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

Thank you, Sheri, and good afternoon everybody. Thank you for joining the Agilysys' fiscal 2020 third quarter conference call. We will get started in just a minute with management's comments. But before doing so, let me read the safe harbor language. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the second half provision of the Private Securities Litigation Reform Act of 1995 including statements regarding our financial guidance and continued business momentum. Although, the Company believes its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially. Important factors that could cause actual results to differ materially from these and the forward-looking statements are set forth in the Company's reports on form 10-K and 10-Q, and other reports filed with the Securities and Exchange Commission. With that, I'd now like to turn the call over to Mr. Ramesh Srinivasan, President and Chief Executive Officer of Agilysys. Ramesh, please go ahead.

Thank you, Dave, and good afternoon everyone. Welcome to our fiscal 2020 third quarter earnings call. Joining Dave and me on the call today is Tony Pritchett, our CFO. We're pleased to report that we completed yet another strong quarter, highlighted by revenue of $42 million, a 17% increase over Q3 of last year with record revenue across all three received lines, recurring revenue, product revenue and professional services revenue. With respect of overall quarterly revenue, this is the ninth consecutive sequential revenue increase, seventh consecutive record revenue, and sixth consecutive double-digit year-over-year revenue increase quarter. Recurring revenue was a $21 million, led by a 28% year-over-year growth in subscription revenue. Our customer's satisfaction levels continue to improve. As a result, customer churn as a percentage of recurring revenue continues to decline significantly year-over-year as of being the case the past couple of years. That improving metric continues to validate our organizational improvement across all aspects of our business especially in product development, professional services and customer support. Professional services revenue for Q3 fiscal 2020 was a record $8.9 million. This was our second consecutive record revenue quarter in professional services. As we mentioned in our last call, professional services is a good measure of how busy we are with various software implementations all across the globe and is therefore a good leading indicative of the overall strength of our business, especially our future growth of recurring revenue. Due to changing customer preferences, an increasing number of new customer software implementations involve subscription revenue arrangements. Our selling momentum continues to be strong with our global selling success in Q3 fiscal 2020 being one of our best ever. Please note, we used the word sales, selling and bookings to mean new product and services sale arrangements with customers, while revenue is…

Thanks Ramesh. We're happy that our business momentum continued into the fiscal 2020 third quarter. We're hitting our stride with respect to the plan was set out on three years ago, obtaining this company into a consistently profitable top-line growth company. The fact that this quarter was our sixth consecutive quarter of double-digit year-over-year revenue growth with strong adjusted EBITDA to back it up is solid evidence of that. We are focused on delivering the best most reliable products to our customers and supporting our customers ever changing business needs, and we are confident that this will continue to drive our success. Looking at our financial results, third quarter fiscal 2020 revenue was a record $42 million, or 17% higher than total net revenue of $36 million in the prior year period. This quarter's $42 million in revenue is made up of record revenue in all three revenue categories of our income statement the fact that we're understandably proud of. The increase in our top-line was driven by an 18.5% increase in product revenue to $12.1 million, and 8.4% increase in recurring revenue to $21 million, and a 38.2% increase in professional services revenue to $8.9 million. I want to highlight that the 8.4% recurring revenue growth includes subscription revenue growth of 28% for the quarter. Subscription revenue comprised approximately 38% of total recurring revenue, compared to 32% of total recurring revenue in the second quarter of fiscal 2019. Total recurring revenue represented 49.9% of total net revenue for the fiscal third quarter, compared to 53.7% of total net revenue in the third quarter of fiscal 2019. It is important to keep in mind that this dropped in recurring revenue as a percent of total revenue is not a negative fact for our business. This is a representation of strong…

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

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

Hi, George, thank you for joining the call. The competitive replacements picking up, we've been noticing that trend for quite a few quarters now. I would say for the last four or five quarters, the rate at which we've been replacing major competitive systems because that is what we keep track of replacing. Major competitive system has really picked up and they don't necessarily take too much time George. There have been cases where a customer has contacted us and they have gone live with our product like a couple of months later. Now some of the things that trigger that is there could be a competitor system for whom a hardware refreshers coming up, on the POS side. And while you're spending that kind of money on that refresh, they start thinking why don't we go look for a system. That could be one. The other thing that very often happens is they want certain enhancements done to help their business and very often a lot of those vendors just don't have the engineering breadth and wherewithal to get those changes done quickly. They will want an interface created with another system that they have bought that many competing vendors just don't do and that becomes a compelling event for them to change the system. And their business could expand for which the other vendor may not be able to keep up. I don't think these decisions take too much time, George, based on our experience. But there are cases where, let's say, they're marginally like another system. But they're quite happy with their current system, but they would really like to have a competing system, that could take time. They might wait for a year or so before they really make that decision. But when there are compelling events and there are many, especially with many vendors not doing great customer support, these kinds of things do tend to happen a lot faster than probably what your sample sizes show.

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

Yes, the product and services strength that you're seeing will lead to recurring revenue and subscription revenue strength. So like how Tony described in his prepared remarks, what comes first is product revenue. So, as part of the sale given the nature of our POS business, a certain amount of hardware comes with it, a certain amount of services revenue comes with it, that's the first thing that happens. And then as we go implement and the customer wants more activities from us, the services revenue picks up. And that's a good indicator of the fact we are doing a lot of implementations now. We are taking -- we're replacing a lot of companies and systems, and we are doing a lot of new product installs of customers who already have other products. So, as a services activity picks up, as we've seen in the last six months, that leads to recurring revenue. So, those customers go live and the recurring revenue you should expect will pick up, and it just so happens that more and more of our customers are preferring subscription-based arrangements. We don't force them into that. We want to be customer centric and we try to do what the customer wants us to do. It just so happens more and more customers want software solutions based in the cloud and subscription based arrangements. So as you see, the product revenue is a good indicator that our business is doing well. We are doing a lot of sales, selling out. Services revenue is a good indicator that we are doing a lot of implementations and in turn that will lead to recurring revenue in the future. And it just so happens. A good portion of the implementations we're doing happened to be SaaS subscription basis.

Lastly, if I could, Tony, it may be helpful because I've had a few client questions the last few days on the potential virus impact on your PMS business. Obviously, I understand the model, but I'm not sure most people understand what limited impact you might see, if travel were reduced?

Yes. So, limited impact on our business but before that George, we do have employees in the Shenzhen and Hong Kong area. So, we are very concerned about this because employee well being comes number one for us, and we care about all our global employees a lot. So, we are very concerned about our employees in Shenzhen and Hong Kong, and to a certain extent Singapore as well. And Malaysia, we have a number of employees there. So, we are very concerned about their well being, and so far so good, they have not been affected. We are nowhere close to the affected region. So, we are closely monitoring it and keeping a tab on that. And we are taking very safe decisions as far as travel and everything is concerned. So, that's the employee part of the answer, which is our number one concern now. As far as business is concerned, we have more than 4,000 properties all over the world who are currently using a system property sites, of which only 20 are in China at the moment. Our China is an initial business for us now. We have a lot of growth potential there, but we have traditionally historically not had a major presence there. So, we only have 20 properties live there. And there are about 20 other new opportunities that we are working on, many properties of them belong to one or two big hotel chains that we are working with. So, it is possible that those deals get postponed due for travel and other restrictions. So, when you think about possible revenue impact may be a $500,000 revenue impact in Q4 and on this fiscal year is possible for us. It is not significant at the moment, but we are watching it carefully. It is not a major part of our business process.

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

First, on for Ramesh, you've talked about increasing success selling modules into your existing customers. Maybe can you drill down a little bit more into that? What specific modules are you seeing, having the most impact there? And then going forward, what do you see being the most important modules for driving growth?

Yes, so, good to talk to you, Tyler. Thank you for joining the call. So, the modules, let's break them up into POS and PMS separately. So, as far as POS is concerned, the two main flagship products that we have our InfoGenesis, which is more staffing solutions; and rGuest Express Kiosk, which is more guest facing kiosk, where the guests can sell help where they can order food items directly from a kiosk, and it just speeds up a lot of cues and other things in employee cafeterias. Now, there we have an additional product called on-demand, which helps you order the food from either your desktop. So imagine you're in the 15th floor of a building and its 11:30 in the morning, and you're getting ready to order lunch, you can order it from your desktop or you can order it from your phone as well, from your smartphone. So, you're sitting in the hotel room, you can order food items from the phone. And it will even give you details of exactly how many minutes they can sell you the food, depending on what kind of pressures there is in the kitchen. So that on-demand product is an additional software module, which is a good margin module for us, that many of our POS customers are considering and a few of them have already purchased. On the PMS side of the business, on the hotel management system, property management system side of the business, there are a number of products that are already getting good traction in the industry. Like one of them is a direct channel web booking system. So, customers have always wanted a web booking system that is PMS aware that can differentiate you from being a platinum player versus a silver player. Customers…

And I guess going back to the competitive displacements question. You've mentioned kind of factors I could get people to switches, POS refresh. Is there any kind of developments you see on the horizon, be it pay a table or something like that, that would a new feature, that could sort of spur people into having a refresh those?

Yes. So, Tyler, I can't give you one magic bullet like you create one module and suddenly picks a scale over. All these additional modules, right, including pay-at-table, which one of our biggest gaming customers went live with recently and that is an additional thing, the support now. You keep adding all these modules. You keep modernizing your core product. You keep adding more functionality to your core product. And somewhere along the line, the scale tilts in your favor. And with each customer, how much weight does it take to tilt a scale varies. I can't give you one magic module that now that we have that everybody has to go to work. It doesn't happen that way. We keep adding these competitive advantage trends. And for different customers, that tilting of the scale happens at different times, right, or for different reasons. Like there is no one magic module that's going to create it. But as we keep doing all this R&D innovation work, it keeps tilting more and more towards our phase.

Our next question comes from Ishfaque Faruk with Sidoti.

Gone that guys on the great results. A couple of questions from me. Ramesh, you said you guys got around 18 new customers this quarter. Can you give a sense for how many of those had added PMS solutions?

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

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

No, Ishfaque, I don't think -- the three separate things that you mentioned, Ishfaque, average deal size has to do with the fact that when you go sell a product now there are three other modules we can sell in that same deal, which very often the customer picks up. And we don't measure it exactly my average deal size, but we do keep track of how many of our deals more than 50k per and how many of our deals are less than 50k per. And the number -- the value of these deals now selling about 50k per deal have increased. It's now at record levels. That's much we continue, but we can't give you an exact number on that. Customers churn that you mentioned is an entirely different matter, right. That is a matter of regaining the customers we have. And that is because we service the customer better, now we support them better. And customers normally stay with you when they see you innovating and moving the products forward. So more and more our customer retention is world class levels now, our customer churn is going down. And then new customer, this is of course is an entirely different matter that we already talked about.

Okay. And last one from me. Tony, I think you mentioned that your R&D group went up to as much as a 738, I believe. Do you guys expect that to flatten out at some point? Or you expect that to move a little higher?

Ishfaque, we do expect the R&D team to continue growing on an absolute headcount basis. The R&D team will continue to expand from the 730 number that we mentioned. The way to think about R&D from a financial modeling perspective though, is that, this fiscal year you should be R&D pretty close on an annual basis as a percentage of revenue for last year. It's in the 27%, 28% of revenue range. That's a pretty reasonable number to expect going forward for the near-term. Looking into next year, we don't expect any major shifts in that as a percentage of revenue. In out years, past next year, you'd like to start seeing that number tick down as a percentage of revenue. But yes, we'll continue to expand the team as far as headcount goes. But again, we do that smartly as revenue increases and as the business support the need. And again, percentage of revenue is really where we focus from that perspective.

Our next question comes from Allen Klee with National Securities.

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

Yes. Allen. Good question, Alan. Hey, good to talk to you. Yes, the PMS side of it is, is actually less than modest side. So, that is the core worry that is the biggest elephant in the room for us. And we are improving the products, those products are getting better. Now what you see in the room count that Tony gives you is after implementation. So for example, the four or so customers we have signed this quarter, we have not yet implemented them. They have not yet gone live. So, they will act to the room count in the next quarter, the room count we give you is not a sole room count but an implemented room count. So that will improve over time. But to answer your question, there is still more product work to be done, right, in fact Ishfaque's question about R&D expanding, we are expanding our R&D will continue to do so for the foreseeable future while keeping it as a percentage of revenue at the same or levels below where we are today. But we still have some more product work to finish on the PMS side, before we have the kind of competitive advantage that we currently have with the POS side of the business. In the meanwhile, we are also adding all these additional software modules, which when the core product work gets done will put us in a very, very good spot where our competitive advantage in PMS will also be as big as it is in POS today. So, growing the PMS side of our business has a lot of our focus now Allen. And in terms of taking are revenue and shareholder value and all that to great levels, PMS will start contributing in the next few quarters.

And then in the guidance, it was mentioned that you're keeping your EBITDA guidance and you would mentioned that that's due to reinvesting some of the higher revenue. Could you maybe give some details of what that's being reinvested in?

Yes. So, Allen as we mentioned, I mean, it's a consistent message last quarter and this quarter as well, where we've seen some opportunity this year is to invest in our SaaS infrastructure. We've seen a lot of growth with our SaaS implementations, and we obviously have a lot of new products coming on. So, there's some SaaS infrastructure investments that we've done as well as the R&D team as we've talked the decent amount about already. And then, with customer facing services personnel and support personnel, there's been some additional headcount added there as well, just to support -- continue to support our customers as well as we can. So, we can help address all of their issues, post implementation and any support all the go-live that are happening. But as you can see, our professional services revenue is growing, that comes from the services team that we've built. And that's where most of the investment that we've talked about admission and that we've invested this fiscal year.

And also Allen, as Tony mentioned in his prepared remarks, even though, we're saying that adjusted EBITDA is growing by 25% this year from 10 million also it was last year. If you remove the 2.2 million software capitalization advantage FY '19 had, it's actually a 60% increase in EBITDA 60. So why you grow revenue by 16% that we are guiding to now, growing EBITDA by 60% is quite significant operating leverage. We don't want to overdo that because we want to make sure that focuses on growing the top-line as well. So, we have balancing that out about as best as we can.

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

So, as far as the payment goes Allen, for professional services, just as a general rule, all of our one-time items that are in a contract. As a general rule, we usually collect 60% of that upfront. That's pretty standard in the industry and generally, that's what we experience as well. Of course, there are certain customers that there's exceptions made for that, et cetera. But generally speaking, 50% of our one-time items upfront and that include professional services. Now, as far as the timing goes of getting installations done, the way to think about that is usually -- and again, this is a broad generalization, but usually we can sign a contract. This quarter, the product revenue would come in this quarter, the professional services would come in a quarter after that, and then the recurring revenue would start coming in a quarter after that. If you're looking at -- generally speaking, it's about a three month lead time from contract signature to implementation. We're pretty happy with that. It's a pretty good balance at this point. And we've got the ability to get customers implemented faster, if they need that. Some customers push out implementations longer than that. So, it's a pretty good balance from that perspective. We're happy with the level that we've got now. Now, as revenue grows as professional services revenue grows, certainly we're going to have to increase the size of the services team. But we feel like profession services margins in the range they're at today, high-40s, mid-to-high-20s, is reasonable to expect going forward. So, we don't expect those margins to come down because we have to add people.

Actually, can I sneak in one more question? I know you're having your user conference next week. And I was just wondering, kind of what you think that is going to be kind of the focus or there may be something new that you think is important to happen there?

Yes, there's -- Allen, there's no special one-time thing you are expecting in terms of any major announcement or anything like that. So all our customers getting together in the user conference is mostly to give them an update of all the product improvements that have happened in the past 12 months and all the product roadmap, the future improvements that are coming in the next 12 months. Now why that is important for us is that a lot of our customers use either only one of our products or maybe they use two of our products, and now we have a lot more modules and products to offer. So for example, the POS customer it is important, they understand how much advancements we made in the PMS area and vice versa. And if there is already a PMS customer, they should know all the other modules that we have to offer. And the advantages, there will be another customer there, who is actually use that module and who can tell them the kind of return on investment they are getting out of those modules. So there's a lot of shared knowledge among the customers that normally works out very well for us. And also in terms of some of the challenges that they have, they can share with each other as to how the challenge for one of those customers has got sorted out. So that's a major part of it. And we have breakout sessions where we also do training programs, where customers want to get more in-depth training on the products. So, we do that as well. So, it's an excellent gathering of hundreds of customer users. And it also helps us improve our relationships with them, give them both resources update and there is a company is growing, and share with them all those details. So, it's a very powerful event for us that we do once a year that brings our customer base together, and that is a big part of our business growth for us. But no particular, there is no major announcement or anything we are planning at that time. It's a fairly routine once a year even for us.

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

Thank you, Sheri. Thank you all for joining us on the call today and for your continued interest and support. Agilysys continues to be well positioned to increase shareholder value. This is a terrific value creation opportunity. We are determined to make good on for our employees, customers and shareholders. I want to also take this opportunity to give a very special thanks to our 1,200 plus team members across the globe, who are working hard every day to make Agilysys a world class company and to our customers who trust us with their investments now more than ever before. Thank you.

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