Agilysys, Inc. (AGYS) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal Year 2018 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, today’s conference is being recorded. I would like introduce your host for today’s conference, Mr. Norberto Aja, Investor Relations. Sir, please go ahead.

Thank you, operator. Good afternoon, everyone. Thank you for joining the Agilysys fiscal 2018 first quarter conference call. We’ll get started in just a minute with management’s presentation and comments. But before doing so, let me review the Safe Harbor disclosure. Today’s conference contains forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as anticipate, intend, plan, goal, believe, estimate, expect, future, likely, may, should, will, and other similar references to future periods. Examples of forward-looking statements include among others, statements we make regarding guidance relating to revenue and adjusted earnings from operations, expected operating results, such as revenue growth and profitability, market demand, cost efficiencies and strategy for growth, product development, customer service, market position and financial results. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions, regarding the future of our business. Future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, our ability to achieve operational efficiencies and meet customer demand for products and solutions and the risk described in today’s news announcement in the company’s filling with the Securities and Exchange Commission, including the company’s reports on Form 10-K and Form 10-Q. Any forward-looking statement made by us in today’s conference call is based solely on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement that maybe made from time-to-time whether as a result of new information, future developments or otherwise. Today’s call and webcast will also include non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and present in accordance with GAAP can be found in today’s press release as well as in the company’s Web site. With that, I’d now like to turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilysys. Please go ahead, Ramesh.

Thank you, Norberto, and good evening, everyone. Thank you for joining us on the call today to review our fiscal 2018 first quarter results and our promising path forward. Joining me on the call today is Tony Pritchett, our Chief Financial Officer. Let me begin with a quick overview of the first quarter results, before providing an update on our progress against our strategic initiatives and some comments regarding our forward-looking guidance. Compared to last fiscal year’s first quarter, total net revenue increased 9.4% to $33.9 million, an all-time quarterly record. Adjusted EBITDA improved to 1.6 million compared to 0.4 million last Q1, while the GAAP net loss was higher at 3 million, a loss of $0.13 per share compared to 2.3 million, a loss of $0.10 per share last Q1. Compared to last year’s – last fiscal year’s Q1, our non-GAAP adjusted earnings from operations remained close to the same level as last year at a negative $3.5 million versus a negative $3.2 million last year, in spite of a significant increase in our cost structure towards the end of last year to prepare ourselves internally for certain large customer deals that are now beginning to materialize, and capital expenditures to open our India development center. With improving efficiencies, we’ve now started dialing back on our overall spend. Our services gross margin at 20% was lower than last year’s due to the recent restructuring of the services team to redeploy certain internal resources into billable functions with direct customer responsibility, which results in their cost being included in the cost of goods sold definition. Previously, our services teams were organized by function and by product, making direct accountability for customer work difficult to pin down. Our services teams are now organized by customer segments by customers, with clearly defined responsibility and accountability for customer satisfaction levels. We’ve also recently created a technical services team entirely focused on immediate customer needs. We expect improvements in services margins going forward. As mentioned during our June earning’s call and press release, we expect to achieve a full year revenue growth of between 7% and 10%, meaning our FY '18 full year revenue level of 136 million to 140 million. We expect revenue during the second half of fiscal 2018 to be higher than the first half, as the strategic growth initiatives currently being put in place take complete shape. We also expect to generate positive adjusted earnings from operations during this fiscal year’s fourth quarter. That would make the FY '18 fourth quarter our first ever positive adjusted earnings from operations quarter. We expect to maintain positive adjusted earnings from operations thereafter. Please note that the non-GAAP adjusted earnings from operations measure is a close proxy of our free cash flow on an annual basis. Our free cash flow tends to be cyclical on a quarterly basis. Typically, lagging the adjusted earnings from operations measure during the first two quarters of most fiscal years and then getting ahead of it during the last two quarters. That has to do with the historical timing of our annual recurring revenue billing and collections and is not related to anything operational. On an annual basis, we expect the free cash flow and adjusted earnings from operations to closely mirror each other with the exception of any one-time cash payments. Tony will provide more color on our financial results later. We continue to make good progress on nine strategic operational initiatives as we move towards transforming Agilysys into a high-performance SaaS and on-premise base leader in the hospitality, technology and software solutions space. One, during the past few months, virtually every aspect of our business has become a lot more customer-centric than before. Every department at Agilysys now understands that we are in the business to help our hospitality customers serve their guests better, increase their guests experience and create and maintain guest loyalty. We are listening a lot more to our customers now regardless of which Agilysys product they currently use. That increased customer sensitivity culture shift can now be heard and felt in our offices and in various customer locations every day. I have personally been involved in many customer visits during the past six months. This industry is hungry for a world-class customer-centric technology vendor, and we are fast becoming The One. We have seeing positive and encouraging signs from our customers that they are noticing the change, and they are now discussing more business opportunities with us. We expect that positive business trend to keep getting better. Number two; following up on the customer sensitivity topic, we are seeing growth opportunities in each of the major market segments we are currently operating in. In Gaming, many of our customers are seeing increases in non-gaming revenues, which creates good opportunities for point-of-sale and property management software solutions. Across hotels and resorts, there is an increasing demand for software platforms and solutions that can operate in both SaaS cloud-based and on-premise installation architectures for solutions that can help increase overall guest experience, improve guest loyalty and operational efficiencies. As the hotel and resort industry continues to compete against online booking units and strive to create an identity of their own with their guests, there is a growing demand for the kind of technology solutions we offer. Cruise lines are currently enjoying a healthy business environment with passenger numbers expected to exceed 25 million in calendar 2017. Cruise operators are now having an increased need to improve operations, optimize inventory control, streamline their food and beverage management and maximize fleet efficiency. In the restaurants and food services verticals, there is increasing demand for comprehensive and easy-to-use solutions, including guest-facing terminals that elevate guest experiences and allow brand consistency and enhance customer loyalty for restaurant operators. Our installed base is now just over 41,000 point-of-sale endpoints and 251,000 property management system rooms. While this represents 13% and 5% growth, respectively, from the first quarter of fiscal 2017, we feel we have barely done justice to the market opportunity in front of us and to our potential. Number three; we have taken major strides towards increasing our products and solutions delivery velocity, a critical component of our overall operational strategy. Our customers want to do more business with us as we continue to provide them the required products and solutions at a more rapid pace. Between March 31, 2017, that is earlier this year, and September 30, 2017, that is coming up in a couple of months, we expect our development engineering capacity to have increased by more than 40%. We are also focused on increased R&D efficiency so that we can get more development done at lesser overall costs. We have greater control over our R&D processes now. We are also focused on increasing our engineering development capacity in non-R&D areas, like professional services and customer support. Our newly created technical services division has already created a number of significant revenue opportunities for us while also fulfilling a long-pending customer need. We expect to continue to increase our engineering development velocity capacity in R&D, services and support functions, while also simultaneously reducing the overall spend as a percentage of revenue. Number four; our captive wholly-owned development center based in Chennai, India, is now operational and contributing meaningfully to our product development efforts. We will decide on expanding the center after we get through this initial phase. Number five; we continue to develop and improve our world-class suite of software solutions. As just one example, we recently announced the latest version of our groundbreaking DataMagine Document Management System, which now includes innovative enhancements designed to increase speed, improve security and boost overall performance. We continue to invest in and enhance our well-established product solutions like InfoGenesis, LMS, Visual One, Eatec and Stratton Warren while also making good progress with our newer rGuest solutions, like Stay, Buy, Pay and Seat. rGuest Buy is fast becoming a significant growth driver for us and the number of properties live on rGuest Stay continues to grow. We recently crossed the 5,000 room threshold for Stay. We support SaaS cloud-based solutions for our customers across virtually our entire product set. We are uniquely positioned in the marketplace as a technology provider who can provide solutions both on-premise and SaaS cloud-based. Number six; we will continue investing in crucial revenue growth areas, including R&D, innovation, services, customer support, sales, marketing and international expansion. We will be sensible to such investments and make them within the overall context of discipline, profitable revenue growth. Driving revenue growth and increasing profitability levels are both crucial and equally important goals for us going forward. A portion of our increased R&D engineering capacity is currently focused on getting our products ready for international markets, especially Asia and Europe. We are also in the process of expanding our business with multiple major hotel chains. Number seven; we went live with Salesforce.com a couple of weeks ago. The Salesforce.com implementation has helped us get a single, centralized customer record for all sale, support, services and other customer activities. This enhanced availability of customer information has already improved collaboration among team members and gives us far better visibility into our sales opportunities and processes. During the recent past, we have thoroughly reviewed sales productivity and processes and have implemented significant changes in our sales and marketing approaches, including the composition and regional coverage patterns of our teams, compensation structure and go-to-market strategies. Number eight; we have made good strides in increasing internal efficiencies and teamwork. We are all together beginning to pull our company forward and towards customers. We have uncovered multiple areas where we can be a lot more efficient in our execution. Efficiency increases in multiple areas of the business are helping us find the cost room to invest sensibly to take advantage of the many revenue growth opportunities that are there in front of us. Number nine; last and definitely not the least, we are intent on building a workplace that attracts and retains the best and the brightest to help us improve our product and innovation delivery velocity and customer service. Investing in employee, technical and leadership training is a crucial priority for us. In summary, we remain confident in achieving the financial guidance provided when we reported the fiscal 2017 fourth quarter results, as we continue to make good progress towards transforming this business and becoming a more nimble and efficient operating business that is customer-centric and engineering product and innovation-driven, providing far greater value propositions for our customers and thereby, delivering much improved financial results. We are a couple more quarters away from turning positive on our adjusted earnings from operations measure for the first time and becoming increasingly profitable from there. We are in growing marketplaces with increasing demands for the solutions we offer. We essentially control our own fate, which is a great position to be in. With that, I will now turn the call over to Tony Pritchett, our CFO, for more color on our financial results and future outlook. Tony?

Thank you, Ramesh, and good afternoon, everyone. Our first quarter fiscal 2018 revenue was $33.9 million, a 9.4% increase from total net revenue of $31 million in the comparable prior year period, marking a quarterly record. Our top line growth largely reflects an increase in recurring revenue of 11.5%. Going forward, we expect future recurring revenue growth to level off and fall back to the mid to high-single digit range over the balance of the year. Looking at revenue in greater detail, product revenues increased 8% to $10.3 million and represented 30.4% of total revenue during the quarter. Product revenue in the quarter fell within the typical range of 60% to 70% hardware and 30% to 40% software. Support, maintenance and subscription services revenue or recurring revenue increased 11.5% to $16.7 million or 49.2% of total net revenues compared to $14.9 million or 48.3% of total net revenue in the first quarter of fiscal 2017. In addition, recurring revenue growth was driven by a 58% increase in SaaS revenues for the first quarter. SaaS revenues comprised 28% of total recurring revenues compared to 20% of total recurring revenues in the first quarter of fiscal 2017. We are pleased that SaaS recurring revenue continues to grow at a faster pace than our overall recurring revenue. Professional services revenue grew 6.6% to $6.9 million compared to the first quarter of fiscal 2017, reflecting the positive impact of enhanced throughput from our customer-facing implementation and installation teams, driven by our professional services team realignment. Total revenue related to our rGuest platform comprised approximately 5% of total fiscal 2018 Q1 revenue. Moving down the income statement, cost of goods sold increased 16.5% or $2.4 million in the first quarter versus the prior year period. This increase was largely due to the amortization of software development costs for first-generation versions of the company’s rGuest solutions along with increased costs in the professional services line associated with restructuring of professional services workforce to better address customer needs, leading to more customer-facing employees and adding a technical services team. This led to total gross profit of $16.7 million or a 3% increase compared to the first quarter of fiscal 2017. Gross margin for fiscal 2018 first quarter was 49.2% compared to 52.3% in the prior year period and in line with stated guidance for our annual gross margins to be in the low 50% range due to the previously disclosed impact of the amortization of software development costs for first-generation versions of rGuest, which achieved general availability in the first half of fiscal 2017. Looking at operating expenses, including product development, selling and marketing and general and administrative expense, the first quarter saw a 6.9% increase to $18.6 million compared to the prior year period; but as a percentage of net revenues, represented a decrease to 54.8% versus 56.1% in the prior year period. As expected, product development expense was down slightly to $6.6 million compared to $6.9 million in Q1 of fiscal 2017, but decreased as a percentage of revenue to 19.6% compared to 22.1% in Q1 of last year. And as a percentage of total revenue, product development expense decreased from 27.5% for the fourth quarter of fiscal 2017. Sales and marketing costs decreased 8.9% year-over-year in the first quarter of fiscal 2018, primarily reflecting strategic initiatives undertaken to better align compensation with common industry standards for a software technology-focused company. And as expected, general and administrative expense increased $1.9 million or 39.5% year-over-year. This increase includes about $600,000 in non-recurring expenses related to professional fees and contract labor, and we expect our Q2 general and administrative expense to be back down to a level similar to that of Q4 fiscal '17, with incremental improvements in Q3 and Q4. Depreciation of fixed assets and amortization of intangibles are both slightly elevated over prior year levels, reflecting investments in internal-used assets. As a result, we reported an operating loss of $3 million for the first quarter of 2018 compared to an operating loss of $2.2 million in the prior year period. Net loss for the first quarter was $3 million or $0.13 per diluted share compared to a net loss of $2.3 million or $0.10 per diluted share in the first quarter of fiscal 2017. Adjusted EBITDA was a gain of approximately $1.6 million in the first quarter versus a gain of $0.4 million in the first quarter of fiscal 2017. Moving to the balance sheet and cash flow statement. Cash and marketable securities as of June 30, 2017, was $43.4 million compared to $49.3 million at March 31, 2017. The decrease in cash reflects approximately $5.1 million in spend for our ongoing product development investments and investments in our internal assets, as well as a normal cash outflow from operations that we experienced in the first fiscal quarter due to the timing of when we bill and collect the annual maintenance. It is also important to note that our capital expenditures in the first quarter included approximately $1 million for the investment in opening the India development center. Without the investment in the India development center, our cash burn for the quarter would have been less than $5 million compared to $5.3 million of cash used in the first quarter of fiscal 2017 and $9 million of cash used in the first quarter of fiscal 2016. And in terms of our NOLs, we continue to have approximately $190 million on our books, for which we can attribute a full valuation allowance and will help us remain liable for only taxes paid in certain foreign jurisdictions along with minimal state taxes for the foreseeable future. Adjusted earnings from operations was a loss of $3.5 million in the first quarter, relatively flat compared to a loss of $3.2 million in the first quarter of fiscal 2017. As Ramesh mentioned, we remain on track for a significant improvement in the second half of the year and reiterate our forecast for fiscal 2018 full year revenue of between $136 million and $140 million and to generate positive adjusted earnings from operations in the fourth quarter of this fiscal year with adjusted earnings from operations growing from there. As a reminder, we will be providing and periodically updating guidance based on two broad measures; a range of annual revenue and a non-GAAP adjusted earnings from operations metric. We believe this metric provides a good indication of how we are tracking towards becoming a profitable company. It normalizes our non-cash and non-recurring charges, but includes expenditures on developed software and fixed assets, and therefore, approximates our expected cash generation or cash burn for a given period for ongoing needs in the business. We are also tracking our business internally based on this measure, as we manage and monitor our progress towards overall positive free cash flow and profitability. As it relates to margins, we continue to expect gross margins in the low-50% range as non-cash developed technology expenses come off the balance sheet and solutions such as rGuest Stay reach general availability and commence to amortize their development costs in a linear fashion onto our income statement. In closing, we continue to maintain a healthy balance sheet, including over $43 million in cash. We are improving our fiscal discipline and opportunities to expand the business, all of which better position Agilysys to deliver overall free cash flow generation and profitability. We are making progress towards top line and bottom line growth, which will unlock value for our shareholders. With that, let’s turn the call over to the operator for questions. Michelle?

Thank you. [Operator Instructions]. And I’m showing no questions on the phone lines.

Okay. If there are no questions, thank you, Michelle. Thank you all for listening and participating in this call. On behalf of our Board of Directors, our management team and all our talented and dedicated team members, we sincerely thank you for your continued interest in Agilysys. You have our commitment that we are working hard and smart towards improving rapidly and becoming a better company to work at, do business with and invest in. We look forward to providing you our next update three months from now. Thank you, and enjoy the summer and take some time off to visit our customers more often. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.