Agilysys Inc

NASDAQ:AGYS

Earnings Call Transcript 2023-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Agilysys’ Fiscal 2023 Second Quarter Conference Call. As a reminder, today's conference call may be recorded.

I would now like to turn the conference over to Jessica Hennessy, Senior Director of Corporate Strategy and Investor Relations at Agilysys. You may begin.

[Jessica Hennessy, Senior Director, Corporate Strategy and IR]

Thank you, Justin and good afternoon everybody. Thank you for joining the Agilysys fiscal 2023 second 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 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 continued effects of the COVID-19 pandemic and other global economic factors on our business, our ability to continue profitable growth, and the risks set forth in the company's reports on Form 10-K and 10-Q and other reports filed within 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.

[Ramesh Srinivasan, President and CEO]

Thank you, Jess. Good evening. Welcome to the fiscal 2023 second quarter earnings call. Joining Jess and me on the call today at our Atlanta headquarters is Dave Wood, our CFO.

Let me first cover sales and what we are seeing in the overall market before moving to revenue and other details. We measure sales or selling success based on annual contract value of sales agreements won and signed. After five consecutive quarters of solid good sales quarters as reported during the previous earnings call, this July to September, Q2 of fiscal 2023 was a great sales quarter, possibly representing the first phase of growth breakthrough we have been building towards for a while now.

Despite a slow start in July, Q2 was our highest sales quarter in more than six years. This good sales momentum has carried into October as well. While the gaming casinos and Europe EMEA sales verticals set new quarter sales records, we also saw good momentum in other verticals with the exception of Asia. Though fiscal Q2 was again slow with respect to Asia sales, the number of prospective customer meetings and product demo requests have increased significantly in Asia as well during the month of October.

Our general sales trends have picked up significantly since the beginning of August. We have not seen any noticeable effects of the negative macroeconomic headlines during the past few months. From our window, we are seeing ample evidence that the shifting demands and compelling hospitality industry needs for technology solutions will thrive and expand despite the macroeconomic challenges. We think this industry has been underserved for a long time from technology and functional innovation standpoints. It is seeing that opportunity that drove us to make the kind of research and develop investments that we did during the past five plus years.

Hospitality customers need now more than ever before, world class, cloud native, integrated, configurable, innovative software solutions to make operational management easier for their team members and create memorable experiences for their guests even when they're short of staff. Given the current and growing status of our state-of-the-art software solutions, which have been carefully crafted to fulfill the real and immediate needs of this industry, we are cautiously optimistic that our current sales momentum can be maintained and improved upon even if the economic headlines don't lend a helping hand during the short and medium term.

Our total addressable market remains huge relative to our size, and that should also help serve as an adequate shock absorber to possible upcoming macro-economic bumps in the role. We continue to increase sales and marketing investments as you can see in the GAAP P&L statement, operating expenses table in the earnings announcement. Q2 sales and marketing expenses increased 55% year-over-year compared to Q2 last fiscal year.

We are in the process of opening a Middle East office and have hired a local sales leader in Dubai recently. We see good medium-term potential in the Middle East region, which is already a big hospitality market and is gearing up for another major expansion. We have had precious little presence there till now. Many big prospective customers in the Middle East region are eager for good world-class technology provider alternatives, after relying on only a couple of vendors for several decades.

Our participation in the June HITEC Show in Orlando, the recent G2E Gaming Show in Las Vegas, the NoVacancy Show in Australia and Hospitality Stakeholder Conference in Dubai, the last two involved our attendance for the first time ever, and the customer responses to our recent innovations at these shows has given us further confidence that our current sales momentum can be sustained and improved further.

Modernized Visual One Hotel Property Management System, PMS, which we have rebranded as Versa, is now live across seven customer sites. Visual One PMS has had a presence among hundreds of multi-amenity resorts for several decades. We took it up for a complete ground up rewrite three to four years ago and completed this major task earlier this calendar year. The V in the new name Versa is a nod to the heritage of the old V1 or Visual One name, while the inspiration for the name Versa comes from this cloud native product’s current versatility to support both cloud SaaS and on-premise implementations of a single code base.

After not being one of the leading players in the PMS space for a long-time, it feels good to launch ourselves in the huge PMS global marketplace with not just one, but two, cloud native world class solutions. Stay, which is a cloud only product and Versa, which can support both cloud and on-premise installations of the same core base. This of course is an addition to LMS, which continues to stay strong in the domestic market, especially among bigger gaming casino hotels. All the 20 plus PMS add-on experience enhancer software modules are already or will be soon integrated with all these three core PMS products.

During Q2 fiscal 2023, July to September, we added 13, one-three, 13 new customers, of which, 12 were fully subscription deals. The deal size for new customer during Q2 was almost twice as big as the previous quarter. We also added 70, seven-zero, 70 new properties, which did not have any of our products before, but the parent company was already our customer. This total number of current parent customer, additional properties added during the past two quarters has been at the fastest pace since the start of the pandemic about two and half years ago. Business levels and the pace of technology decisions among multi property bigger customers are improving. Of the 83 new properties added during the quarters across new customers and new properties of current parent customers, more than 85% were either partially or fully subscription based.

With respect to new product sales, there were 75 instances of selling at least one additional product to properties which already had at least one of our other products. These 75 instances actually involve a total of 186 new products sold to current customer properties. Meaning some of these new product sales instances involve selling multiple products. So an average of 186 divided by 75, about two and a half new products sold per new product sales instance.

The average deal size this quarter across these 75 instances of new product sales is among the highest we've seen. In annual contract value terms this was our best quarter in three years for total value of new customers, new properties and new product sales combined. The number of new products installed per customer property sites has grown from about 1.6 to about 2.1 during the past two years. With about 25 additional software modules available in our sales toolbox now, we obviously have a long runway of growth available to us just based on our current customer properties.

One other interesting detail for you, the number of properties currently using four or more of our software modules has more than doubled during the last one and a half years. So one slight negative about sales this quarter was the addition of only five core PMS customer properties. We are not losing sleep over that, though we are only beginning to scratch the surface of the PMS addressable market in front of us. This quarter, fiscal 2023 Q2 was our best quarter in more than six years in terms of sales measures, annual contract value of PMS and related add-on attachment modules. The state-of-the-art PMS solutions are in the early stages of establishing themselves and we are clearly moving in the right direction. We are now competing with our PMS products in more multi-property, bigger opportunities than ever before.

As the number of reference customers on the newer state of the art core PMS products and additional software modules increases, our success rate with such opportunities will improve significantly. Increasing PMS sales will also help us sell more additional software modules because there are just more of them available for PMS than for POS. Across all products combined Q2 fiscal 2023 was our highest quarter ever with respect to subscription sales bookings measured in annual contract value terms and it was about 15%, one-five, about 15% higher than the previous best quarter, which was Q2 last fiscal year.

Now, on to revenue. Fiscal 2023 Q2 revenue was a record $47.7 million, the third consecutive record revenue quarter close to 26% higher than the comparable prior year quarter, but sequentially only slightly higher than Q1. We remain well on track to achieve our full fiscal year revenue targets. One-time product and services revenue combined at $18.7 million, that is 1-8, $18.7 million was 35% higher than the comparable prior year period, but down compared to the sequentially preceding Q1 fiscal 2023 quarter. We expect one-time revenue consisting of product and services revenue to remain in the $19 million to $20 million range each quarter for a few more quarters in line with our expectations going into the fiscal year that the overall revenue guidance was based on.

Having said that, services revenue and margin levels were disappointing this quarter. Services cost levels remained at the same level or slightly less than the sequentially preceding quarter, but services revenue was close to $600,000 less. Disappointing? Yes. But concerning? No. We are currently working through a tough transformation period, transforming from an older technology on premise-based software provider, to one which is based on an innovation driven subscription license model, which as all of us know is among the toughest transitions for an enterprise software organization to go through.

In addition, we are also transforming from a one or two product install services project management unit to one that handles complex multi-product integrated implementations routinely, while also dealing with far higher customer expectations. We also experienced a slower start to the quarter for project implementations. All that added up to a lower than expected fiscal 2023 Q2 services revenue and services margin levels. We expect both those metrics to improve gradually during the medium to long term.

One other interesting service-related detail for you, this fiscal 2023 second quarter was our highest quarter with respect to services sales bookings, apart from one quarter in calendar 2019 before the pandemic.

Fiscal 2023 Q2 recurring revenue grew to $29 million driven by just under 29% year-over-year subscription revenue increase over the comparable prior year quarter. In percentage terms, the 21% year-over-year total recurring revenue growth from Q2 of fiscal 2022 to Q2 of fiscal 2023 is also the highest such percentage increase in more than six years. Quarter subscription revenue has now grown to 49% of total recurring revenue.

Subscription revenue generated from add-on software modules, most of which were developed ground up during the past few years constituted 16%, one-six, 16% of total subscription revenue this quarter compared to 11% during the full previous year fiscal 2022, and 10% during the fiscal 2022 second quarter. Each of these innovative additional software modules, which are becoming increasingly better integrated with the core point of sales, property management and inventory procurement systems, has now stabilized in at least a handful of customer sites and providing good value.

Feedback on these additional attachment experience enhancive modules has been positive, particularly the reduced need for the customers to manage complex integrations across multiple software providers, increased operational efficiencies and incremental revenue generation opportunities enabled by these modules. Overall, recurring revenue was 5% sequentially higher than the previous quarter and about 20% higher than the comparable prior year quarter. We've added more than $1 million in recurring revenue sequentially quarter-over-quarter for the fourth consecutive quarter. There were only two such quarters in our software solutions for hospitality history before.

Adjusted EBITDA for the quarter was $7.4 million and 15.5, that is one-five, 15.5% of revenue, a slight improvement over the sequential Q1 quarter and in line with our expectations for the first half of fiscal 2023. Our overall profitability levels continue to be challenged by the current need to carry dual costs across R&D services and support for supporting our previous generation older products and the newer state-of-the-art technology innovations, which we are currently implementing across the globe. We expect our profitability levels to improve in the medium to long-term, as we make progress with this difficult transition and the need to support older product versions diminishes.

Free cash flow for the period was $2.3 million, slightly lower than the comparable prior year quarter of $3.2 million. Consistent with the normal pattern of our business, we expect free cash flow during the second half of each fiscal year to be better than the first half. Cash collections remained strong and at record levels. Capital expenditures will increase during the second half of the fiscal year, which is unusual for us. We planned before the pandemic to move to a world-class high-tech facility in Las Vegas, our largest single geographic market, and we expect to make that move sometime before mid calendar 2023. We will be working through the outfit process for this facility the rest of this fiscal year, costing one time additional capital expenditures.

With that, let me hand the call over to Dave. Dave?

[Dave Wood, CFO]

Thank you, Ramesh. Taking a look at our financial results beginning with the income statement, second quarter fiscal 2023 revenue was a quarterly record of $47.7 million, a 26% increase from total net revenue of $37.9 million in the comparable prior year period. All three product lines increased compared to the prior year period with product revenue up 44.5% and professional services revenue up 24.3% over the prior year. Recurring revenue was also up 20.8% with subscription up 28.6% over the prior year period.

Sales in fiscal 2023 Q2 are our highest for a single quarter and well over six years and included record subscription sales. Q2 FY '23 sales were 13% over Q2 fiscal year 2022, which was our highest sales quarter in the previous fiscal year. While up significantly over the previous year, one-time revenue consisting of products and professional services declined sequentially. Products revenue declined slightly mostly due to timing of delivery related to new sales. The product backlog increased 17% compared to last quarter and is north of 80% of record levels. Professional services revenue declined sequentially due to remaining implementation challenges, because of the breadth of our multiproduct installs as well as some delays in projects during July as a result of our extremely busy customer sites.

August through October have resumed to a normal implementation schedule. We continue to staff the team in order to meet higher revenue levels and decreasing our backlog as customers go live in multiproduct installations. Professional services sales increased by more than 25% compared to last quarter. And this increase along with the decline in services revenue drove services backlog back to new record levels.

Total recurring revenue represented 60.8% of total net revenue for the fiscal second quarter compared to 63.4% of total net revenue in the second quarter of fiscal 2022. Increased revenue from professional services implementations and product revenue coming back into the business drove the change in revenue mix compared to the prior fiscal year.

We are also happy with our subscription revenue growth, which grew 28.6% during the second quarter of fiscal 2023. Subscription revenue comprised around 49% of total quarter recurring revenue compared to about 46% of total recurring revenue in the second quarter of fiscal 2022. Add on software modules comprised 16% of subscription revenue in Q2 fiscal year 2023 compared to 10% in the comparable prior year quarter and continued to be a meaningful contributor to subscription revenue. As Ramesh mentioned, the penetration level of our add-on software modules still has significant room for growth within our existing customer base.

Moving down the income statement, gross profit was $29.4 million compared to $24.3 million in the second quarter of fiscal 2022. Gross profit margin decreased to 61.5% compared to 64% in the second quarter of fiscal 2022. The gross profit margin decrease was primarily due to product and professional services revenue coming back into the business, causing a shift in revenue mix.

Combined, the three main operating expense volumes: product development, sales and marketing and general and administrative expenses excluding stock based compensation were 46% of revenue, consistent with the prior quarter and in line with our FY ‘23 plan. As a reminder, share based compensation should remain in the 6% to 9% of total revenue for the entire fiscal year 2023.

Operating income for the second quarter of $2.9 million, net income of $3.6 million and gains per diluted share of $0.12 all compared favorably to the prior year second quarter gain of $1.1 million, $1 million and $0.02 per diluted share, respectively. Adjusted net income normalizing for certain non-cash and non-recurring charges of $6.3 million and adjusted diluted earnings per share of $0.24 compared favorably to adjusted net income of $4.6 million and diluted earnings per share of $0.18 in the prior year second quarter.

Fiscal 2023, second quarter adjusted EBITDA was $7.4 million compared to $6.3 million in the year ago quarter. As we discussed on the last call, we expected adjusted EBITDA would be lower in the first half of the fiscal year. Adjusted EBITDA during the first half came in slightly ahead of plan at 14.8% of revenue. Adjusted EBITDA this quarter was 15.5% of revenue.

Moving to the balance sheet and cash flow statements, cash and marketable securities as of September 30th, 2022 was $96.2 million compared to $97 million on March 31st, 2022. The primary reason for the cash balance decrease compared to the beginning of the fiscal year, despite our profitability levels were due to the timing of payments in Q1 related to bonus, dividend and inventory payments, which came due during the April to June timeframe. However, we generated roughly $1.3 million in cash during the second fiscal quarter.

Free cash flow in the quarter was $2.3 million compared to $3.2 million in the prior year quarter. As we stated in the past, free cash flow in the first half of the year is significantly impacted by working capital fluctuations, mainly due to amortization of our calendar year annual maintenance invoices, timing of bonus payment, along with paying down accounts payable as a result of higher inventory levels. In closing, we are pleased with our second quarter financial results and remain comfortably on track to meet our FY ‘23 financial plan.

With that, I will now turn the call back over to Ramesh.

[Ramesh Srinivasan, President and CEO]

Thank you, Dave. In summary, overall, we are pleased with our continued business progress. We think that there is a high probability that the significant increases in selling success we have enjoyed during the past close to three months marks the first phase of the growth breakthrough we have been building towards. This sales surge also drove the combined product recurring revenue and services backlog to close to peak record levels, giving us increased confidence and comfort in the revenue guidance provided at the beginning of the fiscal year.

We continue to expect fiscal 2023 annual revenue to be in the range of $190 million to $195 million driven by year-by-year -- driven by year-over-year subscription revenue growth of approximately 30%, three-zero, 30%. We also continue to expect EBITDA levels for the full year to be better than 15%, one-five -- better than 15% of revenue despite the first half of fiscal 2023 being less than that level.

We are continuing to invest in increasing our sales and marketing efforts to keep the current sales momentum going and to move it up to the next year. While our increased marketing efforts both in terms of quality and quantity, will take a bit more time to show measurable increased sales results, we are already seeing positive responses to the improved messaging, more focused market development, higher quality public relations efforts and more frequent attendance in trade shows. Some of them are seeing us participate for the very first time.

Despite all the pressures, the current transformation costs us and need to maintain increased cost levels to support the old and invest in and grow the new, we remain a disciplined growth business unit that will not get too far ahead of its skis at any point in time. We will continue to remain proficient at walking and chewing gum at the same time.

With that, let's open up the call for questions. Justin?

[Operator]

[Operator Instructions] And our first question comes from Matthew VanVliet from BTIG.

[Matthew VanVliet, BTIG]

Nice job on the quarter. I guess first off, would be curious to hear how the launch of and sort of rebranding of the Versa PMS platform is progressing out there? Do you feel like, you have some customers kind of waiting to see that fully deployed and get kind of proof-of-concept at other properties? Or is it just sort of the pent-up demand taking time to work its way through the sales cycle? And then any kind of next level or I guess layer deeper extra detail in terms of any geographic subversion in terms of U.S. versus Europe versus APAC in terms of performance of that product?

[Ramesh Srinivasan, President and CEO]

Yes. Hi, Matthew. Before I answer the question on Versa Matthew, one thing I want to confirm with you is, the reception for Stay, the demand for Stay, our cloud PMS product, also remains good. But let me focus -- since your question was about Versa, let me answer that.

So Versa I would say is ahead of schedule, Matthew. There are about seven customer resorts who have gone live and have all settled down quite well during the last six months or so. So from the beginning of this calendar year, we have been installing that product and it has settled down quite well.

Just to give you a snippet of information for you. If you take our V1/Versa sales, and we always measure sales in annual contract value like you know, this is our best sales quarter for that in 3.5 years, for just that product alone. So the reception is good and we are now getting some reference customers as well because seven of them have gone live and about half of them are now referenceable because they have settled down well. And there are a couple of pretty interesting global big PMS sales deals we are working on where Versa is the product being looked at. That is across APAC and across us U.S. as well.

So I would say, the short answer to your question, Versa is ahead of schedule. We are happy with the way it has progressed with the current installs. And for example, this sales quarter was our best V1 Versa sales quarter in about 3.5 years. So it continues to go well. But it is still a young product. It is only less than a year old. So we are focused on settling it down and improving it further.

[Matthew VanVliet, BTIG]

All right. Very helpful color. And then as you look at the, I guess, sort of like chain hotel or maybe urban hotel locations that were seemingly sort of most impacted by the pandemic, curious how you are seeing progress there? Are they looking to make investments now that business travel has picked up quite a bit, based staring the macro headwinds potentially impacting their business and getting a little skittish on future investments. Just curious how that segment of the business has been performing over the last couple months?

[Ramesh Srinivasan, President and CEO]

It's been performing well, Matthew. I wouldn't say, it's back to pre-pandemic calendar 2019 levels, but it is definitely at the best level that we have seen it be since the start of the pandemic. So the business from the hotel chains who are already our customer and a couple of similar customers has picked up and was one of the big contributors to us having our best sales quarter in six plus years. So the business from such chains has improved now, not yet back to calendar 2019 levels though.

[Matthew VanVliet, BTIG]

And then maybe one last one if I could. Adding to the leadership team over the last year, plus I think a lot of effort, and you highlighted the sales and marketing expenses going up. But, curious how you feel like the additions to the marketing team and just sort of the overall branding and visibility of the company out there is going so far? How much more work do you have to do, or is it now about execution on the sales front that you have gotten that better visibility in the market? Thank you.

[Ramesh Srinivasan, President and CEO]

Thank you, Matthew. It's going very well. The addition of Terrie O'Hanlon and the team that she has brought in in marketing is doing terrific work, right, the kind of quality work that we have never had before. To be honest with you, as far as this company is concerned, we have focused so much on the product part of it. We have just not paid enough attention to marketing at all. And Terri and her team have made a dramatic difference. And all the new sales staff and our new, VP of HRC sales, Andrea Fitz, have made a big difference. And HRC also had that is hotels, resorts, cruise ships, the vertical that we call HRC also had a very good quarter of in terms of sales this quarter.

So to address your question, the way growth always happens is you invest more and we have made a big investment in sales and marketing when you compare Q2 to Q2, fiscal ‘22 to fiscal ‘23 our sales and marketing costs have gone up by 55%. So we have done the investment. Now it's a matter of executing for the level of investments we have done, and that is going very well.

And once we reach the next stage of growth, we obviously will invest more in sales and marketing as well. So now it is a matter of executing on what we have invested, which is going well. And once we reach the next level of quantum growth, we will think about investing more in sales and marketing as well.

Now, some of the things that we have done, the top of the funnel that you measure in marketing, the marketing qualified leads and what we call sales accepted opportunities, SAOs, the top of the funnel is really doing well. The top of the funnel now is bigger than it has been before, but ultimately it's all about final sales results. This quarter the sales that we saw, I would attribute it a bit more towards the product improvements that we have done, if I have to give credit and also to the increased sales presence. The increased number of sales personnel we have, our increased participation in trade shows, not just in the U.S. in APAC and EMEA as well and market development outbound efforts, which have been more targeted. Both marketing campaigns and market development efforts have been very targeted.

So we think it's a culmination of all that, that we have seen a real pickup since August. The rest of the brand image changes us, really presenting ourselves as a more modern company, which was long overdue. Those positive effects will take a bit more time to show up really in our results. So currently our focus is, our sales marketing efforts are going better than ever before. Our demos today are really -- I mean orders of magnitude better than we've ever had before. Now it's a matter of also focusing on implementations, making sure those go better, having more reference customers for our newer products, and then the growth cycle will kick in and then we will continue investing in sales and marketing more as well. That's a long winded answer to your question.

[Operator]

[Operator Instructions] And our next question comes from George Sutton from Craig-Hallum, your line is now open.

[George Sutton, Craig-Hallum]

Thank you. Nice results. So I wondered, Ramesh, if you could just give us some quantitative numbers relative to the quota of carrying reps that you have relative to where you were. Any sense on the number of that batch, you mentioned a bigger funnel? Any update on your win rates? Are they consistent in that 70% ballpark? Just curious if you can give us some more numbers around the growth.

[Ramesh Srinivasan, President and CEO]

I don't know if we have exact numbers on that, George. I can only give you a qualitative answer about the number of sales accepted opportunities and marketing qualified leads increasing. We have not yet evolved to a stage where we can share those exact numbers with you outside.

But to answer the second part of your question, our win loss ratios continue to be good. So when you look at all our competitive wins, that is new customers, new products, and new properties, it still remains, at a – we win a majority of those deals. And if you just take new customers alone, we win a very good portion of those deals alone -- deals also, as long as we can get them to the demo stage, right? Once they reach the demo stage and they take a look at the products, the end-to-end functionality that we offer that -- stuff to compete against us now, once we get them to that stage, our win loss ratio continues to be very --

[George Sutton, Craig-Hallum]

I was particularly interested in what you said about Asia, given how challenging Asia's been for you. You mentioned that's picked up in October. Can you just give us a more specific sense of what you meant by that pickup?

[Ramesh Srinivasan, President and CEO]

Yes. There are two things that I was trying to convey, that I did not say explicitly. Number one, George, is the quality of the Asia sales team has improved dramatically. Some of -- several of the recent sales leadership additions we have made, we may not have announced it publicly, a sales leaders in Singapore, a sales leader in Australia, and then sales engineering strengths that we have added to Asia, they've all been excellent recruitment pickups for us.

So number one, it's a very strong sales team there. And I would say the first time since I've been here that the Asia sales team is really full and of high quality. That's number one. Number two, what we have noticed in October and probably including September as well, is the activity in Asia has really picked up. And there are at least a couple of reasonably big interesting opportunities that we are working on now that we feel we have a reasonable chance of winning are in Asia. And the number of opportunities, the demos, the conversations we have with new customers, prospective customers has increased significantly in the last couple of months compared to the previous months since the start of the pandemic. So that activity level is increased and we are hoping very soon you will -- we will see it in the sales numbers as well.

[George Sutton, Craig-Hallum]

Okay. Just one other question. And this would be for Dave, who's been too quiet on the Q&A. And I wonder when we talk about the need to support older versions of the product, can you just talk about what that means? Are you going to see step function reductions in cost over time as those fall off, or is it going to be a more gradually lower expense base over time?

[Dave Wood, CFO]

Yes. I think it's -- I mean it's consistent to what we've said in the past. I mean, R&D as a percentage of revenue will stay in the 26% to 28%, and starting next year you'll see a real gradual decline. So we kind of topped out around the 30% of revenue for R&D expense. It's coming down into the 26%, 28%. I don't think you'll see any kind of big step or cliff. It'll just incrementally get better as revenue grows. And, keep in mind we've also said we can handle another $50 million to a $100 million of revenue on this team. So it'll be a real gradual step down.

[Operator]

[Operator Instructions] And our next question comes from Nehal Chokshi from Northland Capital Markets.

[Nehal Chokshi, Northland Capital Markets]

Sorry. Here we go. You can hear me now. Thank you and congratulations on moving from good to great sales quarters. I know you addressed this in the business script, right, I think I just missed it. So Apologies. Could you just walk through again why the service business has not performed the way you had expected it to in terms of the delivery and limitations?

[Dave Wood, CFO]

Yes. So I mean, it's just a lot of it is just taking longer for these multiproduct implementations. And kind of the secondary factor was -- July was just generally a little bit slower over a month. I mean, we said on the call that, August through October have kind of returned back to normal. But the multi-product implementations are more challenging and we remain staffed to do a lot more billable work than we do today. But we pretty much just got a slow start to the quarter, and July revenue was a little bit lower than expected.

[Nehal Chokshi, Northland Capital Markets]

I see. Okay. And is this effectively the reason why you are only reiterating guidance as opposed to raising guidance, given that you have gone some good to great in terms of sales/booking quarters?

[Ramesh Srinivasan, President and CEO]

Yes. So Nehal, as far as the guidance is concerned, the fiscal year is going exactly as we planned, as we thought it would. And it is proceeding towards whatever assumptions we made, when we initially provided the guidance, those assumptions are working out. And it is gradually improving and we are beginning to do well. And we are confident now. We have just had the two, three good sales months and we are hoping that trend continues and that is to start up a new trend for us. And we are comfortable. We are confident about the guidance provided, and we are always realistic with whatever guidance we provide. This fiscal year is going along exactly the way we thought it would be. It is building up nicely for us.

[Nehal Chokshi, Northland Capital Markets]

Okay. So presumably in order to make this guidance, you don't need to build additional backlog here. You'd like to get drained as you start to see your fiscal year, correct?

[Dave Wood, CFO]

Yes. I mean, we feel really really comfortable with where our backlog sits today and the visibility it gives us into the second half of the year. And the way to look at the second half is, products in professional services kind of goes up and down amongst the quarter, but it will remain about in the second half about $38 million and then subscription will keep incrementally going up quarter-to-quarter. So the simple way to look at the second half is, one-time revenue being product and professional services will remain in that $37 million to $38 million range and recurring revenue will go up by about $4 million.

[Ramesh Srinivasan, President and CEO]

And we have to continue to add to the backlog, Nehal. It's a continuing story, right? Both, increased consumption of the backlog and adding to the backlog are both important functions. So we have to keep our focus and just continuing doing more of what we are doing well.

[Nehal Chokshi, Northland Capital Markets]

Okay. Understood. I think you already sort of spoke to this a little bit. But, you have added a lot of capacity and you talked about going from good to great sales quarters. Does this mean though that the productivity of the new sales rep is now at mature levels already or is there still a lot more ramping left to go here?

[Ramesh Srinivasan, President and CEO]

I think if you measure it in terms of sales success, right, not just -- in terms of sales activities, yes, the productivity levels are mature and they are all contributing. But in terms of sales success, right, how much each of them actually closes, depends not only on the sales team, but on the rest of us as well. And that we are focused on improving the number of reference customers we have on the new state-of-the-art products. All of them have been implemented, but we have to build the number of properties that use those products, and then you have to increase customers being delighted with them and willing to talk about that. So that part has to increase as well. That in turn will increase sales productivity in terms of how much sales is closed. So I wouldn't call that close to the peak, but the activity level is very good and we are very happy with how the sales team is progressing.

[Nehal Chokshi, Northland Capital Markets]

But to be clear, when you say the closing of the sales rate --

[Ramesh Srinivasan, President and CEO]

Nehal? He probably dropped off, right? Let me just, I'm assuming the rest of you can hear us.

[Nehal Chokshi, Northland Capital Markets]

Sorry. Yeah, no, I cut out for a second. The question was that -- Got distracted.

[Ramesh Srinivasan, President and CEO]

So let me pick it up from there, Nehal, and help you out. We can sell more with the current level of sales staff we have and the current level of sales and marketing spend. I think that's where you're going towards. That is a matter of us implementing better, increasing the number of reference customers and just making the current state-of-the-art modern technology solutions we have more spread out in the space so that more people come to know about it. So with the current sales staff, if that is your question, yes, we can sell, close more deals. And once that reaches the peak, we will add more to our sales teams as well.

[Nehal Chokshi, Northland Capital Markets]

Got it. And I now remember exactly where I was trying to go. The close rates remain good, it's just that the increased number of assets that you have generated hasn't gone through the full life cycle of the pipeline yet. And that's more or less what you're waiting to see if that close rates that your mature sales teams have had translates with the new sales team, is that correct?

[Ramesh Srinivasan, President and CEO]

That is correct. The additional sales member are also beginning to contribute well and we need to increase at bats, and the more successful implementations we have with the new products, the more at bats will come.

[Operator]

And thank you. And I am showing no further questions. I would now like to turn the call back over to Ramesh for closing remarks.

[Ramesh Srinivasan, President and CEO]

Thank you, Justin. Thank you all for your interest and attention. Please enjoy the holiday season and have wonderful travels. We look forward to talking to you again in about three months from now, when we will report on fiscal 2023 third quarter results towards the end of January. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.