Agilysys Inc (AGYS) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Agilysys fiscal 2014 first-quarter conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, today's call is being recorded.

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 these 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.

I would now like to turn the conference over to your host, Mr. Jim Dennedy, President and CEO. Sir, you may begin.

Thank you, Kate, and good afternoon, everyone. We appreciate you joining us on the call today to review our fiscal 2014 first-quarter results. With me this afternoon is our Chief Financial Officer and Chief Operating Officer, Robb Ellis.

Before we get started I would like to remind everyone that we will be discussing some non-GAAP metrics on today's call, primarily adjusted operating income from continuing operations and adjusted net income from continuing operations, which eliminates the effect of restructuring and other items that are either non-cash or nonrecurring. Reconciliations to GAAP metrics are provided in the financials of the press release issued earlier today.

Our strategy over the past couple of years has been to pursue the highest return on capital opportunities available. This includes the end markets we serve, the solutions we develop and deliver, and the businesses we choose to own.

The completion of the sale of the Retail Solutions Group earlier in July is consistent with that strategy. Now we have a more focused business, a stronger balance sheet, and an improved operating structure that better positions us to execute on growth initiatives and compete for market share in the hospitality industry.

Our operating model permits us to further invest in new product development, pursue select acquisitions to advance our product roadmap and expand our market depth, and make important investments in our business to improve the quality of services we provide. Our first-quarter financial results reflect the success of the business strategy we have implemented.

This strategy continues to deliver year-over-year growth in total revenue, recurring revenue, and gross margin. With nearly a double-digit revenue growth rate, we continue to outpace the overall market rate of growth, with expanding margins.

The team has made significant strides in becoming more capital efficient within the business. While we have a modestly increased operating expense, we drove a year-over-year improvement of greater than 300 basis points in the operating expense-to-revenue ratio. This resulted in delivering a nearly $2 million year-over-year improvement to adjusted operating income.

Capital efficiency is the key metric on which we rely to assess the quality of the business and financial objectives we have accomplished. In this regard, our business and our personnel have performed exceptionally well.

It is important to note, however, that we intend to fully deploy the positive operating results back into the business and pursue the growth opportunities we see in the end markets we serve. As a result, full-year results will be more reflective of the general guidance we provided in our fourth fiscal-quarter earnings call.

With that, I would now like to turn the call over to Robb to review the financial results for the quarter, balance sheet, and cash flow. I will then provide some additional insight on the business before opening the lines for questions. Robb?

Thanks, Jim, and good afternoon, everyone. Let me begin by highlighting that the results we reported for the fiscal 2014 first quarter and that we will be discussing today are related to the Hospitality business only and do not include any contributions from our former Retail division, which are now included in discontinued operations. In addition, we will be reporting as one business segment going forward and, as such, our previously reported corporate services expenditures are now included within our Hospitality business.

Looking at the detailed results for our fiscal 2014 first quarter as compared to our prior-year results, revenue increased by 9% or $2.1 million, driven by a 15% growth in product sales, an 8% increase in recurring revenue, and a 2% increase in professional services. Revenues domestically grew 12% organically for the quarter, which is above the market rate of growth. International revenues, which make up 7% of our consolidated revenues, were a little down year-over-year due to the timing of project completions.

Overall, gross margin in the fiscal 2014 first quarter improved by over 380 basis points to 66%. This improvement in the gross margin is due mostly to the decrease in software amortization expense from our legacy products. The release of new products and updated versions of our existing products during fiscal year 2014, as well as our continued movement to a subscription-based revenue model, will result in additional expenditures and lower but more sustainable gross margins around 60%.

Operating expense, which includes product development, selling and marketing, general and administrative, and depreciation expense, increased 4% from $14.5 million to $15 million. However, we continue to increase our investment in our product development, which rose 47% year-over-year to $6.5 million, or 26% of our revenue.

We've been able to decrease our sales and marketing and general and administrative expenses by 23% and 9%, respectively. This represents a reduction from 42% of revenue in fiscal-year 2013 to 33% of revenue in fiscal-year 2014. This reflects our ongoing commitment to managing our cost structure and our prudent approach to expenses.

In the first quarter, we undertook restructuring actions to better align corporate functions and to reduce operating costs following the sale of our Retail segment. We recorded approximately $44,000 in restructuring charges during the first quarter. Our restructuring activities are expected to be completed in fiscal 2014 and total less than $1 million.

Adjusted operating income improved by $1.9 million year-over-year to $1.5 million. This led to adjusted net income from continuing operations of $1.4 million or $0.06 per diluted share, compared with an adjusted net loss from continuing operations of $900,000 or a loss of $0.04 per share last year, an improvement of $0.10 per share.

GAAP net income from continuing operations was $400,000 or $0.02 per diluted share, an improvement of $3 million from a loss of $2.7 million or $0.12 per diluted share in the first quarter of fiscal 2013.

In regards to our balance sheet and cash flow statement, cash as of June 30, 2013, was $70.6 million, which does not include the net proceeds from the sale of our Retail business unit, which occurred on July 1. Inclusive of these proceeds, our current cash position is over $100 million.

Adjusted cash used in continuing operations was $5.2 million, compared to $6.8 million in the previous year. Consistent with prior years and as expected, our cash flow was negative in the quarter, due to the first quarter normally being our lowest revenue-generating quarter as well as the period in which annual bonuses earned from the previous year are paid.

As such, we expect improvements in our cash flow going forward. However, we also expect this cash to be utilized for investments in the business, which may impact our adjusted cash flow from operations or free cash flow.

Our successful first quarter provides strong support that our business model is primed to deliver positive operating results. During the quarter, we generated above-market revenue growth, which we believe will be sustainable throughout fiscal 2014.

As we continue to invest in the business for future growth, both organically and inorganically, we remind you that profits may vary depending on the investments we make and whether they are classified as capital assets or part of our operating expense structure. We will continue to run the business exceeding the market rate of growth organically, increasing our investments in our people, our products, and our customers. And we will continue to do so while generating positive adjusted operating income.

With that I would now like to turn the call back to Jim for a review of some of our most recent announcements as well as some closing remarks, after which we will open the call for questions.

Thanks, Robb. Before opening the call to your questions I would like to review some highlights from the quarter including notable customer wins, product launches, and comment further on our strategy and capital discipline.

In late June we announced that Apache Casino Hotel, owned by the Fort Sill Apache Tribe in Oklahoma, had selected a suite of software solutions from Agilysys including our Lodging Management System and InfoGenesis point-of-sale system to improve the guest service experience at its casino and new 132-room hotel. In higher ed, Yale University recently selected the Eatec inventory and procurement system along with InfoGenesis to streamline its campus food service operations across 23 locations including dining centers, cafes, and retail markets.

In another important segment to our business, stadium, arena, and entertainment venues, we announce that Wet 'n' Wild, Nevada's largest waterpark, selected InfoGenesis to enhance guest service at the park and to streamline its food and beverage operation. And just last month we received top honors in the industry supplier category at the Stadium Business Awards competition in London. This prestigious award recognizes our consistent service and industry support as a product and services supplier and reflects the success we are having as a partner to customers in this market, such as the O2 Arena, the Barclays Center, and Chester Racecourse.

Turning to our product development initiatives, during the quarter we introduced the Agilysys Insight Mobile Manager application at the HITEC 2013 conference in June. Insight Mobile Manager is a mobile dashboard application that allows hotel managers to quickly view critical information about their property from a mobile device.

The application contains panels of various data elements including arrival, departures, VIPs, groups, total guests, rooms, house status, housekeeping, reservation summary, revenue, and RevPAR statistics. The application is available today for LMS and will be fully integrated with all Agilysys's property management systems.

We also announced the general availability of the latest version of our award-winning InfoGenesis point-of-sale solution and the latest version of the Lodging Management System property management solutions. The latest version of InfoGenesis is built on a simplified architecture, making the product easier to install and maintain, and features a number of infrastructure enhancements which provides greater scalability and enables customers to easily add data storage. The latest release of the Lodging Management System contains several new features which enhance hotel operations, key interfaces, reporting, cashiering, housekeeping, Web booking, and accounts receivable.

In addition to the significant customer wins, industry recognition of our solutions, and new product releases during the quarter, we also announced the acquisition of the assets of TimeManagement Corporation. This acquisition is consistent with the core value we provide the industry.

Our mission is focused on developing and delivering solutions to help drive performance for our customers, enabling them to recruit more guests, maximize wallet share, and stay more connected to the guest throughout the engagement process. Our organic development and acquisition strategies are designed to further those objectives in the most capital-efficient manner available. It is important to note that the acquired technology from TimeManagement Corporation already seamlessly integrates with our point-of-sale and inventory procurement systems, including InfoGenesis and Eatec.

With regard to further capital deployment, we see several attractive areas where we can invest and support our growth in the hospitality industry. We are looking to invest both organically as well as through strategic acquisitions.

We see clear opportunities to invest in our teams to improve our capabilities, in our solutions to add more value, in our markets to create more awareness, on our business to enhance our service quality, and in our business to profitably grow revenue and reduce expense. Through our recent corporate development activities we have strengthened our ability to grow our market share in the hospitality industry, and we continue to improve the capital efficiency of our business.

Agilysys is making clear progress towards becoming a more nimble, focused, and efficient operating business that can continue to deliver improved financial results and expanded and more attractive solutions offerings for our customers. While we are pleased with our nearly 14% revenue growth year-over-year in fiscal 2013 versus 2012, and with our more than 9% revenue growth in this most recent quarter over the same quarter last fiscal year, we see opportunity for growth ahead.

We believe our focus on strategic growth and capital efficiency will deliver above-market revenue growth and create greater value for our team, customers, and investors. With that, I will now turn the call over to the operator for questions. Kate?

(Operator Instructions) Brian Kinstlinger, Sidoti & Company.

Hey, guys. How are you? The first question I had, maybe talk about on the revenue growth, you've got a couple of different products, obviously. What drove that growth? And maybe you can talk about which sub-industries within Hospitality were you seeing more strength than others?

Well, Brian, I think the overall growth was driven uniformly across many of the product lines. I would say it's leading with our point-of-sale and followed very closely by our property management systems.

With respect to the industries or markets that are leading that growth, we are continuing to show strength in the casino, the stadium, arenas, and events venues, as well as we picked up some additional wins in the hotel segment. So those three primary areas contributed to the growth in this particular quarter.

At the end Jim, you mentioned the growth ahead. I guess I was trying to decipher why -- I realize you are talking about above-market growth rates. Are you meaning to communicate that you expect acceleration?

Or is 8% something that really is not sustainable? Obviously, the market is growing much slower. Just maybe give us a sense of what you are looking for.

Again, we have been fairly cautious in guiding that you should expect above-market rate of growth and we think you should continue to anticipate that. We expect that from our business.

In terms of bracketing it and saying you're going to expect 8% to 10%, or 8% to 12% growth, I am not -- we're not in a position to give that type of guidance, Brian. But I think indicating that we are intending to grow above the market rate of growth, either organically or through the M&A activity that we are pursuing, I think that is what investors should continue to expect.

In terms of growth opportunities forward-looking, while we feel that 14% year-over-year and above 9% year-over-year in the quarter was solid, we expect to see more growth opportunity. It's been capitalizing on that through our sales initiatives and our product launches.

Can you maybe share -- obviously your new stand-alone business without the Retail piece, what is the average deal size for business maybe in the quarter? And maybe how did that compare to last year?

The deal sizes in the quarter for Hospitality have been fairly consistent. The Hospitality business is comprised primarily of many smaller deals, say sub $50,000. And then you are going to have somewhere in the range of between 10 and 12, 10 to 13 deals that are going to be in the greater than $200,000 range. So it is sort of barbell shaped.

When those are the numbers, is that over a very short time period, or is that over a one- to two-year period? Because obviously -- does that -- meaning does that include the maintenance and services piece?

It does not include the maintenance and services piece. That perspective is generally looking at, let's say, the half years. But then it's (multiple speakers).

That is on a bookings basis as well. So then when you look at how we then turn the bookings into revenue, there can be a small time lag depending on the delivery of all of the elements that compose the contract and whether that deal is a subscription-based deal or a licensed-based deal.

Speaking of bookings, I was going to hold that one, but since you mentioned it, I am wondering if you intend to provide backlog numbers now, given your business may portend to that. And maybe how more bookings compared to year-over-year, if I look at deferred revenue, went down sequentially; but you had divested some assets so it is hard to tell, obviously, what that meant. So maybe give us a sense of what is going on for bookings.

At this time we are not intending to give backlog information.

Okay.

The jury is still out for us on the advantage of giving bookings-related data.

Okay.

Some of it can be highly competitive, Brian. We're just a little bit sensitive about releasing too much information. Because while we love and embrace our investors, who we wish that -- participate on these calls, it is also possible that others are listening to this that we'd perhaps not want them to have that information.

You mentioned -- you talked a lot about investments in your press release as well as on the call here. I guess I was unclear about the -- where that will play out.

So maybe highlight the three areas, the top three areas. Is it people you have got to add? Is it research and development? Is it marketing? Is it -- maybe just the three areas that you intend to deploy some of that excess capital that you are generating in this quarter.

Primarily people or full-time equivalents from contractors that we use or sources that we use as service delivery. So it is primarily people.

And from time to time, like in the acquisition of the assets of the TimeManagement Corporation, you will see us acquire technology through M&A. But the investments are primarily people-driven. Even if it is R&D we still have people that we need to retain in order to do the work on the R&D side.

So it is primarily an investment in our people, not only the acquisition of new staff, but in the training and the [upleveling] of the knowledge of the existing staff.

And then maybe highlight Europe. I saw you have talked about that in the press release, too. What is your footprint there? I know you have 7% of your revenue, but how many people do you have there?

Do you have to double or triple that? Do you need more infrastructure? How much will the investment take into Europe, and how long will that take?

Europe is a really --

International -- you didn't say Europe, sorry. You said international, not Europe.

Yes, Europe itself is a little difficult, challenging economic environment across the UK and the Continent. In Asia, while the growth rates have slowed in Asia generally, we still see more opportunity available to us in the Asian markets for growth than we see in the EMEA market for growth.

So getting back to your specific question of when you should see the growth, there is some work that we need to do around products before we think the growth rate could meaningfully accelerate both in Europe or in EMEA. We would expect that to occur late second half of our current fiscal year.

Okay. Then when do you think the -- unless I missed it, I didn't hear any comments on where you are and if you are still developing the next generation property management system. Where are you with beta customers or early adopters? And when are we expecting that to be readily available for sale?

Well, on the last earnings call we discussed some of the timing. It is still an ongoing investment.

One of the interesting components that is in the market today around V.NEXT is the Insight Mobile Manager we discussed and its release at HITEC. When users and our customers consume the Insight Mobile Manager that technology, the UI for that technology, is the UI for V.NEXT.

So what we have done is we've taken the investments that we are making in that UI; we are building a layer that can talk to our existing technology, so that as our customers take up components like the Insight Mobile Manager they are already beginning to use the V.NEXT product. It is a matter of conditioning them toward that new, fresher UI, that over time as we then introduce the back-end engine we can take out and substitute our own engine for the new V.NEXT.

We discussed in our fourth-quarter call, I believe, some timing around this, which will be private beta sometime late current fiscal year, start of next fiscal year; for a limited beta product to be out as a release candidate for the limited-service hotelier market late first half of fiscal '15. So we wouldn't expect meaningful revenues from the product until fiscal '16.

Great. Last question I have is on the SaaS business. What percentage of the deals that you win at this point are SaaS versus a traditional product software or sale, if you well, type of transaction?

Yes, hey, Brian. It's Robb. The percentages are right about 10% to 15% of deals that we are winning on the street are a SaaS or a subscription-based model.

I guess I'm going to squeeze one more in. That seems low, I guess. Given the ROI and the limited investment, it seems more and more SaaS and cloud as a percentage of total sales for software companies has been the trend.

Is that increasing? Do you expect it to increase quickly?

Why do you think that you have such a large percentage of non-SaaS business? Is it the customer type?

Well, it is increasing, although modestly; and you have hit on it. It is customer type-driven.

If you look at the composition of Hospitality as it exists today, approximately 50% of our revenues, five-zero, comes from the gaming segment. That segment has some challenges in their business with taking systems off-property, particularly as it relates to guest spend information that we then consolidate or they will consolidate in their property management systems.

So it is a little bit customer-centric for the percentage of the customers that are represented by the gaming industry.

Great. Thanks so much for your time, guys.

(Operator Instructions) I am not showing any further questions at this time. I would like to turn the call back over to Mr. Jim Dennedy for closing remarks.

Thank you, Kate. Thank you for your participation on the call today. We are pleased to deliver quarterly results and strong underlying business performance. We believe our strong balance sheet, positive operating income, and focused strategy presents a compelling and financially strong partner for our customers.

I would like to thank my talented and dedicated colleagues at Agilysys, who are responsible for our success, and our customers who entrust us with their business. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.