AGILYSYS INC Q4 2026 earnings call

Thank you, Victor, good afternoon, everybody. Thank you for joining the Agilysys 2026 fourth quarter and full fiscal year 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, increase implementation and operational efficiencies, the company's ability to maintain retention rates, utilize AI to continue to increase competitive advantages, and the risks set forth in the company's reports on forms 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. Good evening. Welcome to the fiscal 2026 4th quarter and full year earnings call. Joining Jess and me on the call today at our Alpharetta Atlanta headquarters is Dave Wood, our CFO. Fiscal 2026 Q4 was an excellent overall business quarter for Agilysys, including with respect to sales, revenue, and profitability, each of which set a new quarter record. We measure sales and selling success in Annual Contract Value terms, and fiscal 2026 fourth quarter was the highest sales quarter on record. All sales and backlog values mentioned here for Q4 and full fiscal year 2026 do not include anything from the Marriott Property Management System, PMS project. Fiscal 2026, the year ending March 2026, was a record global sales year overall.

It was a record best sales year and well more than double the previous year's sales level for the, managed food services, FSM vertical. A record best sales year for international sales. A record sales year by a good distance for subscription SaaS sales, 29% higher than the previous best prior year, including gaming subscription sales, which were 27% higher than the previous best gaming subscription sales year.

It was a record high sales year for both point of sale, POS, and POS-related modules, and for property management systems, PMS and PMS-related modules. While the PMS side of our business obviously continues to make great progress, fiscal year 2026 was a particularly excellent year for POS, making a fantastic recovery from the challenges faced during the previous couple of years, and finishing as the best year for the POS product set in our history.

With the modernized and unified POS ecosystem now working well at hundreds of sites, we are back to being a very strong POS player in hospitality with growing product-driven competitive advantages. Addition of AI-driven voice and chat ordering features, which are context-aware, like ordering inside Microsoft Teams for our business and industry customers in FSM who serve corporate cafeterias with support for Slack coming up soon.

Ordering through Amazon Alexa for our senior living customers. Ordering on a concierge app or tablet for hotel guests. Such additions are bringing home with greater emphasis the competitive advantages of a unified POS ecosystem. Fiscal 2026 full year retained recurring bookings. Annual 12-month value of SaaS fees, plus maintenance for perpetual licenses sold during the year, net of ARR lost through customer churn.

This net number, which is a crucial leading indicator of future recurring revenue growth and a metric we constantly monitor internally, was an all-time record by a long distance during fiscal 2026, exceeding the previous best prior year by an impressive 43%. While our recurring fee sales bookings are at the highest levels we've ever seen, the customer retention rate also being at better-than-world-class levels makes it a virtuous double benefit combination, driving recurring revenue levels forward at an excellent rate.

Overall, the January to March period, fourth quarter of fiscal 2026, was a blockbuster best sales quarter ever, beating the previous best level, which was achieved during Q4 last fiscal year. It was the highest ever sales quarter for the managed food services FSM vertical. Gaming sales during the quarter improved sequentially by nearly 60%. That is 60.

Improved sequentially by nearly 60% over Q3 of fiscal 2026, and was also an excellent sales period for every other sales vertical. This was an excellent overall business quarter in various ways, breaking records all over the place. However, it is always best to judge our business progress on an an annual basis. There is no guarantee that each upcoming quarter will be a record. We can, however, state with a fair degree of certainty that next year, fiscal 2027, is well-positioned to be a record best year for sales, revenue, and profitability.

This is a business that should be judged on annual results and full year guidance levels. With respect to signed sales agreements during January to March Q4 fiscal 2026, we added 20 new customers, excluding Book4Time. These new customer deals averaged seven products each, and 19 of the 20 were subscription-based.

We also added 85 new properties during the quarter, which did not have any of our products before, but the parent company was already a customer. Of the 105 new properties added during the quarter across new and current customers, excluding the 22 new customer properties who purchased Book4Time, 103 were either partially or fully subscription software license-based. There were also 129 instances of selling at least one additional product to properties already running one or more of our other products. These 129 instances involve sales of a total of 345 products. Both these numbers, 129 new product wins and 345 new products sold in those wins, are quarter record levels.

There is ample evidence that our business levels and market share gains are operating at the best levels we've ever seen. To reiterate, while this was a record quarter in many ways, the more crucial fact is fiscal 2026 was a record year. It is best to judge our business on an annual basis. Sales win-loss ratios remained remarkably impressive during the quarter and during the entire fiscal year. The record sales performance during fiscal 2026 reflects the compounding competitive advantage of our product ecosystem, and AI has become a powerful accelerant on top of that solid foundation. The AI-based capabilities we've introduced during recent months, and those planned for deployment in the quarters ahead, are only possible because of two durable, hard-to-replicate assets.

A modern cloud-native product ecosystem built over the last several years and deep hospitality domain knowledge accumulated over decades as the industry's trusted systems of record for mission-critical business operations. This distinction matters. AI tools are widely available. What is not widely available is the combination of AI, domain expertise, and a comprehensive, trusted data foundation structured by the governance, information security, and personally identifiable information, PII controls that are critical for hospitality enterprise operations.

Thank you. Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. Fourth quarter fiscal 2026 revenue was a quarterly record of $82.9 million, an 11.7% increase from total net revenue of $74.3 million in the comparable prior year period. As a result of the continued momentum in our business, we are pleased to see 15.9% total revenue growth compared to fiscal year 2025. During fiscal 2026 compared to the previous year, professional services increased by 12.4%, and recurring revenue increased by 21.1%. Fiscal year 2026 was another great year regarding all aspects of our business. Sales, backlog, and operations continue to perform at an extremely elevated level.

With or without the large PMS rollout, backlog and sales are exiting at record levels and plenty strong enough for our FY 2027 plans. Professional services increased over the prior year quarter to $18.2 million. Professional services revenue continues to perform well. We are also happy to see professional services gross margin return to slightly north of 30%. Total recurring revenue represented 65.5% of total net revenue for the fiscal fourth quarter and 64.5% for the full year, compared to 62.2% and 61.7% of total net revenue in the fourth quarter and full year fiscal 2025. We continue to be pleased with subscription sales and revenue growth levels. Subscription revenue grew 24.1% for the fourth quarter of fiscal 2026 and 30.2% for the full fiscal year.

The large PMS roll-out contributed to about 0.2% of the growth for FY 2026. Subscription revenue outside of the large PMS rollout was 30% for the full fiscal year, well above our original expectation of 25% going into FY 2026. Subscription sales during the year, along with excellent customer retention levels, have us set up well for our FY 2027 plan. Moving down the income statement, gross profit was $53.4 million compared to $45.1 million in the fourth quarter of fiscal 2025. Gross profit margin was 64.4% compared to 60.7% in the fourth quarter of fiscal 2025. For the fiscal year, gross margin was roughly flat at 62.6% compared to the prior fiscal year.

We are extremely pleased to see us exit the year at 64.4% gross margin as product mix in the P&L catches up to sales. We have finally entered the beginning of the gross margin expansion part of our journey. Combined, the three main operating expense line items, product development, sales and marketing, and general and administrative expenses, excluding stock-based compensation, were 38.7% of revenue in the fiscal 2026 fourth quarter compared to 41% of revenue in the prior fiscal year. Excluding stock-based compensation for the full fiscal year 2026, product development decreased to 18.6% compared to 19% of revenue in the prior fiscal year. General and administrative expenses reduced for the year from 12.6% to 11.2% of revenue.

Sales and marketing increased slightly from 11.4% of revenue to 11.8% of revenue. Combined, the three main operating expense line items, product development, sales and marketing, and general and administrative expenses excluding stock-based compensation, were 42% of revenue this fiscal year compared to 43% of revenue in FY 2025. Operating income for FY 2026 of $43 million, net income of $38.8 million, and gain per diluted share of $1.37 are well above the prior year gains of $22.6 million, $23.2 million, and $0.82.

Adjusted net income normalizing for certain non-cash and non-recurring charges of $50.8 million compares favorably to adjusted net income of $43.8 million in the prior year, and adjusted diluted earnings per share of $1.79 compares favorably to $1.55. For the 2026 fourth quarter, adjusted EBITDA was $21.5 million compared to $14.8 million in the year ago quarter. For the full year fiscal 2026, adjusted EBITDA was $67.7 million compared to $53.8 million in the prior year. We are pleased to see our profitability levels end up well ahead of our original FY 2026 plan, with adjusted EBITDA coming in at 21.2% of revenue. Moving to the balance sheet and cash flow statement.

Cash and marketable securities as of March 31st, 2026 was $116.9 million, compared to $73 million on March 31st, 2025. We remain comfortable with our current levels of cash. As it relates to free cash flow, we are pleased to see an increase for the full fiscal year. Free cash flow in the quarter was $35.4 million compared to $26.5 million in the prior year quarter, and $68.1 million for the full fiscal year compared to $52.3 million in the prior year. As we've said in the past, adjusted EBITDA and free cash flow after normalizing the impact of CapEx continue to be good proxies for the health of the business on an annual basis.

Full fiscal year 2026 free cash flow was $500,000 greater than adjusted EBITDA, mostly due to timing of working capital adjustments. For our fiscal year 2027, we expect revenue to be in the $365 million-$370 million range. We expect product revenue to remain flat and to continue to trend around $10 million per quarter or $40 million for the year as customers continue to choose consumer-grade devices and a larger portion of our business becomes PMS. Professional services should grow in the 5%-10% range as well. As a reminder, this year, professional services revenue will not have any significant benefit of large development projects as the ones we are working on in the past are now well into their rollout phases.

Recurring revenue will continue to grow around 20% inclusive of subscription revenue growth north of 30%. Subscription revenue growth in the fiscal Q1 should be similar to the FY 2026 Q4 exit of around 24% and then increase from there throughout the year as we accelerate the large PMS rollout we continue to make good progress with. Adjusted EBITDA will increase to 24% of revenue as we begin to see margin expansion from our current sales momentum and large project rollouts.

As a reminder, fiscal first quarter profitability will be lower due to the beginning phases of the large PMS rollout and timing of our user conference expenses. We expect profitability to be in the 16%-17% range in the first quarter and then increase sequentially, exiting Q4 at nearly 30% of revenue.

Adjusted EBITDA excludes stock-based compensation, which will continue in the 5%-7% range. Free cash flow and adjusted EBITDA will continue to be comparable proxies for profitability after normalizing for CapEx, which is not a significant portion of our business. In closing, we are pleased with our FY 2026 financial results and the solid business fundamentals for future revenue growth and profitability growth. With that, I will now turn the call back over to Ramesh.

Thank you, Dave. In summary, we are now about as bullish about our business as we've ever been. Our timing has been impeccable these last few years. Unlike other technology providers in the industry, we made the tough decision to rewrite and modernize every product in our ecosystem a few years ago. We future-proofed the system with the expectation that we would be ready to leverage the next wave of technology changes when they came.

We have rapidly made AI an integral part of everything we do, and the pace at which we are creating AI-based features has served as a good validation of the previous technology modernization efforts. The industry firmly believes in what we are doing, and this is reflected by the fact that demand for our product ecosystem remains high. The high sales win ratio continues to point to increasing product superiority competitive advantages.

Sales levels, particularly pertaining to subscription SaaS sales, continue to get higher. Our customer retention rates remain world-class. A combination of selling more recurring fees and retaining them at such levels will continue fueling good levels of recurring revenue growth. The product mix is improving with a consistently increasing tilt towards recurring revenue, which should continue to push gross margin levels upward.

Our operating leverage continues to improve as well. AI is making it easier to meet and exceed the long-pending and underserved hospitality industry innovation demands, which currently very few technology providers are in a position to or are interested in serving. The modernized product ecosystem has settled down well in the field and continues to be a big competitive advantage. However, beyond all that, what gives us the most optimism and satisfaction is the increasing number of customer success stories.

Instances of customers seeing meaningful improvements with revenue generation, operational efficiencies, and guest satisfaction levels enabled by the Agilysys integrated ecosystem of modern solutions. Software development is one thing, but creation, maintenance, and enhancement of a complex ecosystem of interconnected, innovative, robust, and configurable software solutions that can create meaningful, measurable value for a widely diverse world of customers, each one using the product sets in a different way, is an entirely different level of challenge that we are making great progress mastering. Such customer success stories are increasing, both in terms of quality and quantity, and that is the progress that is now giving us momentum.

When customers are willing to get up on main stage in front of hundreds of other current and prospective customers, as has happened in two consecutive user conferences now, to talk about the real, tangible, measurable improvements they have gained from switching to Agilysys systems, we know we are doing a lot of things right. We remain very bullish about our short, medium-term, and long-term prospects. With that, Victor, let's open up the call for questions.