Agilysys Inc (AGYS) 2012 Q2 法說會逐字稿

Good morning and welcome to the Agilysys fiscal 2012 second 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 earning 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, Denise. Good morning and thanks to everyone joining us on this call to review our unaudited fiscal 2012 second quarter results.

Today I'm pleased to introduce you to Robb Ellis, who will participate in his first Agilysys earnings call as our Chief Financial Officer. Robb joined us a month ago from Radiant Systems and brings a wealth of industry-related knowledge to the CFO role. Since joining Company, he has exhibited great strength of leadership in guiding our finance and accounting staff, as well as working with me in identifying areas to improve all functional areas of the business. We are very pleased to have him join our team and look forward to his continuing contributions. Welcome, Robb.

Thanks, Jim, and good morning, everyone. I'm pleased to speak to you for the first time as the Chief Financial Officer of Agilysys. I want to take a minute to thank former CFO, Henry Bond, and the rest of the Agilysys management team for their help in easing the transition. Since joining the Company last month, I have focused my attention on getting up to speed on our business operations, our team, and our financial position. I've been impressed with our strategic objectives and the strength of the business model that we are creating and I'm very excited to be part of the Agilysys team.

Thanks, Robb. Also, I'd like to remind today's listeners that, as usual, we'll be using a slide presentation as the basis for this review. And if they've not already done so, they can access the slide deck from the Investor Relations section of our website at www.agilysys.com.

Also, during today's conference call, 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.

Before we begin the discussion of our quarterly results, keep in mind that from this point forward, the Technology Solutions Group, TSG, is being reported as a discontinued operation. That said, the second quarter of fiscal 2012 was a solid quarter producing results that were better than a year ago and sequentially. We are encouraged by our early success following the sale of TSG and look to build on this success as we profitably grow the business.

Regarding the second quarter, consolidated revenue from continuing operations grew 9% to $53.6 million from the $49.3 million reported last year. During the period, we experienced solid sales growth of 8% in hardware, 23% in software, and 7% in services. Gross margin expansion was encouraging as it widened significantly during the quarter to 40.3%, up from 36% in the second quarter of last year. This was due to a variety of factors including higher service margins related to improved efficiencies, higher hardware margins, and a favorable mix of proprietary software.

Cash SG&A decreased 5% to $21.1 million from $22.3 million last year as a result of ongoing cost reductions. On an operating basis, the operating loss narrowed to $5.2 million, which included $2.4 million in restructuring charges versus an operating loss of $6.7 million in fiscal 2011's comparable quarter. The net loss from the quarter from continuing operations was $3.2 million, or $0.14 per share, compared with a loss of $4.9 million, or $0.22 per share last year. We reported net income of $7.2 million, or $0.32 per share. Adjusted EBITDA, excluding restructuring and asset impairment charges from continuing operations, improved to $1 million, compared with a loss of $4 million last year.

With that, I'll turn the call over to Robb for a segment and balance sheet discussion.

Thanks, Jim. The Hospitality business generated a 10% increase in revenue during the quarter, due to higher sales across the board in hardware, software, and services. Gross margin showed significant improvement over the prior year, increasing from 59% to 64%. Higher software margins and improved utilization within our service projects accounted for the majority of the increase in the margin. Though we're not sure how sustainable this margin level is, we can say that some of the new practices and procedures we are putting in place are expected to produce permanent improvements. Some of the benefits we realized during the second quarter, such as sales mix, is an area we will continue to emphasize in future quarters.

Selling, general, and administrative expenses, excluding depreciation and amortization, increased $500,000 from last year. This was primarily due to higher variable compensation related to improved sales volume, and the reinstatement of the Company's 401(k) contributions. Despite recording $600,000 in restructuring charges, operating income increased substantially to $1.4 million from $200,000 last year. Adjusted EBITDA, which excludes restructuring charges, more than doubled, increasing from $1.3 million to $3.1 million for the quarter.

Sales in the Retail Solutions Group increased 8% from last year on better volume in both hardware and services. Gross margin expanded in the segment from 19% to 23% due to higher product margins and the mix between products and services for the quarter due to the timing of retail rollouts. Selling, general, and administrative expenses, excluding depreciation and amortization, increased slightly reflecting the reinstatement of the 401(k) match. Including $200,000 in restructuring charges, operating income doubled to $2.2 million, from $1.1 million last year. And, as was the case with our Hospitality business, adjusted EBITDA in our Retail Solutions Group more than doubled, increasing from $1.2 million to $2.6 million.

At Corporate, we reduced selling, general, and administrative expenses, excluding depreciation and amortization, from $6.5 million to $4.7 million by reducing staff and third-party expenditures. Depreciation and amortization is above last year's run rate due to the acceleration of depreciation related to our property and equipment located in Solon, Ohio, which we will be vacating in the fourth quarter of fiscal 2012. In addition, $1.5 million of the restructuring charges were related to corporate severance packages.

Overall, the transitioning of our Corporate Services functions from Solon, Ohio, to Atlanta, Georgia, is progressing as planned with no disruption to the operations of the business. The leadership team is coming together very quickly and staff recruitment in Atlanta is going well. We were also pleased to be able to reach a buyout settlement on our current lease in Ohio. The one-time payment of $2.1 million related to the lease termination was paid in October and will be classified as a restructuring charge in the Company's third quarter. Once the transition phase is complete in early calendar year 2012 and we realize the full effect of the current restructuring, our focus on strategic top line revenue growth, coupled with a lower cost structure, is expected to drive further improved profitability.

Turning to the balance sheet, our cash balance at quarter end was approximately $94 million. Day sales outstanding decreased from 59 days to 51 days during the quarter, which freed up $5.2 million of cash. We also generated a couple million dollars during the quarter by lowering our inventory on hand. This was primarily the result of significant rollout activity within our Retail Solutions Group during the order.

Our vendor payables decreased, which negatively impacted our cash flow by more than $9 million, mostly as a result of payments made in the current quarter related to the inventory build up in the previous quarter. Once again, this inventory build up was for expected retail rollouts which occurred in the second quarter. We also had lower deferred revenue on the balance sheet at quarter end, as a result of the quarterly recognition of revenue related to our annual software support and maintenance billings collected earlier in the year.

Overall, during the quarter, we generated $3.6 million of cash from operating activities. As far as the stock repurchase program goes, we have bought back a total of 1.1 million shares, 800,000 of which during the second quarter. We expect to complete the stock repurchase program during the upcoming quarter.

Now I'll turn the floor back to Jim for some final comments on our financial results and an update on our strategic objectives. Jim?

Thanks, Robb.

Year-to-date revenues grew 12% with increases in all categories, led by hardware sales, which grew approximately 18%. So even though we had better services margins, overall gross margins were basically flat given the higher mix of hardware sales during the six-month period. Selling, general and administrative expenses, excluding depreciation and amortization, were essentially unchanged and we have expensed approximately $4.7 million of our planned $14 million to $16 million of restructuring charges in the first half of the fiscal year.

We also recorded a meaningful tax income benefit in the first half of the fiscal year related to the TSG sale. Including the impact from the TSG sale, earnings per share was $0.11, compared with a loss of $0.55 last year. Adjusted EBITDA, excluding charges, narrowed to a loss of $1.2 million from a loss of $5.5 million in the previous year.

Switching to our longer-term focus and strategy, I believe the results we reported this morning reflect the direction we are headed. The principal objectives of our longer-term business strategy are to deliver market-leading growth and peer-beating performance metrics. We intend to achieve these objectives by targeting the highest margin revenue opportunities in the end-markets we service. These themes will drive how we manage and shape the portfolio products and services we offer in the Hospitality and Retail markets. In turn, the way we manage the portfolio will determine investments we make in product development, in sales and marketing initiatives and how we intend to deploy balance sheet capital. We believe in the strength of the Hospitality and Retail markets and how those markets embrace technology to enhance the guest experience and reduced the operating expense of providing that enhanced experience. This past quarter reinforces our belief, as evidenced by the success we experienced across the segments in those markets.

In the cruise segment in July, Norwegian Cruise Lines embraced our document management system, DataMagine, it enable its [e-youth] initiative for its Nickelodeon All-Access Cruise on the Norwegian Epic. This solution dramatically reduced line queuing and the process to register children for their activities. The solution permitted the children and their parents to enjoy their Epic experience more richly than ever before. This is the type of brand enhancement Agilysys tries to enable for its customers.

In the casino segment, we continue to find market leadership, particularly behind our Casino1 initiative, which offers business system components from the Agilysys product portfolio that incorporates property management, point-of-sale, inventory procurement and document management. In this concept, we satisfy the markets desire for one-stop shopping with bundled solutions and services, as well as addressing the growing demand from ability-enabled solutions. In the quarter, the market responded with Treasure Island and Fort Sill Apache acquiring their property management system and point-of-sale solutions from Agilysys.

Our market-leading point-of-sale solution has significant multi-year renewals with several large customers, of which I'd like to highlight 2 customers in particular. The first is the Fulham Football Club in the United Kingdom, now enjoying quite a nice run in Europe in the Europa League. Fulham joins our European portfolio, stadia and arenas using our point-of-sale solution, which includes the Manchester United Football Club, Lord's Cricket Ground, Twickenham Stadium, Croke Park, and the Aviva Stadium. In the United States in the quarter, the American Airlines Center in Dallas, Texas renewed a multi-year hosted implementation of our point-of-sale solutions. Combined, these customers, among others, evidence our continued strength in the stadia and arena segment.

The hotel and higher education segments also contributed to our success in the quarter with the Mandarin Oriental Excelsior Hong Kong implementing our point-of-sale solutions while Fountainhead Hotels in Alaska and University of Utah implemented the Agilysys property management solution.

In the Retail market, we continue to make progress on the large multi-year retail project we discussed on prior calls. In the quarter, Stein Mart, a Jacksonville, Florida, retailer of fashion merchandise for women and men with more than 250 retail locations, awarded Agilysys the contract to provide a system-wide point-of-sale refresh. In the franchise solutions area, we have seen higher than expected selection rate as the implementation partner with major commitments from top-tier names. In addition, we have been selected to provide the mobility solution for several leading specialty retailers in advance of the upcoming holiday shopping season.

This review of business won in the quarter demonstrates the market relevance of our product and solutions. The success in the quarter reflects the dedication our personnel have to our customers and our Company.

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

Thank you. We will now begin the question and answer session. (Operator Instructions) Brian Kinstlinger of Sidoti & Co.

Good morning. The first question I had, you've laid out your cost cutting plans. I think it's $14 million to $16 million. You've also got the TSG business that you're supporting right now. I guess, when the costs to support TSG come out, is that part of the $14 million to $16 million of cuts? Then, the second part of the question is, that $14 million to $16 million, is any of that already out of the business as of the second quarter numbers?

Good morning, Brian. To answer your question, yes, the TSG -- the first part, the TSG expenses -- are coming out are part of the $14 million to $16 million. With respect to what happened within the quarter as expense reductions, the $14 million to $16 million does not include the achievements we've made, thus far, in the year in our operating results reported.

That's great. So, the $14 million to $16 million that are coming out, is that mostly going to be coming from corporate overhead? Or is that -- I know we've talked about evaluating each of the businesses -- or will some of it come out of the businesses as well?

Well, Brian, the majority of that -- well over the majority is coming out of corporate and some facilities reduction. There's a small piece that's planned right now, that are coming out of the operating businesses. As I indicated earlier in the call upon introducing Robb, he and I have been working very hard at trying to identify ways to get greater economies out of the operating businesses themselves.

Great. Now the -- again, we talked about combining and integrating your software label in Hospitality. Maybe give us a sense of how far along you are on that? Maybe what clients are saying to you about that?

Brian, could you repeat the question? Our phone was breaking up as you asked it. I'm sorry.

Sure. No problem. You talked about combining and integrating your software labels in Hospitality. I'm curious, how far along the way are you in integrating them? Maybe, what customers are saying about that?

Well, Brian, we haven't initiated the development effort to integrate the products, per se, when I referenced the Casino1 initiative. We are selling the titles as an enterprise suite and selling them together and we're seeing our customers buying them together. The market demand we indicated in that discussion was that, they do prefer to see a one stop solution, if you will, for their systems needs. It just so happens that we have best-of-breed products in point of sale and inventory procurement and property management. It's now, getting after integrating the data. We're going to start there, so they get a more holistic view of their customer activity and proceed with the continued investment in integrating the products. However, that product integration effort first requires a plan, a well thought out architecture, and that's the stage that we're in right now, with the product development.

Okay. I guess, when we look at the third quarter, it's typically been seasonally strong with the Retail business and TSG. I'm curious if that's still the case. Then, when you look at the overall demand trends, while you mentioned some wins in Retail, it wasn't clear to me if you thought demand was a strengthening, stable, weakening, compared to where it's been in the past. So, maybe give me a sense on both of those, please?

We typically -- we haven't been giving guidance, per se, about our quarters and what we're going to do in the second half of '12. However, within the market itself, what we're seeing in our pipeline and our sales activities is that the Retail segment is stable to strengthening. We typically do see a seasonal bump in Q3. A lot of our business in the first quarter and third quarter is aligned to the seasonal business that we see from our partner -- our biggest partner in that Retail segment, IBM. So, we do expect to see a seasonal bump in Q3 as well.

Great. Now, in that business as well. The margins were -- in the gross margin -- was as high, I think, as it's been a very long time. You talked about the mix and I think -- I can't remember who referenced -- you're not sure of the sustainability. I guess, what's the target there long-term? Do you think that this was just an abnormally high quarter in terms of sales mix or can you replicate that in the future?

I'll talk to sales mix but Robb had made the comment about the sustainability of the margin on a composite basis. In the quarter, we had a stronger mix of services and proprietary software, which helped lift the margin in the quarter. With respect to the margin for the half year. As you note in Q1, we had a stronger Retail business production in Q1 and that had a stronger mix of hardware in the first quarter. So, when you blend the 2, we're coming up with somewhere in the mid to upper 30s on the half-year. It was that this particular quarter had a stronger blend of proprietary software and services. When we reflect around the sustainability of that, and you consider the comments that we just made relative to the seasonality we experienced in the third quarter. That third quarter seasonality is largely driven by increased sales of hardware, particularly driven by the push of year-end that IBM drives in the market. So, Robb, do you want to make any more color on that?

Yes, that's exactly right. The -- my point was that the sales mix, like Jim was saying, specifically around the hardware, is not determinable. That's why we look at the increase of the margin going from 59% to 64%. That's where we think that the issue would lie with the mix going in the hardware in the Q3. So, we see that decrease potentially in the gross margin.

Great. 2 more questions. The first one is in Hospitality. Again, you cited a couple of nice wins, I think some renewals, and some new work. I guess the same question related to Retail. Would you say, where you sit today versus six months ago, that the demand environment's improving? Is it stable? I guess you've got casinos, which I'm not sure how -- if that's strengthening [volume] you've had some wins which you haven't had, I think, in a while. Maybe just tell us how you feel about that versus 6 months ago?

Well, I think in the market itself with HSG, we're very happy with our position in the Hospitality segment. The demand indications that we're getting, and we'll talk about each one of the segments, but in casino itself, you see the corporate casino environment adding system enhancements to address greater customer experience. In the tribal gaming segment, we're seeing a broader pickup, generally, in demand for new implementations of our systems for their investments in the gaming segment. More broadly, in the hotel food service management, we are seeing stronger indications of demand now than we had 6 months ago but I wouldn't call them materially stronger.

Okay. That's helpful. The last question I have -- on the other end, this is minor, but you've got no debt, you've got a nice sizable amount of cash -- just take me through why you're seeing in net interest expense. I'm not sure if you mentioned that. I may have missed it.

It's the amortization of fixed assets. Of financing, --

So, the 500 -- I mean, you have 2 different line items of --

I guess it's looking at the ABO we recently terminated and the financing fees associated with that termination.

When do those fall off? How long do you continue to amortize that over?

I think we're done.

So, you'll start to see net other income positive going forward?

Well, to the extent you're going to get a return on cash, yes.

Right. It's small. Right --

It should not be negative, let's put it that way.

Right. That's what I was getting at. Okay. Thank you.

(Operator Instructions) Alan Mitrani of Sylvan Lake Asset Management.

Hi. Thank you. I just wanted to clarify a couple things I might have missed. You talked about $14 million to $16 million in cost cutting. That's a cash investment do you expect to make, so the cash should decline from the current level -- in terms of cutting costs?

Yes, cash will decline from the current level. We had indicated earlier that we're taking -- in the first quarter conference call and then we did the call upon the sale -- the completed sale of TSG -- we indicated that we're expected to realize $14 million to $16 million in cost savings. The expense associated with that would be somewhere in the $16 million to $18 million level.

And how much of that cash have you already have spent of the $16 million to 18 million? Roughly, I mean,

We've only spent a small amount of money on the cash restructuring charges. So, we've had some executives depart, for which there were severance expense. We had some personnel leave for which there would be severance expense associated with that. It's very nominal amount. We had the $2.1 million we announced, although it's not in the second quarter numbers, we did announce it as a subsequent event in buying out the Solon lease. It's fairly minimal. I think we -- it's probably in the $4 million to $6 million range at this point.

Okay. So, we're going to see a lot of charges then, in the next couple quarters, as you clean this up going into fiscal '13?

Yes, you will.

Okay. So, instead of $93.5 million of cash, roughly, or $94 million of cash. We should think of the money spent in October in terms of the stock buyback, which you expect to spend by the end of the year, you indicated about $5 million-plus, and change. Let's call it, I don't know, $10 million-plus in restructuring to pull off. So, we should look at something like $75 million or roundabout there of cash levels by the end of the fiscal year? Plus or minus, a little. I just want to get a sense of where we're going to start --

I think -- we're not going to comment necessarily on your math and what we've guided because we haven't an issued guidance, but I don't think your analysis is unfair.

Okay. That's fair. Have you -- since you've only been at the Company I guess in the last, I don't know, whatever number of months. Can you just give a little bit more of your impressions and where you think the Company needs to focus on, besides just the immediate cost cuts, now that you're a smaller Company and moving the headquarters -- just from a growth perspective? Because that's really what's really going to determine the value, and why the Board, you think, chose you for the job?

Well, I had been on the Board since 2009. So, I had been participating in understanding the strategy, the markets, the direction we're headed. It was part of the special committee that evaluated the sale of TSG business. Upon completing the sale of TSG business, I came off the Board and joined the Management team. So, I think with respect to my tenure with the business, I have a pretty good perspective on what the Businesses can do and what we which should expect from the markets.

That said, we like the Retail and Hospitality end markets. We think we have participated in those markets well, but not as fulsomely as we think we can. We have great products that are best-in-class in their segments on Hospitality side. We have extraordinary people in both the Hospitality and the Retail business who have been in these markets and servicing customers in these segments for greater than 15 years on average. We have a great customer base to leverage and to extend. So, we like the position that we have. We think that our products with additional investment can help us leverage into new segments within Hospitality and Retail markets. I think the way we're considering or thinking about our products and solutions portfolio, as we indicated earlier, we're targeting these higher margin revenue opportunities, that are available in these segments, than we have before. So, in the past, if you look at our Retail and Hospitality businesses, there is higher margin revenue opportunities that we haven't addressed that we're going to go address in the subsequent quarters and as a part of our forward-looking business plan.

As far as why the Board chose me, I think that their understanding of my knowledge of, not only the business itself but in, the focus on being an efficient allocator of shareholder capital in the pursuit of our business objectives, are probably the 2 reasons why the Board felt confident in selecting me to lead our initiatives going forward.

Great. Oh, thank you. I appreciate the answer. One other question regarding the stock buyback. Is there a reason why you're rushing now to buy it back? Is it because before -- while there's still a lot of noise in your numbers and ahead of where the Company could potentially be and few analysts paying attention, you think there's a good opportunity now to buy it? Or is there just -- you're over capitalized and you think it's an efficient way to return capital now? I'm just wondering why now versus waiting to bit or looking for added dividend or something else?

Well, I wouldn't say we're rushing at it. When we announced the sale of TSG, we also expressed how we would dispense the cash. We talked about funding the working capital needs of this business, with respect to the ABL going away. We talked about making select investments in the business to make us more competitive. We also discussed returning capital to shareholders. As a part of that initiative, we, the Board, have selected an amount to distribute and we have begun executing on that distribution via share repurchase. So, we committed to it in the proxy. We had a defined horizon from the Board over which to complete it, which was the end of our fiscal, and we think that this allows us the opportunity to redeem shareholders who want to get out -- the opportunity to exit given the transformation we're going through. We also think, if you evaluate our Company and the -- I guess the valuation that the market is giving our Company, we do think that the Company is undervalued.

Okay. Lastly, will you give us -- once the fiscal year is over or -- and it is a cleaner Company -- you've taken your charges, you've shrunk the employee base, you've put whatever cost cuts you need to and you've bought back the shares and the cash seems stable. Are you then going to start to giving us some sort of metrics or market opportunity and goals once you've had time to put the employees that you want in place. So, that we can have some sort of framework to judge the Company over the next couple of years?

Yes, Alan, that's one of the initiatives on which Robb and I are working. There is going to be a lot of noise in the P&L this year. We acknowledge that early on due to the transition services we're providing to the buyer, the TSG business, as well as the relocating of the Company from Solon to Alpharetta. Given that we've also heard from investors that they would like a clearer expression of our P&L that, is more reflective of our peers in terms of software and services technology companies. So, we are undertaking initiatives to be more transparent in how we express that and that's an initiative that investors should expect in fiscal 2013.

Great. Thank you.

Yes, sir.

(Operator Instructions) Showing no further questions in the queue, this will conclude our question and answer session. I would like to turn the conference back over to Mr. Dennedy for any closing remarks.

Thank you, Denise. In closing, while I'm pleased with the overall progress of the reorganization to date, I am all the more gratified by the commercial success we continue to enjoy. We have streamlined our facility footprint and made progress on reducing the operating expense of the business. To that end, we are on track to reduce corporate overhead by $14 million to $16 million beginning in fiscal 2013. The Company's solid capital structure puts us in the enviable position of being able to invest organically, to advance our proprietary solutions, to maintain our industry leading position, while providing the flexibility to be opportunistic -- should select opportunities arise, to enter new markets or add to our portfolio of industry leading solutions. We maintain a disciplined view for making strategic investments, to not only improve our operating and financial performance, but also to increase our competitiveness in the marketplace and capitalize on growth opportunities. Thank you for joining us today and look forward to reporting additional progress when we report our third quarter results in February.

The conference has now concluded. Thank you for attending today's presentation.