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Edited Transcript of AGYS earnings conference call or presentation 28-Jan-20 9:30pm GMT

Q3 2020 Agilysys Inc Earnings Call

Solon Jan 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Agilysys Inc earnings conference call or presentation Tuesday, January 28, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Pritchett

Agilysys, Inc. - VP & CFO

* Dave Wood

Agilysys, Inc. - VP of Finance

* Ramesh Srinivasan

Agilysys, Inc. - CEO, President & Director

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Conference Call Participants

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* Allen Robert Klee

National Securities Corporation, Research Division - Research Analyst

* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

* Ishfaque Ahmed Faruk

Sidoti & Company, LLC - Analyst

* Tyler Jacob Wood

Northland Capital Markets, Research Division - VP & Senior Research Analyst

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Presentation

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Operator [1]

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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 Dave Wood, Vice President of Corporate Strategy and Investor Relations at Agilysys. You may begin.

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Dave Wood, Agilysys, Inc. - VP of Finance [2]

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Thank you, Sherry, 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 safe harbor protections 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 in 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.

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [3]

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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 are pleased to report that we completed yet another strong quarter, highlighted by revenue of $42 million, a 17, 1-7, a 17% increase over Q3 of last year, with record revenue across all 3 revenue lines: recurring revenue, product revenue and professional services revenue. With respect to overall quarterly revenue, this is our ninth consecutive sequential revenue increase, seventh consecutive record revenue and sixth consecutive double-digit year-over-year revenue increase quarter. Recurring revenue was a record $21 million led by a 28% year-over-year growth in subscription revenue.

Our customer satisfaction levels continue to improve. As a result, customer churn, as a percentage of recurring revenue, continues to decline significantly year-over-year, as has been the case the past couple of years. That improving metric continues to validate our organizational improvements 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 indicator of the overall strength of our business, especially of 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 use the words 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 words sales and revenue tend to be used interchangeably, while it means different things for us. For us, sales this quarter will partially affect the current quarter revenue and also contribute towards building future recurring revenue, product revenue and services revenue backlog.

With the exception of 1 quarter way back in fiscal 2016, which contained a couple of significant deals, the last 5 quarters have been our 5 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 6 quarters through Q3 of this fiscal year have been our sixth-best subscription booking quarters on record, which augurs 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 handles the growing demand for guest-facing kiosk and other functionality requirements, continues to build momentum in the marketplace 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 levels further forward at a significant pace for the foreseeable future, we continue to improve our property management system, 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 the 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/checkout, kiosk check-in/checkout, 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 customer sites who have 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 competing POS vendors in the marketplace today, there are far fewer major PMS providers. And the number of providers who are actually trying to create fully integrated, yet modular PMS ancillary modules, 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 at least one of these emerging product modules, with about half of them coming just in the past 6 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 vendor 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 guest engagement ecosystem. Customers in this industry are starved for such progress and are steadily rewarding us for being the partner they can depend on for both day-to-day great 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 and Resort located in South Dakota invested in both our PMS and POS solutions, along with a couple of other software modules, 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 foodservice verticals, during the last couple of quarters, we've also made good breakthroughs into renewed areas of focus in managed foodservice, higher education and health care. During Q3 fiscal 2020, we had new customer wins in this 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 -- 3 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%, 1-6, 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 cost 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 modules, which face much less competition in the marketplace and is helping us focus on our long-term top line and bottom line growth strategies.

In summary, we 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 disciplined, 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 4 months from now, when we will be reporting our fiscal 2020 fourth quarter and end of fiscal year results. With that, let me hand over the call to our CFO, Tony Pritchett, for more color on our financial results and future outlook. Tony?

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Anthony Pritchett, Agilysys, Inc. - VP & CFO [4]

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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 we've set out on 3 years ago of turning 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 3 revenue categories of our income statement, a fact that we are understandably proud of. The increase in our top line was driven by an 18.5% increase in product revenue to $12.1 million, an 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 drop 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 feel that 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 end points, we currently service approximately 274,000 rooms and approximately 61,000 point-of-sale end points, 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 result of growth across our 3 revenue line items. Gross profit margin was 50.2% compared 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 was a little better than expected this year. This acceleration of revenue growth starts with product and professional services revenue as 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 planned since product revenue and professional services revenue had lower margins than our consolidated results. As such, we now expect gross profit margins for fiscal 2020 to be slightly less than those of fiscal 2019.

Moving on to operating expenses. Excluding charges for legal settlements and restructuring, severance and other charges, the third quarter saw 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 cost at a slower pace than we increase revenue. Combined, our 3 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 fiscal 2019. The increase in the same operating expense lines, combined, was only 5%, while revenue increased 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 in 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 noncash and nonrecurring 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 9 months ended December 31, 2019, is $4.3 million better than the comparable prior year period. These cash flow results indicate that we are on track for our expectation of significantly improved free cash flow this year over last.

During the fiscal 2020 first quarter, we recorded a right-of-use 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 results 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 carryforwards 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 2038.

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 in 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 are excited about what the future holds for Agilysys in the hospitality industry. Customers repeatedly confirm to us that they are 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 plan, a plan that was set out 3 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. Sherry?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from George Sutton with Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [2]

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Congratulations on the results. I'm curious, when we do due diligence, we -- and talk to existing and potential customers, what we find is competitor systems being replaced is a fairly slow process. And you mentioned this quarter, you actually saw a fair bit of that. I'm curious, is there a certain functionality or form types that are the appeal that's causing that change to be made?

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [3]

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Yes. George, thank you for joining the call. This -- the competitive replacements picking up, we've been noticing that trend for quite a few quarters now, I would say, for the last 4 or 5 quarters. The rate at which we've been replacing major competitive systems because that is what we keep track of. Replacing major competitive systems 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 in the -- there could be a competitor system for whom a hardware refresh is coming up on the POS side. And while they are 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 marginally like another system, but they are 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 size has shown.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [4]

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Perfect. 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? Or are we going to start to see the subscription side of it really start to show that benefit?

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [5]

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Yes. The product and services strength that you are 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 a 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, the fact we are doing a lot of implementations now. We are taking, we are replacing a lot of competitor systems, and we are doing a lot of new product installs of customers who already have other product.

So as the services activity picks up, as you are seeing in the last 6 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 -- the product revenue is a good indicator that our business is doing well. We are doing a lot of sale -- selling now. 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 are doing happen to be SaaS subscription basis.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [6]

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Got you. 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.

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [7]

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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 #1 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 anything else is concerned. So that's the employee part of the answer, which is our #1 concern now.

As far as business is concerned, we have more than 4,000 properties all over the world, who are currently using our system property sites, of which, only 20 are in China at the moment. 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 selling opportunities that we are working on. Many properties of them belong to 1 or 2 big hotel chains that we are working with. So it is possible that those deals get postponed due to travel and other restrictions. So when you think about possible revenue impact, maybe 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.

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Operator [8]

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(Operator Instructions)Our next question comes from Tyler Wood with Northland Securities.

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Tyler Jacob Wood, Northland Capital Markets, Research Division - VP & Senior Research Analyst [9]

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First one for Ramesh. You talked about increasing success selling modules into your existing customers. Maybe could 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?

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [10]

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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 are InfoGenesis, which is more staff-facing solutions; and rGuest Express Kiosk, which is more guest-facing kiosks, where the guests can self-help, where they can order food items directly from a kiosk, and it just speeds up a lot of queues and other things in employee cafeterias. Now there, we have an additional product called OnDemand, which helps you order the food from either your desktop. So imagine you're in the 15th floor of a building and it's 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 a hotel room, you can order food items from the phone, and it will even give you details of exactly how many minutes they can serve you the food depending on what kind of pressure there is in the kitchen.

So that OnDemand 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. Now 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 have 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 5 or 6 customers already. Then the other one is mobile check-in/checkout, so that you don't need to go to the 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/checkout facilities. Instead of going to the reception counter, you can also walk to a kiosk. So a couple of customers, a couple of big customers have already gone live with that.

Then we introduced a product called rGuest Service, which basically optimizes all the tasks and operations in a hotel. So if you are running a hotel, there are just a lot of things happening in the hotel, a lot of tasks, including housekeeping tasks that you're assigning to various people. And if somebody doesn't react quickly, it should automatically get escalated to a supervisor. So that product completely automates 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'll do that module. While for us, the advantage is because of our R&D strength, we can do it ourselves, and it's also much better integrated with all our core products.

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Tyler Jacob Wood, Northland Capital Markets, Research Division - VP & Senior Research Analyst [11]

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That's helpful. And then, I guess, going back to the competitive displacements question. You mentioned kind of a factor that could get people to switch is the POS refresh. Is there any kind of development you see on the horizon, be it pay-at-table or something like that, that would -- a new feature that could sort of spur people into having to refresh those?

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [12]

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Yes. So Tyler, I can't give you one magic bullet like you create one module and suddenly tips 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 we 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 skill -- to tilt a scale varies. I can't give you one magic module that now that we have that, everybody has to move to us. 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? Over -- 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 favor.

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Operator [13]

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Our next question comes from Ishfaque Faruk with Sidoti.

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Ishfaque Ahmed Faruk, Sidoti & Company, LLC - Analyst [14]

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Congrats, 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?

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [15]

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Tony, about 4 of them?

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Anthony Pritchett, Agilysys, Inc. - VP & CFO [16]

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Yes, it's probably about 4.

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [17]

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I think out of the 18 new logos, new customers we won, I think the PMS number is 4, if I'm not mistaken. Once we finish this call, Ishfaque, I'll -- Tony and Dave will confirm that number for you, but I think the number is 4.

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Ishfaque Ahmed Faruk, Sidoti & Company, LLC - Analyst [18]

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Great. All right. And Ramesh, you also said that you're seeing your average deal size increasing with the reduced churn in terms of more competition. Can you give a sense of like how much you've seen maybe your average deal size growing relatively maybe on a year-over-year basis?

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [19]

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No, Ishfaque. I don't think -- see, the 3 separate things that you mentioned, Ishfaque. Average deal size has to do with the fact that when we go sell a product now, there are 3 other modules we can sell in that same deal, which very often the customer picks up. And we don't measure it exactly by average deal size, but we do keep track of how many of our deals are more than $50,000 per and how many of our deals are less than $50,000 per and the number -- the value of deals we are now selling about $50,000 per deal has increased. It's now at record levels. That much we can tell you, but we can't give you an exact number on that.

Customer churn that you mentioned is an entirely different matter, right? That is a matter of retaining the customers we have. And that is because we service the customers 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 win is, of course, is an entirely different matter. That we already talked about.

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Ishfaque Ahmed Faruk, Sidoti & Company, LLC - Analyst [20]

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Yes. Okay. And last one from me. Tony, I think you mentioned that your R&D group went up to as much as 730, I believe. Do you guys expect that to flatten out at some point? Or you expect that to move a little higher?

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Anthony Pritchett, Agilysys, Inc. - VP & CFO [21]

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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 see R&D pretty close on an annual basis as a percentage of revenue to 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 likely 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 supports the need. And again, percentage of revenue is really where we focus from that perspective.

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Ishfaque Ahmed Faruk, Sidoti & Company, LLC - Analyst [22]

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Congrats once again on a great quarter.

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Anthony Pritchett, Agilysys, Inc. - VP & CFO [23]

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Thank you.

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Operator [24]

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Our next question comes from Allen Klee with National Securities.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [25]

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My question's 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?

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [26]

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Yes, Allen. Good question, Allen. Good to talk to you. Yes, the PMS side of it is actually less than modest, right? 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 4-or-so customers we have signed this quarter, we have not yet implemented them. They have not yet gone live. So they will add to the room count in the next quarter. That room count we give you is not a sold view 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. We'll continue to do so for the foreseeable future, while keeping it as a percentage of revenue at the same-odd 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 our revenue and shareholder value and all that to great levels, PMS will start contributing in the next few quarters.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [27]

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Okay. And then in the guidance, it was mentioned that you're keeping your EBITDA guidance. And you had 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?

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Anthony Pritchett, Agilysys, Inc. - VP & CFO [28]

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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 a 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 that we can help address all of their issues post-implementation and any -- and support all the go-lives that are happening. And 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 and mentioned and that we've invested this fiscal year.

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [29]

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And also, Allen, as Tony mentioned in his prepared remarks, even though we are saying that adjusted EBITDA is growing by 25% this year from $10 million or so 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, 6-0. So while 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 our focus is on growing the top line as well. So we are balancing that out about as best as we can.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [30]

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And then last question on professional services, which has been growing very fast. Can you help us understand like how -- if you win some business, the timing that it takes to implement? And are you comfortable with how long it takes? And do you get paid upfront 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?

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Anthony Pritchett, Agilysys, Inc. - VP & CFO [31]

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So as far as the payment goes, Allen, for professional services, just as a general rule, all of our onetime items that are in a contract, as a general rule, we usually collect 50% 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 onetime items upfront and that includes 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. So you're looking at -- generally speaking, it's about a 3-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. So we're happy with the levels 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 professional services margins, in the range they're at today, high 20s -- 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.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [32]

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Okay. Actually, could I sneak in one more question?

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [33]

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Sure, Allen.

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Allen Robert Klee, National Securities Corporation, Research Division - Research Analyst [34]

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Okay. 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.

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [35]

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Yes, there is -- Allen, there's no special onetime thing we are expecting in terms of any major announcement or anything like that. So all our customers getting together in this 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 road map, 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 2 of our products, and now we have a lot more modules and products to offer. So for example, it's a POS customer, it is important they understand how much advancements we have 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 advantage is, there will be another customer there who has actually used 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, updates on where the company is going 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 event for us.

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Operator [36]

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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.

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Ramesh Srinivasan, Agilysys, Inc. - CEO, President & Director [37]

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Thank you, Sherry. 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.

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Operator [38]

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