Agilysys Inc (AGYS) 2010 Q1 法說會逐字稿

Good morning and welcome to the Agilysys unaudited fiscal 2010 first-quarter 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's corporate filings with the Securities and Exchange Commission and the Company's earnings release.

Today's conference call is being broadcast live on Agilsys's website. At the conclusion of the call, it will be archived and available for replay via the investor relations section of the Agilsys website.

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

Thank you, Sean. Good morning, everyone, and thank you for joining us this money to review our fiscal 2010 first-quarter 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, we will be using a slide presentation as the basis for today's review. If you have not already done so, we invite you to access the slide presentation from the investor relations section of our website.

With that, we'll begin today's discussion with the requisite Safe Harbor statement. Please note that the additional important information and risk factors can be found in our SEC filings, all of which are available on our website. Also, during 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 this presentation as well as in the press release issued this morning.

Let me begin with a few general comments on the quarter. The June quarter was weaker than anticipated and softness seen earlier in the year continued through the first three months of the new fiscal year. Across the industry, demand for IT products, particularly hardware, was weak.

From a cost management standpoint, costs were in line with our expectations. However, we will continue to evaluate our cost structure to address current market demand.

The almost 28% decline in consolidated sales was largely due to lower hardware revenues. Weak demand negatively impacted Agilysys's product and service revenues across the board. Generally, average deal size is smaller and many customers delayed spending, as they remain somewhat reluctant to deploy their IT budgets. This is generally more pronounced with larger projects, which typically have a longer payback period.

Gross margin contracted during the quarter to approximately 25% of sales compared with 27% of sales in the prior-year period. We saw some pricing pressure; and where pricing pressure was significant we declined to participate in very low margin transactions.

However, the change in margin is partly due to lower services margins in the quarter and also due to miscellaneous pricing adjustments that were positive in the prior year and negative in the current year. Ken will flesh this out during his comments.

On the cost structure side, we have begun to realize the benefits of cost-savings initiatives executed over the last nine months and were pleased with cost structure as a whole.

Selling, general, and administrative expenses excluding depreciation and amortization decreased $11.7 million year-over-year. Unfortunately, the decline in gross profit from lower sales more than offset the $11.7 million reduction in SG&A. As a result, adjusted EBITDA excluding restructuring and asset impairment was a loss of $6.3 million compared with a loss of $1.9 million in the first fiscal quarter of 2008.

Finally, financial flexibility remains strong. Cash on hand increased $15 million in the quarter to $51 million at June 30. We are debt-free and are undrawn on our $50 million credit facility.

As mentioned, demand for IT products, particularly hardware, was weak across the industry. Consolidated revenue for fiscal 2010 first-quarter declined 28% to $130.2 million and was negatively impacted by hardware sales which fell 32% year-over-year. Services revenues declined 26%, and software fared much better, down only 1%.

We were disappointed to see sales down sequentially in the June quarter when we generally report sales being flat to up sequentially in June.

We successfully reduced SG&A expense by almost $12 million from the prior-year period. This was due to much lower compensation and benefits, T&E expenses, and lower bad debt charges, partially offset by $1.5 million in higher medical expenses.

The reduction in SG&A was largely related to the benefits of fiscal 2009 cost-cutting initiatives, which are in excess of $35 million on an annualized basis. However, the significant decline in gross profit more than offset the cost savings achieved during the period.

The reported loss from continuing operations narrowed to $12.4 million compared with a loss of $60.1 million in the fiscal 2009 first quarter. Last year's results included $56.7 million in charges related to asset impairment and restructuring.

While sales of software and services revenue declined year-over-year, the software and services revenue mix improved partly to software sales faring better in the current market and also due to weak hardware sales in the June quarter. Software sales were down only 1%, whereas services were down 26%. We continue to focus on growing our proprietary software and services offerings and expect the long-term trend of growing these offerings to continue.

With that, I'll turn the call over to Ken, who will provide an overview of the segment results and add some color around the Company's financial condition. Ken?

Thanks, Martin. I will review each of our business segments, balance sheet and cash flow for the period, and then turn the call back over to Martin for an overview of recent business trends, outlook, and questions.

For our Hospitality Solutions Group, revenue decreased 35%, primarily as a result of lower infrastructure IT hardware and proprietary services sales. Demand remained soft in the commercial gaming and destination resort markets. We continue to see some strength in the managed food services, education, and cruise line segments of Hospitality. In addition, we have noticed a slight shift in the managed food service market to purchasing software as a service rather than acquiring software licenses and hardware infrastructure. As a result, we will see an increase in our recurring revenue stream in future quarters.

Gross margin for the period increased slightly due to the higher proportion of software and services relative to hardware sales compared with last year.

While higher medical expenses negatively impacted SG&A during the quarter, the combination of fiscal 2009 cost reductions resulting in lower salaries and wages, as well as a decrease in T&E expenses and the capitalization of Guest 360 development costs, which were expensed in the prior year quarter, resulted in SG&A decreasing by $1.6 million year-over-year.

We continue to be excited about the progress being made on our development of Guest 360 property management system. The project's development is on plan from both a scheduling and budget perspective, with rollout anticipated in early 2010.

This was a challenging quarter for HSG; however we don't believe this is a cycle where sales will be down materially year-over-year. The overall hotel market continues to suffer from declining RevPAR and average daily rates; but we see opportunity beyond hotels in markets such as corporate food service and cruise lines.

Retailers have certainly been hit hard by the recession. But the retail markets that our Retail Solutions Group serves in grocery, chain drug, and discount retail chains have fared better than the overall market. RSG sales were consistent with our expectations in the quarter. As we've discussed, RSG sales are volatile based on the timing of large customer rollouts.

Sales decreased 36% as point-of-sale hardware and implementation services volumes declined compared to prior year, which included two large customer rollouts. Gross margin percentage remained relatively flat year-over-year.

SG&A excluding depreciation and amortization declined $600,000 compared to prior-year period. This was primarily related to lower bad debt expense and outside services, offset by a $400,000 increase in medical expenses.

Retailers continue to deal with the cautious consumer spending environment, which results in cautious IT spending. Our RSG customers -- primarily retailers of consumer staples -- should outperform the overall retail market; and our move to develop recurring revenue streams helps to provide stability in the challenging retail market.

Soft demand for IT infrastructure solutions, especially hardware, caused by corporate customers' reluctance to spend their IT budgets, affected the entire IT supply chain from manufacturers to solution providers. In addition, Oracle's pending acquisition of Sun Microsystems created uncertainty which dampened demand in Sun's historically strongest sales quarter.

TSG's revenue declined 23% versus the comparable 2009 quarter. Based on what we're seeing in the industry and hearing through our channel sources, Agilysys is at least maintaining market share despite the poor year-over-year comparisons.

On lower revenues, gross margin percentage slightly expanded as a result of higher vendor incentives. SG&A excluding depreciation and amortization decreased $2.9 million due to the cost-reduction initiatives taken throughout fiscal 2009. The savings would have been higher but for the $500,000 increase in medical expenses.

Gross profit in the corporate segment declined $2.6 million from the first quarter of fiscal 2009 due to nonrecurring pricing and cost adjustments. Going forward, we expect these adjustments to decline and we will be recording these adjustments to the respective business segments.

SG&A excluding depreciation and amortization decreased $6 million due to cost-savings actions taken in fiscal 2009. The majority of these cost savings were employee related, in addition to professional fees being down $600,000 compared to prior year.

Switching to the cash flow and balance sheet for the period ended June 30, 2009. Cash at the end of the first quarter was $51 million, an increase of $14.8 million from March 31, 2009. The increase in cash for the quarter was primarily due to cash generated from accounts receivable of $47 million, offset by net cash consumed of $25.9 million from accounts payable and payoff of the floor plan financing facility which was terminated in May 2009.

Days sales outstanding improved 15 days from 88 days at March 31, 2009, to 73 days at June 30, 2009. As mentioned in our June call, we had strong cash collections in early April and experienced consistent collection patterns throughout the quarter.

Capital expenditures were $3.5 million for the quarter, primarily related to the implementation of the Oracle enterprise software and capitalized costs associated with Guest 360. We remain debt-free and have no outstanding balances on our $50 million credit facility.

Additional information regarding our fiscal first-quarter financial and operational performance is in the quarterly report on Form 10-Q which we filed early this morning. I'll now turn the call back to Martin for his comments on recent business trends and our outlook for the balance of the year, after which we will open the call for questions. Martin?

Thanks, Ken. As discussed, the June quarter was weaker than anticipated and softness seen earlier in the year continued through the first three months of the new fiscal year. While Retail was up sequentially, Hospitality and Technology Solutions and the Company were down year-over-year and sequentially. However, we still expect to see seasonal strength in the December quarter later this year and a strengthening in IT demand as the economy recovers.

Before we open up for questions, let me review the change in our dividend policy and our outlook for the remainder of the year.

As announced in the press release this morning, the Board voted to eliminate the Company's quarterly cash dividend. The topic of dividends and cash distribution policy has been reviewed on a regular basis as the Company's business has evolved over the last number of years. In addition, the current quarter's weak operating performance resulted in the Company not maintaining its fixed charge coverage ratio, which includes the payment of dividends. As a result, the Board voted to eliminate the payment of cash dividends.

The elimination of the dividend will preserve approximately $2.7 million in cash on an annual basis and will further improve our financial flexibility.

Turning to outlook, in our review of market information we believe we have at least maintained market share. However, we are yet to see tangible evidence of a sustained rebound in IT spending in our end-markets. As far as the outlook for the remainder of the year is concerned, we continue to have a reasonably good pipeline but have limited visibility into when the pipeline will convert to revenue, especially as it relates to hardware opportunities.

While companies have established IT budgets for IT spend, many remain cautious regarding timing of any significant IT investment unless it has a short payback period. As a result, our visibility into revenue and thus profitability for the remainder of the year remains limited. We continue to suspend revenue guidance and have also suspended earnings guidance until visibility improves.

As we look to the balance of fiscal 2010, we plan to continue to focus on those items under our control that can help produce tangible improvements in results. With the significant cost reductions we have implemented, an improvement in overall demand will manifest itself in greater leverage over fixed costs and improve our profitability. We hope to be able to provide greater clarity in the quarters ahead as market conditions improve.

With that, we'll open it up for questions. Operator?

(Operator Instructions) Brian Kinstlinger.

Hi, thank you. My first question is -- you had hefty customer concentration. I think it was Verizon. Can you give us a sense, did that -- was that any change in spending patterns there from one quarter to the next here?

Brian, good morning. No real change in spending patterns. Verizon continues to be a large customer of ours, and they continue to spend on their IT investment. Their contribution to this quarter's revenue is probably a little bit more pronounced given the softness that we've seen generally in the marketplace.

Okay. On the Hospitality side, I'm wondering. It came as quite unexpected how poor that division performed on a profitabiliy and revenue standpoint. Was there delays? What's going on with demand? And then I have some follow-ups on that as well.

From a revenue standpoint, there are probably a couple of items that are worth noting. The first is that where we are seeing some strength in the Hospitality segment, particularly in our corporate food service providers and restaurants, generally customers buy a hosted offering versus an upfront license and implementation. And in that instance, you don't get as much of the upfront license fee, but ultimately get to book an annuity stream with that customer over time. So there's a little bit of that impacts current quarter revenues.

The other part is that we have had some meaningful opportunities that came in later in the quarter that we continue to roll out. So a little bit of that has rolled out into the second quarter.

From our standpoint, we were disappointed with the softer sales; but based on what we see in the pipeline and opportunities out there, it is a little bit more of an aberration than I think any change in overall -- or any significant change in overall demand in that segment of our business.

So revenue is down 33% or more quarter-to-quarter. Is that going to bounce back you think in September based on the pipeline? Or is it going to take longer than that?

We think it will be back in September. Exactly where, we'll have to wait and see until the September quarter completes. But we don't think that the June quarter will be repeated on a regular basis.

The other part that impacted the quarter was -- as we've mentioned -- overall hardware sales were down for the Company. In the Hospitality Solutions business, where we do do hardware sales for customers, these were down too. There were a couple of transactions late in the quarter that got pushed into the second quarter.

So as I say, while we are disappointed with the revenue, we think it's more of an aberration in the June quarter than anything persistent in demand in the hospitality industry.

Last year, I think about this time, you guys talked about strategic alternatives, at least searching them and thinking about them. I'm wondering; it doesn't seem like the market is capturing the value of this Hospitality business. Has there been any thought of taking a look once again at how to maximize this Hospitality business, the value of it?

Well, I think our view of maximizing the value is to continue to execute on the business plan. As we've discussed, we've invested in developing Guest 360 over the last number of years. That product is coming to market early next year and is currently in beta testing.

As we continue to deliver on results, we think that that will be reflected in the stock price. I'm not sure that in the current market environment it is easy to attach intrinsic value to stock price, particularly given where the market has been and where our stock has traded.

Brian Alexander.

I'm sorry, this is Brian Peterson in for Brian Alexander. First off, clarification on the gross margin. I know by segment they were all at least flat year-over-year and some improving. But the gross margins I believe were down about 180 bps on a consolidated level. Could you clarify that?

Morning, Brian. The gross margin on a consolidated basis was impacted by those couple of items that Ken spoke about on the corporate segment. The corporate segment, these were some pricing adjustments that were positive in the prior year. If you look in the prior year at the corporate segment, there was a credit to gross margin and a debit in the current year. So as a result, we've seen meaningful swing year-over-year.

Those pricing adjustments, part of legacy issues as we continue to clean up process now that we no longer own our distribution business. We expect them to go down as we move forward. But they were certainly a meaningful contributor to the overall change in gross margin year-over-year.

The other contributor to gross margin or the decline in gross margin was the lower margins on our services revenue year-over-year.

Got it. Just on the earnings guidance, a lot of the macro points out there have been indicating that things are actually getting better; and it sounds like you're at least seeing some of that. Why would you see the need to suspend the earnings guidance in light of those indications?

A couple of points. The first is, as we look at alternative scenarios going forward, whether we look at pipeline and other information about commentary in the marketplace and expectations, one has one sense of how the next number of quarters in the fiscal year may pan out.

On the other side, when we look at the weakness that we saw in the June quarter and what we typically see in the way of seasonal changes in the way of revenues over June, it's not clear to us that the market has turned at this point. And given that fairly significant disparity between looking at seasonality and then other commentary in the marketplace, rather than providing a wide range on guidance that at the end of the day doesn't really help anybody, we've decided to withdraw guidance until the markets stabilize a little bit more and we can provide something that's more useful to you and the investment community.

Fair enough. I guess lastly, on TSG, are you seeing a lot of commentary from customers looking to potentially have a server refresh in maybe late calendar year '09, 2010, given some good profit margins?

There is certainly opportunity in the pipeline. I think we still remain cautious as to when those opportunities convert to revenue. I don't want to talk for end-users and customers as a whole, but I think generally people are being quite cautious with respect to capital spending in their businesses until they get comfort that their own businesses have turned. So there is some correlation in our minds between the overall broader macroeconomic environment and companies willing to open up their purse strings as it relates to IT CapEx.

Those that have projects that are ongoing and are sizable and have initiated them, we continue to see spend there. But I think visibility still remains limited at this point with respect to end of the year demand being meaningfully different from historical seasonal upward tick.

Thanks. Just lastly, how is Sun's recent acquisition affecting your September and maybe end of year expectations, at least from like a qualitative standpoint? Thanks.

Well, there are probably macro issues as it relates to Oracle and Sun closing the acquisition later this quarter. And that probably has some implications for execution within the Sun organization as well as customers who may wait for new information.

On the other hand, customers that are investing and building out data centers and have projects lined up, they're going to continue to spend. So I think it's going to be a combination of customer-specific issues, where we see customers that are spending today and have a pipeline to continue to spend; and then there's probably a few that may wait for new information.

As you probably know, we are Sun's largest solution provider in North America and have had a long-standing relationship with Oracle over a number of years on both the point-of-sale side as well as on the infrastructure software side. So we expect to fare pretty well with Sun and Oracle as the transaction closes.

But I think like many, we would like to see it closed and get it behind us, so that we can start executing in the marketplace.

Thank you.

Brian Kinstlinger.

Great. I have got a bunch of follow-ups. The first one is you talk about monitoring costs and it seems like they're no longer in line with demand, given we've had another step-down in demand. So are there imminent cost-cutting ahead? Or could we see this level of unprofitability, if you will, go on for a couple of quarters if demand remains here?

As I mentioned earlier on in the call, Brian, we will continue to address our cost structure as it relates to overall demand in the marketplace. We've obviously done quite a bit over the last nine months or so. Based on the conversation we just had with Brian Peterson, the issue here is how does the demand change in the quarters ahead.

But having said that, we're looking at cost structure in the context of current demand both in the June quarter as well as what we see going forward into the September and December quarters.

So basically, nothing is imminent until another couple of months, until you see how demand changes. So is that accurate?

No, we're looking at cost structure at the moment; but as I say, we are not in a position to announce anything today. Depending on how demand changes, we will address cost structure in the context of overall demand.

So I know you've suspended guidance, but does that suggest you no longer think you might generate cash this year? You only had two guidance figures out, but they weren't earnings; they were EBITDA and cash flow. You didn't have revenue numbers attached to that $25 million of EBITDA and that was one of the questions we were asking before.

So is it no longer, A, feasible to think that you'll generate cash this year; and B, is it a sense on EBITDA, that's now a function revenue more so maybe than it was in the past?

Well, clearly EBITDA is a function of revenue. As far as cash is concerned, we still expect to generate cash over the fiscal year. Ultimately, the amount of cash will be largely determined by revenue and obviously cost structure. But we still expect to generate cash this fiscal year.

Okay. On the fixed charge coverage ratio, what are the implications of that? Does that mean that -- is your financing still available to you? Do you have to again get refinancing, get a new rate on that facility? Give us a sense for what that means to you guys.

We still have availability under the line. We do not need to refinance. And the implications were around cash distribution, so dividends and stock repurchases are restricted when we breach the fixed charge coverage ratio.

Last quarter, you talked about all the cuts that were made. Have you realized all those cost-cutting efforts now in the first quarter? And so, you know -- actually that's just my question.

Yes.

We have seen it all? Now, on the medical claims, I guess I'm a little confused. Do you pay claims as they come, or is it just higher premiums that you are paying? I'm confused about why you're paying more medical claims.

Basically we're self-insured. So what we are seeing is an increase in medical claims being submitted, so that's driving up our medical cost compared to last year.

Self-insured meaning if someone goes to the doctor you pay for a visit, but you also pay the full cost?

No, on catastrophic claims, we're partly self-insured. And over the last number of months we have had a number of sizable claims.

Okay. On the Sun business, how much was it down year-over-year? I guess that was a point you made, that you're not losing market share and obviously the acquisition is impacting you.

So give us a sense for what your actual Sun business may have been down year-over-year.

Well, we have not disclosed the individual vendor lines, but we were down significantly less than Sun and others in the marketplace.

Okay, and so then me being the poor analyst I am, tell me how much Sun was down so I know relatively what you did better than.

I think Sun put out earnings release that suggests they were down somewhere between 29% and 32% year-over-year.

Okay, and the final question I have is related to the Oracle implementation you're doing internally. When is that expected to be completed?

The implementation, Brian, had two components to it. The first was Oracle general ledger and financial statement. That part is complete.

The second phase, which is order entry, will continue over the remainder of this fiscal year with the expectation that we go live on order entry round about the end of this fiscal year. That will move us off legacy systems and then off our existing legacy system; and then there will probably be another couple of quarters as we address business units that are on their own systems and international operations that do not run on our current legacy systems.

So CapEx for that this year and next seems like what, roughly?

Our CapEx for this year is a total of $10 million. Of that, about $5.5 million or $6 million relates to the Oracle implementation.

Will that all fall off in fiscal 2011, or not necessarily?

Well, there will probably be additional capital expenditures related to ramping up international operations and some of the work around that.

So less pronounced than the $5 million to $6 million or something equal to that?

Less pronounced.

Great. Thanks, guys.

There are no further questions at this time. I'll turn the call back over to you, Mr. Ellis.

Thank you, Sean. With that, let's wrap up today's discussion. The following slide represents a reconciliation of adjusted EBITDA from continuing operations for fiscal first-quarter 2010 and 2009 to net income. With that, we would like to thank you for joining us today and look forward to reporting our progress in the second-quarter report.

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