AGILYSYS INC Q3 2026 earnings call

Good day, ladies and gentlemen, and welcome to the Agilysys 2026 third quarter conference call. As a reminder, today's conference may be recorded. I will now like to turn the conference over to Jessica Hennessy, Vice President of Investor Relations and Operations at Agilysys. You may begin.

Thank you, Lisa, and good afternoon, everybody. Thank you for joining the Agilysys Fiscal 2026 third 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 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, increased implementation efficiencies, 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 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. Welcome to the fiscal 2026 third quarter earnings call. Joining Jess and me on the call today at our Atlanta headquarters is Dave Wood, CFO. Hope all of you are staying warm and safe. As is our usual practice in these calls, let me cover sales and selling success first before discussing revenue, profitability, guidance increase, and other business updates. We measure sales in annual contract value, ACV, terms. Q3 fiscal 2026 was the second best Q3 October to December period sales quarter.

This was the best Q3 sales quarter on record for the Hotels, Resorts, and Cruise Ships (HRC) sales vertical, highlighted by several significant new customer wins, including Bolt Farm Treehouse in Tennessee, a five-star luxury nature immersive wellness retreat property, who selected Agilysys Property Management System (PMS), Agilysys web booking engine, spa, and five other Agilysys software solutions to provide their guests the seamless exceed expectations experience they are looking for, and Sands Resorts in Northern Myrtle Beach, South Carolina, who also selected various software solutions from our ecosystem of products, including PMS, to help improve guest experiences at their oceanfront gateway property. Q3 sales also included a couple of big brand properties switching from a competing system to the Agilysys POS platform ecosystem.

Casino gaming, our strongest sales vertical for several years now, witnessed a relative sales slowdown during the months of October and November, pulling down global sales levels during those two months, but recovered well during the month of December. With respect to overall global sales, this was the best December month in our history. On a year-to-date basis, Food Service Management (FSM) sales over the first three quarters of fiscal 2026 is already higher than full year sales during each of the previous two years. Full fiscal 2026 may possibly end up being the best ever sales year or come close to it for FSM, which relies mostly on selling the point of sale (POS) family of products.

While cumulative international sales over the first three quarters is already close to making fiscal 2026 the second best international sales year with one full quarter remaining, Q3 international sales were somewhat lackluster. International sales will continue to experience this sort of up and down trajectory as we continue to establish our reputation across the globe and steadily exchange our current reliance in international regions on hit or miss big deals to a more consistent mix of small, medium, and big wins like we see in the domestic market. Cumulative subscription SaaS sales during the first three quarters of fiscal 2026 is already at 95% of previous best full year sales, which happened to be last fiscal year. Fiscal 2026 year-to-date subscription sales is up 37% year-over-year. Calendar 2025 was the best calendar sales year in our history.

Our win-loss ratio in competitive deals remains impressively high and far ahead of normal established enterprise software norms. During fiscal 2026 Q3 October to December, we added 1,616 new customers, excluding Book4Time. All of them were fully subscription-based and involved an average of about five products per deal. Nine of these new customers included purchase of PMS. In addition, 1,313 new customers signed up for Book4Time spa. We also added 91 new properties, which did not have any of our products before, but the parent company was already our customer. Of the 120 new properties added during the quarter across new customers, new properties of current parent customers, and Book4Time, 118, meaning all but two, were either partially or fully subscription-based.

With respect to new product sales, there were 109 instances of sales to properties which have at least one of our other products already in use. These 109 instances involve sales of a total of 248 new products. Before moving on to revenue details, a quick word on the Marriott PMS project. We are happy to report that this project is being expertly managed by customer personnel and is making good progress. PMS pilot property implementations have been completed successfully across the U.S. and Canada. We are now in the exciting process of getting going on the implementation waves, which are expected to keep increasing in size and scope during coming months. We continue to exclude the Marriott PMS project from all our sales and backlog numbers.

Now, with respect to revenue and profitability, fiscal 2026 Q3 revenue was a record $80.4 million, 80, $80.4 million, the 16th consecutive, that is 16th consecutive record revenue quarter, 15.6%, that is again 15.6% higher than the comparable prior year quarter. Product revenue was $10.7 million, which was about the same as Q3 last fiscal year, slightly ahead of our expectations. Product backlog at the end of Q3 was at about 85% of the previous Q2 quarter exit value and almost doubled the level it was at the end of Q3 last year, giving us good visibility for the rest of the fiscal year. Fiscal 2026 Q3 October to December services revenue was $17.7 million, that is $17.7 million, 22% higher than the comparable prior year quarter and in line with our expectations for this quarter. This quarter was a record high for normal projects implementation services revenue.

The sequential quarter-to-quarter decline was mostly due to the Q3 holiday period quarter being typically more challenging than Q2. We saw significant improvement in the management of projects during this period compared to the holiday season last fiscal year. We continue to make good headway in improving software implementation efficiencies and finding ways to reduce customer implementation delays. Services revenue backlog at the end of Q3 was less than at the end of the previous quarter, which is a good indicator of improving implementation efficiencies. The quicker we implement the project signed up by sales, of course, the better off we are. Fiscal 2026 Q3 recurring revenue was a record $52 million, 17.2%, that is 17.2% higher than the comparable prior year period. Recurring revenue was 64.7% of total revenue this quarter. Within recurring revenue, subscription revenue was a record $34.9 million, 23.1% higher than the comparable prior year quarter.

This was the 17th, that is 17th consecutive quarter of subscription revenue year-over-year growth of at least 23%. Subscription revenue quarter run rate has doubled in the last two and a half years and has increased from 63.8% of total recurring revenue Q3 last year to 67% of total recurring revenue this quarter, the highest percentage level reached so far. Annual maintenance revenue was also 6.8% higher than Q3 last year. The current subscription growth levels are coming for the most part from new incremental projects and are not dependent on cannibalization of annual maintenance generating on-premises installations. Subscription revenue pertaining to point of sale POS and POS-related modules grew by 20% year-over-year, improving from the mid to high teen growth levels reported during the past few quarters.

We are hitting normal growth stripes again with our POS business, with the modernized versions making an increasingly greater positive impact in the field. Subscription revenue pertaining to PMS and PMS-related modules grew by 30%, 30, grew by 30% year-over-year. Add-on modules across both PMS and POS, including Book4Time, constituted 37% of total subscription revenue. Despite all the challenges associated with the holidays filled October to December Q3 period, fiscal 2026 Q3 was the best quarter on record with respect to the sum of annual recurring revenue (ARR) of all subscription projects implemented. The extent of subscription ARR installed during fiscal 2026 Q3 was 40%, that is 40, 40% higher than during the comparable period last year.

The increased velocity of project implementations has a lot to do with the modernized products becoming exponentially easier to implement over time, greater use of AI tools to improve implementation services efficiencies, and far higher staffing levels compared to the same time last year. While we continue to expand team sizes as business levels improve in areas like sales and services, we are currently well-staffed for the most part to fuel continued business expansion during the short and medium term. In general, the use of AI tools continues to improve various business areas, including product development and quality assurance initiatives, AI-driven product enhancements, implementation services efficiencies, marketing, sales initiatives, finance, customer support, and legal.

One other quick reminder, virtually all our software licensing is based on number of rooms for PMS and related modules, number of terminal endpoints for POS, and number of sites or locations or profit centers within sites for inventory procurement for food and beverage products. Virtually all our software license structures are not based on number of users. As customers increase their operational efficiencies using AI and we ourselves continue to embrace AI tools more and more, all of that is great for our business. An excellent services implementation quarter has pushed down combined product recurring and services revenue backlog levels, excluding the Marriott PMS project, to about 90%, that is 90, 90% of previous record levels, leaving us with considerable room to achieve our ongoing revenue and profitability growth goals.

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement, third quarter fiscal 2026 revenue was a quarterly record of $80.4 million, a 15.6% increase from total net revenue of $69.6 million in the comparable prior year period. One-time revenue consisting of product and professional services was up 12.7% over the prior year quarter and in line with our expected 5%-10% increase in one-time revenue for the fiscal year. Recurring revenue was up 17.2% on the back of strong subscription revenue growth. FY 2026 year-to-date revenue is $236.4 million, up 17.4% over the prior year-to-date period. Q3 sales kept up on pace toward reaching the higher end of our annual revenue targets. Through the first three quarters of FY 2026, subscription bookings have increased by 37% compared to the same period last year.

Despite increasing subscription revenue growth guidance from the original 25% to 29%, the subscription backlog is still about 88% of its all-time high. Thanks to a robust backlog and strong sales momentum, we continue to have considerable insight into our business for the final quarter of fiscal year 2026 and into fiscal year 2027. Professional services revenue increased 22% over the prior year quarter to $17.7 million as we continue to see year-over-year improvements in backlog deployment compared to the low point during Q3 fiscal year 2025. Professional services revenue remains a good leading indicator for future subscription revenue growth as the vast majority of services revenue is contributed from normal implementation-type projects and activities. Professional services performed much better than expected in Q3 fiscal year 2026. We expect Q4 FY 2026 professional services revenue levels to return to the $18 million range like prior quarters.

Total recurring revenue represented 64.7% of total net revenue for the fiscal third quarter compared to 63.8% of total net revenue in the third quarter of fiscal 2025. Subscription revenue grew 23.1% for the third quarter of fiscal 2026. Subscription sales and backlog remain at healthy levels, rising by 14% over the elevated FY 2025 exit rates. Subscription revenue is trending comfortably towards our 29% subscription growth guidance, with organic growth trending near 25%. Moving down the income statement, gross profit was $50.2 million compared to $43.9 million in the third quarter of 2025. Gross profit margin was 62.5% compared to 63% in the third quarter of fiscal 2025. Gross margin was down slightly due to margins associated with one-time revenue while we continue to ramp up our newly hired professional services team members.

Combined, the three main operating expense line items, product development, sales and marketing, and general and administrative expenses, excluding stock-based compensation, were 41.2% of revenue in the fiscal 2026 third quarter compared to 42.1% of revenue in the prior year quarter. Excluding stock-based compensation for the third quarter fiscal 2026, product development increased slightly to 19.3% compared to 18.2% of revenue in the prior year quarter third quarter. General and administrative expenses reduced for the quarter year-over-year from 11.7% to 11.2% of revenue, and sales and marketing decreased from 12.2% to 10.6% of revenue. Operating income for the second quarter of $11.7 million, net income of $9.9 million, and gain per diluted share of $0.35 were all well above prior year third quarter income of $7.4 million, $3.8 million, and a gain of $0.14.

Adjusted net income, normalizing for certain non-cash and non-recurring charges of $12.2 million, compares favorably to adjusted income of $10.7 million in the prior year third quarter, and adjusted diluted earnings per share of $0.42 increased compared to the prior year quarter of $0.38. For the 2026 third quarter, adjusted EBITDA was $17.3 million compared to $14.7 million in the year-ago quarter. FY 2026 adjusted EBITDA continues to pace with our annual guidance of 20% of revenue. Through the first three quarters of the fiscal year, adjusted EBITDA is 19.5% of revenue and trending just north of 20% full year profitability guidance. Moving to the balance sheet and cash flow statement, cash and marketable securities as of December 31st, 2025, was $81.5 million compared to $73 million on March 31st, 2025.

As a reminder, 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 $22.7 million compared to $19.7 million in the prior year quarter. As we've 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 the financial health of the business. For our fiscal year 2026, we are maintaining guidance for subscription revenue growth at 29% based on our current backlog and sales momentum. This quarter, we are also raising our top-line revenue guidance to $318 million. Adjusted EBITDA of 20% remains the same for fiscal year 2026 as we continue to evaluate various strategic growth initiatives.

In closing, we are extremely pleased with how our business has performed during the first three quarters of fiscal year 2026 and how it's shaping up going into our last fiscal quarter. With that, I will now turn the call back over to Ramesh.

Thank you, Dave. In summary, the business continues to march along the revenue and profitability growth paths we have created for ourselves like a relentless well-oiled machine. The modernized cloud-native product ecosystem and our top-notch sales leadership teams are opening up many exciting hospitality industry doors for us that were inconceivable a few years ago. The multiple growth paths ahead of us are based on a solid foundation of a world-class product set and an ecosystem of hospitality software solutions that, taken together, has virtually no match in the industry. We only need some of these growth paths to work out well to feed our increasing revenue and profitability growth ambitions. What gives us our current growing competitive advantages has taken us several years of sustained high-quality product development work to build and will be very tough to duplicate anytime soon.

We are not seeing any signs of anyone else even trying to create such an ecosystem, and our pace of innovation is only getting faster with the availability of AI-based tools that are increasing development speed and providing us with product enhancement possibilities which did not exist before. There is absolutely no question about the fact that the total addressable market remains huge relative to our size and growing. There are several PMS competitors whose install base is currently many, many times our size. The extent of growth possibilities ahead of us in the coming years, especially on the PMS side of the business, which is completely software-based, is staggering.

I could sit here and bore you with details of various sales successes accomplished during this quarter, including a global POS hunting license master sales agreement signed with one of the largest hospitality corporations in the world, major PMS and multi-product ecosystem deals signed with several casino gaming corporations, including for a big waterpark project, expansion of business with several Ivy League universities in the FSM vertical, and I could go on.

But for me personally, the most heartening and promising highlight of the quarter was a couple of our best and biggest customers willingly taking reference calls with a couple of other big prospective customers, talking about our development velocity, pace of innovation, willingness, and ability to bring the product enhancement dreams of customers into reality in a matter of weeks and months, world-class levels of consistent customer service, thereby providing prospective customers the reasoning of why we are increasing the best technology provider partner any hospitality corporation can hope for.

One other significant highlight during recent months has been two of our major customers currently using multiple Agilysys products, including POS and PMS, are in the process of taking on a couple of major brand flags but have turned down and refused to take on the brand's mandated PMS product, insisting that they will need to stick with Agilysys PMS even after the brand flag changes to be able to maintain the kind of experience their guests have become accustomed to in the recent past. News nuggets like this, which may appear minor details for now, are significant indicators of a promising future that is just beginning to take shape. The competing PMS products have been entrenched in the field for decades, but we are well and truly climbing the charts now.

We remain confident in the current state of our business and our ability to continue driving top-line growth while simultaneously improving profitability levels. It is highly likely that the next couple of fiscal years will turn out to be the most exciting ones in our history, with increased top and bottom-line growth expectations. We are excited and cannot wait to share fiscal 2027 guidance levels with you during the next earnings call, likely around the middle of May. With that, Lisa, let's open up the call for questions.