Agilysys Inc (AGYS) 2012 Q3 法說會逐字稿

Welcome to the Agilysys fiscal third quarter 2012 conference call. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Although the Company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially. Important factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in the Company's reports on Form 10-K and 10-Q and new releases filed with the Securities and Exchange Commission.

Today's live broadcast will be archived and available on Agilysys' website. At this time, I would like to introduce your host for today's call, Agilysys' President and CEO, James Dennedy. Please go ahead, Mr. Dennedy.

Thank you, Valerie. Good morning and thanks to everyone listening on today's call to review our unaudited fiscal 2012 third quarter results. Joining me today is Chief Financial Officer, Rob Ellis. Before we get started, I would like to remind our call participants that we'll be using a slide presentation as the basis for this review. And if they have 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 a discussion of our quarterly results, I would like to remind you also that, as in previous quarters, we are reporting TSG's operating results, including the gain on the sale and its assets and liabilities as elements of a discontinued operation.

Turning to the quarter results, consolidated revenue from continuing operations declined during the quarter to $51.6 million from last year's $59 million, primarily due to lower hardware-related revenue. The quarter was characterized by continued positive results from initiatives to shift the business into higher quality revenues and into more recurring revenues. This initiative delivered an overall revenue mix containing a higher proportion of recurring revenue contracts.

Secondly, this initiative drove gross margin expansion by 620 basis points during the quarter to 38.6%. In addition, we managed the expense side of our business more effectively and realized lower costs on the services we provided during the period. As a result of improved expense management, selling, general and administrative expenses decreased $2 million to $20.4 million from $22.4 million last year.

Depreciation and amortization increased $1.3 million due to the acceleration of depreciation related to our property and equipment located in Solon, Ohio, which we will be vacating by fiscal year end. On an operating basis, the Company reported a loss of $7 million for the quarter compared with a loss of $5.3 million in the same quarter last year. Excluding $3.2 million in restructuring charges and a $1.3 million in extraordinary depreciation and amortization during the quarter, the operating loss from continued operations for the fiscal 2012 third quarter would have narrowed to $2.5 million, a $2.8 million improvement over the same quarter last year.

Adjusted EBITDA, excluding restructuring and one-time charges, was break even versus last year's $3.1 million loss. The loss from continuing operations, including the $3.2 million of restructuring charges, was $5.8 million, or $0.26 per share, compared with a loss of $2.3 million, or $0.10 per share last year. The one-time items account for $0.20 per share of the reported $0.26 per share loss.

With that, I will turn the call over to Rob for a review of the segments, balance sheet, and fiscal year-to-date results.

Thanks, Jim, and good morning, everyone. The hospitality business reported a 12% revenue decline during the quarter, primarily due to a decrease in product volume. As Jim mentioned, sales efforts continue to be concentrated on higher quality product offerings and selling our products under a subscription model, both of which have contributed to the revenue decline. As a result of those efforts, although we have seen a decrease in our revenues quarter-over-quarter, gross profit has increased 5% to $14 million, pushing our gross margins from 54% to 64%. This increase can be attributed not only to the product mix and overall quality of our revenue streams but improved labor efficiencies in our service offerings, as well.

Selling, general and administrative expenses, excluding depreciation and amortization, increased as developers that were working on capitalizable software and maintenance projects in the previous year were moved to research and development projects in the current year. Operating income for the current quarter was $1.7 million versus last year's $2 million and adjusted EBITDA was essentially flat versus last year's third quarter.

Moving on to the Retail Solutions Group. Revenues in the Retail Solutions Group declined 13% from last year as a result of two significant hardware deals that occurred in fiscal year 2011 and not replaced in fiscal year 2012. Gross margin improved from 17% to 20% year-over-year due to labor efficiencies within our services offerings and the change in our product mix. Operating income grew 30% to $1.3 million from $1 million last year on the gross margin expansion and cost reductions. Adjusted EBITDA also increased to $1.5 million from $1.1 million for the same reasons.

At corporate, we reduced the selling, general and administrative expenses, excluding depreciation and amortization, to $4.2 million from $6.4 million. This decrease was a result of expenditures in fiscal year 2011 from our Oracle ERP implementation that were not repeated in fiscal year 2012, as well as an acceleration in the decrease is in Solon, Ohio staff prior to the hiring of replacements in Alpharetta, Georgia.

Depreciation and amortization up $1.1 million due to the acceleration of depreciation related to our property and equipment located in Solon, Ohio, which we will be vacating at the end of the quarter. We have made significant progress in moving our corporate services headquarters from Solon to Alpharetta and the hiring of our new corporate services team is nearly complete. We have transformed and improved our team in order to satisfy the needs of our business and with this team, our expectation is that we will be able to provide greater assistance and insight to the business, develop more efficient and streamlined policies and procedures, and increase the visibility of our Company.

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, product development, and process efficiency coupled with a lower cost structure is expected to drive further improved profitability.

Turning to the Company's cash flow for the quarter. Cash and liquid investments on hand at quarter end was approximately $84 million. This is a decrease of approximately $9 million from the second quarter of 2012. The one-time items that affected our cash balance in the third quarter included a $2.4 million payment related to deal costs associated with the disposition of our Technology Services Group, a $2.1 million lease termination payment associated with our Solon office, and $6 million associated with our stock repurchase program.

Adjusted cash flow from operations, which excludes one-time cash items such as the Company's restructuring initiatives and the disposition of our Technology Services Group, was approximately $3.7 million. Days sales outstanding increased slightly from 51 days to 55 days but was offset by positive cash flow pickups in our inventory turns and days payable outstanding.

In regards to our stock repurchase program, we had bought back approximately 1.5 million shares of the Company's common stock at December 31, 2011. Approximately 700,000 of those shares were purchased during the third quarter. Subsequent to December 31st, we repurchased the remaining 100,000 shares under the existing authorization. Taken altogether, we completed the total 1.6 million stock repurchase program for $13.2 million at an average per share price of $8.23.

Now moving on to our fiscal year-to-date results. During the third quarter, we identified errors in the approach the Company was taking in recognizing revenue for certain software license and service arrangements in prior periods. We concluded the impact of these error were not material to any previously issued financial statements and, therefore, revised previously issued fiscal year 2012 financial statements to correct the effect of these errors and I've included adjustments associated with prior periods to fiscal year 2012 in our first quarter fiscal 2012 financial statements.

These prior period adjustments are also included in our year-to-date fiscal 2012 results. These adjustments associated with fiscal years prior to 2012 negatively impacted the current fiscal year results by reducing revenue by $1 million and reducing gross profit and net income by $1.1 million. Excluding the adjustments associated with periods prior to fiscal year 2012, revenues grew approximately 1.4% year-over-year while gross margins improved to approximately 38.1%. Adjusted EBITDA, excluding charges and one-time items, was a loss of $2.7 million, or a negative 1.7% EBITDA margin, compared with a loss of $8.8 million, or a negative 5.7% EBITDA margin in the previous year.

In regards to our restructuring charges, we have expensed approximately $8 million of our planned $16 million to $18 million in the first three quarters. Most of the restructuring charges were associated with the headquarters relocation and other cost reductions executed throughout the Company during the period. Of the $14 million to $16 million of cost savings to be recognized off of our fiscal year 2011 run rate, we have realized approximately half of this in our fiscal year 2012 third quarter run rate.

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

Thanks, Rob. Switching to our longer term focus and strategy, the results we reported today reflect the longer term strategic direction of the Company. 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 serve. These objectives shape the business we pursue, the products and solutions we develop, the personnel we recruit and retain, our sales and marketing investment, and how we deploy our balance sheet capital.

The selling environment for hospitality and retail remains competitive with large capital expenditure projects taking longer to commission. That said, customers are embracing our flexibility to sell, deliver, and support our solutions in a subscription-based model. Looking forward, there are no clear catalysts which materially change our views on the growth rates or technology investments for the markets we service, nor do we see or anticipate any events which would dramatically pinch technology consumption patterns. As a result, our confidence in the stability of the hospitality and retail markets remains optimistic.

This past quarter reinforces our belief as evidenced by the success we experienced across the segments in those markets. The food service management segment provided several important wins with new business and large cafeterias, stadium and arenas, and healthcare, a growing segment for us. In the casino segment, the market continues to respond favorably to the Casino1 offering. In the quarter, customers validated this offering highlighted by important customer wins, including Revel Entertainment Group, Hilton Grand Vacations, the Golden Nugget, and Bordertown Bingo and Casino.

Our international business continues to expand with key wins with the NEC Group in Birmingham, United Kingdom, Citysuper in Hong Kong, and the connection at Fair Park in Singapore. The NEC Group is the Birmingham-based venue management company that operates four world-class venues-the National Exhibition Center, the International Convention Center, the LG Arena, and the National Indoor Arena. The group also operates a national ticketing agency, the Ticket Factory, and award-winning prestige caterer, Amadeus. Amadeus are premier caterers at venues and events across the United Kingdom, including the Scottish Open Golf, RHS Hampton Court Palace Flower Show, and Olympic Park North at the London 2012 Olympic and Paralympic Games.

Citysuper is a Hong Kong-based high end supermarket and retail chain. The chain currently has three brands and nine stores in Hong Kong, three stores in Taipei, Taiwan, as well as one store in Shanghai, China. The stores regularly organize promotional events and various design and cultural exhibitions. It is upper market to its main rivals, offering goods that are usually otherwise unavailable in Hong Kong. The connection at Fair Park is Asia's first ever integrated healthcare and hospitality complex, comprising Fair Park Medical Center, a premiere specialist medical center, Fair Park Hospital, a private tertiary hospital, and One Fair, a luxury hotel with state-of-the-art wellness and conference facilities.

The hotel segment also contributed to our success in the quarter with the Hotel Modern in New Orleans selecting Guest 360 as their property management solution. Hotel Modern joins its sister property in New York, the Gotham Hotel, both part of the August group portfolio of distinctive hotels adopting Guest 360 as its property management system. Additionally, the Elms Resort and Spa in Excelsior Springs, Missouri selected Agilysys as their partner for their property management and point-of-sale system requirements.

In the retail business, we experienced continued progress in the large multi-year retail project we discussed on prior calls. In mobile retail solutions, Sephora Americas, a San Francisco-based prestige beauty retailer, selected the Agilysys Next Position solution for a large number of its US-based stores to enhance customer service. The solution provides comprehensive mobile customer service enabling both mobile point-of-sale and returns.

In the franchise solution area, we continue to experience a higher than expected selection rate as the implementation partner with major commitments from top tier names, including Taco Bell and Arby's. We're extremely proud of the customers that selected Agilysys as their partner and sincerely appreciate their business. We believe our continued success with the markets we service demonstrate the effectiveness of our business strategy, relevance of our products and solutions, and attests to the quality of service our personnel provide our customers and our Company.

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

We will now begin the question-and-answer session. (Operator Instructions). The first question comes from [Shy Totashti] of DCM.

Hi, good morning. I'm looking at the quarterly PowerPoint presentation, slide four, I notice that there's -- on slide four, there's a 13.3% EBITDA margin, looking at a $2.9 million EBITDA versus $21.7 million of sales on the hospitality segment. When I look at the (inaudible) proxy filings from June 25, 2010, on page 21, there's an 18.8% EBITDA target for bonus payout. I'm wondering what holds back the Company from being -- what holds back -- is the 18.8% segment EBITDA still possible given the business now versus the way it was two years ago?

I'm not sure I understand the question. You want to know whether the 18% target --?

Yeah, is that target still relevant on a forward basis given the way the Company is now versus the way it used to be? Is that still realistic or is that completely the past?

Well, if it's 18% for that segment specifically, talking about the hospitality segment specifically and the 18% target margin for that?

Correct, only hospitality, correct.

Yes, it's still relevant. That's a contribution, that's an EBITDA contribution percentage that we get from that industry or business. So when we provide incentives to management and bonuses that aren't based on sales commissions, the bonus structure is that EBITDA contribution is more important than the gross profit contribution, which is more important than revenues. So those are the three elements on which we bonus. And there is a defined percentage or objective for both EBITDA, gross profit and revenue production against which we assign bonus allocation. So that percentage, it changes from year-to-year based on the budget, and in this year, that percentage is modestly different than in past. But each year we revisit and target these three elements for bonus opportunity.

I guess my question is, is there any reason why 18% is egregiously high? Is 18% still possible or is the business completely different? I'm assuming it should be possible unless the business is different than it used to be.

No, it's possible, Shy, and in the business, the hospitality segment itself. But one element I think that's probably most different from 2010, fiscal 2010 to where we are today in 2012 and what we're targeting for fiscal 2013 is the revenue composition is showing in our bookings are showing an increased percentage of subscription-based software sales. However, the EBITDA expectations we have for the contribution by that industry have actually grown.

So what's holding you back? I mean why can't the EBITDA be at 20% margin in two or three years on that segment? Like, what's the major headwind that you face?

Well, the biggest headwind, and I think we talked about this going back to our first quarter results in which I was -- it was my first time presenting the results of the Company to shareholders, was primarily that we hadn't fully integrated the operations of the acquired businesses comprising the hospitality segment prior to really the initiatives we've taken on this year. So we had somewhat unlevered operations in the hospitality segment. We have taken that on as a fiscal year 2012 initiative, in addition to restructuring the business. So we're getting more efficient within the OpEx lines of sales and marketing, product development, and the other general and administrative expenses that will enable us to achieve higher EBITDA contributions from that industry. But up and to this point, we had effectively unlevered operations in a business unit.

If I start to do an analysis of revenue per employee, is revenue per employee in 2013/2014 completely different because you have a different business model with subscription services? Should I kind of stop doing that now just completely, or is there actually -- are there any rules of thumb that might help me in terms of what one employee could be doing with revenue if he's doing a great job?

But you were going to have to get into a bookings discussion, but yes, so as we increase the percentage of our bookings to more subscription-based software sales, you're going to have to evaluate our bookings numbers in consort with reported revenues to get a more effective measure of overall revenue or sales production per employee. To give you an example, I look at bookings very closely on a monthly basis and we evaluate performance of the business internally on a quarterly basis based on these bookings numbers. Bookings fiscal year-to-date in 2012 over FY 2011 are up approximately 20%. Now, how do you reconcile that with the revenue numbers within hospitality? Well, approximately one-third of the total bookings this year were subscription-based software sales, anywhere from three to five-year contracts. So this creates some backlog that will be recognized over future periods, but these are then revenue opportunities that don't get accounted for in their totality within the current quarter or current fiscal year.

Now, we haven't reported numbers like this, Shy. However, in the past, we haven't really been a software and services-focused company. We have heard from investors like you and others who want reporting more clearly aligned with the way they would compare software company reporting and we have expressed previously that that is an initiative that we are intending to deliver in our fiscal 2013 presentation. So you'll see fiscal 2013 and 2012 year-over-year comparisons that will look more like a software company, a software and services company reporting.

All right. Thank you very, very much. Great job. Thank you.

You bet.

(Operator Instructions). And at this time, I'm showing no further questions and I would like to turn the call back to Mr. Dennedy for any closing remarks.

Thank you, Valerie. In closing, the transition to a smaller business and the realignment to a smaller cost structure are nearly complete. We remain confident in our ability to execute in our chosen markets. Our investment in the restructuring activities is producing the expected results using less cash to achieve the planned results. I am confident that Agilysys has the requisite personnel, leadership team, technology, development capabilities, and financial strength to execute our strategy and increase shareholder value.

Looking forward, investors should expect continued emphasis on revenue quality, expense management, and select investments to grow the business. This emphasis will allow us to grow the business in line with the market rate of growth while achieving our planned financial and operating performance. Thank you.

That concludes today's presentation. You may now disconnect.