription revenue growth and we've always kind of said one-time was a high single digit -- sorry, product revenue was a high-single digit grower. So really the only anomaly in this year's numbers would be the professional services associated with large rollouts..

So, when you think through that, Brian, and just unpack it, the backlog is going to help; services revenue, we expect fiscal '24 to be a good year for services revenue; and we expect our sales momentum to continue, Brian. Make no bones about it.

Our sales momentum is very good and we expect that continue, right? We are winning a high percentage of the deal we participate in.

And you could say, Brian, there is a little bit of provision there in case the second half of the fiscal year gets affected by any macroeconomic challenges, right? So, we have taken that into account as well as we have worked through and thought through our revenue guidance for the year..

Thank you for taking my questions..

Thank you, Brian..

Thank you, Brian..

Thank you. This does conclude the question-and-answer session of today's program. I'd now like to hand the program back to Ramesh for any further remarks..

Thank you, Jonathan. Thank you all for joining us on the call today and for your continued interest in Agilysys. We look forward to discuss our fiscal 2024 first quarter results with you in a couple of months from now. In the meanwhile, enjoy a terrific summer, and please stay healthy and well. Thank you..

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..