Agilysys Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 23, 2023

There are 9 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Agilisys Fiscal 20 24 Second Quarter Conference Call. As a reminder, today's conference may be recorded. I would now like to turn the conference over to Jessica Hennessy, Senior Director of Corporate Strategy and Investor Relations at Agilysys. You may begin.

Speaker 1

Thank you, Victor, and good afternoon, everybody. Thank you for joining the Agilis' fiscal 2024 Second Quarter Conference Call. We will get started in just a minute with management's comments. But before doing so, let me read the Safe Harbor language. Some statements made on today's call will be predictive and are intended to be made as forward looking within the Safe Harbor protection of the Private Securities in the litigation Reform Act of 1995, including statements regarding our financial guidance.

Speaker 1

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 vary materially from these forward looking statements include the effects of global economic factors on our business, The hospitality industry's need for technology solutions, our ability to drive sales, our ability to increase profitability and our ability to improve services margins and manage increased cost investments and the risks that are set forth in the company's reports on Form 10 ks and 10 Q and other reports filed with the Securities and Exchange Commission. As a reminder, any references to record financial and business levels during this call refer only to the time period after Agilysys made the transformation to an entirely hospitality focused software solutions company in fiscal year 2014. With that, I'd now like to turn the call over to Mr.

Speaker 1

Ramesh Srinivasan, President and CEO of Agilisys. Ramesh, please go ahead.

Speaker 2

Thank you, Jess. Good evening. Welcome to the fiscal 2024 Second Quarter Earnings Call. Joining Jess and me on the call today at our Alpharetta Atlanta headquarters is Dave Wood, CFO. As has become the regular practice in our earnings calls, let me cover the selling success summary first before moving on to revenue and other details.

Speaker 2

We measure sales of selling success in net annual contract value, ACV, of sales agreements won and signed. Fiscal 2024 Q2 July to September with one of our best ever sales success quarters. Overall, fiscal 2024 April to September was our best first half of fiscal year sales, comfortably better than the first half last year. Fiscal 2023 last year was, of course, our best ever full year of sales, and we are off to a significantly better start halfway through this year. July to September was a good sales quarter for virtually all the sales verticals across gaming casinos, resorts, Cruise ships, hotels, managed food service providers and international regions.

Speaker 2

Sales from non gaming resorts, hotels and cruises were particularly stellar and encouraging because our market share levels in these areas are still low with major growth possibilities ahead. April to September was also our best first half thus far for international sales across Europe and APAC. As of the end of September, year to date APAC sales was already close to the full year sales level reached across all of last fiscal year. Our competitive positioning strength is increasing with every passing month. An end to end ecosystem of software solutions, the breadth and depth of feature sets offered, with more getting added at increasing rates now that most of the product reengineering efforts are done and over with, all based on state of the art cloud native technology, which can also work well in on premise installations, Which several hospitality customers still prefer.

Speaker 2

All that is becoming increasingly compelling value creators and unique selling propositions for us. The significant pickup in selling success, which Started around the month of August calendar 2022 has continued unabated through the recent July to September period 13 months later. We've not seen any noticeable negative effects of macroeconomic challenges. The hospitality industry is global, huge and has a high need for technology and innovation to help with growing needs, to improve operational efficiencies, enable ease of use for staff users and help create far better guest experiences than are possible today. We cannot say the technology providers of this industry have done too well keeping up with innovation needs due to, among other reasons, a lack of focus on end to end hospitality needs and far less than needed research and development investments.

Speaker 2

In the meanwhile, the digital transformation revolution around hospitality is We think we have done well Executing on our strategy to fill that gap and expect our escalating product and technology driven competitive advantages to continue to drive good business momentum in this huge total addressable market space. We think that momentum will have good staying power even in a possible challenging macroeconomic environment. In line with that assessment thus far, we are not seeing any growth threatening clouds in the sky. Our sales win loss ratios continue to be at impressive levels. One of the highlights of sales success during the first half of fiscal twenty twenty four was the rapidly increasing sales productivity of quota carrying sales personnel hired during the past couple of years post COVID.

Speaker 2

To place this in context, the average Agilysys tenure of our quota carrying sales personnel is around 7.5 years now. Of them, slightly less than half the personnel have joined us after COVID, and the average Agilysys tenure of this group is only about a year. During the first half of fiscal twenty twenty four, this group of sales personnel have already won sales measured in annual contract value amounting to close to twice as much as they did all of last fiscal year. While we continue to make prudent and appropriate decisions with respect to increasing sales force strength, current sales staff Still have additional capacity to not only maintain momentum, but also grow sales from current levels. In addition, The number of marketing generated sales accepted opportunities focused on new customers and new properties generated by innovative and effective marketing efforts continues to improve.

Speaker 2

During recent months, This number has been twice as high as it was at the same time last year. While our competitive strength with point of sale POS solutions continues to improve by leaps and bounds and remains our mainstay. Sales wins during the first half of fiscal twenty twenty four have also included several significant for Property Management Systems, PMS, wins. A notable win during Q2 was BlackRock Oceanfront Resort on the Western Coast of Vancouver Island in British Columbia, Canada. This iconic property selected Agilysys PMS and several Experience Enhancer add on software modules for their stunning multi amenity oceanfront resort.

Speaker 2

There are now close to 20 properties live on the modernized ground up reengineered Visual One PMS, rebranded as Versa and released for production deployment about 18 months ago. We are still in the early stages of establishing our state of the art technology based cloud native PMS value proposition in the field. There is a long runway of PMS and related modules growth ahead of us. During Q2 fiscal 2024, July to September, we added 17, 17 new customers, of which 76% were fully subscription agreements. 17 new customers is within the 15 to 20 new customers per quarter range, which has been one of the drivers of our revenue growth in the recent past.

Speaker 2

New customer deal sizes remains at impressively high levels. We also added 70, 70, 70 new properties, which did not have any of our products before, but the parent company was already our customer. The average deal size of new property deals this quarter was about 25% higher than the previous couple of quarters. Of the 87 new properties Added during the quarter across new customers and new properties of current parent customers, More than 90, 90, more than 90% were either partially or fully subscription based. In addition, there were 67 instances of selling at least one additional product to properties, which already had in one of our other products.

Speaker 2

These 67 instances involved a total of 142 new products and sold to current customer properties. The average deal size across these 67 instances of new product sales was about 40 percent higher than the sequentially preceding Q1 quarter. Now on to revenue. Fiscal 2024 Q2 revenue was a record $58,600,000 the 7th consecutive record revenue quarter, close to 23% higher than the comparable prior year period. The year over year quarter revenue increase of $10,900,000 is the highest we've ever seen.

Speaker 2

Overall revenue during the first half of fiscal twenty twenty four was 20% higher than revenue during the first half of fiscal twenty twenty three. Fiscal 2024 Q2 recurring revenue grew 18%, 18% year over year and 6.6% sequentially quarter over quarter to a record $34,200,000 driven by a 29% year over year increase in subscription revenue. Subscription revenue constituted 53 point 6% of total recurring revenue compared to 48.9% Q2 of last year. The year over year growth in quarter subscription revenue compared to Q2 of last year was a record 4,100,000 consisting of record year over year increases in both POS and PMS and related modules. Quarter over quarter sequential growth of subscription revenue of $1,600,000 and overall recurring revenue of $2,100,000 where both are best such sequential increases.

Speaker 2

Subscription revenue generated from add on Experience Enhancer software modules, most of which were developed during the past few years, grew at a slightly better rate year over year than the overall subscription growth of 29%. The value of these models and the modules and the end to end ecosystem we have built over the past few years goes far beyond such numbers. These add on modules working in conjunction with each other and with the core POS and PMS products and are helping customers make tangible measurable improvements in their operations. We heard several such customer stories about positive measurable impact on hotel operations during the recent gaming show and in customer advisory board meetings held in Las Vegas, and these stories were shared with other attending customers. Each of these modules are competing on their own as best of breed solutions and bringing tremendous value when used, enhanced and innovated together.

Speaker 2

Services revenue was a record $11,700,000 44 percent higher than the comparable prior year quarter. The increasing pace of implementations being handled by services teams augurs well for upcoming recurring revenue growth. We continue to make good progress with implementing relatively newer software products and modules at a quicker pace now, Handling complex multi product implementations and managing the balance between majority cloud and several on premise installations. Services margins improved to 23.6%, but still fell short of our 25 percent expectation. Improving services margins from current levels remains one of the few business objectives We are falling short of currently.

Speaker 2

We remain focused on taking all necessary steps to improve services margins without affecting One time revenue consisting of product and services revenue added up to a record 24,400,000 about 30%, 30%, 30% higher than the comparable prior year quarter. Revenue levels during the first half exceeded our initial expectations, and we are now happy to be in a position to raise full year fiscal year 2024 revenue guidance range to $235,000,000 to $238,000,000 The rate of project implementations has picked up well and subscription revenue growth during the first half of the year was better than we anticipated. We think subscription revenue growth during full year fiscal 2024 will be 28%, significantly better than the previous guidance of 25%. Adjusted EBITDA for the quarter was $8,100,000 and 13.7 percent of revenue, a couple of percentage points better than the sequential prior Q1 quarter and ahead of our expectations going into the fiscal year. We've done well managing through a difficult period of increased cost investments, which were required to drive medium term revenue growth.

Speaker 2

Increasing revenue and stabilizing cost levels should help us improve profitability consistently going forward. We now expect EBITDA by revenue to be 14%, 14%, 14% for full year fiscal 2024, 1 percentage point higher than the 13% guidance provided at the beginning of the year. With that,

Speaker 3

let me hand over the call to Dave for further color. Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. 2nd quarter fiscal 2024 revenue Was a quarterly record of $58,600,000 a 22.8% increase from total net revenue of $47,700,000 in the comparable prior year period. All three product lines increased compared to the prior year period, with product revenue up 19.8% and professional services up 43.8%.

Speaker 3

Recurring revenue Was also up 18% with subscription up 29.1% over the prior year period. Sales momentum continued throughout Q2 with total exit backlog remaining strong and near record levels despite revenue being above our expectations. We also remain pleased to see our professional services backlog remain about the same for the Q2 in a row despite strong sales as implementation efficiencies and effectiveness of the services team have continued to improve. Product revenue increased 19.8% over the prior fiscal year to 12,600,000 Our point of sale business continues to perform better than expected, which is increasing our product revenue expectations for the year. We now expect product revenue to stay north of $12,500,000 during the last two quarters of the fiscal year.

Speaker 3

Professional services increased 43.8% over the prior fiscal period to a record 11,700,000 We expect professional services to continue to increase sequentially throughout the year and should grow north of 30% for the full fiscal year. Most of our professional service revenue is related to projects contributing to the acceleration of fiscal year 2024 Subscription revenue. Development for large projects with the corresponding subscription revenue happening in future years has been less than 10% of revenue. Total recurring revenue represented 58.4% of total net revenue for the fiscal 2nd quarter compared to 60.8% of total net revenue in the Q2 of fiscal 2023. Recurring revenue as a percentage of total revenue decreased slightly because of a 30.3% increase in one time revenue consisting of products and professional services.

Speaker 3

Subscription revenue grew at 29.1% for the Q2 of fiscal 2024. Subscription revenue now comprises higher than 50% of total recurring revenue at 53.6% compared to 48.9% of total recurring revenue in the Q2 of fiscal 2023. Subscription revenue increased sequentially $1,600,000 and was better than the FY 2024 expectation for sequential revenue increases. The subscription backlog remains strong and we expect subscription revenue to continue to increase between $900,000 and $1,200,000 sequentially each quarter for the rest of the fiscal year. Q2 was higher than normal due to timing of completion of a couple large multi product implementations, which were in the backlog and were being worked on during prior quarters.

Speaker 3

Moving down the income statement. Gross profit was $35,100,000 compared to 29 $4,000,000 in the Q2 of fiscal 2023. Gross profit margin was 59.9% compared to 61.5 percent in the Q2 of fiscal 2023. As expected, Gross margin was affected in the first half of the year as we continue to ramp up the services team. 2nd half gross margin should get back into the 60% range.

Speaker 3

Combines the 3 main operating expense line items product development, Sales and marketing and general and administrative expenses excluding stock based compensation were 46.2 percent of revenue compared to 46.1 percent of revenue in the prior year quarter. Product development increased slightly to 22.8% due to previously discussed additional investments made to prepare for large future deployments compared to 21.9% of revenue in the prior fiscal year. General and administrative expenses decreased to 12.7% compared to 13.7% of revenue in the Q2 of fiscal 2023. Sales and marketing increased slightly from 10.5% of revenue to 10.8 percent of revenue mostly due to timing of expenses. Operating income for the 2nd quarter of $3,600,000 net income of $4,100,000 and gain per diluted share of $0.16 all increased compared to the prior year's Q2 gain of $2,900,000 $3,100,000 and $0.12 Adjusted net income Normalizing for certain non cash and non recurring charges of $6,600,000 was slightly higher than adjusted net income of $6,300,000 in the prior year's Q2 and adjusted diluted earnings per share of $0.25 was slightly more than $0.24 in the prior year period.

Speaker 3

For the 2024 Second Quarter, adjusted EBITDA was $8,100,000 compared to $7,400,000 in the year ago quarter. Adjusted EBITDA in Q2 FY 2024 was 13.7 percent of revenue. Profitability for the quarter was better than previous guidance of high single digits, largely due to higher than expected revenue levels. Profitability levels remained comfortably ahead of our prior FY 'twenty four guidance of adjusted EBITDA as a percentage of revenue of 13%. Moving to the balance sheet and cash flow statement.

Speaker 3

Cash and marketable securities as of September 30, 2023 was 107 point $4,000,000 compared to $112,800,000 on March 31, 2023. We remain comfortable with our current levels of cash. Free cash flow in the quarter was a gain of $2,500,000 slightly above $2,300,000 in the prior year quarter. For the year, we still believe adjusted EBITDA less CapEx will be a good proxy for free cash flow. For our fiscal year 2024, we are raising our revenue guidance range to $235,000,000 to $238,000,000 inclusive of an increased expectation of 28% subscription revenue growth.

Speaker 3

We are also raising our profitability guidance from 13% to 14% adjusted EBITDA as a percentage of revenue for the year. In closing, we are pleased with the sales momentum, professional service improvements and revenue growth during the first half of the year. With that, I will now turn the call back over to Ramesh.

Speaker 2

Thank you, Dave. In summary, We do understand the macroeconomic headlines and the drumbeat of predictions of possible expected headwinds. We do not want to sound tone deaf to what we are hearing each day when we listen to the news and read what the economy pundits are saying. However, we can only report what our reality is. The truth is, we are not seeing any signs of slowdown in business momentum.

Speaker 2

To use a crude example, We are a relatively small fisherman, now operating with state of the art modern equipment with huge growth potential in a large total addressable market pond with a lot of fish around of all possible sizes. It is possible that we may not feel any negative effects, even if there are any ripples or the level of the water shrinks a bit, unless it becomes an enormous drought that overwhelms everything. We have met and spent time with many customers during recent trade shows and other meetings and have not heard of or seen signs of any reluctance on their part to make the required appropriate technology investments to meet their short term and long term business needs. In addition, the massive levels of product innovation we have worked through during recent years, including the creation of around 25 High value creating additional experience enhancer modules, the real tangible value the modular and integrated solutions are beginning to Create for customers. All of that is also providing an additional blanket around us that should protect our growth prospects for the foreseeable future.

Speaker 2

And we will ensure we remain disciplined managing growth, never getting too far ahead of ourselves. While our implementation services effectiveness and efficiencies have improved significantly during the April to September first half period of this year. The continuing sales success has kept aggregate recurring revenue, Services and product backlog total at a near record level, giving us confidence in the raised revenue guidance provided. We will also continue to increase our sales and marketing investments as necessary to keep business momentum moving along. To repeat what we said last quarter, our overall business remains in excellent shape, and we are well positioned for all round progress and growth.

Speaker 2

With that, let's open the call up for questions. Victor?

Operator

Thank you. And our first question will come from the line of Mayank Tandon from Needham, your line is open.

Speaker 4

Thank you. Good evening. Well, first, congrats on the quarter and great to hear about the record sales performance.

Speaker 2

Ramesh Thank

Speaker 5

you, Matt.

Speaker 4

Great. Ramesh, let me ask you more in just in terms of for growth rate. As you look ahead, how do you break that down between new logo wins, expansion with existing clients And ARPU expansion, could you maybe just parse it out between the three components as we think about growth going forward?

Speaker 2

Yes. So when we think about the first half, Mayank, the sales from new customers that is Internally, we refer to it as new logos. New customer sales, when you compare the first half of this year versus the first half of last year, This year's new customer sales success was far higher, was significantly higher than last year. So that remains A big driver of growth for us, more new customers signing up with us is definitely a significant driver of growth. The other driver of growth is Whether it is new products, meaning current property signing up for new products or new customers signing up, Our deal sizes are giving us a big advantage now.

Speaker 2

Typically, customers sign up for multiple products compared to a few years ago. So deal sizes, the fact that customers sign up for multiple products instead of just one, that remains a good growth driver for us. The other growth driver that we expect to get better and better with every quarter is our PMS presence now, property management systems, where we still our market share is still very low. We are becoming an increasing presence in all major PMS RFPs and the products are also a lot more impressive now. That also is driving our growth forward, while the point of sale POS strength continues to remain and continues to drive forward.

Speaker 2

Our current customers also continue to make a lot more investments in us, whether it is new sites Our existing customers signing up for services and other existing product purchase expansions, that is driving us as well. And above all, win loss ratios, right, without increasing our sales efforts way too much and spending too much, when we participate in an effort the chances of winning is also much better now than what it used to be in the past. So I would say all that together It's driving our growth forward now and it is all product and innovation driven for now and our marketing efforts are also getting Lot more opportunities to the door now. So I would say it's a combination of all those factors, Mayank.

Speaker 4

That's very helpful color. And as a quick follow-up question, I wanted to focus in on the margins. So the outperformance that you saw this quarter and then that you're guiding to for the remainder of the year, How does that break down between gross margin expansion and leverage on the operating cost line?

Speaker 3

Yes. So, gross margins were about 1 point ahead of expectations, largely just like we talked about due to the higher revenue levels. Certainly, the sequential subscription increase of $1,600,000 was pretty accretive to the gross margin expansion. So think of it as kind of 1, a point or 2 ahead on the gross margins. And then our cost was pretty much Settled coming into Q2, I mean most of our investments for the rest of the year would be incremental.

Speaker 3

So the higher revenue obviously, We didn't incur additional OpEx cost. So most of it was the revenue over achievements and the expansion of the subscription revenue.

Speaker 2

And Mayank, what you should expect, like I mentioned in my comments, is margins. We typically measure our profitability as EBITDA by revenue to improve consistently from here. We've gone through the tough phase when we had to make Significant cost investments in order to drive medium term growth and you're aware of that. So starting now, you should see a consistent improvement in profitability during the second half of the year and into the next fiscal year as well.

Speaker 4

That's great to hear. Again, congrats on the quarter and thank you for taking my questions.

Speaker 2

Thank you, Mike. Thank you.

Operator

One moment for our next question. Our next question comes from the line of Matthew VanVliet from BTIG. Your line is open.

Speaker 6

Yes, good afternoon. Thanks for taking the question. I guess when you made a couple of comments around, 1, your win rates continue To be very strong, and then also the deals, especially in Europe and APAC that you mentioned strength there. So I guess as you think about sort of the big drivers there, and I know you went through a couple on the last question, but curious on how much, if at all, it's been mentioned that The win of the Marriott contract has sort of brought Agilysys more top of mind for potential customers. How much that's helping versus the replatform product, and then the sales investments, especially in the international markets, Driving that, anything sort of additional on the international side that you would highlight that might be a little bit of a diverging or I guess at least different driver than in the U.

Speaker 6

S.

Speaker 2

Yes. So whether it's this international or even domestic areas where our market Kit share is a bit low, I mean, actually very low. What is driving us to get the opportunities are Superior marketing efforts compared to where we were 1 2 years ago. So those are the marketing efforts are definitely opening up opportunities for us. And the product the impressiveness of the product demos is definitely keeping us in contention.

Speaker 2

Now what we need to do Get more reference customers. There are many countries in the world where we have to establish ourselves more because Apart from the product superiority and the ecosystem superiority, they also require customers who will give them the comfort feel That yes, we went with these products and we are doing well. That's what we are building now. The product work is more or less done, Matt, And now it is the field work that is beginning in many international regions and even in some domestic areas. So now we are focused on establishing these products, Establishing these integrations within our ecosystem in the field and creating more reference customers and then the ball will really start rolling.

Speaker 2

So the win loss ratios are very good when customers look at our product demos and nobody else is doing this kind of end to end ecosystem innovation. But what we are focused on now is generating more presence in the field, More customers saying great things about our products. That's what we are focused on.

Speaker 6

Very helpful. And Dave, your comments Seem to sort of imply that the majority of headcount additions for the full year have more or less been made here. So 1, wanted to just sort of confirm that's what your comments implied. But maybe more importantly, what would give you the confidence or the rationale to Now to add additional headcount in the back half, especially as we think about the continued success of new business wins, Do you need some additional capacity potentially on the services delivery team, especially as the Marriott project ramps up? Or where do you stand in terms of total capacity on the delivery team In light of the better bookings performance of late.

Speaker 3

Yes. So starting with the services team, I mean, we still have ramp left on the services I mean, they've done a tremendous job with revenue through the first half of the year, but there's still ramp left on that team, Which their gross margin should continue to increase. But certainly, I think we're pretty settled and we're pretty From a headcount, whether it's OpEx or delivery, we're pretty settled on headcount and certainly for the revenue guidance we've given. But that's not to say that we wouldn't make more incremental investments as we see fit, right? If other parts of the market start to open up Or there's something we wouldn't be foolish over that, but we feel pretty settled on where we sit from a headcount perspective at the moment.

Speaker 6

All right. Great. Thank you.

Operator

Thank you. One moment for our next question. And our next question will come from the line of George Sutton from Craig Hallum. Your line is open.

Speaker 7

Thank you. Ramesh, I appreciate the fishing analogy in particular. So You and I have talked about increasingly you are playing offense versus playing defense, particularly when you're out at a large trade show. I just wondered if you could walk through what exactly you mean by that and help translate that to part of why you're seeing the sales success and the increased guidance.

Speaker 2

Yes. So that comment about offense versus defense, like when you compare us to a few years ago, right, During my initial days here and even a couple of years after we got here as we started improving the products, whenever you meet customers in trade shows, The success of implementations tends to be measured by the low number of pending issues, Pending technical issues. So there are only 10 issues pending to be resolved. That's how they tend to be measured. And you're constantly playing defense with customers, making sure They stay with you despite the technical issues that are there and all that.

Speaker 2

In recent shows, especially this year, In the various shows we have attended, there were more and more stories and some of these stories were shared publicly in publicly attended sessions where they were talking about we moved from a competing system to Adilysys. We implemented their core PMS product and these 2 or 3 additional modules. And these business parameters went up from this percentage to that. So they were actually happy to share those details with other customers. So that's what I mean by playing offense that we no longer go into trade shows Expecting to play defense like many enterprise software companies do, where customers are going to come and complain and you're going to defend with them.

Speaker 2

Now we are looking for the positive stories that can be shared with other customers. So more and more, we are switching to offense from the defense we used to be many years ago and the products are supporting that and our implementation services staff are supporting that. Our support is becoming better as we go along. So there are more positive stories for customers to share with others That provides an incentive for other customers to buy the products as well. That's what I meant, Charles.

Speaker 7

That's great. So There were clearly some big large operators, particularly in the gaming space that have had some cybersecurity issues. I know you've made a big investment And your capabilities on the cybersecurity side, can you talk about any impacts that those have had to you? And what happens when Cybersecurity becomes part of a sales cycle, which I know is increasingly important. How are you doing in those situations?

Speaker 2

Yes. So a number of questions there. Let me make sure I cover all of them. Number 1, no impact directly. There's a couple of news that you've heard recently, No direct impact.

Speaker 2

Our knowledge of the incidents and our overall understanding of the incidents is nothing more than what has been reported publicly. So not impacted directly and we are not directly involved in it, though we were there to help the customers with bringing up the various products back up again to the extent they asked us for help, of course, We were absolutely always there to help them. So a couple of things to keep in mind here, George, as you think through this. Number 1, Cybersecurity incidents are not new in hospitality. If you just go look up in the last, say, 5 years or so, there's quite a list of Hospitality customers are customers who have been affected by this because they tend to deal with a lot of guests, lot of consumers.

Speaker 2

So hospitality tends to be like a magnet, right? It attacks the hackers and cybersecurity incidents tend to happen. So number 1, what happened A few months ago is not new. It has happened many times before. So that is one thing to keep in mind.

Speaker 2

The other thing to keep in mind is our revenue growth now is broad based. Our sales and revenue growth sales growth revenue growth is broad based and not too dependent on 1, 2 or 3 customers, right across the chain, only in enterprise software. So we are not in the SMB space. But in that enterprise software, the size doesn't matter. There's just a lot of fish in To use that analogy, some decisions do get postponed charge, but none of them get canceled.

Speaker 2

And those kinds of decisions being forced Because they are focused on getting themselves back or tightening cybersecurity around themselves does not Too badly affect our sales or anything. The patients get postponed and then they tend to happen a few months later. So it's not any direct impact or something We are too worried about from a sales or revenue growth standpoint. But what we are worried about is making sure we are there to help the customers whenever required, And we do help several customers during the year. This is sort of a regular thing and reasonably frequent thing and we are always there to help Customers, we have security specialists with us and all that.

Speaker 2

So we are always involved in helping, but I wouldn't be worried about these from a sales and revenue growth standpoint. So we have protected ourselves very well as best as we can. There is no perfection in cybersecurity, multiple layers within the company, Very severe training of employees, very stringent training of employees, protecting various layers of our business and even if a hacker gets through to one layer, Making sure they cannot reach much else. So we have worked with several great vendor partners to do increasing investments to make sure that we are About as well protected as you can be. And also in application design, in the applications we create, Information security personnel are always involved.

Speaker 2

Now it's a joint exercise among IT, information security and product development to make sure that the products we are creating cannot be used as a weapon later on. Again, there's no perfection there, but we are absolutely doing our best to both

Speaker 7

Apologies, I'd love to just squeeze one more in. You haven't said a Favorable thing necessarily about managed foodservice for a while and this sounds like it was a pretty good quarter. Could you just give us a little bit more specificity in that Specific area?

Speaker 2

Yes. So the FSN business, George, continues to recover and progress well from COVID time. But if there is a star in this particular first half of sales and Q2 sales, it is definitely resorts and cruise ships. So what we refer to as HRC internally, Hotels, Resource, Cruise ships was definitely The star performer compared to how much things have improved over the last couple of years. FSM, I would say, continues to show a steady improvement from the depth of the COVID days.

Speaker 7

Perfect. Thank you.

Operator

Thank you. One moment for next question. Once again, one moment for our next question. All right. And our next question will come from the line of Brian Schwartz from Oppenheimer.

Operator

Your line is open.

Speaker 8

Hi. This is Ari Friedman sitting in for Brian Schwartz. Thanks for taking my question and congrats on the quarter. I remember speaking about management companies, Midsize Management Companies and like the opportunity there. And I was wondering what's like the usual Product or module that they land with and how does this compare to you say like your other customers you currently have and where do you see the opportunity ahead there?

Speaker 2

Yes. Hi, Ali. So as far as midsized management companies, that is one area we continue to make good progress. I would say a good majority of the sales deals we are involved in with such companies tends to be on the point of sale POS side, And they tend to use the PMS that is suggested or recommended by the various brand names who are whose brand name tends to be used in those properties. So the best way I would describe it is, our progress with midsized management companies continues to improve.

Speaker 2

We are talking to more and more of them who are keen on looking at our latest product versions. It tends to be more on the POS side at the moment and the PMSI continues to improve.

Speaker 8

Got it. Thanks. And then I guess like one other question is You guys talked about strength in POS as well this quarter and last. I was wondering if you could like compare it to like maybe like a baseball analogy, What inning would you say we are in terms of like the growth and how much is left for POS?

Speaker 2

Yes. I mean, there's a lot of growth, Ari, left for POS. We are doing well with POS. The competitive advantages of POS Had been established with all the rewriting and reengineering we have done. We seem to be ahead of the competitors As far as POS is concerned, because we've had a long track record with it, well established product, lot of good stories in the field.

Speaker 2

So POS has been A strength of ours and it continues to improve, but market share wise, our POS market share is still very low in many areas. So There's just a lot of growth ahead on the POS side, though we are a bit more mature in how we compete in the market. On the PMS side, all the product reengineering work is done. We've also created like 20 additional modules that are adding a lot of value, but we still have more field work to get done. The product work is done, but as far as establishing the PMS products in the field, Having more customers sing the praises of the products that I would say we are very early in the baseball game.

Speaker 2

We are in the 1st or second inning there and that still has to improve. POS were well established high competitive strength, but still low market share in many areas, both geographical and sales verticals. PMS, all the product work is done. We are in the early stages of establishing ourselves in the field.

Speaker 8

Awesome. Thank you so much.

Speaker 4

Thank you,

Operator

And our next question will come from the line of Nehal Chokshi from Northland Capital Markets. Your line is open.

Speaker 5

Thank you, and great quarter. Nice to see this big revenue and EBITDA guidance uptick. It sounds like this is being driven by an earlier than expected turn on of some large implementations rather than better than expected ACV in the September quarter. Is that correct?

Speaker 2

No, Nehal. I would not say that is correct. The subscription revenue growth was driven by a couple of large projects that went live and our revenue recognition, we only Recognize the revenue after they go live, but that has got nothing to do with the sales progress we talked about. The sales progress has been broad based. It has been particularly high in the resorts and cruise ships and hotels in that space, but gaming casinos continues to do very well.

Speaker 2

FSM continues to improve, And we had our best half of sales internationally ever before than ever before. So sales is broad based across all our verticals, The subscription revenue growth, the sequential growth this quarter was driven by a couple of large implementations that went live that we have been working on for quite some time.

Speaker 5

Okay. So to be clear, the main reason why you're raising guidance is because you did have a really strong ACV

Speaker 3

Yes, Nehal. We had a strong sales quarter and even despite The large revenue increase, I mean, keep in mind, our backlog is still at near record levels. I mean, it's for most of our product lines, It's within the it's either number 1, 2 or 3 as far as record level. So despite the good revenue quarter, there wasn't a depletion in the backlog, which Yes, sales has gone really well as well.

Speaker 5

Okay. So maybe an additional factor is that the Rate of implementation have improved better than expected and that's also a factor in the ratings guidance?

Speaker 2

Yes. In the revenue doing well, subscription revenue doing well, recurring revenue doing well, the fact that implementation efficiencies are increasing, Nehal, because we had a lot of new products to establish on the field. We are getting more fluent with implementing those new products. We are also getting more adept So yes, all that is contributing to recurring revenue. But us increasing the guidance of revenue also has With our sales doing very well and winning new opportunities at a faster pace.

Speaker 5

Okay. And can you give a little bit more color as far as How did ACV bookings actually trend in the September quarter more than just simply saying, one of the best ever quarters and for fiscal one half, Best ever because when you're growing 20 plus percent year over year, it's kind of like an expectation that every quarter is going to be kind of the best ever.

Speaker 2

As far as I mean revenue, I understand what you're saying, Nehal. Every quarter is generally expected to We are the best ever when we are a growing company and doing well. As far as sales is concerned, when you finish a quarter, every quarter you start from 0 and you have to build it back again. Our sales continuing to do well has a lot to do with our product strength and has a lot to do with the fact we have a lot more products to sell. And in many geographical areas, our market share is low.

Speaker 2

So that's one of the reasons why sales should continue to do well. And some of the color we have given is this quarter was one of our best, but the first half of the year was our best first half of the year of any year as far as sales is concerned and comfortably higher than last year. Now when you take last full year fiscal 2023, it was a record sales year for us. So this year, first half, we made a much better start to the year than even last year.

Speaker 5

Okay. All right. Finally, you made a comment last quarter, sharks and dolphins are in the pipeline. How is that pipeline how is the shark and dolphin pipeline looking this quarter, September quarter relative to the June quarter? Has it Continue to transact at a rapid rate.

Speaker 5

Do you have any graduation of those within the September quarter? Any speech on the trucks and dolphins narrative would be great.

Speaker 2

Yes. I mean, but George will also like this analogy now. Sharks and dolphins continue to play a big part of our sales. So We do have the entire gamut of sales opportunities in terms of size of customers. But during the first half of the year, April through September, there were several sizable Sales wins that we had, which were the resort or the cruise ship, they were sizable companies and they also bought multiple products from us with good deal sizes and that trend I don't think there is going to be any slowdown of that trend.

Speaker 2

When we look at our sales pipeline, There are quite a few doubles and triples that are possible in that sales pipeline. So yes, we do have sizable opportunities, Whether you refer to them as doubles and triples or sharks and all since they are there. They were there in the April through September 1st half and they continue to be in our pipeline going forward.

Speaker 5

And they've increased an amount in terms of numbers on the Q?

Speaker 2

More and more, yes. We are increasing Significant opportunities, mostly because the opportunity sizes are bigger, Mehul, mostly because they tend to buy multiple products from us. The deal sizes are higher.

Speaker 5

Got it. Understood. Thank you. Thank you and congrats.

Speaker 2

Thank you, Neha.

Operator

Thank you. And with that, I would now like to turn the conference back to Ramesh for closing remarks.

Speaker 2

Thank you, Victor. Thank you all for your interest and participation. Enjoy the holiday season. We look forward to talking to you again in about 3 months when we will be reporting fiscal 2024 3rd quarter results. Thank you.

Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

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Earnings Conference Call
Agilysys Q2 2024
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