Agilysys, Inc. (NASDAQ:AGYS) Q1 2024 Earnings Call Transcript
Agilysys, Inc. (NASDAQ:AGYS) Q1 2024 Earnings Call Transcript July 24, 2023
Agilysys, Inc. beats earnings expectations. Reported EPS is $0.18, expectations were $0.14.
Operator: Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2024 First 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. You may begin.
Jessica Hennessy: Thank you, Lisa, and good afternoon, everybody. Thank you for joining the Agilysys' fiscal 2024 first 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 effects of global economic factors on our business, our ability to increase profitability, our ability to improve services implementation efficiencies, 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.
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.
Ramesh Srinivasan: Thank you, Jess. Good evening. Welcome to our fiscal 2024 first quarter earnings call. Joining Jess and me on the call today is Dave Wood, CFO and we're at the new Alpharetta, Atlanta headquarters. We moved into here a couple of weeks ago. As has become the norm during our last several earnings calls, we will cover sales first before moving on to revenue and other details. All sales numbers discussed in this and other calls are measured in annual contract value terms. The current stretch of increased sales success, which started around August last year has kept up its momentum during the past few months as well. The state-of-the-art cloud native technology breadth and depth of the functionality feature sets we've built in the end-to-end hospitality-focused ecosystem of software solutions are making our sales value propositions compelling for prospective customers.
Fiscal 2024 first quarter sales was the highest we've seen during any April through June period. This was the best sales quarter in APAC in about 3.5 years and that was the top highlight of the quarter with respect to selling success. It was also another excellent sales quarter for the U.S. HRC, Hotels, Resorts, and Cruise Ships sales team. Other sales verticals also kept up their recent progress, rounding out another excellent sales quarter. With respect to sales across product categories, software subscription and services sales during Q1 were respectively 46% and 28% higher than the comparable quarter of last fiscal year. The other highlight was services implementation efficiency picking up during the quarter to match the pace of sales success, resulting in total backlog across products, services, and recurring revenues decreasing slightly, which is a positive for the business.
Services backlog by itself remained flat from the sequentially preceding Q4 fiscal 2023 quarter end while product and recurring revenue backlog reduced slightly. Thanks to the improved pace of project delivery during the quarter. Total backlog across products, services, and recurring revenue as of June 30 at the end of Q1 was at 96% of record levels reached at the end of the sequentially previous quarter and 46% higher than at the end of Q1 last fiscal year. With respect to sales deals won during Q1 fiscal 2024 April to June, we added 20 new customers, 18 of whom signed full subscription SaaS agreements. There was an average of about three products or modules licensed for new customers during the quarter. We also added 74 new properties, which did not have any of our products before, but the parent company was already our customer.
Of the 94 new properties added during the quarter across new and current customers, about 85% were either partially or fully subscription software license based. In addition, there were 91 instances of selling at least one additional product to properties, which already had one or more of our other products. These 91 new product sales instances included a total of 199 new products sold. Our quota-carrying sales teams strength has increased steadily over the past couple of years, while the average Agilysys tenure of sales personnel is above 7.5 years across the entire team, close to half the team members have been with us for only 2.5 years or less. The value of sales reached closed one by them represented only 6% of total sales during full fiscal year 2023 and it's already 3x higher at 19%, 1-9, at 19% through the first quarter of fiscal 2024.
During the first three months of fiscal 2024, the total value of deals closed by this half of the team who have been with us for 2.5 years or less is already at about 72% of the total value of sales closed by this team during all of fiscal 2023. Sales productivity is another growing strength in our business now. On to revenue. Fiscal 2024 Q1 revenue of $56.1 million was a record for the sixth consecutive quarter and 18%, 1-8, 18% higher than the comparable prior-year quarter. This was the best-ever record quarter for all four major revenue categories; subscription revenue, overall recurring revenue, products and services revenue. We are off to a good start this fiscal year and have put ourselves in a good position to achieve our full fiscal year revenue and other annual goals.
Recurring revenue during Q1 fiscal 2024 grew to $32.1 million, about 16%, 1-6, about 16% higher year-over-year driven by a 27.4% increase in subscription revenue. Subscription revenue constituted 52.2% of total recurring revenue. Subscription revenue from add-on experience enhancer software modules, most of which were developed in our R&D labs during the past few years constituted 17%, 1-7, 17% of total subscription revenue this quarter compared to 15%, 1-5, 15% during Q1 last year. Our ability to provide end-to-end solutions continues to be a significant competitive strength keeping sales win-loss ratio at impressive high levels. One-time revenue consisting of product and services revenue added up to $23.9 million, close to 21% higher than the comparable prior-year quarter.
Services revenue was $11.2 million, the first time we have crossed the $11 million mark during a quarter, and 27.7% higher than Q1 last year. Many of our recently hired services personnel were in a ramp-up mode during the quarter causing services margins to be lower than the sequentially preceding Q4 fiscal 2023 quarter. We continue to expect services margins for full fiscal year 2024 to be around 25% with higher margins expected during the second half of the year. Services implementations increasing in volume and efficiency was another good sign of improving business momentum and has helped our increased confidence in the annual revenue guidance provided. Given the extent of reengineering efforts, new software modules development, product integration initiatives completed, and the dramatic improvements in product innovation undertaken during the last few years, virtually all the implementations we are carrying out in the field today involve software developed, most of them in-house during the past few years.
Now that is both the strength and the challenge. The most encouraging aspect of this April to June quarter was all these products and modules becoming progressively easier to implement and support and settling down well in the field. That paves the way for growing improvements in our future ability to scale up and keep improving customer satisfaction levels. That was true this quarter, especially on the PMS side of our business, that's Property Management Systems. We are now involved in more Property Management Systems, PMS sales opportunities than ever before and are encouraged by the PMS credibility we are building with prospective customers. Our competitive positioning against the major very well-established PMS provider is far better today than it was a year ago.
We expect core PMS products along with all the add-on experience enhancer PMS software modules, we've integrated the core products with to make increasingly bigger contributions to our short and long-term growth. Adjusted EBITDA for the quarter was $6.3 million and 11.2% of net revenue slightly ahead of our expectations, but still the lowest EBITDA of revenue percentage during a quarter in about three years. As discussed during the last couple of earnings calls, this decline in profitability was caused by recent increases in cost investments in preparation for major business growth opportunities we are making good progress with along with the fact that the first half of each fiscal year tends to be more challenging for us with respect to costs and cash management.
The timing of incentive bonus payments, trade shows, professional fees, and several other cash and cost elements, and incoming annual maintenance payments, a majority of which tend to come in during the second half of the fiscal year makes the first half relatively more challenging for us for cash management and profitability. Free cash flow during the past couple of quarters have been affected by increased capital expenditures pertaining to our moving to new offices in our two main U.S. locations Atlanta and Las Vegas. And the fact that India Development Center is also in the process of moving into a single building. We are currently distributed across multiple buildings, which are within one world-class campus in Chennai but are not contiguous.
Profitability during the next sequential quarter Q2 fiscal 2024 will also remain compressed due to many of the recent cost increases now becoming applicable for the entire quarter. We expect profitability to then return to our normal previous levels during the second half of the fiscal year. We continue to expect EBITDA by revenue percentage to be around 13%, 1-3, around 13% for full fiscal year 2024 and expect the Q4 exit rate percentage to be higher than the corresponding prior year Q4 exit. As during previous fiscal years, we expect free cash flow to approximate to adjusted EBITDA minus capital expenditures on an annual basis with the unfavorable first half being compensated by the second half of the fiscal year. With that, let me hand the call over to Dave for more color on the financial and other business details.
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Dave Wood: Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. First quarter fiscal 2024 revenue was a quarterly record $56.1 million, an 18% increase from total net revenue of $47.5 million in the comparable prior year period. All three product lines increased compared to the prior year period with product revenue up 15.7% and professional services up 27.7% due to a strong sales quarter with sales up 21% over Q1 fiscal year 2023. Recurring revenue was also up 15.9% with subscription up 27.4% over the prior year period. The backlog remains strong and on track for the FY '24 plan. Q1 FY '24 exit total backlog across products, recurring revenue and services decreased slightly as we deployed more products and started to implement some of our larger projects.
The total backlog remained 46% higher than a year ago when comparing Q1 FY '23 exit levels. Product revenue increased 15.7% over the prior fiscal year to a record $12.8 million. At our current sales levels $12.8 million in Q1 FY '24 product revenue should be the high mark for the year. We expect product revenues to level out and remain around $12 million per quarter for the remainder of the year. Professional services increased 27.7% over the comparable prior fiscal year quarter to a record $11.2 million. We are also pleased to see our professional services backlog remained about the same as the last sequential quarter exit as we ramped up the resource strength in the services team and the pace of deployment stayed in sync with sales velocity during the quarter.
We expect professional services revenue to continue to increase sequentially through the year and should grow north of 30% for the full fiscal year. Total recurring revenue represented 57.3% of total net revenue for the fiscal first quarter compared to 58.4% of total net revenue in the first quarter of fiscal 2023. Recurring revenue as a percentage of total revenue remained around the same level despite a 21% increase in one-time revenues. Like we said on the last call, we expect FY '24 recurring revenue as a total percentage of revenue to remain the same or slightly decrease as we perform professional services for larger customers prior to realizing corresponding subscription revenue growth in subsequent fiscal years. Subscription revenue grew at 27.4% for the first quarter of fiscal 2024.
Subscription revenue now comprises over 50% of total recurring revenue at 52.2% compared to 47.4% of total recurring revenue in the first quarter of fiscal 2023. Subscription revenue increased sequentially by $0.9 million and in line with our FY '24 plan. Subscription sales and backlog levels remain comfortably in line with our FY '24 plans. We expect subscription revenue to continue to increase between $0.9 million and $1.2 million sequentially through the year depending on timing of go-lives in any given quarter Moving down the income statement. Gross profit was $33.1 million compared to $28.5 million in the first quarter of fiscal 2023. Gross profit margin was 59% compared to 60% in the first quarter of fiscal 2023. As expected, gross margin percentage will remain lower in the first half of the year as we continue to ramp up our services team.
The second half gross margin should return to the low 60% range. Combined, the three main operating expense line items, product development, sales and marketing, and general and administrative expenses, excluding stock-based compensations were 47.8% of revenue compared to 46% of revenue in the prior year quarter. Product development range remained about the same at 20.9% compared to 21.1% of revenue in the prior fiscal year first quarter. General and administrative expenses have remained about the same as well from 14% to 14.3% of revenue. Sales and marketing have increased from 10.8% of revenue to 12.7%, mostly due to the increased number of quota-carrying sales reps and timing of trade shows and other expenses, which tend to be higher during the first half of the year.
Operating income for the first quarter of $1 million, net income of $1.1 million, and gain per diluted share of $0.04 were all less than the prior year first quarter gain of $3 million, $2.6 million, and $0.10. Adjusted net income normalizing for certain non-cash and non-recurring charges of $4.6 million was less than adjusted net income of $5.2 million in the prior year first quarter and adjusted diluted earnings per share of $0.18 was less than $0.21 reported in the prior year period. Fiscal 2024 first quarter adjusted EBITDA was $6.3 million compared to $6.7 million in the year-ago quarter. Adjusted EBITDA in Q1 FY '24 was 11.2% of revenue. Profitability for the quarter was slightly better than the previous guidance of high single digits, largely due to higher-than-expected Q1 revenue performance.
Profitability levels remain on track for our FY '24 guidance of adjusted EBITDA as a percentage of revenue of 13%. Moving to the balance sheet and cash flow statement. Cash and marketable securities as of June 30, 2023, was $107.1 million compared to $112.8 million on March 31, 2023. We remain comfortable with our current levels of cash. Free cash flow in the quarter was a loss of $3 million compared to breakeven in the prior year quarter. For the year, we still believe adjusted EBITDA less CapEx is a good proxy for free cash flow. Q1 free cash flow was negative due to working capital adjustments, which are typical in the first half of the year. For fiscal year 2024, we remained comfortably in our expected revenue range of $230 million to $235 million.
In closing, we are pleased with the strong start to the fiscal year and remain on plan for fiscal year 2024. With that, I will now turn the call back over to Ramesh.
Ramesh Srinivasan: Thank you, Dave. In summary, we are pleased with the Q1 April to June quarter results which have given us an excellent start toward reaching our fiscal 2024 financial and other targets. Across several measures, including sales success measured in annual contract value terms, this is the best start we've enjoyed to a fiscal year. While selling success across our traditional strongholds like gaming casinos and foodservice management performed well during the quarter, we were particularly pleased to see APAC sales having a good sales quarter and sales in the U.S. hotels, resorts, and cruise ships vertical where our market shares are not great currently continue its excellent progress. While all those were increasing aspects of business during Q1 fiscal 2024, probably the best news was the improvement in services implementations efficiency which is a good indicator that the recently created products are settling down well in the field and our transformation to a cloud subscription-based business unit built on solid state-of-the-art technology-based solutions is making great progress.
This kind of major transition of an organization of our size is not an easy task, and we continue to make excellent progress while managing well the balance between continuing good short-term results and setting things up well for the medium and long term. We are not sure of the so-called J-curve pertaining to such transformations can be managed any better than this. We are confident the profitability did seen in this quarter as we do the needful and make the necessary cost investments to ensure we take advantage of the significant growth opportunities currently in our grasp is temporary and should last at a little less than this level perhaps for only one more quarter. We are being included now in an increasing number of RFP processes especially Property Management System, PMS RFPs, and are currently in the midst of several major exciting sales opportunities across both PMS and POS.
From our vantage point, the pace of technology investment decisions and intent to move legacy applications to the cloud remains at a healthy pace in this industry with no sign of any notable slowdown. The momentum that started around August of last year in selling success has continued on that basis regardless of the uncertainty seen in the macroeconomic headlines. Backlog levels across products, recurring revenue, and services are at near-record levels, all that adds up to our continuing confidence in the fiscal 2024 guidance levels provided across subscription revenue growth, overall revenue range, and profitability. The overall business is in excellent shape and well positioned for all-round progress and growth. With that, Lisa, let's open up the call for questions.
Thank you.
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