Agilysys Inc (AGYS) 2009 Q3 法說會逐字稿

Good morning and welcome to the Agilysys Inc. fiscal 2009 third-quarter earnings conference call. For your information all participants will be in a listen-only mode and there will be an opportunity for you to ask questions at the end of today's presentation.

Before we begin the Company would like to remind you that all remarks today may include forward-looking statements based on current expectations that involve risks and uncertainties that could cause the Company results to differ materially from management's current expectations. Please refer to the risk factors which can materially affect results outlined in Agilysys' corporate filings with the Securities and Exchange Commission and the Company's earnings release.

(Operator Instructions). For your information, today's conference is being recorded and transcribed. At this time I would like to turn the conference over to Mr. Martin Ellis, President and CEO of Agilysys. Mr. Ellis, you may begin.

Thank you and good morning, everyone. Our unaudited results were issued before the market opened and are currently available on our website. With me today is Ken Kossin, Senior Vice President and Chief Financial Officer.

Let me start out by saying that I'm very pleased with the significant improvement we made both in EBITDA and in the cash flow generated during the quarter. The fact that these results came in the face of a weakened demand environment is all the more notable. Like most companies we continue to be affected by the weak macroeconomic environment.

However, notwithstanding that revenue for the quarter decreased to $224 million compared with $248 million a year ago, our adjusted EBITDA, excluding restructuring charges, increased significantly to $18.1 million for the current quarter compared with $10.8 million last year. Software revenue was $30 million, up 17.4% compared with $25 million a year ago. The increase is primarily due to acquisitions. And services revenue was $39 million, up 10% from revenue of $35 million a year ago. The increase in services is primarily due to acquisitions and strong services sales in our Retail Solutions Group.

Third-quarter revenue from hardware products was $156 million, down 17% compared with $187 million in last year's third quarter. The decrease is due to the absence of several large transactions reported in the prior year. Gross margin increased to 26.7%, up from 23.1% in the prior year. The increase in gross margin was primarily due to a higher mix of software and services offset by a 60 basis point decrease in rebates as a percentage of sales.

Selling, general and administrative expenses, excluding restructuring, for the third quarter were $48 million or 21.6% of revenue compared with $55 million or 22% of revenue a year ago. The decrease in SG&A was largely due to a reduction in compensation and benefits partially offset by higher professional fees of $1 million.

As mentioned, we are pleased with the year-over-year improvement in EBITDA of almost 70% to $18.1 million. A significant contributor to the improvement has been a result of the pro-active actions we have taken during the year. Over the past nine months the Company has been very active in addressing alternatives to create value for shareholders.

In the spring of 2008 the Board initiated a process to explore strategic alternatives and, following a five-month evaluation process conducted in concert with JP Morgan, we announced that the Board had completed its review concluding that the best course of action to maximize shareholder value is to remain an independent company, realign costs and overhead structure and drive value creation.

Over the past six months, and more recently in the last 90 days, we have proactively addressed our cost structure and profitability. These cost initiatives, which were quickly executed on, are making Agilysys a stronger company that is well positioned to deliver sustainable increases in shareholder value.

Specifically the following restructuring actions have been executed over the past six months. We have restructured the go-to-market strategy for our Technology Solutions Group professional services offering; we've eliminated investments to fund organic growth which were made when the macroeconomic conditions were healthier; we've exited the Asian operations of our TSG segment; we've realigned executive management, closed corporate offices in Boca Raton and relocated back to Cleveland and realigned a number of departments and streamlined certain processes to reduce costs and drive efficiencies.

More specifically, in the first quarter of fiscal 2009 we conducted a detailed review of the Company's businesses to identify opportunities to improve operating efficiencies and reduce costs. In June 2008 we executed on a cost savings plan to reduce costs on an annual basis by approximately $14 million.

In October we took actions to realign overhead infrastructure which resulted in an additional $8 million in annualized cost savings. These cost savings are over and above the $14 million of cost reductions just discussed. The $8 million in additional savings includes the elimination of executive positions, consolidation of headquarters and the initial phase of realigning a number of corporate SG&A functions into the Company's three business units.

These restructuring actions have resulted in significant cost reductions and in addition to this $22 million of annual cost savings announced to date the Company further reduced costs by an additional $3 million in the third fiscal quarter. The $25 million in cost savings consists of $12 million related to the corporate segment, $12 million related to our Technology Solutions business and $1 million related to our hospitality solutions business. To date we have realized approximately one-third of the $25 million in cost savings.

As part of the restructuring initiatives we divested our TSG China operations in January of 2009 for approximately $1.2 million. These actions will further enhance the Company's EBITDA as we tighten our focus on our most strategic and profitable geographies. That said, we continue to serve and grow our hospitality solutions customer base in Asia including China.

Now let me turn to our cash and liquidity. I'm very pleased to report that in the midst of the weak economic environment that we remain a well-capitalized company. We are debt-free and cash and cash equivalents as of December 31st increased to $72 million from the $50 million we reported at September 30th. The increase was driven by strong cash flow from operations and further utilization of our floor plan financing facility.

In January we terminated our credit facility with Bank of America. This was put in place a number of years ago to fund acquisitions and we have not drawn against this facility since its inception in 2005. We're currently working with various financial institutions to implement a new financing facility to complement our existing floor plan facility as well as the cash on hand.

I'm also pleased to report that the Company is now current with all its NASDAQ listing requirements and with the SEC filing requirements. With these filings behind us we look forward to continuing to focus on the business and serving our customers. With that let me turn the call over to Ken who will review the segments and the balance sheet.

Thank you, Martin, and good morning, everyone. Before we review the third-quarter segment results let me start by summarizing our third-quarter consolidated results. For the third quarter revenue was $224.1 million compared to $247.9 million a year ago, down 9.6%. Gross margin for the third quarter increased to $59.8 million or 26.7% of revenue from $57.3 million or 23.1% of revenue last year. The increase in gross margin percentage was primarily due to a higher mix of software and services.

SG&A decreased $6.2 million for the third quarter to $48.3 million compared to $54.5 million a year ago. The decrease was primarily due to a $5.6 million decrease in compensation and benefits which included a $2.2 million credit primarily related to a change in estimate of stock option forfeitures in addition to a $900,000 decrease in intangible amortization offset partially by a $900,000 increase in professional fees.

Restructuring expense for the third quarter of 2009 was $13.9 million primarily comprised of a $7.4 million expense related to termination benefits, a $1.3 million expense related to the relocation of our headquarters to Cleveland and a $4.5 million non-cash charge related to the executive defined benefit plan curtailment.

Adjusted EBITDA without restructuring for the third quarter was $18.1 million, 8.1% of sales, compared with $10.8 million, 4.4% of sales a year ago. Net interest expense for the third quarter of 2009 included non-cash charges of $1.1 million to establish a reserve for the Company's investment in the reserve fund and $400,000 for the recognition of unamortized bank fees related to the termination of our unsecured credit facility.

Now I'd like to review the performance of our reporting segments for the quarter. Beginning with the Hospitality Solutions Group, in the third quarter of 2009 HSG recorded revenue of $27.9 million, up 1.8% compared with $27.4 million in the third quarter of 2008. The acquisitions of ETEC and Triangle, which were acquired in February 2008 and April 2008 respectively, contributed $3.7 million of revenue during the quarter.

Gross margin was $15.8 million or 56.7% of revenue compared with $14.1 million or 51.5% of revenue a year ago. The gross margin percentage increase was due to a higher mix of software and services. SG&A was $12.7 million in the quarter compared with $12.2 million a year ago. The $500,000 increase was due to SG&A costs associated with the acquisitions of ETEC and Triangle and increased development costs associated with Guest360, our new property management software.

Guest360 cost were $1 million in the quarter or a $400,000 increase over the same period last year. Higher SG&A costs resulting from acquisitions and the development of Guest360 were partially offset by cost saving actions taken in HSG. Depreciation and amortization expense was $1.6 million compared with $1.5 million a year ago. Adjusted EBITDA for the quarter was $4.7 million or 16.9% of revenue, up 38.2% from $3.4 million or 12.4% of revenue a year ago.

Moving on to the Retail Solutions Group, RSG's revenue decreased by 34.3% to $34.8 million compared with $53 million a year ago. The decrease is primarily related to the absence of a large transaction that was recognized in the third quarter of fiscal 2008. Gross margin was $8.9 million or 25.7% of revenue compared with $7.9 million or 14.9% of revenue in the same period last year. The increase in gross margin percentage was due to a higher mix of services.

SG&A was $4.7 million in the third quarter compared with $5.4 million in the same period a year ago. The decrease was due to lower compensation and benefit costs and a decrease in outside services. Adjusted EBITDA was $4.2 million or 12.1% of revenue compared with $2.5 million or 4.7% of revenue a year ago.

Revenue for our Technology Solutions Group decreased $3.6 million -- 3.6% to $161.4 million from $167.5 million. TSG continued to be affected by the soft demand for IT products during the quarter. Gross margin was $33.8 million or 20.9% of revenue compared with $34.1 million or 20.4% of revenue in the same period a year ago. The increase in gross margin percentage was due to the absence of several large transactions that carried lower gross margin in the third quarter of fiscal 2008.

SG&A decreased to $22 million in the quarter compared with $26.1 million in the same period last year. The decrease in SG&A is due to the cost reductions we have executed. Depreciation and amortization for TSG was $4.1 million compared with $5.3 million in the same period last year. The decrease in depreciation and amortization expense was primarily due to decreased amortization of intangibles. Adjusted EBITDA was 15.5 -- $15.9 million, 9.8% of revenue compared with $13.4 million or 7.5% of revenue a year ago. The increase in EBITDA is primarily due to lower SG&A costs.

In our corporate segment, SG&A excluding restructuring decreased to $9 million during the quarter from $10.8 million last year. The decrease is due to a credit of $2.2 million primarily related to a change in estimate of stock option forfeitures, cost reductions as a result of the benefit of corporate cost saving actions in the first and third quarters which was partially offset by a $900,000 increase in professional fees associated with the Company's SEC filings and recently concluded evaluation of strategic alternatives.

In addition, cost savings from the Company's executive management realignment and closure of the Company's corporate office in Boca Raton Florida were not fully realized in the third quarter. Adjusted EBITDA excluding restructuring was a loss of $6.7 million compared with a loss of $8.5 million a year ago.

Now let me turn to the balance sheet as of December 31st. Cash flow from operating activities in the statement of cash flows includes a $35 million payment related to the innovative earn out and does not take into account the transition of Accounts Payable trades to our floor plan financing agreement which is classified in financing activities. Adjusting cash flow from continued operations for these two items the Company generated $44.2 million in cash flow from operations year to date.

Notwithstanding a DSO improvement of eight days, Accounts Receivable increased to $172 million as of December 31, 2008 from $166.9 million at March 31, 2008. The increase was primarily due to seasonably high sales volume in the December quarter.

Accounts payable and floor plan financing increased to $152 million as of December 31, 2008 from $110.8 million at March 31, 2008 as a result of transitioning Accounts Payable to floor plan financing which has more favorable terms. That inventory was $25.5 million at December 31, 2008 compared with $25.4 million at March 31, 2008 or relatively unchanged.

Net working capital remains well in line with the Company's goals of keeping working capital under 5% of sales. Our net working capital was 2.5% of sales for the third quarter of 2009. With that I will turn it back to Martin for a discussion of our business outlook.

Thanks, Ken. Before we take your questions let me briefly review our outlook for the remainder of 2009 which ends March 31, 2009. As we discussed in last quarter's earnings release, current market conditions remain uncertain and with limited visibility into the quarters ahead. As a result last quarter we suspended revenue guidance until conditions stabilize.

However, notwithstanding the weak demand trailing 12 month EBITDA has increased significantly from fiscal 2008. And consolidated EBITDA margin has improved from 0.6% of sales for fiscal 2008 to a reported 2.5% of sales for the trailing 12 months ended December 31, 2008. Pro forma for full-year cost savings executed recently and during the fiscal year EBITDA margin would be 4.7%.

Based on the strong December quarter we expect to exceed the high end of our adjusted EBITDA guidance of $22 million announced in the Company's second-quarter fiscal earnings release. Fiscal 2009 adjusted EBITDA excluding restructuring and goodwill impairment charges is expected to be in the range of $23 million to $25 million compared with fiscal 2008 adjusted EBITDA of $4.6 million.

Our market conditions remain difficult. We are confident the plan we have executed over the past number of months places us in a strong position to weather the uncertain market conditions. We will continue to concentrate on those elements of the business that we control and we will focus on growing EBITDA and driving cash flow to generate sustainable increases in value for our shareholders. With that let me open up for questions.

(Operator Instructions). Brian Kintslinger, Sidoti.

Thanks. First I wanted to talk a little bit about the three different segments. Obviously we've seen a decline with certain retail and the retail environment; as everyone knows here no surprise is pretty weak. So maybe talk about what you're seeing at least today. Of course we can't see in a year what's going to happen today in terms of retail spend and what your clients are saying. Is there just much less expansion which could cause further deterioration?

Good morning, Brian. Let me start out with a general comment about retail and then more specifically about our retail business. Clearly the overall retail environment is weak at the moment. However, our Retail Solutions Group is fairly heavily concentrated in grocers, chain drug and discount retail stores. And as a result have continued to perform reasonably well even in this weak market environment.

There have obviously been retailers that have either softened or have entered into chapter 11 and we continue to monitor the retail space. But to date our retail business has performed quite well with a significant increase in services. We'll continue to evaluate our Retail Solutions Group, but as for now our customer base has remained fairly stable and continues to perform reasonably well given the nature of their business.

Now you said there was one large transaction that didn't repeat itself. Is there some -- I mean, I didn't realize there was that big of a recurring component in your business. What kind of transaction are we talking about and does that generally hit once a year? Give us a sense for what you're talking about there.

Generally we have a fairly stable customer base. But from time to time we may pick up transactions with a customer that are of some size. In the December quarter of prior fiscal year we had a large hardware transaction that was with a customer that we don't have ongoing business relationships with and as a result in December of 2007 revenues in that quarter reflected that large hardware transaction.

If we look year over year that's one of the largest changes in performance was really the recognition of that sale in the prior fiscal year. Going forward we can certainly have opportunities where we have sales like that again, but that's generally not a regular outcome in every quarter.

Okay. And let's turn to hospitality. We're reading in the press every day about the difficulties that, for example, the Vegas casinos are having and then on down about capital budgets being cut. Obviously December was a strong quarter for you, but when you think about, without giving specific numbers going forward, is there going to be some real pressure do you think there based on those capital budgets?

Well, I think when you look at certainly some of the casino hotels and some of the lodging establishments there has been reported weakness and in many instances quite a bit of difficulty for some of those businesses.

However, if you go back and look at our acquisitions over the last 12, 18 months, those acquisitions have significantly diversified our customer and revenue base. And while historically we may have been more heavily linked to casino gaming and resorts, we're now fairly heavily diversified into other markets like food service, stadiums and arenas entering K-12 service providers and we're actually seeing some reasonable growth in some of those other segments, particularly on the food service side.

So while the overall hospitality market is certainly quite a bit bigger than it was at three in six months ago, we have also diversified our revenue base. Having said that, sales are not as robust as we'd expected 12 months ago and we continue to monitor the Hospitality Solutions market place. But as I say, our customer base is quite a bit more diversified than it used to be.

And should I take that as there will be weakness maybe, but not as much as someone might think from the point you are today because of those new markets? I suspect that you still have a lot of your business tied to some of those other places where there's weakness, right?

I think depending on how close someone is to the individual markets that we serve, if their reference point was that it was purely in the resorts and casino hotel space then there would be -- certainly missing a large part of our other customers in the Hospitality Solutions business. And some of those customers and market segments continue to perform reasonably well.

Knowing what you know about -- clearly you had some strong EBITDA in the quarter, but knowing what you know about the future, at least what you think you know about demand overall for hardware purchases right now, is there intentions by you guys to further restructure -- to lower your costs in case or are you waiting to see how demand plays out over the next six months?

You know, Brian, part of the cost initiatives that we've executed on are yet to be reflected in numbers going forward. And so I think as we look at it, part of it is the expectation that we'll still see some improvements in cost structure as we report these cost savings over a full trailing 12-month period. Having said that, the overall demand for IT products as we and pretty much most others in the industry have discussed remains weak, and so as we go through our planning for the next fiscal year we'll certainly take that into account. But right now we don't have anything else to discuss or disclose as it relates to addressing cost structure. But like everybody else we're very cognizant of what's going on in the broader macroeconomic environment.

The last couple of questions I want to talk about is the balance sheet and cash flows. First of all, how much cash do you have today? I know you've reported the year end, but I guess things moved so quickly for financing and cash that maybe I'm interested to see what it looks like today if you have a rough number.

Day to day, Brian, it can move fairly materially depending on when we make payments to our suppliers, which are scheduled to take place at regular intervals. So if you pick one day versus another you can see a material movement. But in the months following the end of a quarter we could range from where we closed out at slightly above 70 to the high 70s down to the mid-50s depending on timing of payments to suppliers. And so a daily estimate of cash is probably not as good as an outlook for the rest of the year. Right now I think we are in the high fifties.

Right, that makes sense. And I asked that because it seems like you ended on a favorable day -- not that you can't have a bad day or a good day on a given quarter. And I guess I'm curious to really understand better the floor financing because the way your cash flow statement builds it out it looks you burned $34 million in the quarter.

Now I know for floor financing is below the line of free cash flow, but I guess I'm confused because payables obviously is coming down as quickly as receivables are going up. It seems like it's almost like a credit facility that IBM has for you and I had some other question on that. So it's almost like it's a short- to a long-term debt instrument. So just take me through it to understand it better, please?

We've got generally speaking two alternatives for funding the procurement of product. The one is we can buy it directly from our distributor Arrow, and the other is that we can put in place, as we did, a floor plan financing agreement where effectively we have payment terms under the floor plan financing agreement. What we did over this last nine months or so was transitioned most of our purchases from Arrow, the payment of our purchases -- we still make our purchases from Arrow but the payment would then go to a floor plan financing agreement with IBM global finance who then settles up with Arrow.

And so what you've seen is a decline in payables, which is effectively a decline in the line directly with Arrow being built up under floor plan financing and then IBM Global Finance settles up with Arrow. Given the nature of the floor plan financing agreement, it's reported under financing versus payables. The benefit for us using the floor plan financing is that we have slightly approved payment terms and as a result have used it.

There are instances where we still buy it from other distributors or suppliers so we would have a payables line with those suppliers. If you reversed what we did what you would end up seeing is payables would go up again and floor plan financing would go down, effectively you're just substituting one for the other.

So in effect you think -- the way you guys look at it is almost like putting floor plan financing and operating cash flow and that's the real number of how you're looking at it. Is that accurate?

Yes.

And then help us understand -- I note you guys have put out your Q already and it talks about IBM dropping I think there line from 150 to 100 and it looks like you're already at about 150. So talk about what you can do. You talk about having liquidity and talking with other parties about borrowing, but talk about what all that means and how you change that going forward and what you need to do.

Firstly, as far as our seasonal drawing either under floor plan financing or in terms of payables is concerned, it's obviously largest in December. So we have a peak at the end of December that then comes back down to a lower level in most other quarters. End it spikes slightly at the end of each quarter. So you'll see it come down during the quarter and then as you end up with intraquarter seasonality it spikes a little at the end of the quarter.

As far as IGF is concerned, one of the participants in our floor plan financing agreement, one of the other credit providers had withdrawn given what's going on in credit markets. And so we've addressed the overall facility limit under the floor plan financing agreement with that partner having withdrawn.

Given the fact that we also terminated our credit facility back in January, we're looking at capital structure issues right now and addressing not just the floor plan financing with IGF but also what other credit facility you would want to put in place. And we're in discussions right now with a number of financial institutions to put in place a new credit facility and address the floor plan financing.

What it really means is that right now the limit is down to $100 million, it was $150 million at the end of the quarter. But we paid down a good portion of that anyway post quarter end.

And so any amount above that you're trying to get financing so you can lower it below $100 million -- is that basically what I should assume?

No. Because we have -- we would go back to payables; it would depend on the timing of purchases during the quarter. So we don't see anything above that being needed to be financed in the traditional sense of a credit facility; that would just be financed through normal payables terms with our suppliers.

I guess the last question I have is in terms of rates, when you're in these discussions obviously it look like IBM has some favorable terms at the start. No financing fees I think you said for the first 75 days. These new agreements you're talking with, I take it in today's credit market it's less favorable financing or is that not fair to characterize it like that?

Well, what you should really compare, Brian, is the pricing on a credit facility for general corporate purposes. So let's set aside the purchase of products and if you talk about a credit facility for general corporate purposes pricing has clearly changed from what it was 18 months, two years ago.

The other part as it relates to our procurement of product, the floor plan financing agreement has free financing period and with any other supplier our distributor, Arrow, there are effectively payment terms -- free payment terms from any supplier as we give our customers. And so I wouldn't characterize the putting in place of a credit facility and pricing there with impacting pricing in terms of normal payment terms with our suppliers and our distributor, Arrow.

Okay, thank you very much.

[Ryan] Alexander, Raymond James.

Hi, this is [Brian Peterson] in for Brian. Could you guys talk about the linearity in the quarter? It sounds like December was pretty strong, so I'm just trying to see if the budget flush came in as expected, particularly in TSG where it looks like sales growth year-over-year actually accelerated.

Good morning, Brian. I would say our linearity was fairly consistent with what we typically see in the December quarter end probably two ways of looking at that. The one is sequential growth from September to December and the other part is within the quarter what do the relevant months look like in terms of total sales.

From Q2 to Q3 the sequential increase was fairly close to what we typically see, maybe just a tad softer than some of the other December's where we've had meaningful increases over September. And then within the quarter the intraquarter seasonality from October through to December was reasonably consistent with what we typically see if you look at percentages of sales in the first month, second month and third month.

So it was clearly a little bit softer than prior year, but in terms of linearity it was fairly consistent with what we've seen in prior quarters and prior years.

And have we seen any big changes thus far in the March quarter?

It's too early to say. From a linearity standpoint couldn't comment at this point. From an overall demand standpoint it's too early to comment.

Okay. Also on the cost-saving initiatives; and I appreciate the detail you guys have given there. But you said that one-third of the cost savings have been recognized. Is there any timing where we should see the benefit of that other $17 million or so hit the P&L?

Yes, you should see it now come in ratably in each quarter. So if I separate out those three buckets there was 14, eight and three. The 14 was executed at the end of June so -- and into July, so what you will see is in our September quarter the initial benefit of some of that cost savings. In December you would have a full quarter's benefit of the $14 million. And if you just divided by that by four you would have a quarterly impact from that cost saving.

The $8 million which was executed in October, at the end of October and into November you will get a partial quarter benefit of that. And then from the March quarter, including the March quarter going forward, you'll have your quarterly benefit of approximately $2 million. And then the $3 million which was the third component was executed late in the year and so you're going to see effectively very little in December on that. And then in the March quarter you should see effectively full benefit and then in each quarter going forward.

And so the comment was through December about one-third of those benefits are recorded in trailing 12-month performance, two-thirds still to come. So if you wanted to use that as a pro forma you'd be able to get what pro forma profitability would look like based on the cost savings and what we've recognized to date.

Thank you, that's helpful. I guess just lastly, can you guys talk about how you -- at least from a financial perspective -- your compliance with the debt covenants?

The debt covenants had a technical compliance which related to filing and completing audited financials and then we got performance covenants. The technical compliance requirements we did breach last year with the late filing of our 10-K and we obviously have a requirement to provide audited financials. And given that we did not file audited financials until the middle of December for our prior fiscal year we were in technical breach of our covenants. From a performance standpoint we're in compliance currently with our coverage ratios and leverage ratios, and particularly leverage ratios since we have no debt.

Do you see any risk of this going forward?

No, and the other part is right now, Brian, we're looking at a new credit facility and capital structure that would have new covenants and the covenants would address what's going on in the business today, both in terms of performance and profitability. By the end of this quarter we hope to have a new credit facility in place and given that the previous one is terminated those covenants are no longer relevant.

Thank you.

(Operator Instructions). Mr. Ellis, at this time I'm showing no additional questions. Would you like to make any final comments?

Thank you. Thanks for joining us today, everyone, and we look forward to following up after the end of our fiscal year.

That does conclude today's conference call. Thank you for attending today's presentation. You may now disconnect your lines.