Agilysys' (AGYS) CEO Jim Dennedy on Q1 2015 Results - Earnings Call Transcript

Aug. 8.14 | About: Agilysys, Inc. (AGYS)

Agilysys, Inc. (NASDAQ:AGYS)

Q1 2015 Earnings Conference Call

August 07, 2014 09:00 a.m. ET

Executives

Jim Dennedy – President and CEO

Janine Seebeck – Chief Financial Officer

Analysts

James Lee – Potrero Capital Research

Presentation

Operator

Good morning, ladies and gentlemen, welcome to the Agilysys Fiscal 2015 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 actually 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 call over to your host, Mr. Jim Dennedy, President and CEO.

Jim Dennedy

Thank you, Teria, and good morning everyone. We appreciate you joining us on the call today to review our fiscal 2015 first quarter results. Joining me today is our Chief Financial Officer, Janine Seebeck.

Before we get started, however, just a quick reminder that we’ll be discussing some non-GAAP metrics, primarily adjusted operating income from continuing operations and adjusted income from continuing operations, which eliminates the effect of restructuring and other items that are either non-cash or non-recurring. Reconciliations to GAAP metrics are provided in the financials of the press release issued earlier today.

A few years ago, we implemented a strategy to align our business and putting our product roadmap and our internal resource allocation with what we saw would be the evolving trends and needs of our clients across the hospitality industry. Our strategic initiatives reflect a commitment to strong capital and operating discipline, and development of new services and solutions to deliver more efficient ways for our customers to maximize and leverage their relationships with their guests, grow revenue, and operate their business in a more efficient and effective way.

Over the last three years, we have made consistent progress towards our goals, relying on these key principles as we have simplified our business, evolved our offering, and delivered against the milestones of our next generation platform. The progress is evident in the 14 major releases and four new titles since early 2012, as well as improvements in our financial and operating metrics.

The reorganization of our sales force, which began late in our fiscal 2014, was a topic we had discussed on prior calls. The reorganization of this team will help us expand it to new market sectors, for example, fine dining, table service and quick cash restaurant sectors, develop opportunities with new logos across all markets we serve, and to better equip the team to sell subscription-based solutions, all with the end goal to better serve our customers, develop our team, and add more value to the business.

The results for the first quarter highlight these transitional efforts as reflected in our comparable revenue level, growth in recurring revenues, in particular, SaaS related revenue, a slight decline in gross margins, primarily reflecting amortization expense for recently released products, and the continued investment in research and development.

Our first quarter results highlight several key achievements that stand out and that reflects the continued health and improvement of our business, strong growth in recurring revenues, which are comprised of support, maintenance and subscription services, and which reached a first quarter record of $13.8 million. This is an important metric because recurring revenues offer clear evidence of the success we are having on growing our long-term relationships with our customers, shed light on the stability and strength of our business and provide additional visibility into future performance, which in turn will help generate additional value in our business for our shareholders.

A healthy balance sheet and robust financial foundation to help support and grow the business, including close to $90 million in cash and marketable securities. This serves as a foundation for us to support the development of critical products, such as the introduction of the rGuest technology platform, higher and important team members around key technologies and sales functions, and affording us the opportunity to deploy capital that offer a high return on our investment and drive shareholder value, and our team’s ability to continue to generate solid financial results throughout the significant transformation over the past 36 months. I believe this validates not only the team’s skill to recruit, develop and retain the right people to transform, grow and operate the business, but also to engage our customers and market to develop and deliver highly valued solutions in an efficient manner.

These three key factors, along with our strategic vision and product roadmap position us well for success. We continue to make significant progress in bringing to market our next generation rGuest hospitality platform, while maintaining our innovation and leadership position with our current end market products by introducing select point products, incorporating next-generation rGuest technologies to the market. For example, in the beginning of the year, we introduced InfoGenesis Flex, a mobility solution for food and beverage outlets with limited space or no access to power that can be deployed as either a slim, fixed terminal or as a convertible, simply by removing the tablet from its base, providing a sleek and modern alternative to the traditional point of sale installation.

We also introduced the Agilysys Visual One Property Management System version 8.51, our property management solution featuring significant architectural improvements, such as quick application deployment, more robust functionality, and numerous other benefits. Additionally in our fiscal 2014, we introduced the Agilysys Insight Mobile Manager, a manager dashboard providing property managers with critical management information on the current data arrivals and departures, including VIP level guests, status of the house and housekeeping and financial information such as RevPAR and ADR, along with filled and unfilled group room blocks.

This solution utilized rGuest technology and its delivery and works in connection with our end market Lodging Management System and Visual One Property Management System. As for next-generation products, we remain on track to release on schedule later this fiscal year and consistent with the development pipeline we previously discussed, our new rGuest technology platform, including rGuest stay. rGuest stay is our next generation property management system. It is the first element in the suite of products on the rGuest platform.

We initiated private beta testing with rGuest stay earlier this summer, and enjoyed very enthusiastic response from industry operators to the product as we previewed it at high-tech in June, and continue to expect that initial revenue from our next generation products will be realized late in our current fiscal year with public beta on track for the fall of 2014.

The rGuest stay application was developed with input from an advisory board formed by select industry operators, including independent hotels, gaming properties, resorts and luxury hotels. The full rGuest solution suite is designed exclusively with the hospitality industry in mind, and capable of addressing the industry’s needs for more flexible solutions. And for Agilysys it provides us with a platform that we believe will meaningfully grow our subscription revenue.

Delivered as a cloud-based solution initially, rGuest stay offers instant scalability, operational efficiencies, reduced technology footprint and the ability to upgrade capacity without business interruption, which is especially beneficial for small to mid-sized property. For larger hotels, destination resorts and complex casino properties, rGuest stay is designed so that future releases can be delivered as an on-premise solution for maximum control and seamless integration with existing technologies.

We are very pleased with the enthusiastic feedback from a broad range of hospitality operators following the introduction of rGuest stay, especially considering it is still very early in the release cycle. We feel products like rGuest stay will help address the unique deployment needs, each customer has and as a result key decision makers across the hospitality industry will value the flexibility that offering provides.

Following closely behind the introduction of rGuest stay at high-tech we brought to market the first expansions of the rGuest platform to include solutions for online dining reservations, table management, loyalty and a point-to-point encryption payment gateway. These additions, when combined with the modules, like Agilysys analytics version 2.0, and our supply, staffing and transaction-based solution offer an ecosystem for our clients to control and leverage the total guest experience, giving them more power to maximize guest consumption, reduce cost and align resources to improve operations.

Modules such as rGuest Reserve, an online dining reservation application that enables restaurants to increase bookings and profitability by allowing diners to directly reserve a table via website or mobile apps such as [Indiscernible], rGuest Seat, a table management solution that allows restaurants to optimize the use of tables and resources, rGuest Promote, a customer loyalty engine that allows comprehensive definition of offers and promotions, including various types of discounts and reward accruals, or rGuest Pay, a payment gateway solution for both property management and point of sale products that is PCI certified for point-to-point encryption of cardholder data, are all value-added offerings that work across the entire life cycle of a guest, from recruitment, to follow up with solutions for reservations, transactions, settlement, loyalty, promotion, business intelligence, supply and staff management.

We are not aware of any other offering in the market today that works across the entire lifecycle of the guest the way rGuest does, and we see that in the feedback from our customers. We have also placed a significant recent focus on better aligning our sales and marketing functions to better serve our customers and better position us to support products like rGuest. For example, we have added the function of a business development executive to specifically target new logos within existing markets, and push for new logos in currently served sectors.

We have also invested in the capacity of our existing account executives and major account executives to further develop business with our more than 3000 existing customers to focus on increasing the percentage of multiple product customers. We have undertaken a significant transition in our go to market strategies and while this will place a modest drag on the level of revenue growth we achieve in the short-term, I fully expect that our reorganized sales force will enable us to generate higher, long-term revenue growth and in particular recurring revenue growth.

In summary, our differentiated value proposition combined with strong execution kept our recurring revenues moving forward and we feel good about the progress we are making across our operation, and in bringing to market our next generation products. We are committed to executing on strategies that will deliver stronger growth, and we are making steady and sequential progress as we invest in our product offering and the future of Agilysys.

With that review, let me turn the call over to our CFO, Janine Seebeck, to review our first quarter results. Janine?

Janine Seebeck

Thanks Jim. Our first quarter fiscal 2015 revenue of $23.7 million is comparable to the prior year period. Underlying the comparable revenue was a decrease of 19% in our products revenues, mainly due to the decline in proprietary product sales, principally driven by the reorganization of our sales force, which is expected to keep revenue from this business line separate until later this fiscal year.

This was offset by 7% growth across our support, maintenance and subscription business, or recurring revenues, with SaaS revenue growing at over 8%, and traditional support growing by 6% over the same quarter a year ago. As well, as a healthy growth in our professional services business, which saw a 17% increase over the same quarter a year ago related to revenue from a large deal that closed late in our last fiscal year. It is important to note that we expect revenue from professional services to return to its historical levels for the remainder of 2015.

Moving down the income statement, while we were able to maintain a healthy overall gross margin of 62% for the first quarter of fiscal 2015, we did see a decrease in gross margins of 420 basis points, compared to 66% in the prior year quarter. This was expected as we have the impact of amortization expense as some of our newest products were placed into service. Going forward, we expect gross margins to be inline with the first quarter, and remain in the low 60% consistent with what we have said in prior releases.

Looking at operating expenses, including product development, selling and marketing, general and administrative and depreciation expenses we saw an increase of 8% from $14.3 million to $15.5 million. Product development expense decreased $400,000 or 6% in the first quarter of fiscal 2015 compared with the first quarter of fiscal 2014. This decrease was driven by a greater percentage of labor cost being reclassified to cost of goods sold, as well as an increase in utilization on revenue generating projects, and certain research and development costs being capitalized as software development costs for future use.

We capitalized approximately $3.9 million and $2.9 million during the three months ended June 30, 2014 and 2013 respectively. Going forward, we expect product development expense as a percentage of revenue to be in the mid-20% through fiscal 2015, and thereafter as we complete the development of our next generation products and begin monetizing them that it will trend towards more normalized levels in fiscal 2016 and beyond.

Sales and marketing expense increased $900,000, or 31% in the first quarter of fiscal 2015 compared with the first quarter of fiscal 2014. The increase was due mainly to increased marketing activities surrounding the launch of our next-generation product, rGuest Stay, and an increase in headcount associated with the reorganization of our sales force.

Sales and marketing spend should remain at these levels, or slightly above, as we increase investments in the team and continue efforts to launch rGuest.

General and administrative expenses increased $500,000 or 11% in the first quarter of fiscal 2015 compared with the first quarter of fiscal 2014, as a result of costs surrounding the ongoing initiatives to streamline and improve our back-office processes, including the cost of resources involved in an enterprise resource planning system replacement project that is expected to yield future additional operational efficiencies.

As Jim touched on earlier, in the fourth quarter we initiated a restructuring plan to maximize sales effectiveness and more closely align sales and marketing efforts for targeted vertical growth, new product launches, and marketing alliances, and to shift development resources to the next generation products. As part of this restructuring effort, we incurred a charge of approximately $370,000 in the first quarter. We do not anticipate any significant additional restructuring charges related to this fiscal 2014 action.

Operating loss in the quarter was $3.1 million compared to an operating gain of $500,000 in the first quarter of fiscal 2014, and on an adjusted basis, we also saw a drop in operating results from adjusted operating income of $1.7 million in the year ago period to an adjusted operating loss of $400,000 in the first quarter of fiscal 2015.

Adjusted loss from continuing operations in the first quarter was $400,000 or a loss of $0.02 per diluted share compared with adjusted income from continuing operations of $1.6 million or a gain of $0.07 per share last year. Loss from continuing operations for the quarter of $2.2 million or $0.10 per diluted share compared to a gain from continuing operations of $1.3 million or $0.04 per share for the prior year period.

Moving to the balance sheet and cash flow, cash and marketable securities as of June 30, totaled $88 million compared to $99.6 million at March 31, 2014. The decrease in cash was consistent with prior years and as expected our cash flow was negative in the first quarter due to the first quarter historically being our lowest revenue generating quarter.

Net cash used in continuing operations was $8.2 million, compared to a net cash used in continuing operations of $5.6 million in the first quarter of fiscal 2014. This led to net adjusted cash use in operations for the first quarter of fiscal 2015 of $5.8 million compared to $5.2 million in the prior year period adjusting for non-recurring items.

Total deferred revenues, including both paid and unpaid balances increased 16% to $29.4 million at June 30 compared with $25.2 million at March 31, 2014, which consistent with our focus on generating increased higher margin proprietary products and subscription services sales.

With regards to our NOLs, we currently have $162 million on our book, for which we can attribute a full valuation allowance and which will help us remain viable for just taxes paid in foreign jurisdictions along with minimal state taxes for the foreseeable future.

With regards to our fiscal 2015 outlook, while top line growth is expected to experience some drag as Jim mentioned, we expect to achieve revenue growth in line with or slightly above the overall industry rate of growth, and to generate breakeven to slightly positive adjusted income and adjusted operating income from continuing operations for the full year, in spite of our accelerated investments in new product development and in support of the rollout of rGuest.

In closing, Q1 is the start of an incredibly important time for Agilysys with the recent preview and upcoming launch of rGuest. Our first-quarter performance reflects the steady progress that we are making to restore our growth momentum and we are excited about the opportunities ahead of us to further leverage our existing client base and engage with new clients. We remain confident we are taking the necessary steps to position Agilysys for sustainable long-term growth.

With that, I will turn the call back to Jim before we move to Q&A. Jim?

Jim Dennedy

Thank you, Janine. The past few months have been a productive time for us, not only on the operational and product development side, but also on our ability to sign agreements with both existing as well as new customers. Taking a look at our commercial and tribal gaming market, we were able to continue to grow our customer footprint in this important market, which currently represents approximately 53% of our total revenue.

Highlights include Prairie Band Casino & Resort in Kansas adopting a comprehensive software suite of our products, including solutions for property management, point of sale and inventory procurement for their 297 room resort, and Croc's Casino Resort, a 152 room and 44 private residence property in Costa Rica that will be using our Visual One Property Management System and InfoGenesis point of sale system.

Moving to the hotels, resorts and cruise market we are very pleased with our continued growth and progress in this market, which currently represents approximately 22% of our total revenue and which offers a significant growth opportunity for us both in the United States as well as internationally. Recent highlights include Camelback Lodge & Indoor Waterpark in Pennsylvania, providing a comprehensive software suite to streamline operation and enhance guest service at the new $163 million resort.

HotelWorks Development selected InfoGenesis point of sale to streamline operations and enhance guest service across its new Malana Hotel. The 271 room Washington Duke Inn & Golf Club located at Duke University choosing our InfoGenesis point of sale system, and more recently the Kalahari Resort and Convention choosing our InfoGenesis point of sale system.

And in the highly competitive cruise sector, we continue to develop and foster both old and new relationships and remain confident in our ability to expand key customer relationships, such as Royal Caribbean Cruise line, where we currently have 35 vessels that use Agilysys software solutions.

Looking at the food service management market, a market that represents approximately

15% of our business, just a few weeks ago we announced an expansion of our technology partnership with Compass Group North America, a leader in food service management and support services to roll out the Elevate point of sale solution to additional customer sites nationwide, including schools, healthcare facilities and other food service locations Compass serves.

With respect to the restaurant, university, stadium and healthcare sector we see continued new openings and an increased need for more sophisticated dining experience, including online ordering and reservation, mobile service and higher level of customer interaction. We are pleased to announce that the University of Akron incorporated the Eatec inventory and procurement system to enhance efficiency and streamline operations across its 27 campus food and dining outlets, including dining halls, convenience stores and retail outlets, and that the University of California Berkeley implemented Eatec across its 21 campus food and dining locations, including residential dining halls, campus restaurants and retail markets, as well as on campus catering and concessions at sporting events.

And on the healthcare front, Regional Health, the largest healthcare provider in western South Dakota, selected WMx, our Workforce Management Solution for its cashless capability for payroll management.

One of the areas that we are seeing significant up tick by customers across just about every sector is around cloud-based solutions, including software as a service. Customers continue to show strong demand for SaaS enabled solutions. Given the greater adoption of cloud-based solutions, we have increased our focus around Cloud and SaaS solutions to complement our traditional sales and business development efforts across certain sectors. We are expanding and aligning our sales force to sell SaaS services, and even though we are in the early stages of this effort, we are pleased with the results so far.

Keep in mind that even though this business should provide higher margin, we will give up some of the front-end revenue we receive today from traditional on-premise sales. When you put all of this together, our growing revenue, our continued ability to secure new customer wins, our ability to bring our next generation products to market, our success in realigning our sales team and go to market strategy, our strong financial model, the health of our underlying industries, the growing demand for cloud-based solutions, our significant addressable market and the opportunity to sell across international markets, we feel confident in our ability to deliver added performance for our customers and add value to our shareholders over the coming quarters.

With that let us open the call for your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of [Indiscernible]. Your line is now open.

Unidentified Analyst

How are you doing guys? Good morning. Thanks for taking my call.

Jim Dennedy

Good morning.

Unidentified Analyst

Some work in the gaming space, and lately we have seen some weakness, so I was wondering whether you guys are seeing that in your end as well, and how that is affected your business, and how you see that affecting your business moving forward?

Jim Dennedy

So, this is Jim, we haven’t seen the weakness that we have seen in your reports, and that you all reported on the gaming industry. We haven’t seen that in the order demand or flow from our customers. But one thing I would note is that in talking with many of the CIOs from the properties we serve, they do tell us that they are seeing an increased reliance or importance from non-gaming related revenue, which would include lodging, rooms, events, F&B retail. So those other businesses of the casinos outside of the strict gaming related business activities are increasing in their importance, and I think that is another reason for why we don’t see let us say a drag in demand that you might have reported on based on the overall dampening of the gaming industry revenues.

Unidentified Analyst

Okay, great. That is helpful. Thank you. Also I’m sure you guys are well aware that Oracle recently acquired MICROS, and I was wondering if I could get your thoughts on how that affects your market segment, as well as your competitive position?

Jim Dennedy

We don’t really necessarily want to want to comment on another competitor’s strategic moves, but we think that the activity generally in the market, all the corporate development activity in the market over the past really two years, has increased the level of attention and awareness both from customers and investors in alternatives or other competitors to maybe what be seen as the market leaders and that has increased the awareness and profile of Agilysys on their radar for both customers and investors.

Unidentified Analyst

Okay, great. Thank you. That is it for us.

Jim Dennedy

Thank you.

Operator

Thank you. (Operator instructions) Our next question comes from the line of James Lee of Potrero. Your line is now open.

James Lee - Potrero Capital Research

Okay. On the maintenance revenue, could you talk about why it was down slightly quarter-over-quarter, is that just due to seasonality, it looks like that happened fast?

Janine Seebeck

Yes. So James, it is Janine, good morning. A lot of that actually has to do in the last quarter, we had some of our remarketed support that hit, and so some of that is seasonal since that is upfront revenue, and that causes a little bit of [trough], and so that is really the only reason. Our proprietary and our SaaS continue to grow at the levels with a small pickup.

James Lee - Potrero Capital Research

[Indiscernible] continue to grow sequentially going forward?

Janine Seebeck

Yes, definitely.

James Lee - Potrero Capital Research

Then on the – a question on some products or sales force transition impacting your products growth, I was under the impression in the last quarter that you guys were merely augmenting your sales force, adding more people and it sounds like from [Indiscernible] today there was disruption from that, could you talk a little more about why, what exactly is going on with workforce transition and whether it is impacting your sales?

Jim Dennedy

While we have added capacity in sales, we did indicate that, but in the past calls going back to even I guess the third quarter of our fiscal 2013, we indicated that we need from our sales force more new logo business, and more multiple product customers to selling products into the installed base, of which 3000 customers, about a third or a little bit less than a third, are multiple product customers.

So we changed some of the incentives associated with obtaining new logos versus just selling continuing run rate business, and secondly, we emphasized this year more than ever selling subscription based solutions versus [non-perm] solution. The effect this has on near-term revenue is that if you are pursuing new logo businesses, the sales cycle is a little bit longer, even if it is in markets we currently serve, and if it is a SaaS–based relationship versus a license in maintenance or traditional relationship, you are going to have delayed rev reg on that total contract value that might be sold.

So both of those will have somewhat of a dampening effect on top line rev growth, but where you are going to see it is in the recurring revenue line, particularly in the SaaS element, which we don’t necessarily break out, but we can talk to on our recurring revenue line. Janine do you have any other comments?

Janine Seebeck

No, I think that covers it. James, obviously there is also a ramp up, right. There definitely was within the reorg some transition [Indiscernible], just an augmentation, so the ramp up of that team and the change in some of the staff themselves is part of what is driving that lag.

James Lee - Potrero Capital Research

So when do you expect the sales reorg to be complete and when will we start seeing your product revenue growth and what gives you confidence that it will grow say in the year?

Jim Dennedy

The transition is nominally complete and use a hockey term, work full strength, so we are back on the ice and skating. Everybody has their positions and accounts and territories specified, and that was something that we took care of, let us say, April sales conference we had and I think that kicked everything off. In terms of full strength operational efficiencies, we think that our second quarter is going to be a normal quarter for us. We think the growth levels that we previously experienced, particularly in recurring revenue line, will be evidenced in our third and fourth quarter results and for the full year. But you are not going to necessarily see it in top line because we are going to continue to emphasize SaaS–based engagements.

James Lee - Potrero Capital Research

[Indiscernible] you are expecting product revenue growth to be actually negative, again –

Jim Dennedy

No, I didn’t say negative. While we are expecting product revenue growth to be negative, we are emphasizing more the SaaS–based contracts. So we are trying to persuade our customers, our markets and our sales teams, motivate everybody to pursue sales based – SaaS–based engagements. That will have an overall dampening effect on overall revenues, but we still expect a pretty significant chunk of our installed base will continue to consume in a traditional-based methodology. I don’t think that you are going to see a complete wholesale change in bookings from traditional to SaaS. I think right now our as a percentage of our quarterly or monthly bookings, we are seeing something just south of 30% being SaaS–based engagements, and we are pushing for that to be in the mid-30s to just under 40%.

So we are not seeing a complete light switching effect, where all of a sudden tomorrow we are going to be selling 50% plus of our booking in subscription-based sales. But we are emphasizing that and that emphasis will have a modest drag on rev reg.

James Lee - Potrero Capital Research

And [Indiscernible] full year to grow inline with the industry for your core revenue, so what is the industry growth that you are expecting this year?

Jim Dennedy

Well, the industry as we talked about at it in the recent past and there has been some recent press out from either the National Restaurant Association or the Hotel Management Segments, it is nominally in the 5% to 7% annual rate of growth.

James Lee - Potrero Capital Research

Okay, thank you.

Jim Dennedy

Yes, sir.

Operator

Thank you, and at this time I’m showing no further participants in the queue. I would like to turn the call over to Mr. Jim Dennedy, President and CEO for any closing remarks.

Jim Dennedy

Thank you to everyone for joining us this morning. In closing, I want to take this opportunity to thank the talented and dedicated team at Agilysys, who are responsible for our success and express my thanks to our customers who entrust us with their business. I also look forward to seeing many of you on our September 7 – on September 17, when we plan to hold our second investor day and analyst day in New York.

Please contact our investor relations firm, JCIR at 212-835-8500212-835-8500 if you would like to join us. We will be sending out formal invitation shortly. Thanks again for joining us today.

Operator

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes the program. You may now disconnect. Everyone have a good day.

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