Agilysys Inc (AGYS) 2012 Q1 法說會逐字稿

Good morning, and welcome to the Agilysys fiscal 2012 first quarter financial results conference call. All participants will be in a listen-only mode until the end of today's presentation, when there will be an opportunity for you to ask questions.

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 Company's website for approximately 30 days.

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

Thank you, Maureen.

Good morning, and thank you for joining us to review our unaudited fiscal 2012 first quarter results. With me today is Henry Bond, our Senior Vice President and Chief Financial Officer. We will be using a slide presentation as the basis for today's review. If you have not already done so, we encourage you to access the slide deck from the Investor Relations section of our website, at www.agilysys.com.

Also during today's review we will be discussing non-GAAP financial data, namely adjusted EBITDA. Reconciliations to GAAP are provided at the end of the presentation, as well as in the press release issued this morning.

I will begin with a strategic overview of where we are today. That, of course, brings us to the sale of the TSG business subsequent to quarter end. The closing went smoothly and I am pleased with the overall progress of the Company's reorganization to date.

After accounting for transaction expenses and commissions, severance payments and IT transition services, proceeds from the sale were just under $56 million. Since we closed only a week ago, we could see some additional adjustments to that figure resulting from final balance sheet and working capital calculations.

With the TSG sale closed, we are restructuring the remaining businesses, with a focus on reducing costs and making select investments to enhance our products and capitalize on the significant opportunity we see available from the markets we service, while improving operational and financial performance.

At the same time, we are returning capital to shareholders in the form of a 1.6 million share repurchase program that the Board authorized last week. Additionally, we are progressing with our plan to significantly downsize our physical facility footprint and move corporate functions to Georgia.

As announced in this morning's press release, we have begun quantifying the savings and costs associated with the overall reorganization plan. In addition to the elimination of TSG's specific overhead, we have begun executing a plan expected to eliminate $14 million to $16 million of annualized expense beginning in fiscal 2013.

The restructuring charges to execute the plan is expected to be in the range of $16 million and $18 million, which primarily will be recorded in fiscal 2012, $2.4 million of which was recorded in the first quarter. The Company expects to realize an additional $4 million to $5 million in 1-time expenses related to closing and relocating corporate headquarters from Solon, Ohio to Alpharetta, Georgia, which we do not expect we can record as restructuring charges.

This primarily includes accelerated depreciation of our existing facility in Solon and hiring costs of corporate staff in Alpharetta. We believe the planned investment to realize the run rate savings we have identified offers an attractive return on shareholder capital, which will receive appropriate longer-term value recognition for our shareholders.

Moving forward, I am optimistic about the opportunities we see in the hospitality and retail markets. Particularly, the movement by customers towards areas where Agilysys already excels, such as Mobile Solution and Guest Experience Enrichment.

Currently, the marketplace is serviced through integrating a selection of point products from single and multiple vendors. Through select investments, we see an opportunity to strengthen and integrate our products and offer a guest-centric business system, which will result in an enhanced guest experience and reduced overall cost of service for our customers.

For example, personalization of the guest experience can be greatly enhanced with mobile devices connected to guest preference data; both are areas in which Agilysys is an industry leader. Another area is cross-channel management, which unifies reservations with property administration.

These are the types of solutions where Agilysys has proprietary expertise that goes beyond integration of individual elements. Retailers also seek mobile solutions to enhance guest experience, decrease line queueing, cross sell, upsell and improve labor management. Again, a competency where Agilysys is a clearly recognized market leader.

The industry trends we are seeing are supported by empirical evidence. A case in point is the National Retail Federation's survey that showed mobility as the leading element attracting IT investment by retailers in 2011. In speaking with customers, near-term mobility investment demand drivers include moving legacy solutions closer to the customer with minimal new investment, improving customer service, enabling more knowledgeable associates, and providing point of service anywhere.

We believe this is just the beginning of a momentum building trend that will change the landscape of how retailers use mobile solutions to create more meaningful in-store experiences for their guests. Strategic initiatives will center on product unification, enhancing our industry-leading capabilities to build upon and extend our leadership position, investment prioritization, and expanding our partner base.

Turning to the first quarter operating results, the first quarter of fiscal 2012 was characterized by continued positive momentum and IT demand and improving market conditions. Consolidated revenues for the quarter were up 15% to $152 million, compared with $132 million in the first quarter of 2011, with solid sales volume growth, 22% in hardware and 18% in services, more than offsetting the 14% lower software sales during the period.

Compared with the year ago quarter, revenues for RSG and TSG grew 39% and 15%, respectively. These improvements were partially offset by 9% decline in HSG sales during the quarter, versus a year ago, which primarily reflected a large hardware sale that did not repeat in the current quarter. Henry will review the individual segment performance in more detail in a moment.

Gross profit was up $4.5 million; however, margin contracted to 25.3% of sales versus 25.7% in the prior year. The declining gross margin percentage was primarily due to lower service margins and a higher proportion of hardware sales.

Selling, general and administrative expenses, excluding depreciation and amortization, increased $2.5 million, or 7%, to $39.4 million, due largely to transaction costs and the acceleration of stock compensation expense triggered by the sale of TSG. Depreciation and amortization was down $1.1 million on lower intangible amortization versus the prior year. Also for comparison purposes, last year we had a tax charge of $4.4 million related to a valuation allowance that was not repeated in the current quarter.

On an operating basis, the loss was $5.4 million, compared with a loss of $6.6 million last year. The net loss for the quarter was $4.8 million, or $0.21 per share, compared with a net loss of $10.3 million, or $0.45 per share, a year ago. The adjusted EBITDA loss for the quarter, excluding restructuring charges, narrowed considerably to $0.5 million, from last year's $2.7 million loss.

With that, I will turn the call over to Henry to discuss the segments and balance sheet information.

Thanks, Jim.

HSG sales decreased $2.1 million, or 9%, in the first quarter of fiscal 2012, compared with the same period in fiscal 2011, as an increase in services revenues was more than offset by lower product revenues. As Jim touched on, last year's revenues included a large hardware sale that was not repeated in the current year quarter.

Gross margin expanded 570 basis points during the quarter, primarily due to higher services margins which were favorably impacted by lower project-related costs for proprietary services projects. The improvement in services gross margin was partially offset by lower product margins associated with sales mix and the amortization of capitalized costs related to Guest 360 development.

SG&A expenses increased $1.8 million from last year, primarily due to higher compensation driven by accelerated vesting of stock compensation expense and reinstatement of the Company's 401(k) match. Additionally, in last year's first quarter, HSG capitalized $1 million related to Guest 360.

This compares with $300,000 in enhancements capitalized in the current year quarter. Operating income was $500,000, down $1.7 million from last year's comparable quarter. As result of the higher SG&A, adjusted EBITDA excluding restructuring, was down $1.5 million from the first quarter of fiscal 2011, with the revenue decline and higher SG&A expense more than offsetting the margin improvement.

Sales in the Retail Solutions Group increased 39% from last year, driven by several large hardware orders in the current year quarter. While sales were up, gross margin was down. RSG realized a 490 basis point contraction during the period, as the higher revenues were primarily comprised of lower margin hardware sales.

SG&A, excluding depreciation and amortization, increased by $100,000. Operating income increased 19%, to $2.1 million for the quarter. Adjusted EBITDA, excluding restructuring charges, reached $2.4 million from last year's $1.9 million, as the impact from the higher revenues during the period was partially offset by the gross margin contraction and higher SG&A expense.

Turning to TSG. As there were significant contingencies, among them shareholder approval, associated with the sale of TSG, this segment did not qualify as a discontinued operation until after the quarter ended. Starting in the fiscal second quarter, we will be reporting TSG as a discontinued operation.

TSG's reported revenue increased $12.7 million, or 15%, from the first quarter of 2011, reflecting improved customer demand. Growth in TSG's product revenue was primarily due to higher hardware sales. This was partially offset by a decline in software revenues, as 2 large remarketed software sales in the prior year quarter did not repeat this year.

Gross margin expanded 180 basis points to 19.3%, versus 17.5% last year. The margin improvement was driven by improved hardware pricing, as well as customer and product mix for hardware. SG&A, excluding depreciation and amortization, increased 2%, or $300,000, and operating income was $2.6 million, versus an operating loss of $1.8 million last year. Adjusted EBITDA, excluding restructuring charges, was $2.7 million, versus negative EBITDA of $1 million last year, driven by higher revenue and margin improvement.

In corporate, SG&A expense increased $400,000 in the first quarter of the current year, which was more than explained by $600,000 of accelerated vesting of stock compensation and $1.1 million of transaction expenses, both of which were related to the TSG divestiture. The $1.6 million increase in restructuring charges was primarily attributable to the CEO transition and some initial cost-cutting measures.

As Jim indicated earlier, we anticipate a total of $16 million to $18 million in restructuring charges to be realized, primarily in fiscal 2012. Adjusted EBITDA, excluding charges, was a loss of $7.3 million, compared with a loss of $7 million last year.

Turning to the balance sheet. Cash at quarter end was approximately $52 million. Upon closing the TSG sale and paying approximately $5.6 million in transaction expenses and related adjustments, as well as approximately $13 million consumed for working capital purposes, we currently hold $102 million.

DSOs were flat with the prior quarter and we had no significant bad debt charges. Working capital as a percentage of sales increased sequentially to 5.9%, from 3.4% at the end of the prior quarter. Capital expenditures were down $700,000 year-over-year, as result of lower capitalized expenses related to Guest 360.

With that, we are ready to open the call for questions. Maureen?

(Operator Instructions)

We have a question from Brian Kinstlinger from Sidoti & Company. Please go ahead, sir.

Hello. Good morning, guys.

The first question I had is, when we're talking about the cuts, which sound mostly to corporate overhead, what is the sort of baseline number we're starting from? Where is annual expenses on corporate overhead, where we are today? Is last year the proxy of $26 million, or are we lower than that after what's occurred in the first quarter already?

Good morning, Brian. Thank you for joining us.

I think your $26 million is an accurate figure with which to work.

Okay, great.

And on the last call, 1 of the questions I had asked was, in addition to the cuts, would some of the costs and then corporate overhead also flow out with TSG? Is that included in the numbers you're talking about cutting, or will there be additional costs that flowed out with that business?

TSG had both gross corporate costs in support of the business, but also some allocations to the business. So, if you look purely at the corporate cost structure, you would not expect to see a significant change prior to the restructuring, because while some direct costs in corporate would go away, so would the allocations that we had been doing to TSG.

The first couple questions obviously were around cost, the next 1 is just trying to get -- so I can get EBITDA numbers, is the corporate SG&A going to be about the same of where we were, or does some of that fall off as well? Are you making some changes? You're closing some offices, I'm not sure what offices you are keeping. Will D&A on the corporate side be the same?

On the corporate side, the biggest change would be due to the Solon facility does run about $700,000 or $800,000 per year. And once we have closed that facility, that would go away.

Okay.

And when is that expected to happen? When are you going to close that office?

We've announced that we would have headquarters moved by the end of the first quarter of our -- I'm sorry, the fourth quarter of fiscal 2012.

So, March 31.

March 31, 2012.

Great.

Then if we could touch a little bit on the segment costs too; it seems, and you had mentioned, Hospitality are higher than each of the first 3 quarters last year. The fourth quarter had some extra costs in there. Can you talk about what is driving those higher costs and are you looking at, at least in that division, of ways of paring down costs as well?

Part of what is driving higher costs is capitalization policy, so it is not actual cash expense. That's the difference between $300,000 and $1 million that was capitalized. And then the other things are more 1-time in nature.

There was the reinstatement of the 401(k) plan, which had been suspended back during the 2008, 2009 time period, and then also there was stock compensation expense, which was triggered in all of the business units as part of the TSG divestiture triggering some accelerated vesting of stock comp. So, all of those things are either transaction driven or capitalization policy driven.

Is the capitalization piece found in depreciation and amortization, or is that found in the operating costs? Because it seems that your depreciation and amortization is flat year-over-year in that segment.

You do find a difference in operating cost if you're spending at a run rate and last year you were capitalizing a more significant portion of that than you are this year, then OpEx goes up as result of that.

Okay.

Now if I look at -- moving to the demand side -- Hospitality. First of all, what percentage of revenue is in the form of licenses? And then maybe talk about what industries you saw some weakness in. I mean you mentioned there was one large transactions that didn't re-occur, but it doesn't strike me that your business is a recurring business model where people are buying every year, and maybe I'm wrong. So, maybe talk about what industry you are seeing weaknesses versus others you might be seeing strength, and sort of the outlook given where the economy is.

Let me answer the first question, and then turn it over to Jim.

We do not disclose a breakdown of licenses by business unit. So, I can't give you a percentage number on that. But maybe Jim can speak to the industry trends question.

Brian, with respect to industry trends, gaming had always been such a meaningful portion of our revenue, from a new revenues or bookings perspective. Over the last year, we have increased our revenue diversity. As you saw when we did our fiscal 2011 conference call, we discussed education, crews, food service markets have been increasing in their contribution to our overall new revenues bookings.

With respect to our recurring revenue, we do have exposure to economically sensitive customers, for instance, gaming and hoteliers, in our recurring revenue base. Though unlike previous week economic cycles, their balance sheets now are materially stronger.

So, in terms of economically sensitive customers, we still derive a large portion of our revenue in the less economically sensitive retail space. And in particular, grocers, chain drug, and convenience. So, we do see some risk with respect to economically sensitive customers, but we also have some stability on the retail side of the space, in our customer and our revenue opportunity.

So, staying with hospitality, though, when you're talking about recurring, is that maintenance you're talking about or do you have customers that are constantly buying product every year around the same time?

It is primarily maintenance, and then our software as a service or subscription delivery model for some of the new bookings. So, as I evaluate our bookings results, we are seeing an increasing rate of clients acquiring usage of our solutions in a subscription, as opposed to a premise-based traditional license model.

And then back to the demand question, so given that there's risks you see, do you think Hospitality can begin to grow by the end of this year again? Is that going to be difficult? And maybe talk about, or speak to Guest 360 and the pipeline of opportunity, maybe where it's contributing now in revenue, and what is the opportunity market it's addressing?

Brian, we don't -- we aren't necessarily prepared to give guidance on revenue; however, I will talk about the market opportunity. I think the market opportunity in hospitality, as we measure it, is roughly about a $3 billion market from the addressable space. That's globally.

We do see, at least from the research we've polled from our research providers, that that market is growing in the stable, kind of single-digit rate. So, we can talk about the addressable market opportunity, but not necessarily providing revenue guidance.

Great. 2 more questions.

On the retail side, the strength in hardware, does that lead to the next couple of quarters more services and integration work? Or are those customers that weren't buying services and integration from you as well, as much?

There would be some services integration work tied to that revenue. I don't know that it something you would -- that would pop out and you would see it in the operating results where you could break it out. But, there would be that there, with the hardware.

Great.

And the last question, share repurchases. You mentioned you have an authorization, but what are the intentions of the Company? How quickly do expect to act on it? Have you acted on it? And would you expect to complete that in any orderly fashion, buying through that entire authorization?

Well, Brian, up until today's call, the Company has been in possession of material non-public information.

Right.

So, we could not have acted upon that program until today's call. And then our view is that we have 2 days, Thursday would be the soonest we could act in the market, just based on the regulatory requirements. And I think the Company's intentions, our intentions are to make open market purchases routinely over the -- until we've exhausted the $1.6 million authorization. I'm sorry, 1.6 million share authorization.

Right. Okay. Thank you.

(Operator instructions)

The next question is from Lee Matheson, Broadview Capital Management. Please go ahead.

Hello, guys.

Good morning, Lee.

A couple of questions.

Just going through the Company's filings, historically. Clearly the filings have been written based on TSG being a primary operation -- operating unit of the Company. I'm wondering can you start -- when are you going to start to talk about with this Company looks like, ex-TSG.

In particular on the working capital side, what can you tell us? Presumably RSG and HSG are much less working capital intensive than TSG was. Can you sort of help us there?

First, in terms of financial presentation of that information, starting with our second quarter 10-Q, so 3 months from now, you will see TSG reflected in discontinued operations; and therefore, all of the results, current period, prior-year comparability, et cetera, would be on a HSG, RSG, and corporate basis, with TSG showing up only into discontinued operation.

So I think in terms of really being able to break it out and make those kinds of comparisons, that will not be readily available with the filing of our 10-Q today, because TSG is still reflected in the results, but it would be with our next 10-Q.

With regards to your working capital statement, your observation is correct, which is in general our working capital -- the remaining businesses are less working capital intensive than was TSG, which we just divested. TSG was the most capital intensive part of our business, followed by RSG and then HSG. And probably not a surprise, but it's a reflection of hardware in the mix and relative gross margins of the respective businesses.

So, can you walk us through where working capital goes from here? Because the cash balance -- the cash draw down from Q4 to Q1 was quite substantial. I'm just wondering how much of that was capital that went into working capital at TSG and that you may get back, in terms of a purchase price adjustment? Or is this the new cash number that we are going to deal with?

First of all, in terms any kind of forward-looking guidance of working capital, we are not prepared to give that. But, in terms of generally what to expect, if you look at prior results, you will see that in every year we have a significant decline in cash increase of working capital between our Q4 results and our Q1.

So, in large part what you saw in terms of June cash is reflective of the business mix and the normal operating cycles of the business and the working capital flows. So, that's the first thing is, you would've expected a decrease in cash in the period.

In terms of specifically the cash on hand, we had -- we did have higher working capital in the TSG business than we had previously expected in the quarter. But, it is not surprising that it would've consumed some working capital.

Right. Okay.

So, will you get that back in a purchase price adjustment, though? In terms of, if you've injected a whole bunch of inventory into the business, will the buyer not pay more for the business?

We are expecting -- there was more working capital in the business than what we were expecting, but that doesn't necessarily mean in relation to the adjustment. If you look, there was also an adjustment for working capital that was 2 directional below certain thresholds, and 1 directional above certain thresholds, if you look back at the original proxy.

The net of all that is we currently do not expect a significant working capital adjustment on a go forward basis.

Okay.

And then in terms of reporting, will you shift to reporting your results a little more like most enterprise software vendors or companies in your space, in terms of breaking out contractual maintenance, SAS revenue, license sales and then hardware, separately?

We haven't finalized, obviously, what our forward-looking disclosures will look like. So, again, I'd say that we'll be evaluating it -- probably we are still going through a transition period providing transition services related to the TSG divestiture, so I wouldn't look for any radical changes, for example on the Q, in 3 months. But, we will certainly be evaluating, as we get through the transition period, for 2013 what looks the most effective reporting, on a go forward basis.

Okay. And then once you guys do the corporate move, and TSG is closed and cash is in, and you've made some of these restructuring charges, will you come back to investors and sort of give us a look at what you expect this company to look like going forward?

I think, Matt, the best way to approach that is, when we evaluate fiscal 2012, and as we execute through the quarters in fiscal 2012, when you take into account transition services we need to provide to OnX, the restructuring and relocation, financial performance in 2012 is going to be pretty messy.

I think is going to be difficult for investors to see the progress we're making in reshaping the business to deliver greater shareholder value. It would be my expectation that as we near the end of fiscal 2012 and enter into fiscal 2013, we will be in a better position to describe more accurately what investors should expect from the operating performance of the business.

Got you.

Okay. Last question is just on the restructuring. How much of the charges are you expecting to be cash?

In terms of the restructuring charges, those would be 100% cash. We also called out an additional $4 million to $5 million that we expect would not qualify as restructuring, and many of those will be non-cash.

Will be non-cash.

Okay, great. Thanks, guys.

Thank you.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to the host for any closing remarks.

Thank you, Maureen.

In closing, 2012 will be a transition year and accordingly, for the balance of the fiscal year, our reported financial results will reflect a significant amount of noise. Moreover, we will be recording the associated cost of the restructuring in the current year, but won't reap the full benefits until next year, fiscal 2013.

That said, I believe a significant unmet demand is taking shape in our chosen markets. And to that end, we'll be making sharply focused investments, as we strategically allocate our human and financial capital to position ourselves to exploit the opportunities at hand. I am confident that Agilysys has the requisite leadership, proprietary technology, development capabilities, and financial strength to execute our strategy and create significant shareholder value.

Thank you.

With that, we'd like to thank you for joining us today and look forward to reporting additional progress during the current fiscal year.