Agilysys Inc. Q3 2024 Earnings Call
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Good day, and thank good day, ladies and gentlemen, and welcome to the jealousy fiscal 'twenty 'twenty four third quarter Conference call. As a reminder, todays conference maybe recorded I would now like to turn the conference over to Jessica Hennessy Senior director of corporate strategy and Investor Relations.
At a Genesis you may begin.
Thank you Justin and good afternoon, everybody. Thank you for joining via jealous said fiscal 'twenty 'twenty four 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.
Statements made on todays call well be predicted and are intended to be made as forward looking within the safe Harbor protections of the 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 the hospitality industries need for technology solutions.
Our ability to drive sales and increased market share our ability to increase the profitability 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 a Joseph 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 Agilis, where mashed. Please go ahead.
Thank you Jess good evening.
Welcome to the fiscal 2024 third quarter earnings call.
Joining just for me on the call today about Atlanta headquarters is Dave ball our CFO.
Let me first cover sales before discussing revenue and other details.
We measure of selling success in sales in annual contract value does.
With respect to sales I don't want to confuse matters between calendar and fiscal years, but please allow me to make one quick comment.
Calendar 2023 that is the period from January to December.
What's the best ever calendar sales period.
Calendar 2023 was an extraordinarily successful 12 months' period for selling success.
And we think the pace of sales will only get better in the future.
Now switching back to fiscal year.
As we've reported before the previous fiscal year FY 2023.
Period from April calendar 2022 to March calendar 2023.
What's the best fiscal year for sales success.
She was at the end of the first three quarters of this fiscal year FY 2024.
Is progressing ahead of last year's pace.
Compared to the first three quarters of the previous fiscal year.
During the first three quarters of fiscal 2024.
Seen significant year over year year to date improvements across the Asia Pacific region.
In the U S across the hotels resorts and cruise ship verticals.
Sales from gaming casinos continues to be a major strength area for us and remains the number one vertical in terms of overall sales value.
We've also seen significant year over year sales increases during the first three quarters of fiscal 2024 compared to last year's first three quarters.
In the value of noncompetitive wins, meaning sales to current customers, but there was no competition involved.
And <unk>.
In the value of new customer wins.
C. P O S point of sale software solutions info Genesis guest facing by kiosk.
And guest facing remote ordering tool on demand.
I've also been significantly higher this fiscal year to date compared to the prior year.
While sales of certain property management systems, Pms products and related add on modules have done better this year.
There are other pms modules, which are yet to pick up momentum.
Yeah.
We like our fiscal 'twenty 'twenty, four sales momentum and expect to do even better in the future.
Now that our products are at an excellent spot.
And we are steadily increasing the number of customer success stories based on the use of the re engineered modern versions of the products and new modules create.
Now that we are in the process of moving past the product reengineering phase in our journey to become a world class hospitality focused enterprise software provider <unk>.
Our next objective is to create good reference customers, who are seeing success without new and integrated product ecosystem.
Willing to discuss it with others and that number continues to increase with every passing month.
In fact in the upcoming March 18 to 21st annual user conference.
We're dedicating an entire breakout session track for customers are going to talk about their success stories with our recent product innovations.
While on the subject of a user conference with about eight weeks ago. The number of customer registrations to attend the conference. This year is about 25% higher than during the comparable time last year.
During Q3 of fiscal 'twenty 'twenty for October to December we added 18, one eight we added 18, new customers and all but one of those deals were subscription based.
Though the number of new customers added each quarter remains steady for now.
The average number of products sold to each customer this quarter is the highest level, we have seen thus far.
New customer Pms deals close this quarter.
Killed it on an average of about seven products each.
Why do you each P. O S. D included an average of three point Ford products and all each new customer agreement included an average of four six products.
The average deal size sold to new customers.
During the first three quarters of fiscal 2024 was about 30% three zero was about 30% higher than the new customer average deal size last fiscal year.
In annual contract value terms, we've already sold more value of sales to new customers.
During the first three quarters of this fiscal year compared to all of last fiscal year.
During fiscal 2020 for Q3, we also added 63, new properties, which did not have any of our products before but the parent company was already our customers.
In terms of sales value to such new properties.
The highest quarter since last fiscal year Q3.
Of the 81, new properties added during the quarter across new customers and new properties of current parent customers.
Close to 90% nine zero close to 90%, but either partially or fully subscription based.
With respect to new product sales.
There were 88 zero there were 18 instances of selling at least one additional product to properties, which already had at least one of our other products currently in use.
These 18 sensus involve sales of a total of 183 new products.
Yeah.
We continue to have a long runway of sales and revenue growth ahead of us both within the existing customer base and to new customers. Starting now it's a matter of establishing a modernized state of the art technology based new products and modules at an increasing pace in the field and reaching the flywheel stage of our reputation.
Growth.
We now have the capacity to grow regardless of travel spend trends.
If such things are good that would be great and tail winds are always helpful. But given our current very low market share, especially on the property management systems Pms side of our business, we can grow value, even if such trends are not great.
We've also set ourselves up well for growth across a broad base of possibilities in practically all of the verticals. We play in currently gaming casinos hotels hotel chains resorts cruise ships and manage food services and are not dependent on one or two big wins.
And of course, we have a long growth path ahead in international regions as well given our current low market share.
They're too it is a matter of establishing credibility and notoriety with more high quality implementations.
During the quarter, one of the biggest and most prestigious resorts to open in Asia in recent times. The inspired entertainment resort in Incheon, South Korea near the Seoul Airport opened successfully.
Using a whole array of the most recent versions of our P. O S. P. M S.
Seven expedient than handset add on solutions for a total of nine products implemented.
It's also good to have a P. O S used at the ongoing Australian open tennis tournament in Melbourne.
Okay.
I personally also enjoyed a few friends and acquaintances, calling me to let me know that they notice the ideal assist name at food outlets at the recently opened casinos in Las Vegas, Durango station and content Blue and also it but one of the other major Vegas properties, which hosted the recent CES show.
Yeah.
At this property the various food outlets are in the process of moving too idealistic info Genesis P. O S from a competing system and some of the attendees noticed the idealist his name which was cool.
Such spreading news of successful implementations and customer value creation.
Using the most recent versions of our hospitality solutions ecosystem will be key.
Our future growth.
Back to the topic of sales win during the quarter. There were 11, new core property management systems Pms wins during the quarter across new customers, new site or new products, making it among the best quarters in history in this regard.
Still small numbers and very early days with our BMS business, but the momentum is building given our pms products strength has never been better than it does now.
The core pms products and related modules out there, where we've always wanted them to be at and now it is a matter of creating more great references in the field, which we are making good progress with.
Beyond a credible presence in the Tms space now and an increasing presence in most P. M. S. RFP processes like has been the case with most point of sale, etc.
Piece for many years.
Once we get our silicon the game out of it.
In two N P. M S ecosystem of products all cloud native with the capability to also work on premise gives us great odds to win.
We are competing against very well entrenched pms competitors, who have dominated the space for a long time, but we are gaining ground.
Increasing property management system Pms sales will also help sell more additional software modules.
I sit at about four times as many add on modules with BMS has to be at odds with P. O S.
The significant P M S wins during the quarter.
Included Mount Princeton Hot Springs to Sop.
This historic resort in Colorado has been in service for more than a essentially with several communities and offering visits to natural Hot Springs.
Princeton selected core Pos and Pms products, along with several experienced enhancers.
On software solutions.
Another significant point of sale wins this quarter, what's Dot University and Sue Center, Iowa.
Other than the info Genesis core product. This will also include a purchase of guess self service kiosk.
And licenses for remote mobile lottery kitchen display system and payment solutions.
Higher education is another growing sales vertical where our current market share is low growth opportunities at high and strong integration partnerships with other vendors, including with one of the major campus card providers.
Continue to differentiate us in the market.
Yeah.
Now on to revenue and profitability.
Fiscal 'twenty 'twenty four Q3 revenue was a record $66 million that is six zero $66 million the eighth consecutive record revenue quarter.
21, 3% higher than.
In the comparable prior year quarter.
Including product revenue of $12 7 million, which was 18, 5%. That's one 818, 5% higher than Q3 last year.
Fiscal 'twenty 'twenty four is the first year veteran product revenue has exceeded 12 5 million in each of the first three quarters.
One time product and services revenue combined.
The record $25 $5 million.
Which was 28, 8% higher than the comparable prior year period.
Apart from being a record sales quarter for services.
This was also an excellent quarter for services revenue.
As the pace of implementations picked up considerably giving.
Giving us increased confidence in the recent modern versions of products, becoming easier to implement and making a big positive difference for our customers at various properties.
Services revenue was a record 12.8 million, 41% higher than the comparable prior year quarter.
Services margin.
32, 2% was an impressive improvement over recent prior quarters and should contribute to services margins for the full fiscal year being slightly above our original expectation of 25%.
In addition, the.
The extent of implementations completed in the field this quarter involving subscription revenue was the highest level. We've achieved thus far measure in terms of annual recurring revenue at us what.
What of installations.
That obviously augurs well for continued good future subscription revenue growth.
Speaking of subscription revenue.
'twenty 'twenty four Q3 subscription revenue.
<unk> 29, 9% year over year to a record $19 5 million that is one nine to a record $19 5 million and overall recurring revenue grew 16, 4% one 616, four person to a record $35 $1 million.
Subscription revenue constituted 55, 6% of total recurring revenue compared to 49, 8% Q3 of last fiscal year.
In absolute number tonnes subscription revenue grew by $4 5 million euro over the years, which is the highest level we've achieved till now.
Comparing subscription revenue this quarter.
With the comparable quarter two years ago.
Total subscription revenue has grown by 67%.
Subscription revenue from Pms and related additional modules have doubled in this two year period.
Again relatively small P M as subscription revenue numbers no doubt and we are only getting started with BMS growth now, but the trend is definitely increasing.
Further.
M S related subscription revenue has grown as much in the first three quarters of this fiscal year as it did during the entire last fiscal year.
Fiscal 2020 for Q3.
What are the best quarters, thus far for revenue from international regions.
Small numbers, but encouraging progress with huge future growth potential.
Yeah.
Improving implementation services efficiencies helped reduce our combined product recurring revenue and services backlog levels to about 85% of peak levels.
We expect product revenue to be under a bit of short term and ongoing pressure due to several reasons, including a lower starting product backlog.
And that's P. O S systems now supporting all major operating systems Windows, iOS and Android.
Thereby giving customers more P O S generally hardware options, including off the shelf consumer grade tablets and sleek all in one handheld devices.
This trend is good for our medium and long term and gives a P O S products a clear competitive edge.
But as they expect it to put some pressure on the one time product revenue.
We have a good track record of managing well the J curve involved in the shift towards subscription revenue based cloud software company and I am confident we will manage as well the shift from even less hardware than the level. We are at now and more subscription and other software in our revenue mix.
We expect services and recurring revenue, including subscription revenue to continue to do well.
We remain confident of achieving the recently raised full year full fiscal year 2020 for revenue guidance range of 235 million to $238 million.
This should include continuing solid good subscription revenue growth.
We expect full year fiscal 2020 for subscription revenue growth to be comfortably in and slightly above the 28% guidance already provides.
Fiscal 2024 Q3, adjusted EBITDA was 19, 4% there was one 919, 4% of revenue.
11.8 million more than 35% highest.
In the previous highest level and the first time, we have even exceeded the 9 million Mark.
Even after discounting for the fact that Q3 is normally a favorable quarter for us with respect to profitability due to the absence of radius once a year trade shows and other once a year expenses, even after providing for all of that this was a good quarter for profitability as we continue to focus on achieving greater.
Operational efficiencies.
We expect full fiscal year 2024, adjusted EBITDA to be 15% of revenue that is one 515% of revenue higher than the previously guided 14% level and our expectations of 13% going into the fiscal year.
We will provide revenue range and other guidance for fiscal 2025, covering the period April 24th of March 25. During the year end earnings call in mid to late May.
With that let me hand over the call to death.
Thank you Ramesh.
When you look at our financial results beginning with the income statement third quarter fiscal 2020 for revenue was a quarterly record of $60 6 million a 21, 3% increase from total net revenue of $49 $9 million in the comparable prior year period.
All three revenue lines increased compared to prior year compared to the prior year period with product up 18, 5% professional services up 49% and recurring revenue up 16, 4%, including subscription revenue increases of 29, 9%.
Sales momentum continued throughout Q3 with total exit backlog remaining strong and at comfortable levels to reach our FY 'twenty four revenue expectations.
We also remain pleased to see our total backlog increased by 6% over the comparable prior year period. Despite a decrease.
A decrease in product backlog.
Implementation efficiencies and effectiveness of the services team has continued to improve driving more subscription revenue earlier in the quarter.
Product revenue increased 18, 5% over the prior fiscal year to $12 7 million.
The point of sale business continue to perform better than expected for the fiscal year.
However, we expect product revenue as a percentage of total revenue to continue to decline slightly and be in the $11 million to $12 million range during our fiscal Q4.
As more customers choose commercial grade devices and other all in one handheld devices to run our modernized Pos software solution, we expect less contribution as a percentage of revenue from the onetime product revenue line.
Professional services increased 49% over the prior period to a record $12 8 million.
Professional services continued to be a strong leading indicator indicator for the health of the business professional services backlog increased slightly back to record levels. Despite record professional services revenue during the quarter.
We expect professional services revenue to increase sequentially in Q4 and grow north of 30% for the full fiscal year.
Most of our professional services revenue is related to important implementation projects contributing to the acceleration of FY 'twenty for subscription revenue.
Development associated with larger projects with corresponding subscription revenue happening in future years has been less than 10% of services revenue during the past couple of quarters.
Total recurring revenue represented 58% of total net revenue for the fiscal third quarter compared to 64% of total net revenue in the third quarter of fiscal 2023.
Recurring revenue as a percentage of total revenue decreased slightly because of a 28, 8% increase in onetime revenue consisting of product and professional services.
Fiscal 2024, Q3 subscription revenue grew 29, 9% over the comparable prior year period.
Subscription revenue comprised 55, 6% of total recurring revenue for the current period compared to 49, 8% of total recurring revenue.
In the third quarter of fiscal 2023.
Subscription revenue increased sequentially $1 $2 million and remains at the high end of our expectations.
The subscription subscription backlog remains strong and we expect subscription revenue to continue to increase between nine and $1 2 million sequentially during the fiscal fourth quarter, putting the full year 2020 for subscription growth percentage between 28, 7% and 29.
3% for the year.
Moving down the income statement gross profit was $37 8 million compared to $30 8 million in the third quarter of fiscal 2023 gross profit margin was 62, 5% compared to 61, 7% in the third quarter of fiscal 2023.
We are pleased to see gross profit margin back in the sixties largely due to an increase in professional services margins to 32, 2%.
Combined the three main operating expense line items product development sales and marketing and general and administrative expenses, excluding stock based compensation were 43, 1% of revenue compared to 45, 6% of revenue in the prior year quarter.
Product development increased slightly to 29% compared to 26% of revenue in the prior fiscal year.
General and administrative expenses decreased to 12, 12, 4% compared to 13, 7% of revenue in the third quarter of fiscal 2023.
Sales and marketing decreased from 11, 3% of revenue to nine 8% of revenue, mostly due to expenses related to trade shows and other events happening in different quarters this year compared to the prior year.
Operating income for the third quarter of $7 8 million.
Net income of $76 9 million and gain per diluted share of $2.85 all increase compared to the prior year's third quarter gain of $3 5 million $3 4 million and 13.
Adjusted net income normalizing for certain noncash and nonrecurring charges of $9 3 million was higher than adjusted net income of $6 7 million.
In the prior year third quarter and adjusted diluted earnings per share of 35% was more than 26 cents in the prior year period.
In our fiscal third quarter, we had a release of a valuation allowance of $65 million, causing GAAP EPS to be higher than adjusted EPS. After normalizing. This one onetime item out through adjusted net income.
The release of the tax related valuation allowance allows us to recognize existing U S. Federal net operating losses of around $175 million and associated state Nols as deferred tax assets on our balance sheet.
With our accumulated earnings in recent years, plus our projects projected earnings going forward. It is now likely that will utilize the Nols.
As such the valuation the valuation allowance was released this quarter.
For the 2024 third quarter, adjusted EBITDA was $11 8 million compared to $8 1 million in the prior year quarter.
Adjusted EBITDA in Q3, FY 'twenty four was 19, 4% of revenue.
Profitability for the quarter was better than expected largely due to better than expected gross margin within our professional services and recurring revenue lines.
Professional services margin improvement during the quarter was mainly driven by an increase in efficiencies across the team.
Moving to the balance sheet and cash flow statement cash and marketable securities as of December 30 as of December 31, 2023 was $116 2 million compared to $112 8 million on March 31 2023.
We remain comfortable with our current levels of cash.
Free cash flow in the quarter was a gain of $11 3 million slightly less than a gain of $11 7 million in the prior year quarter.
The decrease in free cash flow was largely attributable to an increase in accounts receivable balance and the associated impact on working capital.
Our over 90 accounts receivable remains less than 10% of total a R.
Yeah.
For fiscal year 2024, we remain comfortably in our revenue guidance range of $235 million to $238 million inclusive of 28% subscription revenue growth.
We are also raising our profitability guidance for the full year from 14% to 15% adjusted EBIT to EBITDA as a percentage of revenue.
In closing we are pleased with the sales momentum.
Professional services improvements in revenue growth during the first three quarters of the year.
With that I will now turn the call back over to Ramesh. Thank you Dave.
Our progress over the past six to seven years has involved among other things a massive overhaul of core products.
The creation of an ecosystem of state of the art World Class software solutions.
Focused on the hospitality industry.
The past years have therefore been.
Product development R&D story for the most part.
We also took massive strides forward in many other areas, but the highlight was clearly product development.
Product development strength is going to remain and grow in a more tempered fashion in the future, but starting now at all.
R&D efforts are going to be a lot more focused on customer acquisition and winning innovation now that the pressures are massive reengineering efforts are no longer there.
Okay.
Now the already built up product development strength will focus on increasing our competitive advantages in each of the products and modules as they compete for best of breed selection versus a variety of competitors.
And on enhancing the integrated ecosystem capabilities that very few competitors can match with us today.
We cannot think of many other competitors, who can match the breadth and depth of our solution ecosystem.
All based on modern cloud native technologies with a versatile ability to also work at customer sites, who want to remain on premises for a while longer.
We've done well to fill the technology and functionality feature set the innovation gap giant hole in the industry and are now well positioned to translate that into growth and business success.
Also now this business evolution will shift to the feet.
Now the focus will be more on services implementation efficiencies and helping customer the properties realized operational gains and guests and staff experience improvements through the use of these new integrated product versions.
As we create more successes, we expect quicker progress towards the flywheel staging out of business. When this steadily improving engine will become an unstoppable force.
Our total addressable market remains huge relative to our size in this industry and market is hungry for a world class technology solutions.
We are seeing good sales growth across sales verticals and product verticals, where our market shares have been low in the past.
We are now a credible presence in the Pms Arena, where the journey is only in the initial beginning stages.
Our balance sheet remains clean and strong.
And we remain disciplined with our growth plans.
We believe all of that adds up to a great probability of continued future success in creating solid good shareholder value during the short medium and long term.
With that let's open up the call for questions Justin.
And thank you.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced towards your all your question. Please press star one again, please standby, while we compile the Q&A roster.
And one moment for your first question.
Yeah.
Speaker Change: And our first question comes from my end Tandon from Needham. Your line is now open.
Thank you good evening formation, Dave I was just curious on the outlook for Q, you, obviously called out very strong sales momentum, but if I look at the guide for <unk> I think it calls for maybe a modest deceleration from <unk> levels and then also the margin guide would be below street level. So I know I'm nitpicking.
Little bit here, but would just be curious if you could walk through some of the data points.
And that is reflected in your <unk> guide.
After the very strong sales momentum that you've called out in the <unk>.
Yeah. Thanks for the question so.
We're expecting an acceleration in revenue in Q4, the commentary was really around the product line, we're seeing more of.
We're seeing more of our product run on an off the shelf products. So we're seeing a little bit of a decline in the product, but we're still expecting professional services to increase sequentially.
And our subscription should still increase between $900001 2 million basically all leading to revenue being up probably around a $1 million over where we are today. So we're still expecting a sequential increase in revenue, but there will be a little bit of a pullback on the product revenue line. So much.
When we started the year, our revenue expectation of $230 million to $235 million. We then raised guidance last quarter to 35 to <unk> 38, and nothing has changed there that still remains the case that we expect revenue to be $2 $35 million to $38 million just like how we guided at the end of the last quarter.
And on the margin side.
Speaker Change: There will be a little bit of a pullback in margin I mean Q3 is just.
From an Opex standpoint is just the lower cost quarter, we just there's not as many tradeshows, there's there's less accruals for unused PTO and.
And all that stuff kind of picks back in our in our fiscal Q4 Theres more trade shows so again, it'll it'll pull back a little bit, but leaving the year higher than we exited last year, so north of 15%.
And again as a reminder, we started the year thinking it'll be 13 person monarch.
And then we increased guidance to 14% EBITDA by revenue and now we expect it to be 15% of revenue sort of margin.
Capabilities of the company have steadily improved throughout the year.
Got it that's very helpful. And then as a quick follow up on the international side I'm, just curious I'm sure the competitive landscape is different.
The growth challenges are different so what are the investments you're making to ensure that you win internationally and you've had already good success, but to replicate what you've done in North America. So maybe if you could just talk about the investment levels.
And what are some of the key initiatives to again ensure that you have success abroad, just like you've had in North America. Both on the P. M S and the U S side.
Yeah. So the biggest investment we made over the last six seven years has been in the products.
Because we wanted to make sure that the products are capable of competing effectively in international regions.
And we built a product so there'll be a conflict level easily adaptable to the particular requirements of various countries. While the core product remains the same so the first part of the answer to your question. The biggest investments we made in order to be more competitive and do better in APAC and EMEA, especially has been at the products. So that's why we.
Started so now the next stage of that evolution is greater investments in the services area.
We are doing one successful implementation after the other and in all kinds of business and our kind of <unk> enterprise software you need residents customers like do you need more and more reference customers and we do have a lot of reference customers without older versions, but we needed them in the newer versions. So that's what I mentioned that in spite of the South Korea is a big <unk>.
Sample of that they went live in all of modern weapons and they have been we had one of the top resorts to go live to.
To get started in the recent past. So we are now focused on implementations and generating more.
I referenced several customers in the Meanwhile, we are also increasing our marketing investments in international regions and we have recently expanded our sales staff, especially in the APAC region, where a couple of senior sales personnel one of them from one of our competing companies has joined US. So we are now investing in sales and marketing as well so they have gone.
And that order right first improve the products make sure they are capable of.
Being implemented and doing well in international regions. So that process is done now we are focused on creating successful implementations. There in parallel we are also increasing our sales and marketing and lists.
That's all very helpful again, congrats on the quarter and thank you for taking my questions.
Thank you Mike.
Speaker Change: And thank you.
And one moment our next question.
And our next question comes from Matthew <unk> from BT I E. Your line is now open.
Hey, good afternoon, and thanks for taking my question.
I guess as you look at specifically on the Pms side of the pipeline here.
I guess, how much of the build in sort of record levels that youre seeing there.
Would you attribute to just sort of the product now being more modern and more easily deployed and integrated with other systems.
And would you lend any.
I guess support to the more halo effect of having won the Marriott deal and sort of getting into opportunities that might not otherwise have materialized.
Yeah, Hi, Matthew Yes, the amount of the deal is definitely giving us credibility in the Pms area. No question right. Because now there was a time before when we were not included in many P. M as rfps and I can't blame customers for that but now with the Marriott daily have credibility and I would it's tough to exclude a sudden which is all we wanted.
Now in the Meanwhile, there are also two other factors Matt one of them is the fact that product is in a much much better state now.
And you cannot ignore it and once you see it you get very interested in it so that's one factor.
And a couple of other factors I would mentioned is number one the market is hungry for innovation.
So at least in auto opinion.
The providers, who have dominated the space the innovation speed has not been that great during the past.
A few years, so someone had to fill the innovation gap and customers find these products to be far ahead of the competition once they take a look at it and the biggest factor also is we built an ecosystem with BMS products. It's not only the core Pms. It's also all its about 15 to 20 add on experience and answered modules around it.
And many customers are preferring to reduce the number of vendors. They deal with it is not just a matter of making integrations easier. It is also a matter of pace of innovation like you come up with a good idea and golf our spa.
And do you want a corresponding change in the Pms, it's much easier for us to do all those changes and that makes it a lease and customers love the fact.
So I would say that the momentum that is building for us in Pms is attributable to all of those reasons. One the Marriott deal gave us credibility to the product is competitively at a much better state and we can answer yes to both being in the cloud and on premise third the industry as always.
Being a hog is become a hungry for those kinds of good products and fourth of course, the ecosystem of Pms products. We have built all of that is contributing to our momentum moment.
Okay very helpful and then.
Dave you mentioned that less than 10% of our services revenue is coming from.
I presume Marriott, but the contracts that subscription will be in later years.
That sort of the appropriate level, we should think about in terms of the mix over the next several quarters as you get closer to the rollout there.
Or should that uptick in I guess.
With that how would you correlate that with utilization rates across the services organization more broadly.
Yes, so I mean, it just stay less than 10% I mean, as you would imagine it will it will go up and down on a quarterly basis, but the far majority of our 90 plus percent is non large deal services working toward our subscription revenue, but yeah, it'll it'll go up and down, but we're not expecting it to get larger than 10%.
Over the next couple of quarters.
And utilization of the of the services team has been really well I mean, the best thing to point to there is the margin right I mean, we've seen over the last couple of quarters roughly.
A 10% margin increase in the professional services team and a lot of that is just more billable, obviously more billable work and less non billable work at the as we work through some of our.
Prior implementation efficiencies.
Efficiencies and just work through the backlog.
The crucial thing to keep in mind, Matt This would've been a record services quarter for us regardless, even without the influence of that.
Product development related revenue it would have been a record quarter for us and year over year, that's improved by 41%. So only a part of that can be attributed to this product development work that we're doing.
The main indicators here, Matt the crucial thing is it's an indicator that our new products have settling down well in the field and are becoming easier and faster to implement which is the biggest thing we take out of our services revenue quarter.
Great and then one last one quickly if I could squeeze it in as you look at the longer term.
I guess upside to margins that's potentially in the model here.
Any anything limiting further upside as growth continues on the topline.
Any major investments that you foresee having to make that could impede that or should we expect with appropriate topline growth a fair amount of leverage going forward. Thanks.
Yes, Matt with with continuing top line growth you should expect improving leverage across practically all of us.
<unk> expenses.
Categories, you should expect improving operating leverage as we go along but remember from a quarter to quarter I would not apply those rules, but on a year over year basis. This fiscal year. The next fiscal year and so on you should expect profitability levels to continue improving as our revenue levels improve.
And especially on the R&D side of it we have a fair amount of leverage I mean, it is not as if R&D is going to go down, but it's going to be tempered. The R&D increases are going to be tempered compared to the revenue growth and also our gross margin is improving now as recurring revenue becomes a higher proportion of our total revenue and our services revenue becomes a higher proportion is.
You should expect.
Overall, our profitability to continue improving as our topline revenue increases.
Great. Thank you.
And thank you and if you would like to ask a question that is star one again, if you'd like to ask a question that is star one one and one moment our next question.
And our next question comes from George Sutton from Craig Hallum Capital. Your line is now open.
Thank you Ramesh you mentioned that you grew subscription revenue was 29, 9% I would like to give you a sell side Roundup and say congratulations for your 30% growth.
Wanted to make sure given that both Marriott and Hilton put out.
Pretty positive indications about room growth today. So obviously the industry is growing very healthy, but with Marriott specifically is they're announcing these big room increase numbers can you just walk through how we think of that relative to what that means for your ultimate contract.
Yeah.
To convince up to some some of my manage that team members to buy a little bit more subscription should allow us to push towards the 30% Mark who had been happened jobs. It ended up at $29 nine.
But yeah that that trend continues to be good subscription revenue growth continues to be good all jokes apart. It is going well and we are encouraged by the direction now that I did listen to that CNBC snippet today.
The Marriott CEO, commenting on the rooms growth and all that means jobs is expanding opportunities alright nothing has.
What's changed as far as out of Marriott BMS agreement goes we continue to work towards it and both parties, both Marriott and it continued a very diligently monitor and manage the project and it continues to progress well, but all the extra room announcements Hilton on the Pos side Marriot on the Pms side means more opportunities for us.
That means if we execute well if we do well with the opportunities. We have today there are more opportunities to be had we are in a good industry that is doing well, where there is a dearth of innovation not much innovation going on so I think we are sitting on some very good opportunities are now that the major project work is done.
Can actually focus on customer acquisition and innovation and those kinds of activities. So I see that reported encouraging Josh and I see that report as more opportunities opening up for us, possibly if we continue to do it.
So in your prepared comments you mentioned that we think the pace of sales will only get better and you talked about it from a product perspective, and why why you do think things will get better can you talk about it from a sale.
Sales efficiency slash productivity or just go to market power.
<unk>.
Give us a sense of why things will get better from that perspective.
Yeah, so starting with sales efficiency, just some you know I think.
Total data for you.
New risks Ryder recently joined new reps the productivity has tripled.
In the nine months this year compared to the nine months last year.
So that's a good indication that as we continue to increase our sales staff and by the way we have in the hotels resorts section and managed foodservice providers.
In that vertical and in Asia, we have improved we have increased the number of sales staff.
And our experience with the new sales staff, who have joined US over the last couple of years is that their productivity triple this year.
They are currently contributing about 25% of overall sales this year. So far so the productivity that's continued to improve because they get excited when they see the new products. They typically come from within the industry. They have worked with our competitors before.
And there is just open up saying we have no idea that this kind of ecosystem of state of the art technology products out there. So that we continue to do and we will continue to improve sales the number of sales personnel.
And that productivity gains are continuing to increase and that's one reason why I think our sales will continue to improve.
Our go to market.
Marketing spend on all of that is increasing we took one step forward. This year and we will continue doing that as we go along because we are seeing good results. Our name is out there a lot more now and a lot more thought leadership contributions and.
There's a lot more participate in trade shows, especially in Asia, and EMEA and other regions. So all of that will continue to increase not what is crucial Josh is we need more feeding successes in order to establish a credibility and more and more customers talking about the success stories about us that's the next crucial step and that will be.
<unk> aided by adding more to sales and marketing.
Perfect. Thank you very much.
Thank you Josh.
And thank you.
And one moment our next question.
And our next question comes from Neil <unk> from Northland Capital markets. Your line is now open.
Good afternoon, and thank you for taking my question congratulations on a solid set of results here. Our roadmap is just the beginning of your prepared remarks.
Fiscal year 'twenty for year to date.
Let's see.
Last year.
So just wanted to ask for when you say hey.
Europe growth is that correct.
Correct me, so just to expand on that answer a little bit me Hal.
Slide 23, right, which is April 'twenty two to March 23 was a record fiscal year sales for us.
And this fiscal year, which is April 23, two March 24 at the end of three quarters at the end of Q1 Q2 Q3 is ahead of last year's space that is correct.
Okay, So basically you're saying accelerating.
Bill pay.
You are to finish themselves I call bookings, but youre seeing that accelerate.
Okay got.
Got it very quickly.
I'm sorry.
Independent of the deal.
Correct. It's now just to reiterate that that deal is not counted.
In any of our sales numbers as yet that we will start counting in sales when the individual properties start signing up with us. So that's not in any of our sales our backlog numbers that we generally report to you so to come back to the origin and fine fiscal year 2024.
When you compare Q1 to Q3 with fiscal year 2023, Q1 to Q3. This year is ahead and by the way in fiscal year 2023 was our best fiscal years after that.
Great Fantastic.
And Dave.
Thoughts on free cash flow for fiscal year 'twenty four now that we're basically 10 out of 12 months through fiscal year 'twenty four.
Yes, I mean, there's no change expectations in free cash flow and that being free cash flow less.
Capex over <unk>.
Certainly theres, a little bit more headwinds with timing of billing. This year. So most of the free cash flow typically we get some.
Pretty favorable working capital adjustments in Q3.
And it wasn't the case this year, but no concern there. It was just timing of billing, we build things earlier in the year and we.
We expect to collect on those next quarter. So.
No change the free cash flow I mean over a period of time free cash flow less capex.
Adjusted EBITDA less.
Less capex.
Yes.
Adjusted EBITDA less capex will be free cash flow.
Yes. So the guidance is around I think like 36 $37 million.
Wrapping around $9 million.
Talking about $27 million of free cash flow for fiscal year 'twenty four.
Talking about $27 million of free cash flow for fiscal year 'twenty four.
Yes, that's right and most of that will come just from working capital specifically related to accounts receivable.
Okay.
And you know I mean for the fiscal year 'twenty, one fiscal year 'twenty to fiscal year 'twenty $327 million of free cash flow each of those years, yet your adjusted a bit.
It's gonna have increased about $10 million.
Three year period.
On the DAU and MAU your working capital requirements are increasingly essentially done well. This year. If there was there was a lot more capex related to our office move we've talked about our office moves we moved offices and.
And our Chennai office, Alpharetta and Vegas, So it's kind of the there was just a lot more capex. This year related to office moves and there had been in the past and we and obviously we will be in these offices for a while so the capex should start normalizing back down next year.
Got it great.
And then look at your cash balance continues to accrete really nicely youre doing a small level of share repurchases, but I mean, it's nowhere close to a range of free cash flow generation and you've proven to have a very prudent M&A you did a nice acquisition three years ago, but I mean, it's nowhere close to the.
Three three years of free cash flow that you've generated.
Last three years there.
Why not go ahead and accelerate the rate of buyback.
Buybacks here.
So we're comfortable with our cash balance now and quickly it is not high enough to do anything significantly.
And we have acquisition opportunities will come to US now and then but we tend to be very conservative and we are very careful with what we look at and.
Organic growth is good for us. So we are not going to use inorganic growth as a crutch, but they're not opportunities that now and then can come to us. So we are comfortable with our current cash balance but as our.
Cash flow generation continues to accelerate all all options are open in front of US we will be prudent we will do the right thing for shareholders and at the moment, we entered the early stages of accelerating cash generation.
Current level of cash balance we are comfortable with in case that is it a rainy day or in case.
A good tuck in acquisition kind of thing comes out of the way, we are well positioned to take advantage of it.
Okay, great. Thanks for taking my questions.
Thank you.
And they in Q.
Okay.
And I am showing no further questions I would now like to turn the call back over to Rebecca for closing remarks.
Thank you Justin and thank you for all your interest and support best wishes to all of you for a very happy cheerful healthy and successful 2020 for our next earnings call will be in about four months from now around the middle to end of May when we will be reporting Q4, and full fiscal year 2024 with us. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
[music].
Okay.
Okay.