Agilysys, Inc. (AGYS) CEO Discusses F1Q14 Results - Earnings Call Transcript

| About: Agilysys, Inc. (AGYS)

Agilysys, Inc. (NASDAQ:AGYS)

F1Q14 Earnings Call

July 25, 2013 4:30 PM ET


Jim Dennedy – President and CEO

Robb Ellis – SVP, COO, CFO and Treasurer


Brian Kinstlinger – Sidoti & Co.


Good afternoon, ladies and gentlemen, and welcome to the Agilysys Fiscal 2014 First Quarter Conference Call. At this time, all participants are on 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 predictive and are intended to be made as forward-looking within the Safe Harbor protection of the Private Securities Litigation Reform Act of 1995. Although the company believes that these forward-looking statements are based on reasonable assumption. Such statements are subject to risks and uncertainties that could cause results to differ materially.

Important factors that could cost actual results to differ materially from this 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.

Jim Dennedy

Thank you, Kate, and good afternoon, everyone. We appreciate you joining us on the call today to review our fiscal 2014 first quarter result. With me this afternoon is our chief financial officer and chief operating officer, Robb Ellis.

Before we get started, I’d like to remind everyone that we’ll 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 non-recurring. Reconciliations of 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 market 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 focus business, a stronger balance sheet and an improved operating structure that better positions us to execute our 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 on those [ph] roadmaps and extend our market depth and make important investments in our business and 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 margins with [inaudible] double-digit revenue growth rate that 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 no greater than 300 basis points in the operating expense through revenue ratio. This resulted in delivering nearly a $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 in pursuit of 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 of the quarter, balance sheet and cash flow. I will then provide some additional insights on the business before opening the lines for questions. Robb?

Robb Ellis

Thanks, Jim, and good afternoon, everyone. Let me begin by highlighting that the results we reported is for the fiscal 2014 first quarter and that we will be discussing those areas [ph] related to the hospitality business only. We do not include any contributions from our former retail division which are now included in discontinued operations.

In addition, we will be recording as one business segment going forward and as centered [ph] 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 and 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 or 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, an updated version of our existing products during fiscal year 2014 as well as our continued movement to a subscription-based revenue model will result an additional expenditures and lower the 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 was 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 the reduction from 42% of revenue in fiscal year 2013 to 33% of revenue in fiscal year 2014. This reflects our ongoing commitment in 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 the operating cost 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 the 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 30th, 2013, was $70.6 million which does not include the net proceeds from the sale of our Retail business unit which occurred on July 1st. 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 trying 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 review of some of our most recent announcements as well as some closing remarks and after which, we’ll open the call for questions.

Jim Dennedy

Thanks, Robb. Before opening the call to your questions, I’d 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 has 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 that is 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 foodservice operation across 23 locations including dining centers, cafes and retail markets.

And another important segment to our business, stadium, arena and entertainment venues, we announced that Wet n’ Wild, Nevada’s largest water park, selected InfoGenesis to enhance guest services to park and to streamline its food and beverage operations.

And just last month, we received top honors in the Industry Supplier category at the StadiumBusiness Award competition in London. This prestigious award recognizes our consistent service and industry support as a product and services supplier and reflected the step we are heading as a partner to customers in this market such as the 02 Arena, the Barclay Center and Chester Racecourse.

Turning to our product development initiative, 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 do critical information about their property from a mobile device. The application contains panels of various data elements including arrivals, departures, VIPs, groups, total guests, rooms, house status, housekeeping, reservation summary, revenue and RevPAR statistics. The application is available today for LMS and we fully integrate it with all Agilysys Property Management System.

We also announced the general availability our latest version of our award-winning InfoGenesis Point-of-Sale solution and the latest version of the Lodging Management System and Property Management Solution. The latest version of InfoGenesis is built on a simplified architecture making the product easier to install and maintain and figures the number of infrastructure enhancement which provides greater scalability and enables the customers to easily add data storage.

The latest release for 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 and as your [ph] 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 guests 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 System including InfoGenesis and Eatec.

With regard to further [ph] 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 acquisition. We see clear opportunities to invest in our teams to improve our capability, in our solutions to add more value, in our markets to create more awareness, on our business to enhance our service equality 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 to 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 could continue to deliver and improve financial results and expanded and more attractive solutions offerings for our customers.

But 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?

Question-and-Answer Session


(Operator instructions) Our first question comes from the line of Brian Kinstlinger with Sidoti & Company. Your line is open.

Brian Kinstlinger – Sidoti & Co.

Hey, guys, how are you?

Jim Dennedy

Good afternoon, Brian.

Robb Ellis

Hi, Brian.

Brian Kinstlinger – Sidoti & Co.

The first question I had maybe talked about the revenue growth. You’ve got a couple of different products obviously. What drove that growth and maybe you can talk about which some industries within hospitality where you’re seeing more strength than others?

Jim Dennedy

Brian, the overall growth was driven uniformly across many of the product lines but, yeah, I would say it’s leading with our point-of-sale and [inaudible] closely by our Property Management System. With respect to the industries or market that are leading that growth, we’re continuing to show strength in the casino, the stadium, arenas and event venues as well as we picked up some additional wins in the hotel segments. So those three primary areas contributed to the growth in this particular quarter.

Brian Kinstlinger – Sidoti & Co.

[inaudible] and Jim, you mentioned the growth ahead and I guess I was trying to decipher why – I realized you’re talking about above market growth rate. Are you meaning to communicate that you expect acceleration or is 8% something that – is reason [ph] not sustainable, obviously, market is going much slower? So maybe give just a sense of what you’re looking for.

Jim Dennedy

Brian, we’ve 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 and say you’re going to expect 8% to 10% or 8% to 12% growth, 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’re pursuing, I think that’s what investor should continue to expect.

In terms of growth opportunity forward looking, while we feel that ‘14 year over year and above nine quarter over – year over year on the quarter was solid, we expect to see more growth opportunity. It’s been capitalized on that through our sales initiatives and our product launches.

Brian Kinstlinger – Sidoti & Co.

Can you maybe share, obviously, your new standalone business without the [inaudible]. What’s the average deal size for business maybe in the quarter and maybe how that compared to last year.

Jim Dennedy

Well, the deal sizes in the quarter for hospitality had been fairly consistent. The hospitality business is comprised primarily of many smaller deals, the sub-50,000 [ph] and then you’re going to have somewhere in the range between 10 and 12 and the 13 deals that are going to be and a greater than $200,000 range. So it’s sort of barbell shape.

Brian Kinstlinger – Sidoti & Co.

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 – meaning, does that include the maintenance and services fees?

Jim Dennedy

This has not included the maintenance and services fees in that. The perspective is generally looking at, let’s say, the half years. Does that – if those are not – that’s not 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 the element that compose the contract and whether that deal with the subscription they feel or a license they feel.

Brian Kinstlinger – Sidoti & Co.

Speaking of bookings, I was going to hold that one, but should you mention, I’m wondering if you intend to provide backlog numbers now given your business may pretend to that, and maybe how where bookings compared to year over year if I look at to further of it went down sequentially but you had divested some assets so it’s hard to tell obviously what that meant. So maybe you could give us a sense of what’s going on for bookings.

Jim Dennedy

This time we’re not intending to give backlog information.

Brian Kinstlinger – Sidoti & Co.


Jim Dennedy

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

Brian Kinstlinger – Sidoti & Co.

Okay. You mentioned...

Jim Dennedy

Some of it can be highly competitive, Brian. We’re just a little bit sensitive of releasing too much information because, well, we love and embrace our investors who participate on these calls. It’s also possible that others are listening to this at least perhaps, not with them they have an information.

Brian Kinstlinger – Sidoti & Co.

You mentioned – you talked a lot about investment, press releases as well as on the call here. I guess I was unclear about the – where that will play out. So maybe highlight the three area – the top three areas is it – is it people you got to add, is it resource and development, is it marketing, is it – maybe the three areas that you tend to deploy some of that excess capital that you’re generating in this quarter.

Jim Dennedy

Primarily people for a full-time equivalent from contractors that we use or sources that we use as service delivery, those primarily people, and from time to time like in the acquisition of the assets of the TimeManagement Corporation you’ll see us acquired technology through M&A. So the investments are primarily people-driven, even if it’s R&D, we still have people that we need to retain in order to do the work on the R&D side. So it’s primarily an investment in our people, not only the acquisition of new staff but in the training and up level and the knowledge of the existing staff.

Brian Kinstlinger – Sidoti & Co.

And then maybe highlight Europe, I saw you’ve talked about that in the press release too. What is your footprint? I know you have 7% of your revenue but, I mean, 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 taken to Europe and how long will that take?

Jim Dennedy

Europe is a really...

Brian Kinstlinger – Sidoti & Co.

International. You didn’t say Europe, sorry. You said international, not Europe.

Jim Dennedy

Yes, Europe itself is a little difficult – challenging economic environment across UK and then the continent. And in Asia, while the growth rate has slowed in Asia generally, we still see more opportunity available to us in the Asian market than we – for growth than we see in the EMEA market for growth.

So getting back to your specific question of when we should see the growth, there’s some work that we need to do around products before we think that 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.

Brian Kinstlinger – Sidoti & Co.

Okay. And then when you think the – and must I mentioned, I didn’t hear any comments on where you are and if you’re still developing the Next-Generation Property Management System where are you with data customers or early adapters and when are we expecting that to be readily available for sale.

Jim Dennedy

Well, on the last earnings call, we discussed some of the timing. We – 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 it’s released 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’ve done is we’ve taken the investment that we’re making in that UI. We’re building a layer that can talk to our existing technology so that as our customers take up components like the Insight Mobile Manager, they’re already beginning to use the V.NEXT product. It’s a matter of conditioning them towards that new fresher UI that over time as we then introduce the backend 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 data, sometimes late current fiscal year, start of next fiscal year. And for a limited data product to be out as a release candidate for the limited services to hospitality market, late first half of fiscal ‘15. So we wouldn’t expect meaningful revenues from the product until fiscal ‘15.

Brian Kinstlinger – Sidoti & Co.

Great. Last question I have is on the SaaS business. What percentage of the deal that you win at this point, our SaaS versus traditional product software sale if you will type of transaction?

Robb Ellis

Hey, Brian. It’s Robb. The percentage is right about 10% to 15% of the deals that we’re winning on the street [ph] or a SaaS or a subscription-based model.

Brian Kinstlinger – Sidoti & Co.

I guess I’m going to squeeze one more and that seems low, I guess, given the ROI and the limited investment seems more and more SaaS and cloud as a percentage of total sales for software [inaudible] has been that 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 position? Is it the customer type?

Jim Dennedy

Well, it is increasing although modestly and you’ve hit on it. It is customer-type driven. If you look at the composition of hospitality that exists today, approximately 50% of our revenues, 50, comes from the gaming segment. That segment has some challenges in their business with taking systems off property particularly as it relates to guest [ph] spending information that we then consolidate or they will consolidate in our property management system. So it is a little bit customer-centric for the percentage of the customers that are represented by the gaming industry.

Brian Kinstlinger – Sidoti & Co.

Great. Thanks so much for your time, guys.

Jim Dennedy

Yes, sir.


(Operator instructions) And one moment for question. And I’m not showing any further questions at this time. I would like to turn the call back over to Mr. Jim Dennedy for closing remarks.

Jim Dennedy

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 focus strategy present 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.

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