Agilysys Inc (AGYS) 2009 Q4 法說會逐字稿

Good morning and welcome to the Agilysys unaudited fiscal 2009 fourth quarter and full-year financial results conference call. 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 remarks made today may include forward-looking statements based on current expectations. These forward-looking statements may involve risks and uncertainties that could cause the Company's results to differ materially from management's current expectations. Please refer to the risk factors that can materially affect results outlined in Agilysys corporate filings with the Securities and Exchange Commission and the Company's earnings release. Today's conference call is being broadcast live on Agilysys website. At the conclusion of the call it will be archived and available for replay via the Investor Relations section of the website.

At this time I would like to introduce your host for today's call, Agilysys's President and CEO, Martin Ellis. Please go ahead, Mr. Ellis.

Thank you, Sara and good morning, everyone. Thanks for joining us to review our fiscal 2009 fourth quarter and full-year unaudited results. With me today is Ken Kossin, our Senior Vice President and Chief Financial Officer. As we announced in the Press Release issued this morning, due to this quarter's conference call is a slide presentation we will use for the basis for today's review. Our intention is to be both enhance transparency around our financial results and the business trend we with are executing. If you have not already done so we invite you to access the slide presentation from the Investor Relations section of our website at www.agilysys.com and as mentioned previously, a replay of today's call will be archived on the site.

That being said we will start with a brief review of the Safe Harbor statements. Additional important information can be found in our SEC filings all of which are available through the website. Also in today's discussion we will be using non-GAAP financial data namely adjusted EBITDA, which we define as operating income plus depreciation and amortization, reconciliations to GAAP are provided at the end of the presentation, as well as in the Press Release issued this morning.

Let me start out by saying that in many ways this has been an extraordinary year. We entered fiscal 2009 focused on the continued progress of integrating acquired businesses to realize intended synergies and improve profitability. As the year unfolded, we were confronted with a number of challenges including delayed filings of our financial statements due to unique reporting issues and a minority investment the rapid decline in IT spending that accelerated as the year progressed and by the fourth quarter had deteriorated beyond many forecasts. During the fiscal year, we also conducted a comprehensive strategic review of various alternatives to unlock value from our assets and executed significant restructuring to reduce our overall cost structure. By fiscal year end, we have taken out more than $35 million in costs.

Turning to our financial results for the fiscal fourth quarter, revenue of $155.5 million was approximately 20% lower than in the year ago quarter. However, higher services revenue and rebates resulted in gross margin expansion of 160 basis points to 25.9%. During the fourth quarter, we recorded a $3.9 million restructuring charge primarily related to head count reductions. And in February, we updated the goodwill impairment tests performed during the first half of the year and subsequently recorded an additional $86.2 million asset impairment charge.

While the market remained weak in the fourth quarter, particularly as it relates to hardware sales, we were pleased with the improvement in adjusted EBITDA given the 20% decline in sales. In the face of a very weak demand environment, we were able to improve cash earnings for both the quarter and the full year. Excluding charges, fourth quarter adjusted EBITDA was a loss of $1.8 million compared with a $2.3 million loss in 2008. We believe that restructuring actions taken to date have reduced our cost structure sufficiently to drive profitability in the current market environment.

From a balance sheet perspective, we have restructured our financing and have significant flexibility to manage the business. While DSOs deteriorated somewhat in the quarter, our April cash collections were very strong and we remain debt free with an untapped $50 million credit facility. Over the past fiscal year we generated cash and expect to do so again in the year ahead.

Turning to the quarters consolidated results, hardware sales year-over-year were softer than expected, down almost 28% during the period as demand for IT infrastructure projects remained weak. Substantially reduced compensation and benefits and lower travel and entertainment among other factors were partially offset by higher bad debt expense and outside professional fees resulting in a $7.1 million reduction in selling, general and administrative expenses versus the prior year fourth quarter. Other expense was higher during the period and was primarily the result of a $1.9 million noncash write down of our investment in the reserve fund. We originally had $36.2 million invested when the fund initiated liquidation in September. So far we have received $32.6 million of the total of $3.6 million still outstanding. Of that amount, $3 million has been reserved and the balance has been reclassified from cash and equivalents to investments in other noncurrent assets on the balance sheet. The reported net loss of $113.8 million or $5.03 approximate per share during the quarter was largely due to impairment of goodwill and restructuring charges.

Given the weak demand for enterprise hardware, this disproportionate decline in demand impacted the Technology Solutions Group or TSG where as our higher margin hospitality and retail fared better. While TSG was hardest hit by the downturn, it is well positioned to benefit from future increases in IT infrastructure spending given its exposure to education, finance, health care, telecommunications and public sectors. Over the last number of years, we have focused on expanding our solution beyond hardware reseller markets toward higher margin software and services revenues. Software and services represented nearly 34% of revenues in the fourth quarter of 2009 versus less than 27% a year ago and has been steadily increasing on an absolute basis given the declining revenue market. This migration is critical to our long-term objective of moving higher up the IT value chain as we expand the solutions we offer.

I would now like to turn the call over to our CFO, Ken Kossin, who will provide on overview of the segment results for the fourth quarter, and add some additional color around the balance sheet and our liquidity positions. Ken?

Thank you, Martin. I will begin with a discussion of segment results, touch on balance sheet and cash flow items and turn the call back over to Martin for an overview of our recent business trends and his final comments, after which we will open up the call for questions. Our hospitality held up relatively well during the quarter. Net sales grew more than 15% reflecting sustained demand for Info Genesis solutions. Gross margin improved 18.2% and as a percentage of sales increased to more than 60%. Adjusted EBITDA excluding asset impairment charge recorded in the quarter more than quadrupled compared to last year.

Turning to the retail segment, revenue decreased 14% reflecting the softer demand for hardware during the period. Gross margin was also contracted slightly due to product mix and lower rebates. And SG&A was higher as a result of bad debt expense relating to the three customer bankruptcies. The weak demand for IT infrastructure was even lower than our expectations. Revenue in our technology business declined 25% for the quarter. However, excluding depreciation and amortization, we were able to lower this segments SG&A by nearly $3 million due to cost reductions primarily related to compensation and benefits. Actions taken at the end of the fourth quarter are anticipated to result in nearly $2 million of additional savings beginning in fiscal 2010. The substantial loss during the quarter was primarily related to the result of asset impairment charges and the write down of innovative goodwill.

Corporate SG&A decreased by $3 million, despite the $600,000 increase in outside services and professional fees. This was primarily a result of realizing the savings of the cost reduction initiatives taken throughout fiscal 2009. This decrease was offset by $2.4 million increase in product pricing adjustments. Additional SG&A cost reductions taken at the end of the fourth quarter are expected to result in more than $2 million in annualized cost savings beginning in the current fiscal year.

Shifting to the consolidated results for the year, revenue in fiscal 2009 was $730.7 million, approximately down 4% from fiscal 2008. $63.7 million of the fiscal 2009 revenue was attributable to acquisitions that were not included in the fiscal 2008 full-year results due to the timing of these acquisitions. Excluding this impact, sales declined approximately 12%. Lower revenues for both the quarter and the year were primarily attributable to less hardware product revenue which declined nearly 10% from last year. Compared with fiscal 2008, service and software revenues rose 15% and 7% respectively partially offsetting the decrease in hardware. The higher mix of software and services revenue and rebates benefited gross profit, which was up more than $20 million from fiscal 2008. Cost saving measures the Company initiated throughout fiscal 2009 and increased revenues from higher margin software and services enabled adjusted EBITDA excluding asset impairment and restructuring costs to more than triple to $19.7 million for fiscal 2009 compared with $5.7 million a year ago.

Excluding -- SG&A excluding depreciation and amortization increased $6.2 million. The increase was primarily due to full-year SG&A costs related to the timing of the fiscal 2008 acquisitions of approximately $14 million. The $2.2 million increase in bad debt expense and a $1.8 million increase in professional fees offset by $15 million realized cost savings from actions taken throughout fiscal 2009. The $15 million cost saving realized in fiscal 2009 is less than half of the total we anticipate realizing in the current fiscal year. As Martin mentioned earlier we have taken out more than $35 million annualized basis and expect to fully realize that this year.

Switching to cash flow and balance sheet for the year ended March 31st, 2009. Cash flows from continuing operations and 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 trade to our floor plan financing agreement which is classified in financing activities. Adjusting cash flow from continuing operations for these two items, the Company generated $8.5 million for the year. Cash at the end of the fiscal year was $36.2 million, a decrease of $36.2 million from December 31st, 2008. The declining cash for the quarter was primarily due to cash consumed of $71.7 million related to the floor plan financing payments, offset by cash generated from accounts receivable of $19.7 million accounts payable of $16.5 million.

Days sales outstanding deteriorated 19 days from December 31st 2008 as a result of back-end loaded fourth quarter sales and customers delaying significant payments until the first week of April. April cash collections were in excess of $80 million, driving our cash balance at the end of April to $78.7 million. Capital expenditures were $2.7 million for r the quarter and $7.1 million for fiscal 2009, primarily related to the implementation of the Oracle Enterprise software. Subsequent to the end of the fiscal year we entered into a $50 million credit facility with a $25 million accordion, which replaced the unsecured financing facility terminated in the fourth quarter. In addition, we paid off with cash generated from operations and subsequently terminated our floor plan financing facility in early May, and are now primarily funding product procurement with cash flow from operations. Additional information regarding our fiscal 2009 financial and operational performance is in the annual report on Form 10-K, which we expect to file early next week.

With that I will turn it back to Martin for a discussion of our recent business trends. Martin?

Thanks, Ken. Notwithstanding the weak demand environment over the past 15 months, we have continued to make improvement in operating profitability in all of our segments. In our hospitality business, trailing 12 month sales have remained largely flat, while we have improved adjusted EBITDA in excess of 50% and have expanded EBITDA margins by 370 basis points since March 2008. In our retail business on the other hand, sales have declined almost 7% over the past 15 months, while adjusted EBITDA has increased over 30% and EBITDA margin has expanded 180 basis points.

As discussed earlier, our Technology Solutions business has been impacted most by the weakening demand for IT infrastructure. Trailing 12 months sales have declined 7.3%. However, in the face of declining revenue, adjusted EBITDA has increased 25% over the trailing 12 months, and EBITDA margin has expanded 180 basis points. Finally, from a corporate expense standpoint, we significantly reduced corporate expenses since the trailing 12 months peak in September. However, much of the action we have taken has been in the past six months, and as a result, we expect corporate expenses to decline further. Our expectations for the year ahead is that corporate cash expenses also be approximately $32 million compared with the current run rate of about $41 million. The benefit of the cost reduction actions has led to steady improvement in adjusted EBITDA to its consolidated level. Our revenues have progressively declined over the 12 months as the economic climate has deteriorated. We have been successful in increasing adjusted EBITDA significantly from $5.7 million a year ago to $19.7 million for the current fiscal year and at the same time increased our consolidated EBITDA margin by over 200 basis points.

While we were disappointed by the very weak market conditions in the fourth quarter, and remain cognizant of ongoing weak demand, we believe our cost structure is right sized to execute our business model. We realized approximately $15 million in cost savings in fiscal 2009. This is less than half of the more than $35 million in annualized savings we anticipate realizing in the current fiscal year. Notwithstanding the continuing weak demand environment, Agilysys is well positioned entering the new fiscal year. Our cost structure is aligned with the current demand outlook and our new organizational structure provides streamline decision making and lower overhead and further reinforced by the substantial financial flexibility Ken just highlighted.

Looking ahead to scheduled implementations for fiscal 2010, HSG new property management software, 360 is on track for formal launch near the end of the current fiscal year. Additionally, our unplanned Oracle Enterprise software initiative is on plan to be implemented in fiscal 2010. This is a significant undertaking but we look forward to realizing the benefit of this significant resource and capital investment. Given the ongoing uncertainty surrounding the macro economic environment we are continuing our suspension of revenue guidance until economic conditions stabilize. However, we have many reasons to be optimistic since Agilysys solutions are ideally saluted to demand particularly on the TSG side. Notwithstanding the on going weak market conditions, the Company expects fiscal 2010 adjusted EBITDA to exceed $25 million with no additional charges related to asset impairment and restructuring compared with fiscal 2009 adjusted EBITDA excluding charges of $19.7 million. Stock compensation is expected to be approximately $4 million capital expenditures are expected to be approximately $10 million including $3 million related to the capitalization of certain Guest 360 development costs and approximately $5.5 million in Oracle, ERP implementation costs. Also the Company expects the generate cash in excess of $10 million in fiscal 2010.

Finally I would be remiss if I did not mention how pleased we are with what our management team and employees have accomplished in the recent months to reposition the Company. And we have emerged re-energized and positioned for renewed profitability. Going forward, I am confident that the strategic plan being executed will drive future shareholder value. And with that, we'll open up for questions. Operator?

(Operator Instructions). Our first question comes from the line of Brian Alexander from Raymond James. Your line is now open.

This is Brian Peterson stepping in for Brian Alexander. Just first question on the cost saving. Martin did I hear you in seeing that the full $25 million in prior savings were recognized in the March-quarter? And as for the $10 million, can you guys talk about the linearity of those savings?

In terms of linearity, let me start with that first. The cost savings that we have initiated should pretty much be linear from quarter to quarter. In other words, this would be no seasonally associated with them. They're largely related to addressing head count, outside service providers and some professional fees. As far as current cost savings are concerned, we have realized about $15 million in cost savings thus far. A number of additional cost savings were executed late in the quarter and the additional $10 million was executed right at the end of Q4. So during the fiscal year, we have executed about $25 million then at the end of the quarter, executed additional cost savings as we entered fiscal 2010.

Okay. The growth in hospitality was a lot better than we were looking for. Were there any one-time items driving that? And how should we be thinking about the growth rate in that going forward.

From one-time item standpoint, there was nothing unique in quarter that was one-time. As Ken mentioned our Info Genesis product sales were pretty robust in the quarter. I think in the current market environment, there is weakness across industries. Our expectations right now is for limited, if any growth in the hospitality marketable we look for ways to try to grow in that market. And expectations today are much lower than they were 12 or 15 months ago.

Okay. That's helpful. I guess just lastly on TSG, were 2/3 of the June-quarter, can you talk about how the demand trends have performed this quarter and maybe if you are seeing any customers potentially push out any products? Thanks.

From a general demand standpoint, the market continues to be weak. As you know, the Technology Solutions business generally back-end loaded. So, a significant portion of sales are, are realized and recorded in the third quarter. Excuse me, the third month of the quarter. I think from an overall demand standpoint, budgets are in place for spending, but most companies I think are a little reluctant to open up the budget for sizable spending at this point. We have seen an increase in number of opportunities but at very low margins. And I think just sort of generally characterize what's going on, you have to a whole lot more willingness on the part of customers to enter into transactions where there's a short pay back period as opposed to investment that is have much longer pay back period. So project that is are getting funded are those that have pay back of obviously less than 12 months gets funded fairly quickly. Two year paybacks and longer take a little bit longer.

Thank you.

(Operator Instructions). And your next question comes from the line of Brian Kinstlinger from Sidoti and Company. Your line is now open.

Martin, on the last question, should we assume that June gets a little weaker in demand trend what you are saying based on the budget being back end loaded compared with March or has there been some stabilization?

The rate of decline has decreased significantly. What does June-quarter looks like I am not exactly sure at this point. The capital that are relevant to our obviously overall demand in the marketplace is relevant. But we have a sizable business and this is fiscal year ending June. There's obviously some disruption with the Oracle Sun acquisition, and I am not sure to what extent that may have implications or may not have implications for the quarter. But I think generally speaking we are looking at more of the same compared to the first quarter. Talk about improvements is more anecdotal than having any formal indication that the demand environment is changed.

For the first two months of the quarter the increase in the business that you might have seen has been pretty nominal, the year-end, is that accurate?

I think its consistent with what we see in the first quarter. But Brian, the third of the quarter is ultimately the final determinant on how we do, you know we do in excess of 50% of our revenue in the third month of the quarter in TSG. So at this point what June, what June turns out the be is ultimately key in determining how the quarter pans out.

And it is interesting to provide EBITDA guidance without revenue guidance, I mean has to be based off some revenue assumption, can you help us understand how you provided one without the other and how low can revenue go and still be able to maintain those EBITDA numbers?

In terms of addressing the guidance question, the revenue, and about profitability, from a revenue standpoint, it was our view that trying to provide guidance was probably not in our best interest or yours, given the wide range that we would have put around it. At this point the market is still uncertain. Clearly we all hear about the anecdotal information and at some point it is going to turn but the question is when. As we look at the year ahead, we obviously looked at performance on the upside, performance on the down side and what that might translate into but felt uncomfortable providing revenue guidance where we had any basis for providing the range narrow enough to be of any value.

From an EBITDA standpoint, we looked at alternative revenue scenarios and then have looked at current cost structure and current expense savings that we expect to impact the year ahead, and from that provided guidance as to what we think we can reasonably achieve given the existing demand environment. If the demand environment changes significantly, we will have to revisit that EBITDA guidance, but we did want to provide the same as we did last quarter some guidance around what we think ongoing profitability is. The EBITDA guidance clearly at some assumption about revenue, but at this point we are not comfortable providing revenue guidance until the market stabilizes a little bit more.

I can assume though because you had revenue, that $25 million assumes the low end of what that wide range would have been to say at least $25 million. I don't care what the number is, but that's sort of what you are getting at?

Yes. I mean that's at the low end and some expectation that we should be able to exceed that unless the market continues to deteriorate significantly.

Okay. You mentioned about the reserve fund and I just want to make sure I understood. There's still $3.6 million of cash being tied up in long-term assets? Is that accurate? Is that what you said?

That's correct. We have a reserve of $3 million for potential nonpayment of that outstanding balance.

Which offsets the 3.6 or that 3.6 includes really 6.6?

No, there's 3.6 offset that is to 0.6.

I see. Okay. And if the market does weaken further, which it may or may not, no one has a crystal ball I'm curious how much more you have in terms of being able to cut costs, did you still have a way to go in terms of cutting fat or are you getting to the point where you will be more and more difficult to cut people and.

As I mentioned earlier, we believe that the cost structure is right sized for the current demand environment. Ultimately a significant change in demand would force us to revisit cost structure, but at this point, we believe cost structure is right sized. We are not thinking about cost structure on a monthly or quarterly basis, we are thinking about it over the next 12 months as to whether we are right sized. As you mentioned, nobody at this point has a crystal ball as to when things change but if it did deteriorate significantly we would have to think about cost structure.

Okay. And can you sort of go over the DSO increasing? Is that sort of a one quarter phenomenon or are customers taking longer to pay? Take us through your assumption going forward on DSO and payment.

The DSO phenomenon in the March-quarter was a combination of a couple of factors. The first was sales were reasonably back end loaded. They always are but probably a little more so than historically. As a result, we are back end loaded nature of the sales, your DSOs don't come down as payments. In addition to that, it was probably in our portfolio of receivable, some customers addressing year-end balance or quarter-end cash balances same way we are and everybody else was. As Ken mentioned we had significant payments in April and had April collections that were stronger than they typically are with year-end or quarter-end cash increasing from $36 million to about $78 million at the end of April. In addition to that in the first couple of days of April, Ken we had what about.

$15 million or $16 million in payments.

Yeah, on the second and third day of April. So those are customers that held payment just two days past quarter end. Our expectation is that the DSOs improve over the next quarters in this fiscal year.

Okay. When I look at the goodwill write down for the hospitality group and you doing fairly well comparatively speaking, just take us through, would that be info general genesis or something else, given that was so strong. I'm confused, not that its overly material, I'm just curious about the write down in the hospitality group, given its the only one doing relatively well.

If you go back to the write down earlier in the fiscal year, we wrote it down hospitality earlier in the year and we wrote it down again now. The overall process for evaluating potential impairments of goodwill is partly driven by the overall stock price and market capitalization of the Company based on the assumption that market prices are the best estimate of value for the business. We perform our annual review in February. So February 1 effectively establishes value for the business, and given stock price at the time, we have got to determine what forecast effectively confirms stock price at the time that you perform your impairment analysis. And with the low stock price and some cash on hand, you obviously need to develop a forecast that is pretty conservative and particularly given where our stock was in February. So the impairment analysis from our standpoint is more of a process of addressing a forecast that ties in to market value and stock price than necessarily our expectations around where the business will be over the next number of years.

Okay. The final question I have, can you give us any details behind the parts for the recently elected director?

Well, firstly we were disappointed to see Steve [Tempidino] resign from are the Board. He had very short tenure on the Board. As we filed in the 8K his reason for a resignation to the Company and our shareholders as well as to his Company and as a result determined that it was in our shareholders best interest for him to resign. This is obviously disappointing given his short tenure, but we would rather address and deal with governance issues earlier on than let them become a problem down the road. We are in process of looking at how we fill that vacancy on the Board.

I'm curious what that conflict was. It wasn't really disclosed and you would think he would have known that coming in. That's why I'm curious for more than what the 8K said.

I don't have specific details. You're welcome to call him and talk about that but there's a business conflict, some concern about that earlier in the year and I guess ultimately it turned out to be in fact an actual conflict.

Okay. Thank you.

(Operator Instructions). There are no further questions at this time.

Thank you for joining us today, and we look forward to reporting our progress to you as the fiscal year unfolds.

This concludes today's conference call. You may now disconnect.