Agilysys Inc (AGYS) 2013 Q3 法說會逐字稿

Welcome to the Agilysys fiscal 2013 third-quarter 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 protections 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 report on Form 10-K and 10-Q and news releases filed with the Securities and Exchange Commission.

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

Thank you, Nancy, and good afternoon, everyone. We appreciate your joining us on the call today to review our unaudited fiscal 2013 third-quarter financial results. With me today is our Chief Financial Officer and Chief Operating Officer, Robb Ellis.

Before we get started, just a quick reminder that once again we will be using a slide presentation to accompany this call. You can access it on the Events and Presentations portion of the Investor Relations section of our website at www.agilysys.com. In addition, I would like to remind everyone that we'll be discussing some non-GAAP metrics on today's call, primarily adjusted operating income and adjusted net income, which eliminates the effect of restructuring and other items that are either non-cash or non-recurring. Reconciliations to GAAP metrics are provided at the end of the accompanying presentation, as well as in the financials of the press release issued earlier today.

Within the last 18 months, we made a strategic decision to shift the Company's focus to three key areas. One, investing in and delivering products and services that offer our customers an immediate, clear, and ongoing value proposition to help them more efficiently manage and grow their businesses. Two, pursuing business lines that can expand our relationships with our customers while improving the overall quality of the revenue mix we earn. And, three, achieving a greater degree of efficiency within the Business across all functional disciplines.

While we didn't expect this shift in strategy to be immediately evident in our results, we feel the Company has reached an important inflection point with the results from our third quarter and through the first nine months of fiscal 2013 support. We believe we are well positioned to achieve consistent improvements in our operating results, driven by both margin enhancement through higher recurring revenue and improved operational efficiencies.

Overall, our third-quarter operating results reflect the early success we are having with the key tenets of our strategy. Total net revenue rose 30% to $67.2 million from $51.6 million in the prior-year period, led by a 56% increase in product sales and consistent mid-single-digit growth in our Support, Maintenance, and Subscription revenues. Gross profit was $23.4 million, an increase of 18% over the same period last year. Total gross margin was 35%, below the gross margin of 39% in the prior-year period, primarily reflecting a shift in our revenue mix during the quarter as a result of some large, lower margin remarketed product [seal].

Moving down the income statement, we reported a GAAP operating income of $111,000 compared to an operating loss of $7 million in the same period last year. Excluding one-time restructuring charge of $4.6 million, the operating loss in the year-ago period would have been approximately $2.4 million. On an adjusted basis, where we exclude stock-based compensation, amortization of intangibles, and other one-time items, we saw a year-over-year improvement of $3.3 million to $2.1 million in adjusted operating income for the quarter, from a loss of $1.2 million a year ago. Adjusted net income was $1.7 million, or $0.08 per diluted share in the quarter, compared to an adjusted net loss of $1.4 million, or $0.06 per share last year.

I am encouraged by the progress reflected in our financial results. In addition, over the past 18 months, we improved many of our day-to-day customer-supporting processes in the businesses, strengthened our senior management team through hiring experienced executives with a track record of accomplishments, and invested in our research and development activity to advance innovation, improve our quality, and open new market opportunities.

The hard work by our team has been instrumental in allowing Agilysys to deliver the significantly improved financial results in our fiscal 2013 third quarter and through the first nine months of the year. We have established a strong foundation and expect to use our current momentum as we remain focused on pursuing higher return on invested capital activities, which we believe will create increased value for our shareholders.

At this point, I will turn the call over to Robb for a review of the segments, balance sheet, and cash flow. Robb?

Thanks, Jim, and good afternoon, everyone.

Our Hospitality Segment revenue increased 30%, or $6.5 million, to $28.2 million, with growth across all of our revenue streams. Products revenue increased by 85% to $12.3 million in the quarter, primarily driven by a couple of large remarketed product sales. Our Professional Services revenue increased 23%, and Support, Maintenance, and Subscription Services increased 2% in the quarter. Due to the higher mix of remarketed product sales, we experienced a 700-basis point decline in margins, resulting in a gross profit margin of 57% for the quarter compared to 64% in the same period last year. Hospitality GAAP operating income was $4 million in the fiscal 2013 third quarter, an increase from operating income of $1.9 million for the same period in the prior year. Adjusted operating income also grew from $2.3 million to $4.4 million.

Moving to our Retail Segment, total revenue grew 31% year-over-year to $39 million, primarily due to a 46% increase in product sales to $28 million, which was driven by a large sale of hardware during the quarter. Our Support, Maintenance, and Subscription Services revenue increased 15%, while our Professional Services revenue declined 14% due to a development project that occurred in the third quarter of fiscal 2012 and which did not repeat in 2013. Gross profit margins contracted approximately 130 basis points to 19% year-over-year due to the mix between remarketed products and Professional Services. Retail GAAP operating income and adjusted operating income of $3 million for the quarter compares favorably to the $1.4 million and $1.5 million reported in the third quarter of fiscal 2012.

Moving on to corporate operating expenses, the reported operated expense from our corporate segment was $6.2 million, an improvement from the $10.4 million of operating expense we had in fiscal 2012. Adjusted operating expenses were $5.4 million compared with $5 million of operating expenses in the previous year. Consolidated operating expenses, excluding stock-based compensation, increased 1% over the third quarter of fiscal 2012. Product development costs drove this increase along with our continued investment in resources to enhance our existing products and the early stage development of our future platforms.

Looking at our balance sheet, we are pleased with our ability to maintain a healthy and liquid cash position of approximately $80 million with no debt. I also want to mention that we have an asset of approximately $170 million in federal net operating losses, which has a full valuation allowance against it at this time. These net operating losses will result in our cash tax rate being in the low- to mid-single digits for the foreseeable future.

Turning to our cash flow, excluding approximately $6.3 million in retirement-related payments as well as $6.6 million in cash expenses related to overall restructuring costs, we generated negative adjusted operating cash flow of $4.6 million for the first nine months of the year. However, in the third quarter, we generated a positive $5 million in adjusted cash flow from operations. Due to the timing of our annual support invoicing, cash flows are strongest in the third and fourth quarters, enabling us to remain on track with our previously stated goal to generate adjusted cash flow from operations in the mid-single digits during the current fiscal year.

The execution of our strategy in the first nine months of fiscal 2013 has resulted in positive financial and operational results. Total net revenue increased $16.2 million, or 10%, so $173.1 million compared with $156.9 million in the prior-year period. Product revenue grew 11%. Professional services grew 16%. And our recurring revenue stream of support, maintenance, and subscription services grew 7%.

GAAP operating loss for the nine months of fiscal 2013 was $1.3 million compared to a GAAP operating loss of $21.2 million in fiscal 2012. On an adjusted basis, which excludes restructuring and other one-time charges, operating income improved significantly to $4.3 million from a loss of $4.4 million a year ago. Adjusted net income improved $9.6 million to $3.8 million, or $0.17 per diluted share, from a loss of $5.8 million, or a loss of $0.26 per diluted share in the prior year, an improvement of $0.43 per share.

Moving to our outlook for fiscal 2013 -- reflecting the year-to-date results and our increased visibility for the remainder of the year, we are raising the fiscal 2013 guidance ranges we provided on our last conference call. Fiscal 2013 consolidated revenue is now expected to be in the range of $230 million to $232 million, compared to the prior forecast of $208 million to $211 million. In addition, we are raising our guidance for fiscal 2013 adjusted operating income to a range of $6 million to $6.5 million from the prior expectation of $3.5 million to $4.5 million. As a reminder, we recorded revenue of $209 million and an adjusted operating loss of [$7.] million in fiscal 2012.

Full-year adjusted net income per share is now anticipated to improve to a range of $0.24 to $0.26 per share from the $0.39 loss reported in fiscal 2012. Our current guidance reflects year-over-year organic revenue growth of approximately 10%, resulting in adjusted operating income improving by approximately $14 million and adjusted earnings improving by approximately $0.65 per share.

With that, I would now like to turn the call back to Jim for an update on the Business, after which we will open up the call to your questions. Jim?

Thanks, Robb.

Before opening the line for questions, I would like to review some highlights from the quarter. During the quarter, Hotel 1000 in Seattle, a property owned and managed by Benchmark Hospitality International, installed an Agilysys Point-of-Sale system to streamline food and beverage operations at its 120-room Seattle-based property. Yale University, among the most prestigious universities in the world, purchased our InfoGenesis Point-of-Sale and Eatec solutions to help them more efficiently manage all of their food outlets.

In the gaming segment, the market in which we are the leading supplier of Point-of-Sale services, we continue to see success as reflected in the recent deal with Miami Tribe Casino in Miami, Oklahoma; and Northern Winds Casino in Box Elder, Montana. Both properties purchased our InfoGenesis Point-of-Sale system, including kitchen video and player tracking setup and the Visual One property management solution. Additionally, Indigo Sky Casino and Hotel in Wyandotte, Oklahoma, selected a suite of software from Agilysys, including our lodging management system, InfoGenesis Point-of-Sale, and the Stratton Warren inventory and procurement system to help manage its property and deliver exceptional guest service.

We continued to expand on the international front as well. During the quarter, we saw increased business with the Mandarin Oriental Hotel Group, a longstanding Agilysys customer, and also closed on a deal with Bloomberry Solaire Resort and Casino in the Philippines for the purchase of our data management suites of document management solutions.

We wish to thank all our customers for the continued support of our business and the confidence they have in our team to deliver for them. In summary, we remain committed to our business plan and are confident in the ability of our talented team to execute on our growth strategies and deliver long-term success.

I will now turn the call over to the operator for questions. Nancy?

Thank you, sir.

(Operator Instructions)

We will we go first to Brian Kinstlinger with Sidoti & Company.

Good afternoon. How are you?

Good afternoon, Brian. How are you?

Good. So, the drivers to revenue growth were -- I wouldn't say all -- but largely product-driven. A couple questions around that. First of all, does that lead to support and services work in the coming months or quarters? And, maybe tell us what was being sold? And, in what end markets specifically were they in?

Brian, the answer to the first part of your question is, yes, generally. The purchases of re-marketed products or products results in a subsequent period where we'll experience increased revenues from services and other software services. And, with regards to the segments, there were large transactions in the gaming segment and hospitality and in the grocery segment within the retail business.

So, at what point do you expect to see the -- will there be an accel -- I mean, this is quite a big quarter, and this is always your seasonally strongest quarter. But, some of that goes away given PSG is gone. So, at what point -- or, will we see a pick up in services and Maintenance related to this quarter that -- a year from now does it take to happen? Is it a quarter from now?

I think the -- in the hospitality segment, you'll see a modest increase in our fourth quarter, but most of the work you'll see evident in our first quarter of fiscal '14. In the retail segment, almost all of the subsequent follow-on services would be realized starting in the first quarter and throughout the remainder of fiscal '14.

Great. And then, when you came on board, one of the major points you've made is, you have this large customer base. But, very few of them use multiple titles of your software. Can you -- is the selling into the existing base playing out yet? And, can you qualify or quantify this in any way?

It is playing out in terms of how to qualify it, the majority of our deals in any particular quarter, since I've assumed the role of the CEO, have largely come from the install base. And, in any particular quarter, we're adding anywhere between 30 to 50 additional net new customers. So, the majority of the revenues that we're realizing within hospitality, in particular, come from the install base. Most of those sales have come from exposing our current install base to other products that we offer.

I'd also add, Brian, that we have in hospitality -- we have 3,500 customers and less than one-third have more than one of our products in there. So, there is still a lot of leg room there for us to up-sell and have some more revenue growth there.

Okay. And then -- thank you. And then, I'm a little shocked that subscriptions growth hasn't picked up a little bit. In past quarters, you've talked about some really high -- or at least much higher than the growth rate of revenue, obviously, in bookings. And, obviously, that takes some time giving subscriptions to layer on. But, 6% year-over-year strikes me as a little bit low given how strong bookings have been. So maybe, have bookings slowed? Maybe give us some numbers there. And, when do we expect that to maybe mirror what happened in bookings?

Yes. Brian, it's a little bit of a change we had with one of our larger customers. We had a couple contract renewals with this customer. And, in order to reduce their third-party support fees and services, we actually changed providers with them and that actually lowered the price a bit, which has negatively impacted the recurring revenue. The good part here is we have been able to retain that customer because we have been able to work with our vendors on doing that. But, that has significantly impacted, especially in the hospitality side, the year-over-year growth numbers.

Overall, the retail numbers, double-digit recurring revenue increases. About what we expected. We would -- after we get through this next four quarters or so related to this change in third-party vendors for this large customer, and the fact that we are still selling the ASP model and so forth out there and still having some legs on the subscription-based model. We would still anticipate this to go up, obviously, into the high single digits. But, for the next couple quarters, specifically in hospitality, because of that change, we are going to see some hard -- it is going to be hard to get above the 5% or above range for hospitality.

Sorry, third-party vendors for what specifically are we talking about? I'm confused about that.

In any recurring revenue services contract, Brian, there is a bundle of services that we sell. Most of which are provided by Agilysys, and some of which are provided by our partners that we contract with to comprise the entire solution. And, in this particular contract renewal, or series of contract renewals with this customer, this customer elected to discontinue certain services that we're reselling or re-marketing.

I see.

That resulted in a lower overall price and a lower overall composition of services that we were providing on a recurring basis with this customer.

Got it. I get that. We haven't heard about in a little bit is you scrapped Guest 360. You are developing a new, all-inclusive property management system. Give us how that's coming along? Tell us who you are going to be selling that initially into? And then, long-term into? And then, finally, what you think the market size is of that?

Well, the market sizing question is pretty broad. What we can tell you is that the long-term vision for the commissioning of this product was eventually a replacement or a super-ceding product to what we sell today to the markets we service. So, if you think about the property management, where we're successful today -- it is in gaming, both corporate and travel gaming. And then, hotels and resorts. The hotel and resorts segments that we sell to, and the gaming one is across the board. So, the hotel and resorts segments that we primarily have been successful in have been large resorts, and then, more boutique or collections of boutique properties in the hotel space.

As we continue to make progress with the next gen platform application, we believe that early releases of this platform application will open up new market opportunities at lower-end properties in the core hotel space. Over time, as we graft on additional capabilities to the platform, they will have a comparable feature set and a comparable interface library to that which you would see in a Visual One or in LMS. Now, we have also planned for two events. One, we have to have an event of transition for those installed customers that we have, such that when they graft on to the new platform it doesn't feel like they're ripping out and replacing something. We have to have a very smooth consumption path and migration path.

But also, we have to have a very smooth consumption and migration path to pull them away from competing products. We think the cloud-based approach to this where they can start consuming PMS-type services from the cloud from Agilysys is the best way to go because they could start consuming portions of their PMS operations piece by piece as they move over. We would expect to be in a private beta around this time next year for the basic PMS operations and be at a more public beta towards the start of our first fiscal quarter in fiscal 2015.

That's great detail. I'm curious. If you were to -- I realize a market size is very difficult. But, if you were to solely replace that cloud-based solution into your installed base, what you're talking about -- just the gaming and then the large resorts, what kind of opportunity is that for you? Can you size that?

I think Robb addressed some of the total addressable market sizing in some material that we presented earlier this year. We have filed that with the SEC. I'd have to go back -- if I want to give you a specific number, Brian. I'd have to go back to that material and get a specific number for you. But, I can certainly follow up with you afterwards.

Okay. That would be great.

And then, the ranges that Robb had in there was an addressable market, in terms of annual spend of somewhere between --.

It was somewhere right around $1.8 billion worldwide.

By your customer base?

For the markets that we serve today.

I got it.

Not the markets that we think may be more available to us through these modifications we are making to the next gen platform. Or, the next gen platform will have an ability for us to address a broader market segment sooner than waiting to just address the market segments that we address today.

Then, on the retail side of your business, you're trying -- from what I understood, obviously, to become a little bit more value add there. And, one of the obvious press releases you had is with the hand-held mobile checkout software that you are building. You've got, I think, one or two large customers, or decent-size customers. Has there been any more success there? And, what is the opportunity you think there over the next year or two for you? Is it a large pipeline? Is there too much competition there?

Well, you can look at the market. There is a ton of competition for people targeting the retail segment, the retail market, trying to make payment and transaction processing easier for their customers. Our particular strategy has been to build a middleware component that sits atop of an installed point of sale system that the retail -- particularly the specialty retail segment already uses. We would then -- we have developed endpoint software for the hand-held on whether it's an IOS device or an Android device that we could quickly install and stand up. Let's say a Sephora-type operation to enable mobile Point-of-Sale or mobile associates in the store.

That particular solution today is enabled over a partner's Point-of-Sale solution. And, this partner we have been working very closely with to not only harden that solution, to make it go beyond a real innovation into an actual hardened product that they could re-market and sell into that install base. And, the success we have been having with the press releases we've made, we feel pretty confident that, that business is going to be able to lift the amount of software and services we provide in that particular line of business in our fiscal 2014. Again, it's a very nascent revenue line for us. Even if we made a significant effort and doubled it, you are still only talking about maybe 2% -- 1% or 2% of total revenues for that business segment.

Okay. And then, the last question I've got is, we're into calendar 2013, which I know you're not a calendar-year Company. But, what would you say the biggest opportunity while you're developing some of these things, especially next gen -- what would you say the biggest growth opportunity for you is? Is it market-specific? Is it product-specific? And, what would that be?

Well, I think the biggest opportunity for us still exists within our install base. And, as Rob indicated, the degree to which the current install base utilizes more than one product from Agilysys. Now, that's not to say that we're not focused on market expansion or opening new market segments with the products that we address. But, I think it's going to cause a shift as we move forward in the way we manage our resources and personnel to address the opportunity before us. We have made significant investments in the products in this past 18 months. And, some of those investments are ongoing that will better enable our customers to use a particular product. To buy another and have a more seamless integration approximate between the products.

And, for that organizationally, we believe, that the way that Robb is redesigning account management and the way we are going to use our inside sales resources, that we are going to get greater leverage and return on the sales spend out of focusing his account managers and inside sales resources on marketing to and courting our current install base. And, taking the external sales resources, the outside sales force, and put putting more incentive and focusing them on getting net new customers to open up some of the new segments we want to address. So, I think that management approach to taking the products that we currently have and the improvements we have made, not only in the feature set but the quality and the integration between them, will open up not only more opportunity in the install base, but make us a lot more appealing to other segments that we haven't participated in as much as we've wanted to.

Great. Thanks so much for answering all my questions. Thank you.

We will go next to Robert Moses with RGM Capital.

Good evening. Just a couple questions. First, just a clarification. I think you mentioned -- kind of an adjusted basis -- about a negative $4.6 million in cash from ops, but you expect to be somewhere in mid-single digits. Does that imply roughly somewhere around a $10 million or so cash from ops adjusted in the fourth quarter? Or, am I -- did I do the math wrong there?

That's correct, Rob. We are anticipating a pretty big uplift in our cash flow from operations in Q4. A lot of that has deal with the annual support and Maintenance Billings that went out at the end of this Q3 that we'll be getting the cash in here in the next -- if not already -- in the next couple of months.

Okay. That makes sense. Second thing. It probably makes sense you did not factor into your guidance both the opportunistic -- two re-marketed deals as well as the hardware deal. Just maybe talk about opportunities? I know the focus is on recurring revenue. Clearly, this helps recurring revenue. Were these just bluebird opportunities? Or, were there things that you just didn't want to bake in your guidance? I am just trying to understand how opportunistic versus how well known they were.

Rob, if you follow the Company -- I know you do. In June of last year when we issued full-year guidance, we indicated nominally flat year-over-year revenue guidance and indicated $3.5 million to $4.5 million of adjusted operating income. Part of the explanation of the discussion we had with investors during that call was the outward movement of a project -- a very large project that we had in our pipeline that we expected to be fully deployed during our fiscal 2013. We indicated that, that project had been moved out and had not gone from the pipeline, but in fact had been moved out.

Through work with our partners and the customer, and I have to really give a lot of appreciation for the hard work that went in between our partners -- Toshiba and Scansource, our customer, and our own internal team -- both the folks on the project, the sales organization, our finance and accounting and legal teams. We were able to come up with, not only a business case, but an agreement where it made sense for them to invest in the assets for this big project in our fiscal 2013 in advance of the roll-out of this project and deployment that will occur primarily in our fiscal 2014. It wasn't a bluebird. It wasn't some halo from the sky that dropped on us. It was planned. We had indicated that it moved out. Through the work of all of the people involved and the organizations involved, we were able to make the business case where investing in it in our fiscal 2013 made sense for everybody.

Thanks for that clarification. Then, just lastly, you touched a little bit on the account management and really the sales force side. But, if I heard you correctly, you feel from a -- there is some reshuffling and maybe account reallocation. But, if you think about the next gen product specifically, I think you said private beta in about a year and maybe more public in a year and a half or so. Do you think that the sales force in terms of -- will it remain stagnant? Will it grow? I assume it will have a lot to do with how much interest you're getting in the product. Talk a little bit about the sales force. Because I think there was a little bit of a turnover, was there not? Over the last 12, 18 months? Where it is today? And, where it needs to be just qualitatively?

We had very modest turnover in the sales staff over the last 12 to 18 months. Most of the sales staff, particularly the outside sales folks that we had when I assumed the role of the CEO -- for the most part, we still have those folks. On a net basis, the number of quota-carrying outside sales folks has remained relatively static over the last 12 to 18 months. What I think you may be hearing from us and what we're trying to convey is that the work streams that they address versus the work streams that a more focused account management and inside sales force may address, may change over the next 12 to 15 months. Where the account management teams, particularly for our large accounts and our inside sales teams, will be more responsible for and have a greater incentive to speak with our customers about more of the offerings that we have than what they have been exposed to thus far. And, focus more of our outside sales resources on opening up net new customers and net new segments.

Makes sense. Thank you very much.

Yes, sir.

And, it appears there are no further questions at this time. Mr. Dennedy, I would like to turn the conference back to you for any additional or closing remarks.

Thank you, Nancy. With the results we've achieved in the third quarter, through the first nine months of our fiscal year, and based on our visibility, I am optimistic about the opportunities ahead. This optimism is further supported by the substantial liquidity we have on the balance sheet to fund growth and investment initiatives. We are successfully executing against a comprehensive product road map that addresses both current and long-term opportunities. Not only with our customers in the markets we currently serve, but also to expand the total addressable market we can serve to position Agilysys as the leader of innovation and service quality in our industry. I want to express my sincere appreciation to our customers for their confidence in us to deliver the solutions that address their needs. I also want to thank the entire Agilysys team whose dedication and skill serve as the foundation for our success. Thank you for your time today, and we look forward to our next opportunity to speak with you.

That concludes today's presentation. Thank you for your participation.