AGILYSYS INC Q2 2026 earnings call

Thank you, Carmen, and good afternoon, everybody. Thank you for joining the Agilysys 2026 second quarter conference call. We will get started in just a moment 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 protections of the U.S. Private Securities Litigation Reform Act of 1995, including statements regarding our financial guidance. 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 our ability to achieve the provided guidance levels, maintaining sales momentum, the company's ability to convert the backlog into revenue, and the risks set forth in the company's reports on Form 10-K 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 the fiscal year 2014. With that, I'd now like to turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilysys. Ramesh, please go ahead.

Thank you, Jess. Good evening. Welcome to the fiscal 2026 second quarter earnings call. Joining Jess and me on the call today at our Alpharetta, Atlanta headquarters is Dave Wood, CFO. As has become customary in these updates, let me cover the details pertaining to sales and selling success first before switching to revenue, profitability, guidance increases, and other business updates. We measure sales in annual contract value terms. We continue to exclude from our sales numbers all aspects of the Marriott PMS project, including those pertaining to services sales. Fiscal 2026 second quarter was our best ever July to September period of sales and the second best of any quarter so far. The first half of this fiscal year was the best first-half sales start to a fiscal year in our history.

We can slice the sales numbers in various ways, but the long and short of the sales story is our current business momentum is excellent. All the years of diligent re-engineering of the core products and the addition of 20+ add-on software modules to create a comprehensive ecosystem of cloud-native world-class hospitality-focused software solutions have created considerable competitive advantages for us in a hospitality technology environment that otherwise seems starved of genuine innovation and significant R&D investments. It's becoming easier for prospective customers to see the obvious pace of innovation benefits of working with one provider for as much of the required ecosystem as possible. When customers come up with an enhancement that involves changes to multiple software modules, they can clearly see who the only provider is who is capable of getting the required innovation done across all the pertinent modules in quick time.

These advantages have been showing up in our sales numbers during recent quarters. In addition, the tailwinds of AI are helping us improve all areas of the business, especially the modernized software solutions, which are well-positioned to take on the engineering of groundbreaking innovations that AI tools are now helping enable and increasing our competitive advantages at an even faster rate. Sales levels during the quarter were good across the various sales verticals, especially gaming casinos and international regions. Looking at sales levels during the first half of fiscal 2026 Q1 plus Q2 compared to the first half of last year, fiscal 2025, overall global sales were up 17% one seven were up 17%, but more importantly, subscription sales were up 59%. Food service management, FSM sales were up more than 2.5x. International sales were up 36%. Gaming casino sales were up 15%

one five were up 15% despite last year being a big record sales year. Point of sale, POS products, including add-on modules, were up 23%. Property management systems, PMS products, including add-on modules, were up 34%. Inventory procurement for food and beverage products more than doubled. I will spare you recounting the entire list. Suffice to say that our current business momentum is good, fueled by increasing sales success levels, which are in turn driven by growing product ecosystem superiority, which is sustainable and getting more pronounced and visible with every passing quarter. The modernized set of software solutions has now been in the field for anywhere from one to three years, and we continue to grow the number of reference customers who have good return on software purchase investment stories to tell.

Considering that the total addressable market we serve is something like a couple of orders of magnitude bigger than our current size, we still have a long growth path ahead of us as we continue to solve the challenge of today's Agilysys not being known well enough in large swaths of the hospitality market. International sales levels had another strong quarter during Q2, growing by more than 35% over the prior year. The ecosystem is resonating across global markets, and customer needs for a unified solution set is driving more awareness and more global wins. One such win during Q2 was Rudding Park in Harrogate, England. This beautiful family-owned luxury resort, which I had a chance to visit recently, located in northern England, includes multiple golf courses, an award-winning spa, upscale dining, and event space.

They selected as many as 21 Agilysys software solutions, including POS, PMS, service optimization, booking engine, sales and catering, golf, and spa. Fiscal 2026 Q2 food service management, FSM sales was twice as high as Q2 last fiscal year. The new modernized and unified POS platform is performing well in the field. Given we no longer need to mix old and new technologies in new implementations, they are becoming increasingly simpler to implement and manage, giving a strong credibility within the FSM vertical to execute on promises made. FSM sales results have not only been great during the first half of this fiscal year, but we are also seeing good momentum for continued good performance through the rest of the fiscal year. We are pleased to see FSM customers renewing and deepening their trust in our POS solutions again. The other sales verticals also generated strong results.

Both gaming and hotel resorts and cruise ships, HRC verticals, returned strong sales quarters. A few notable multi-product new customer wins during the quarter within HRC included Naturally Pacific Resort on the coast of Vancouver Island, Canada, who selected 15 Agilysys products, including PMS, POS, golf, reserve, and spa, to manage all their luxury amenity guest experience options. Waco Surf Waterpark and Hotel Resort, the largest inland surfing and sports facility located in Waco, Texas, selected 13 Agilysys products, including PMS, POS, mobile ordering, membership, and the recently introduced guest app to increase operational efficiencies and provide exceptional guest experiences. During Q2 fiscal 2026, July to September, we added 18 new customers, excluding book for time, and all of them were subscription-based sales agreements. Each of these new customer sales wins included an average of seven products per deal, which is a new high for us.

PMS customers continue to invest in the multi-product ecosystem with an average of 14 products per deal when PMS was part of the purchase suite. We also added 87 new properties, which did not have any of our products before, but the parent company was already our customer. Of the 114 new properties added during the quarter across new customers, new properties of current parent customers, and book for time, 108 were either partially or fully subscription-based. In addition, there were 93 instances of selling additional products to properties which are already running at least one of our other products. These 93 instances involved a total of 241 new products sold at the rate of 2.6 products per new product sales agreement, which is the highest level we have seen so far. Now on to revenue.

Fiscal 2026 Q2 revenue was a record $79.3 million, the 15th consecutive record revenue quarter, 16.1% higher than the comparable prior year period. Overall, revenue during the first half of fiscal 2026, Q1 plus Q2, was $156 million, 18.4% higher than revenue during the first half of last fiscal year. Fiscal 2026 Q2 recurring revenue grew 23% year-over-year and 4.8% sequentially quarter-over-quarter to a record $51 million. This recurring revenue year-over-year increase was driven mainly by subscription revenue increase of 33.1%. This is now the seventh consecutive quarter of overall subscription growth of greater than 30%. Subscription revenue now constitutes 65.5% of total recurring revenue compared to 60.5% Q2 last year. Subscription revenue from POS and related add-on modules grew by 18% year-over-year, and organic subscription revenue from PMS and related add-on modules grew by 55%.

Fiscal 2026 Q2 was the best quarter on record with respect to the sum of annual recurring revenue, ARR, of all subscription projects implemented during the quarter. The extent of subscription ARR installed during fiscal 2026 Q2 was 79% higher than the comparable period last year, and total subscription ARR installed during the first half of fiscal 2026 Q1 plus Q2 was 50% higher than during the first half of last fiscal year. The increased velocity of project implementations has been a strong contributor to the acceleration of subscription revenue growth during fiscal 2026. Despite the current overwhelming customer preference for cloud SaaS installations, annual maintenance pertaining to perpetual on-premises software licenses was once again a record this quarter, 7.5% higher year-over-year. Our current subscription revenue growth levels are coming, for the most part, from new incremental projects and are not dependent on cannibalization of annual maintenance installations.

Virtually all the modernized software solutions and recent product versions are designed to be cloud-native but can also work equally effectively in on-premises installations if that happens to be the customer preference. The fact that we allow hospitality customers, several of whom need to keep their critical business software applications on-premises for good reasons, the fact we are offering the required flexibility and allowing them to control the timing of their move to the cloud without sacrificing the benefits of ongoing innovation is a competitive advantage for us. Fiscal 2026 Q2 product revenue was $10.1 million, right in line with our expectation of product revenue levels on a quarterly basis for the rest of the year.

Product backlog at the end of Q2 improved substantially during the quarter, ending up 49% higher than at the end of Q1 and 74% of previous record levels, thereby giving us better visibility for the rest of the fiscal year than we have had in quite a while. We expect product revenue levels to remain around current levels. Fiscal 2026 Q2 July to September services revenue was a record $18.2 million, that is one eight, $18.2 million, 12% higher than the comparable prior year quarter. We continue to make good progress in our efforts to find ways to reduce customer implementation delays. Services revenue backlog reduced by 10% between the end of Q1, which was a record, and end of Q2. This reduction is welcome as services revenue is now driven increasingly by project implementations, with customer-paid product development work becoming less of a contributor compared to recent previous quarters.

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement, second quarter fiscal 2026 revenue was a quarterly record of $79.3 million, a 16.1% increase from total net revenue of $68.3 million in the comparable prior year period. One-time revenue consisting of products and professional services was up 5.6% over the prior year quarter and in line with our expected 5% to 10% increase in one-time revenue. Recurring revenue was up 23% on the back of good subscription revenue growth. Fiscal year 2026 year-to-date revenue is currently at $156 million, up 18.4% over the prior year to date, and currently at a higher level than the assumptions our original full-year guidance of $308 million to $312 million was based on. Sales momentum remained robust during Q2, leaving total backlog at record levels despite the strong project implementation and revenue start to the year.

Subscription sales exceeded plan for the second consecutive quarter. Subscription bookings were up 41% over the prior fiscal year second quarter and continue to trend ahead of our original subscription guidance. Fiscal year 2026 year-to-date subscription bookings are up 59% over the prior year. Despite the strength of subscription revenue through the first half of the fiscal year, subscription backlog remains at record levels and 26% higher than the same time last year. With the current product backlog strength and sales momentum, it's safe to say the visibility into our business and fiscal year is significantly better than at this time in the prior fiscal year. Professional services revenue increased 11.8% over the prior year quarter to a record $18.2 million. Professional services revenue remains a good leading indicator for the future subscription revenue growth.

In the upcoming fiscal third quarter, we expect professional services revenue to drop slightly sequentially due to less billable hours around the holiday season. Total recurring revenue represented 64.3% of total net revenue for the fiscal second quarter compared to 60.7% of total net revenue in the second quarter of fiscal 2025. Subscription revenue grew 33.1% for the second quarter of fiscal 2026. Subscription sales and backlog were again both at record levels in Q2. Although subscription revenue exceeded our revised guidance of 27%, the backlog continued to grow, rising by 30% over fiscal year 2025 exit rates. We continue to be pleased with subscription sales and revenue growth levels. Moving down the income statement, gross profit was $49 million compared to $43.2 million in the second quarter of fiscal 2025. Gross profit margin was 61.7% compared to 63.3% in the second quarter of fiscal 2025.

Gross margin was down slightly due to margins associated with one-time revenue, while we continue to ramp up the newly hired professional services team members and continue to see a downward trend in on-premise perpetual license revenue. Combined, the three main operating expense line items, product development, sales and marketing, and general and administrative expenses, excluding stock-based compensation, were 41.3% of revenue in the fiscal 2026 second quarter compared to 45.6% of revenue in the prior year quarter. Excluding stock-based compensation for the second quarter fiscal 2026, product development decreased slightly to 18.8% compared to 20.4% of revenue in the prior fiscal year second quarter. General and administrative expenses reduced for the quarter year-over-year from 12.7% to 10.8% of revenue, and sales and marketing decreased from 12.5% to 11.7% of revenue.

Operating income for the second quarter of $14.1 million, net income of $11.7 million, and gain per diluted share of $0.41 were higher than the prior year's second quarter income of $4.1 million, $1.4 million, and gain of $0.05. Adjusted net income, normalizing for certain non-cash and non-recurring charges, of $11.4 million compares favorably to adjusted net income of $9.5 million in the prior year's second quarter, and adjusted diluted earnings per share of $0.40 increased compared to the prior year quarter of $0.34. For the 2026 second quarter, adjusted EBITDA was $16.4 million compared to $12.2 million in the year-ago quarter. FY 2026 adjusted EBITDA continues to pace with our original annual guidance of 20% of revenue. Moving to the balance sheet and cash flow statement. Cash and marketable securities as of September 30th, 2025 was $59.3 million compared to $73 million on March 31st, 2025.

As a reminder, the first half of the year cash balance is typically lower due to timing of working capital events in the first half of the year. In addition to working capital adjustments, we paid down our credit revolver by $24 million in the first half of the fiscal year, leaving us debt-free now. Free cash flow in the quarter was $15 million compared to $5.9 million in the prior year quarter. As we have said in the past, adjusted EBITDA and free cash flow over a full fiscal year after normalizing the impact of CapEx continue to be good proxies for financial health of the business. For our fiscal year 2026, we are raising guidance for subscription revenue growth again from 27% to 29% based on our current backlog and sales momentum.

This quarter, we are also raising our top-line revenue guidance range from $308 million to $312 million to $315 million to $318 million. As a reminder, we expect professional services revenue to decrease by more than 5% sequentially in Q3 due to less billable days available around the holidays before returning to normal levels in Q4. Adjusted EBITDA of 20% remains the same for the fiscal year 2026 as we continue to evaluate various strategic growth initiatives. In closing, we are extremely pleased how our business has worked out during the first half of fiscal 2026 and how it's shaping up for the remainder of the year. With that, I will now turn the call back over to Ramesh.

Thank you, Dave. In summary, we are pleased with the fiscal 2026 Q2 July to September results, our overall current sales and business momentum, the continuing surge in subscription software sales, and the pace of project installations. It is tough not to feel bullish about our business. Compared to the same Q2 July to September quarter four years ago, the overall revenue has more than doubled, subscription revenue has tripled, and services revenue has grown 170%. That's one, seven, zero. We continue to make great progress with our modernized solution ecosystem. Increased use of AI tools is helping us build sustainable and growing competitive advantages. Our barrier to excellence in hospitality-focused technology is increasing. We have done well with retaining top talent over the past several years and continue to add more, including those focused entirely on improvements and advancements using AI.

Compared to the same time last year, the number of quota-carrying sales personnel is 16% higher now, and the global professional services team size is 23% bigger. We've recently added senior personnel strength to our global marketing teams. We continue to do extremely well with customer retention and growing revenue across both current and new customers. We continue to be strong believers in sustained discipline, profitable growth. More major hospitality corporations are taking greater notice of us, and we are now engaged in meaningful conversations with more of them. We continue to maintain and improve on a clean balance sheet. We operate in a total addressable market that is a couple of orders of magnitude larger than us, and we continue to keep our focus undistracted and passionately on hospitality, an industry that is hungry for more technology innovation help.

All that does sound like a good recipe for medium and long-term defendable, sustained, good business growth. With that, Carmen, can we please open up the call for questions?