AGILYSYS INC Q1 2027 earnings call

Thank you, Lisa, good afternoon, everybody. Thank you for joining the Agilysys 2027 first 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 increased guidance levels, continue to improve profitability levels, the company's ability to maintain sales momentum, utilize AI to continue to increase competitive advantages, 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. Good evening. Welcome to our fiscal 2027 first quarter earnings call. Joining Jess and me on the call today is Dave Wood, CFO at our Alpharetta Atlanta headquarters. Let me cover sales and selling success first before discussing revenue, profitability, the decision to raise guidance levels provided a couple of months ago, and other details. We continue to measure sales in annual contract value terms and exclude subscription sales pertaining to the Marriott property management system, PMS project, from the overall sales numbers. FY 2027 Q1 was an excellent overall business quarter for Agilysys, including with respect to sales, revenue, and profitability, each of which set a new Q1 quarter record. This was the best sales success April to June Q1 period on record.

In fact, it was the best sales quarter in our history outside of the Q4 January to March sales period, which has tended to be the strongest during the recent several years. The last two quarters taken together constituted the best ever six-month sales period in our history. Fiscal Q1, April to June, was an excellent sales quarter for several verticals. This was the best sales quarter ever for the Asia Pacific region and the highest Q1 sales period for each major domestic vertical, casino gaming, hotel resorts cruise ships, HRC, and food service management, FSS. Sales success this quarter featured three major seven-figure multi-product ecosystem wins, two in the casino gaming vertical and one in Australia. All three were won battling against our main most often seen competitor.

A major casino resort currently under construction in the Las Vegas Strip chose Agilysys for point-of-sale, POS, property management system, PMS, and several other software modules. Another major casino resort based in Arizona, who had been the customer of our main competitor for about two decades, chose to switch to Agilysys lock, stock, and barrel across POS, PMS, and other software modules. Despite these two big wins in the U.S., the main highlight of the quarter probably was a nine-property resort group in Australia deciding to switch to Agilysys PMS and other related supporting modules after being with our main competitor for more than a couple of decades. We were originally not included in this particular RFP process.

It took a good reference recommendation from one of our current customers in Australia, along with dedicated, persistent efforts by the sales team to get included in the game at the last minute. From that point forward, we surged forward quickly, thanks to the superiority of our best-in-class software modules and the obvious strengths of the end-to-end ecosystem, along with excellent product demonstrations and presentations conducted by our talented personnel in the Asia Pacific region. Finalization of the customer selection process was completed in just a few weeks after that. Our sales win-loss ratio remains high and impressive. Getting more at bats remains our main challenge, and we are getting better at being more persistent in getting included in more selection processes, backed up by a growing number of positive reference customers for the modernized solutions.

A couple of significant customers, including one in the U.K., recently reported achieving excellent revenue improvements directly attributable to the use of the Agilysys ecosystem of modern, interconnected solutions, especially the ability for their guests to book packages online, a recent award-winning innovation, which would be virtually impossible for our competition to duplicate anytime soon. We expect our sales levels to continue running forward with increased momentum as such differentiating value creation success for customers become more well-known. Given the nature of our B2B business, even one such story that a customer is willing to talk about openly is worth a million in marketing spend. While this was another excellent business quarter in various ways, I would be remiss if I don't remind everyone that it is always best to judge our business progress on an annual basis. There is no guarantee that each upcoming quarter will be a record.

We can, however, state with a high degree of confidence that fiscal 2027 will 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 sales deals won during Q1 fiscal 2027, April to June, we added 15. We added 15 new customers, excluding Book4Time, all of whom signed subscription license-based sales agreements. These 15 new customers licensed an average of close to six products each. We also added 87 new properties, which were not using any of our software solutions before, but the parent company was already a customer. Of the 102 new properties added during the quarter across new and current customers, 101 were either partially or fully subscription license-based.

In addition, there were 106 instances of selling software solutions to properties which were already using at least one of our other products. These 106 deals involve the sale of a total of 206 products. Additional product adoption by existing customers continues to be a big contributor to sales and revenue growth. The Marriott TMS project continues to make good progress and remains on plan. It is remarkable to watch and learn from the success we have seen with this huge technology transformation project, one of the biggest ever attempted in the hospitality industry. We are proud to be associated with it and to be playing a leading role in it. Our AI adoption strategy is making good progress and is being executed as planned.

We have been intentional and deliberate about first establishing the necessary cost controls, customer data protection and operational discipline, guidelines, and guardrails, thereby creating a foundation that will allow us to continue accelerating AI adoption with confidence. At the Inspire customer user conference during April, earlier this year, we had announced the development of 30+ AI-based features. That is 30. 30+ AI-based features. Several of these features are in the process of being deployed at pilot customer properties, while the remaining are nearing development and testing completion, as scheduled and on plan. Many of these features require not just AI, but an integrated ecosystem of modern software solutions. Modules like PMS, POS, spa, golf, inventory, all communicating with each other real-time or close to real-time. That is a strength very few competing providers can offer.

We are seeing a need for AI for property-wide features, not just within point solutions. To enable such AI features at scale, we have built a central orchestration layer for all AI processing. This layer routes requests to the appropriate LLM for making intelligent decisions, optimizes token usage, and ensures adherence to our AI governance principles around security, privacy, compliance, and responsible AI norms. As we continue to scale up, we expect this central orchestration layer to provide the necessary controls around internal cost management, customer value creation, and managing monetization levers. Development of the couple of fully AI-native modules, CRS and Revenue Intelligence, is progressing on plan. We expect initial beta implementations at customer sites later this fiscal year. The initial versions of both these modules are designed to work within the scope of our product ecosystem.

With respect to revenue and profitability, Q1 fiscal 2027 overall revenue was $87.7 million. A record for the 18th consecutive quarter and 14.3% higher than the comparable prior year quarter, driven by 26.1% year-over-year growth in subscription revenue and 8.3% growth in professional services revenue. This was the 19th consecutive quarter of more than 23% year-over-year subscription revenue growth. Growing subscription revenue at such a good clip consistently for about five years has been quite an accomplishment. Overall recurring revenue was a record $57.7 million, 18.8% higher than the comparable prior year period and 65.9% of total revenue. Q1 fiscal 2027 subscription revenue was a record $40.2 million and 69.7% of total recurring revenue.

The 26.1% year-over-year growth in subscription revenue was driven by 39.7% growth in PMS and PMS-related modules and 18.5% in POS and POS-related modules. Q1 fiscal 2027 is the first quarter in our history when total subscription revenue pertaining to PMS products was higher than that of the POS ecosystem. We expect subscription revenue growth in POS and related modules to remain in the high teens, low 20s kind of percentage levels for the foreseeable future. Add-on modules across both PMS and POS constituted 36% of total subscription revenue. Q1 fiscal 2027 annual maintenance-related recurring revenue was $17.4 million, very close to record high levels. Most of the subscription revenue growth is coming from new and additional projects and not based on cannibalization of annual maintenance.

We continue to allow customers to make their own decisions regarding timing of moving to the cloud. One-time product revenue consisting of perpetual software licenses and third-party hardware was $10.3 million, in line with our expectations. Hardware revenue remains at these levels despite excellent success in overall POS sales. In fact, the last two quarters have been two of the top three on record for overall POS sales, and the recent six-month period of POS sales has been the highest ever six-month period. Despite such POS sales results, hardware revenue remains at current levels. The current versions of the modernized POS solutions continue to carry a reduced hardware attach rate, since they also work on consumer-grade iPads and other smaller, less capital-intensive handheld devices. We continue to expect one-time product revenue to stay around this general range for the remainder of the fiscal year.

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. First quarter fiscal 2027 revenue was a quarterly record of $87.7 million, a 14.3% increase from total net revenue of $76.7 million in the comparable prior year period. Q1 represented another quarter of strong momentum in the business. Sales levels were at first quarter all-time high. Total backlog, when excluding the large PMS rollout, remains at record levels, and Q1 revenue was better than we expected just a couple of months ago. Professional services increased 8.3% over the prior year quarter to a record $19.6 million. We are pleased to see our professional services gross margin remain above the 30% mark for the second consecutive quarter at 35.4%.

Total recurring revenue represented 65.9% of total net revenue for the fiscal 2027 first quarter, compared to 63.4% of total net revenue in the first quarter of fiscal 2026. As expected, recurring revenue continues to become a growing portion of top-line revenue and a meaningful contributor to gross margin and profitability expansion. Subscription revenue growth during the first quarter of fiscal 2027 was better than expected at 26.1%. Subscription sales and backlog levels, while maintaining low customer churn, have us set up well for execution on our FY 2027 plan. Moving down the income statement. Gross profit was $55.7 million compared to $47.3 million in the first quarter of fiscal 2026. Gross profit margin was 63.5% compared to 61.7% in the first quarter of fiscal 2026. Product mix will continue to drive gross margin to the mid to high 60% range.

Combined to three main operating expense line items, product development, sales and marketing, and general and administrative expenses excluding stock-based compensation were 42.8% of revenue in the fiscal 2027 first quarter, compared to 45.6% of revenue in the prior year quarter. Operating income for Q1 FY 2027 of $9.7 million, net income of $9 million, and gain per diluted share of $0.32 are well above the prior year gains of $4.5 million, $4.9 million, and $0.17. Adjusted net income normalizing for certain non-cash and non-recurring charges of $14 million compares favorably to adjusted net income of $9.3 million in the prior year period, and adjusted diluted earnings per share of $0.49 compares favorably to $0.33. For the fiscal 2027 first quarter, adjusted EBITDA was $18.3 million compared to $12.5 million in the year ago quarter.

We are pleased to see our profitability levels end up well ahead of the original FY 2027 plan for Q1, with adjusted EBITDA coming in at 20.8% of revenue. Adjusted EBITDA performed very strongly on the back of higher than anticipated recurring revenue levels while operating costs were in line with our expectations. Moving to the balance sheet and cash flow statements. Cash and marketable securities as of June 30th, 2026 were $123.7 million, compared to $116.9 million on March 31st, 2026. 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 first fiscal quarter. Free cash flow in the quarter was $7.3 million, compared to a loss of $5 million in the prior year quarter.

As a reminder, free cash flow is typically lower in the first half of the year due to working capital adjustments that normalize throughout the fiscal year. Adjusted EBITDA and free cash flow, after normalizing the impact of CapEx, continue to be comparable and good proxies for health of the business over a fiscal year. For fiscal year 2027, we are raising our revenue guidance to be in the $368 million-$373 million range. We expect product revenue to remain flat and continue to trend around $10 million per quarter or $40 million for the year. Professional services started strong and is still expected to grow in the 5%-10% range for the year. We are raising our subscription revenue growth guidance from 30% to at least 32% for the year due to faster deployment of the backlog than anticipated in the original guidance.

Subscription revenue growth in fiscal Q2 should be close to 30% growth range and continue to accelerate during Q3 and Q4. With respect to adjusted EBITDA, guidance will remain at 24% of revenue, even though Q1 profitability was better than expected. We still expect to exit FY 2027 at nearly 30% of revenue. Adjusted EBITDA excludes stock-based compensation, which will continue to be in the 5%-7% range for the year. In closing, Q1 represented an extremely strong start to the fiscal year, leaving us with plenty of visibility into the remainder of the year. With that, I will now turn the call back over to Ramesh.

Thank you, Dave. In summary, we are off to an excellent start to the fiscal year, which has given us sufficient confidence in our business health to be able to raise revenue guidance levels. The Marriott PMS project continues to make very good progress. Other customer stories of real, tangible value gain from switching to and using the Agilysys ecosystem of hospitality solutions are increasing both in quality and quantity. The availability of AI tools came at just the right time for us. We continue to release AI-based features at a steady rate, with appropriate guardrails and control mechanisms in place, further augmenting the value of the modern ecosystem of hospitality-focused software solutions that have been built diligently over the past several years. The hospitality industry is showing every sign of being hungry for such a modern, AI-enriched, interconnected ecosystem of software solutions.

Being focused only on the huge total addressable market of hospitality, with no other distraction or competing investment objectives, is also turning out to be a significant competitive advantage for us. Our competitive positioning continues to get better, as is reflected in the sales and revenue results. Many of the operational and revenue improvements customers have made recently through use of various modules within the ecosystem cannot be replicated by our competition anytime soon. The competitive advantages being built are based on a strong modern technology ecosystem foundation that is going to remain difficult to recreate for the foreseeable future by the competition, with or without the help of AI tools. Overall, we continue to be very well-positioned for continued disciplined revenue and profitability growth. With that, Lisa, let's open up the call for questions, please.