Agilysys Inc

NASDAQ:AGYS

Earnings Call Analysis

Agilysys Reports Record Revenues and Increases Guidance for Fiscal 2025

Agilysys achieved a record revenue of $68.3 million in Q2 2025, a 16.5% increase from last year. The acquisition of Book4Time contributed $2.2 million, boosting subscription revenue by 36.6%. The company raised its fiscal 2025 revenue guidance to $280-$285 million and expects subscription growth over 38%, with adjusted EBITDA projected at 18%, up from 16%. Recurring revenue now constitutes 60.7% of total revenue. Despite some headwinds in product sales, positive momentum in point-of-sale bookings and professional services suggests strong potential for growth in the second half of the fiscal year.

Strong Revenue Growth Amid Challenges

In the second quarter of fiscal 2025, Agilysys reported record revenue of $68.3 million, reflecting a 16.5% increase from the previous year. Notably, recurring revenue grew by 21% year-over-year, driven primarily by a 36.6% increase in subscription revenue. Including revenue from the recent acquisition of Book4Time, which contributed $2.2 million, the company continues to build on its success, demonstrating resilience despite a 16.7% decline in product revenue. CEO Ramesh Srinivasan expressed confidence in the sustained momentum of their business despite not all areas performing optimally.

Positive Momentum and Growing Backlog

Agilysys has experienced a significant uptick in sales momentum, reporting near-record bookings and backlogs. The management highlighted the strong performance in professional services, which increased by 39.2%, indicating robust demand. Subscription backlog remains exceptionally high, increasing compared to previous fiscal quarters, supporting the outlook for continued revenue growth.

Modified Revenue and EBITDA Guidance

The company raised its full-year revenue guidance to a range of $280 million to $285 million, up from previous estimates, thanks in part to the acquisition of Book4Time. Subscription revenue is projected to grow by at least 38%. Moreover, adjusted EBITDA is expected to reach 18% of revenue, an increase from the earlier guidance of 16%, underscoring Agilysys's focus on profitability as it scales.

Challenges in Product Revenue and Market Conditions

Despite the positive growth in recurring revenue, Agilysys noted ongoing difficulties in product revenue stemming from a transformation in its point-of-sale (POS) solutions. This transition has temporarily affected sales dynamics, particularly as the integration of old and new technologies has posed challenges. However, post-Q2 results showed a 17% increase in POS bookings, suggesting recovery beginning in the second half of the fiscal year.

Acquisition of Book4Time: Opportunities Ahead

The acquisition of Book4Time has significantly expanded Agilysys's customer base, increasing the number of properties using at least one Agilysys product by 30%. This integration not only enriches their product portfolio but also opens avenues for cross-selling opportunities, particularly in spa and hospitality services. The management believes Book4Time will enhance its overall sales strategy by tapping into new segments within existing customer relationships.

Focus on Long-Term Growth and Innovation

Agilysys is committed to ongoing investments in product development and sales efforts, emphasizing the need for innovation in its product offerings to remain competitive. The management recognizes the market's total addressable potential is significantly larger than their current size. As the hospitality sector increasingly embraces integrated solutions, Agilysys aims to position itself as a leader in providing advanced technology solutions that enhance operational efficiency and guest experiences.

Earnings Call Transcript 2025-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to Agilysys 2025 Second Quarter Conference Call. As a reminder, today's conference 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, executive]

Thank you, Marvin, and good afternoon, everybody. Thank you for joining the Agilysys 2025 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 our ability to meet the provided guidance levels, our ability to increase sales and market share, our ability to maintain profitability levels 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.

[Ramesh Srinivasan, executive]

Thank you, Jes. Good evening. Welcome to the fiscal 2025 second quarter earnings call. Joining Jes and me on the call today at our Alpharetta, Atlanta headquarters is Dave Wood, our CFO.

Let me first cover brief details about the Book4Time acquisition we completed during the quarter, followed by a summary of our recent selling success, before moving on to revenue and other details.

We acquired the leading spa management software provider Book4Time and its excellent high-talent team a little more than midway during the quarter. Book4Time is the #1 enterprise SaaS solution for spas within hospitality, currently serving more Forbes 5-star-rated spas than any other competing product. Book4Time has enjoyed a good reputation in hospitality over the last couple of decades for its superior product and world-class customer service.

Book4Time's revenue is almost entirely based on subscription licenses. Their customer base is similar to ours, and includes many resorts, casinos, golf, private member clubs in more than 100 countries, and major brand hotel chains, including Marriott and Hilton, who are common customers with Agilysys, and also other chains like IHG, Hyatt, Accor and Four Seasons who are at best only partial Agilysys customers currently at a small portion of their properties.

In this narrative, we will do our best to highlight sales, revenue and other details separately applicable to Book4Time with the caveat that such differentiation is going to become increasingly more difficult during subsequent quarters. The process of integrating Book4Time into the fabric of Agilysys has moved along faster than we anticipated during the couple of months since the acquisition, and it is soon going to be difficult for us to attribute various business metrics separately to Book4Time and Agilysys.

Agilysys sales personnel now have an additional spa management product to sell to various customers where applicable, and Book4Time sales personnel in coordination with the bigger Agilysys sales team have an entire smorgasbord of hospitality software products they can sell to their current customers and to new ones in their sales territories.

As you will see from the numbers we discuss during this call, we are having considerable success selling additional products to current customer properties. Our win-loss ratio remains high when we reach the product demonstration stage in our sales process. The Book4Time acquisition by itself in 1 stroke has increased the number of customer properties currently running at least 1 of our software products or modules by as much as 30%, 3-0, by as much as 30%.

Less than 15%, that is 1-5, less than 15% of Book4Time's customer properties are common with Agilysys prior to the transaction. One of Book4Time's significant strength is a strong sales team which is experienced and accomplished in selling to the global hospitality industry. The Book4Time sales team was eager for a broader base of products to sell to hospitality even before the acquisition happened. They have certainly come to the right place now and have an entire ecosystem of state-of-the-art technology based and feature-rich set of software products and modules they can sell into more or less the same buyers they are used to selling to.

Overall we are happy we got this opportunity to add a world-class professional team and product that further enhances our improving competitive positioning within hospitality.

During the quarter, around the same time almost to the date of the Book4Time acquisition, we welcomed Mr. Joe Youssef to our executive team as Chief Commercial Officer. Joe comes to us after a close to 2-decade tenure at Amadeus Hospitality focused on hotel technology products like CRS, business intelligence, sales and catering and PMS, where he led the expansion of that division by a couple of orders of magnitude.

When Joe joined Amadeus, its hospitality division was generating annual revenue of less than $10 million. And by the time he left about 18 years later, it was knocking on the doors of being close to a $1 billion business unit. We are obviously thrilled to add such as senior accomplished growth mindset officer to our team, who shares our DNA of employee and customer-centric, disciplined profitable growth. Perfect executive at the right time.

On to a few details regarding our recent selling success. We measure sales in annual contract value terms. One slight additional nuance, we actually measure it in net annual contract value. The net represents our conservative practice of counting only additional incremental sales generated in transactions with current customers. That's an important distinction as we continue to see more growth in subscription sales from our current customer base.

Excluding additional sales generated for the Book4Time product since late August after the acquisition, fiscal 2025 second quarter was our best ever July to September second quarter of sales and the second best of any sales quarter. Sales levels this quarter were excellent for the gaming casinos, resorts, hotel and cruise ship verticals in the U.S. and for overall EMEA.

Sales in the U.S. food service management vertical continued to be disappointing, and APAC had a challenging quarter following a strong sales quarter during Q1.

Fiscal 2025 second quarter July to September sales of property management systems, PMS, and related add-on experience enhancer software solutions, surpassed first quarter sales and also matched our previous record established about 9 years ago when we were selling mostly chunky perpetual licenses.

We are seeing a clear trend of increasing sales in the PMS category for more than a year now. Fiscal 2025 second quarter PMS and PMS-related product sales nearly doubled year-over-year compared to the second quarter of last fiscal year. The number of field implementations of the fully modernized set of PMS solutions are increasing, giving us a growing number of reference customers who are willing to discuss their success stories with others in the industry.

One recent example of the power of integrated PMS solutions was at a major popular resort where the combination of express check-in/checkout kiosks and our core PMS solution reduced guest checking wait times during peak holiday check-in times from a few hours to a matter of minutes. The value of such powerful customer testimonials about the recently modernized PMS solutions cannot be overstated.

Fiscal 2025 April to September was the best ever first half of a fiscal year with respect to sales, ahead of last year's record first half pace by a comfortable distance. We have a long runway of sales growth ahead of us across all sales verticals. The sales verticals where we are performing well can sustain a lot more growth due to current lower market share levels. And the verticals which are still not performing well will scale great heights once we turn the corner with the newer version of the products now available to sell and increased market awareness.

Our market share remains low in most of our sales verticals. And we are at only the early innings of effectively bringing to all relevant marketplaces an entire ecosystem of hospitality-focused products, each of them based on state-of-the-art cloud-native technology that can also perform well on-premise for the many hospitality customers who still prefer on-premise implementations.

We are expanding our marketing efforts, have greatly increased our thought leadership presence, are establishing a good presence in a lot more trade shows, have increased our global quota-carrying sales personnel strength by 50%, that's 5-0, by 50 persons as at the end of September compared to a year ago, and added to the executive team and accomplished senior sales and commercial leader who has an established track record of driving growth, is well respected and wills great influence in the hospitality industry.

Having said all that, the present truth is much of the hospitality industry has not discovered the new Agilysys yet. The Lajitas Golf Resort in Texas recently implemented 14, that is 1-4, 14 modern technology-based Agilysys software solutions. And all of them went into production use over a 2-day window, replacing several competitive solutions.

The hospitality industry in general is just not used to such realities yet, and it is going to take us more time to be more convincing about what can be accomplished today with an integrated ecosystem of modern solutions.

We do not see the possibility of any external factors slowing us down. If the global customer base and hospitality experiences any slowdown due to the economy, interest rates, elections, inflation or any other external factor, we believe that will only increase the need for technology that can help improve operational efficiencies, and provide ways to enhance guest experience and guest loyalty without increasing operational costs.

During Q2 of fiscal 2025 July to September, we added 18, that is 1-8, we added 18 new customers and all but 1 of them were subscription-based. Each of these new customer sales wins involve an average of 5.4 products per deal, which is a new high for us, and was driven by PMS new customer wins which featured an average of 13, 1-3, 13 products per deal.

In addition to the 18, 5 new customers signed up for the Book4Time spa product from the time of the acquisition during the third week of August. We also added 85 new properties, which did not have any of our products before but the parent company was already our customer. Of the 108 new properties added during the quarter across new customers and new properties of current parent customers, about 90%, 9-0, about 90% of them were either partially or fully subscription-based.

In addition, there were 102 instances of selling at least 1 additional product to properties, which were already running at least 1 of our other products. These 102 instances involved a total of 247 new products sold to current customer properties. The average deal size across these 102 instances of new product sales was about 14%, 1-4, 14% higher than the sequentially preceding Q1 quarter. Annual contract value of new product sales sold to current customer properties during the first half of fiscal 2025 increased 84% year-over-year compared to the first half of last year.

Now on to revenue. Fiscal 2025 Q2 revenue was a record $68.3 million, the 11th consecutive record revenue quarter. 16.5%, that is 1-6, 16.5% higher than the comparable prior year quarter. $2.2 million of the $68.3 million was attributable to Book4Time, meaning it would have been a record revenue quarter even without revenue from Book4Time.

Overall revenue during the first half of fiscal 2025 was $131.8 million, 15%, that is 1-5, 15% higher than revenue during the first half of last fiscal year.

Fiscal year 2025 Q2 recurring revenue grew 21% year-over-year and 8.9% sequentially quarter-over-quarter, to a record $41.4 million. Recurring revenue year-over-year increase of $7.2 million and sequential quarter-over-quarter increase of $3.4 million are both record best increases. This recurring revenue increase was driven mainly by a 36.6% increase in subscription revenue, which grew to $25.1 million during fiscal 2025 Q2. This $25.1 million included $2.1 million of subscription revenue attributable to Book4Time since the acquisition. Without the Book4Time contribution, subscription revenue year-over-year growth would have been 25.2% during Q2 and 28.5% during the first half of fiscal 2025.

Second quarter fiscal year 2025 was the third consecutive quarter of year-over-year subscription revenue growth of 30%, 3-0, 30% or higher.

Subscription revenue constituted 60.5%, that is 6-0, 60.5% of total recurring revenue, compared to 53.6% Q2 of last year. Subscription revenue is becoming a significant portion of our total recurring revenue now and consistently one of our fastest-growing revenue lines. Annual maintenance revenue, which is about 40%, 4-0, 40% of total recurring revenue currently, will remain a low to no-growth revenue line as the preference for subscription-based agreements and cloud-based implementations by both new and existing customers is driving the vast majority of our sales currently.

Excluding Book4Time, Subscription revenue from add-on experience enhancer software modules, most of which were developed during the past few years, constituted 21.1% of total subscription revenue, the highest level reached so far. These add-on software modules working with each other, and with the core POS, PMS and inventory procurement modules, are adding immense value to customer operations. When customers like the Lajitas Resort in Texas buy multiple such modules from us, along with core POS and PMS products, not only do they get the benefit of far less integration work they have to manage across multiple vendors, but a lot more valuable than that, they also get the benefit of a far higher pace of future innovation.

When there is a new innovative feature set we have to create that cuts across multiple software modules, it is far easier for customers when we can get that coding done in multiple integrated products simultaneously in the subsequent release of each of them than for customers to go about convincing multiple vendors about the need for such an enhancement and dealing with various different product road map time lines.

The hospitality industry is only beginning to embrace such distinct advantages.

Excluding Book4Time, subscription revenue from profit management systems, PMS and PMS-related add-on modules, during Q2 grew by 32% year-over-year, while subscription revenue from point-of-sale, POS, and POS related add-on modules during Q2 grew by 25%. Our POS business continues to work through a tough transition phase as we discussed last quarter. The good news is implementations involving only recently modernized versions are going well, and we expect to get our point-of-sale, POS, mojo back in short order.

Our current POS modernized and unified solution set is vastly superior and carries tangible competitive advantages. The POS project we completed at the Prestige, a well-known Las Vegas property a couple of months ago, replacing a major well-established competitors who just could not match the benefits of our modernized POS solution set brought to the customer is one such recent example.

We have worked through a tough phase with our POS business for the past several quarters and are cautiously optimistic that we are turning the corner now.

Sales of point-of-sale POS and POS related modules during fiscal 2025 July to September second quarter was 17%, 1-7, 17% higher than the sequentially preceding Q1 quarter and was the best quarter of POS sales in about a year, giving us increasing confidence that we have worked through the low point of our POS business challenges related to the period of transformation from old to new technology.

At a major theme park international site, the fully modernized POS solutions, which were installed recently at one food outlet, helped increase gas transactions by more than 15%, 1-5, by more than 15% through the use of self-service kiosks, and also drove a 5% increase in upsell rates while freeing up their employees to provide more attention to guests.

These kinds of numbers when applied on huge high-volume theme parks and other resort sites make a real difference to customer bottom line results. Driving additional revenue while also increasing guest satisfaction levels is an extremely valuable combination for customers. This was also one of the fastest executed software projects this customer has experienced, thanks to the power of modern technology solutions which enable relatively faster implementations and easier ongoing maintenance and management.

Product revenue, which has been affected by the POS transformation from old to new difficulties during the past few quarters, improved slightly sequentially from Q1 to $10.5 million, but was still 16.7%, that is 1-6, 16.7% less year-over-year compared to Q2 last fiscal year.

Fiscal 2025 Q2 July to September services revenue was a record $16.3 million, that is 1-6, $16.3 million, 39.2% higher than the comparable prior year quarter. Services revenue continues to be a good indicator of future subscription growth.

Services and subscription revenue, our 2 main growth engines, comprised 60.6%, that is 6-0, comprised 60.6% of total revenue in the second quarter, compared to only 51% of total revenue during Q2 last fiscal year. These 2 revenue drivers continue to support strong top line growth.

Fiscal 2025 Q2 being the second best sales quarter on record, drove combined product recurring revenue and services backlog levels, not including Book4Time, to 94% of peak record levels. Product backlog improved slightly but remains far short of previous peak levels. Services backlog grew to record levels with customers continuing to sign up for projects faster than implementations are getting scheduled.

Recurring revenue, and within its subscription revenue backlog, is at about 90%, 9-0, about 90% of record lifts.

Sales momentum, strong in Q2 and even better -- strong in Q1 and even better in Q2, along with the Book4Time acquisition, has been positive for subscription revenue growth. As a result, our expectations for full year -- full fiscal year 2025 results have increased, enabling us to raise all 3 guidance levels. We now expect the full year revenue range to be $280 million to $285 million. Subscription revenue growth to be better than 38%. And EBITDA as a percentage of revenue to be 18%, that is 1-8, to be 18%, higher than the 16% expectation at the beginning of the fiscal year.

With that, let me hand over the call to Dave for further color.

[Dave Wood, executive]

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. Second quarter fiscal 2025 revenue was a quarterly record of $68.3 million, a 16.5% increase from total net revenue of $58.6 million in the comparable prior year period. One-time revenue, consisting of product and professional services, was up 10.2% over the prior year quarter, while recurring revenue was up 21%.

As a reminder, the Book4Time acquisition during August added $2.2 million in total revenue. Without Book4Time, total revenue increased 12.8% over the prior fiscal year despite a 16.7% decrease in product revenue.

We continue to see significant positive momentum in the business. Our sales momentum remained strong with Q2 bookings at near record levels. Our backlog is also at near record levels, and we have significant visibility into revenue for the remainder of the year.

Product revenue will continue to be the biggest headwind in the business and post the biggest challenge during the second half of the fiscal year. However, POS bookings are improving and up 17% over the prior quarter, with product bookings at the highest level in the last 4 quarters, providing additional confidence and acceleration through the second half.

Professional services increased 39.2% over the prior year quarter to a record $16.3 million, with services gross margin at 32.4%. We expect the service margin to remain in the high 20% or low 30% range during the next few quarters as we work to catch up to sell velocity. Professional service backlog once again increased to record levels despite record professional services revenue.

Total recurring revenue represented 60.7% of total net revenue for the fiscal second quarter, compared to 58.4% in the second quarter of fiscal 2024. Fiscal 2025 second quarter subscription revenue grew 36.6% over Q2 last fiscal year. Subscription revenue comprised 60.5% of total recurring revenue, compared to 53.6% of total recurring revenue in the second quarter of fiscal 2024.

Subscription revenue increased sequentially $3 million from the first quarter of fiscal 2025, which included $2.1 million in Book4Time subscription revenue. Subscription growth when excluding Book4Time was 25.2% for the quarter, with the first half of the year 28.5% higher than the first half of fiscal year 2024. This was the second best quarter for subscription sales when excluding Book4Time. Subscription backlog remains high and increase over our FY '24 and Q1 FY '25 exit rates.

Moving down the income statement. Gross profit was $43.2 million, compared to $35.1 million in the comparable prior year quarter. Gross profit margin was 63.3%, compared to 59.9% in the second quarter of fiscal 2024. Overall, total gross margin should remain just north of 60% for the full fiscal year.

Combined, the 3 main operating expense line items: Product development, sales and marketing and general and administrative expenses, when excluding stock-based compensation, were 45.6% of revenue in the fiscal 2025 second quarter, compared to 46.2% of revenue in the prior year quarter. Excluding stock-based compensation, product development decreased to 20.3% of revenue during Q2 of fiscal year 2025, compared to 22.8% of revenue in the comparable prior year.

General and administrative expenses remained steady at 12.7% of revenue, while sales and marketing increased from 10.8% of revenue to 12.5% of revenue.

Operating income for the second quarter of $4.1 million, net income of $1.4 million, and gain per diluted share of $0.05 compares favorably to the prior year second quarter gain of $3.6 million, $4.1 million and $0.16. The reduction in net income was primarily due to tax expense in the quarter along with lower operating income associated with onetime costs for the Book4Time acquisition. Adjusted net income normalizing for certain noncash and nonrecurring charges of $9.5 million and adjusted diluted earnings per share of $0.34 were both improvements over the prior year second quarter results of $6.6 million and $0.25.

For the 20,5 second quarter, adjusted EBITDA was $12.2 million, compared to $8.1 million in the year ago quarter. We are pleased to see our profitability levels being well ahead of the original FY '25 plan with adjusted EBITDA coming in at 17.9% of revenue.

Moving to the balance sheet and cash flow statement. Cash and marketable securities as of September 30, 2024 was $54.9 million, compared to $144.9 million as of March 31, 2024. The cash decrease was related to the portion of the Book4Time acquisition paid with cash on hand. As a reminder, we added $50 million in debt for the Book4Time acquisition. Subsequent to Q2, we paid down $12 million of outstanding debt, leaving the current debt balance at $38 million.

Free cash flow in the quarter was $5.9 million, compared to $2.5 million in the comparable prior year quarter. As we've said in the past, adjusted EBITDA and free cash flow continue to be good proxies for health of the business over the course of a fiscal year. Due to working capital fluctuations, our free cash flow tends to be significantly better during the second half of each fiscal year compared to the first half.

With the inclusion of Book4Time revenue, we are increasing our top line revenue guidance to $280 million to $285 million with subscription growth of at least 38%. Our profitability levels are coming at above our original plan, and so we are increasing our expectations to 18% full year adjusted EBITDA as a percentage of revenue, ahead of the 16% full year guidance provided earlier.

In closing, we are pleased with our Q2 fiscal year 2025 financial results and the solid business fundamentals for future revenue growth. With that, I will now turn the call back over to Ramesh.

[Ramesh Srinivasan, executive]

Thank you, Dave. In summary, we are happy to force good results and increase guidance levels despite several areas of the business not yet firing on all cylinders. We are confident the point-of-sale POS business will move up a couple of years from its low point during the past few quarters now that we have moved fully to modernize solutions for new implementations and gone past the challenges of having to work with combinations of old and new technologies at various implementations.

We are growing the list of reference customers who are gaining significant value from the ecosystem of modernized property management system, PMS solutions. Book4Time is a great addition to our team, talent level and portfolio of products. The number of customer properties running at least 1 Agilysys product increased by about 30%, 3-0, 30% during the quarter because of the acquisition.

The hundreds of Book4Time properties currently running no other Agilysys product opens up another major area of possible sales and revenue growth.

We are not seeing any challenges to our business momentum due to any external factor. Our combined product recurring revenue and services backlog levels are at close to record levels, giving us good visibility into the second half of the fiscal year.

We continue to increase investments in sales and marketing while maintaining a healthy level of spend on products and innovation.

In conclusion, to repeat what we have said before, while our overall business remains in excellent shape, we are only beginning to scratch the surface of the kind of progress and growth possible in this industry for a well-run technology vendor with a modernized integrated set of products driving must-have business functions at customer sites. And the size of the total addressable market remains orders of magnitude bigger than our current size.

With that, Marvin, can we open up the call for questions, please?

[Operator]

[Operator Instructions] Our first question comes from the line of Mayank Tandon of Needham.

[Mayank Tandon, analyst]

Ramesh, Dave and Jeff, I wanted to just clarify the guide first and foremost. So the subscription revenue guidance that goes from 27% to 38%. Just to be clear, how much of that is Book4Time versus what is organic? And then related to that, Ramesh and Dave, would be what is embedded in terms of the growth for both point of sale and for PMS, and the second half guide?

[Dave Wood, executive]

Yes. So the guidance is there's about $10 million in this year's guidance on the subscription. So the 38% would be a little over 25% organic, and then the remainder would be the Book4Time acquisition.

And as far as the point-of-sale guidance goes and property management, we're not guiding to that. But we expect the property management to be growing faster than overall subscription guidance because we're starting from a much lower base. And then the POS should take up from here as well.

[Mayank Tandon, analyst]

Got it. Okay. That's actually clear. And then I just wanted to ask about margins too, Dave. You're obviously outperforming margins pretty consistently over the course of time. Just want to understand, given the scale in the business and some of the leverage in the model, I would think margins would actually ramp up from here. So anything that we should note in terms of why second half margins might be not scaling faster just given the leverage in the model that's inherent, just given the mix shift as well and some operating leverage? So any just factors you could point out just why margins would not be better than the first half for the second half?

[Dave Wood, executive]

Yes. I mean we think margins will be consistent. I mean most of it is related to the product revenue coming back into the business. So we're at a pretty high mark right now at 63% gross margins. As product continues to increase through the year, that will pull down margins.

So I mean, we're definitely seeing operating leverage in our OpEx and, obviously, our subscription revenue. But the slow first half start to the year kind of attribute to a lot of the better-than-expected EBITDA percentage. So we expect gross margin to come down a tick or 2 from the 63% where we're at today.

[Operator]

Our next question comes from the line of Matt VanVliet of BTIG.

[Matthew VanVliet, analyst]

I guess when you look at the success of Book4Time so far that it's been in the portfolio, you mentioned some amount of opportunities that you've already uncovered. But curious what the expectations are, what kind of market size you've sort of calculated in terms of their existing customers that you can sell some of your own products into maybe short term, obviously, long term maybe the entire stack can go into some of those.

But where do you think there's the most opportunity? How big of an opportunity do you think that is? And then, what are the key factors in terms of the timing around that impacting the model?

[Ramesh Srinivasan, executive]

Matt, it is difficult to specify an exact timing, Matt. But the way to think through that is we are having obviously terrific success in what we call new product sales, that is selling additional products to properties that have at least 1 other product already there. And that new product sales has increased 84% year-over-year when you compare this first half with last time's first half.

So fundamentally, the larger picture is, Matt, that when we can get customers to the demonstration stage of seeing the products, we are having very good success. And it is a higher probability for us to get current customers with whom we have a relationship to take a look at the ecosystem we have built.

Now you extend that to the Book4Time properties, literally hundreds of properties, it's well more than 1,000, that are Book4Time properties that do not have a single other Agilysys product, and we have a sales -- a Book4Time sales and customer success team that has built good long-standing relationships with those customers.

So if you extend the new product sales success we've been having with our own properties who don't have too many Agilysys products, we think we'll have good success convincing a growing percentage of Book4Time customer properties to just take a look at the ecosystem we have built. And we think that will lead to good success.

Now the Book4Time product itself has a lot of growth ahead of it because the market share in the overall spa market is still nothing overwhelming. And also spa is a growing presence in hospitality resorts and in terms of guest satisfaction and all that, spa is a growing presence. And in terms of getting introduced to hospitality properties, spa is a pretty good side door. It's not a small door. It is a pretty good side door to get into hospitality properties, and then convince those customers about looking at our other products.

So all told, Matt, revenue synergies is a big part of the upside we are looking at. But can't put a particular time on it. It will continue to enhance over time. And in fact, even during these 2 months, there is one particular deal we have sold where our membership module was bought along with the Book4Time's spa product. That will continue to grow month after month, quarter after quarter.

[Matthew VanVliet, analyst]

Very helpful. And then as you look at sort of the early returns from this deal and how those are, I guess, measuring up to the initial diligence around the deal, how does this impact your M&A strategy going forward? Do you anticipate maybe being a little more acquisitive than you have over the last couple of years now that the product at the core level is all modernized and sort of in a full cloud-based structure? How should we think about this deal relative to future M&A?

[Ramesh Srinivasan, executive]

Yes, Matt, the way I think I would recommend we think about this deal is that the Resort Suite acquisition close to 3 years ago was very successful for us. And the Book4Time acquisition is showing all signs of being successful. It's too early to judge, it's only 2 months down, but it's showing all signs of being successful.

And we think the reason for that is that we have been very careful. We've been conservative, we've been patient, we've been opportunistic. We can't be considered an acquisitive company if we are not going after these acquisitions. But when opportunities come, we are very careful with our analysis and we take our time, which I think has to do with the fact that we have done 2 successful acquisitions so far.

So that attitude is not changing. We are going to remain conservative. We're going to remain patient. We're going to remain opportunistic, keep our eyes and ears open. And we have a couple of product gaps to fill in our ecosystem. Geographic expansion is always possible. And now that we have a completely state-of-the-art modern set of ecosystem products, yes, the market expansion, market share rollup, those kinds of opportunities also are attractive to us.

But the reason why we have been successful so far, we think, is because we've been careful in not going after everything. And I think that attitude will remain.

[Operator]

Our next question comes from the line of Nehal Chokshi of Northland Capital Markets.

[Nehal Chokshi, analyst]

Congrats on good results, raised guidance. and the acquisition. Talking about the acquisition first. In the spa bookings space, what are the other companies out there that also provides spa booking with tight integration with PMS and POS systems like Agilysys spa software does as well as Book4Time's software does?

[Ramesh Srinivasan, executive]

Yes. Nehal. so it is fair to say, I'm trying to be conservative here, Nehal, it is fair to say that between Book4Time, which was far and out the #1 spa product in the industry, and Agilysys spa, which is a little bit new to the space but has been completely modernized and it's state-of-the-art cloud technology and all that, which is introduced, say, 3, 4 years ago. Between the 2 of them, it is fair to say that those 2 are the leading products in the spa market. There is one other product that is also pretty widely used, but not of the most modern technology that you can find. .

So when you combine cloud-native modern technology, along with a very rich feature set, it's fair to say that Book4Time and Agilysys Spa are the 2 leading products in the industry, and we are happy to have both of them with us now.

And in terms of spa products being tightly integrated, most of them are well integrated to POS, PMS. I don't think that is a differentiating factor. But in terms of the state-of-the-artness of the technology and the feature set within spa, these are the 2 leading products, Book4Time and Agilysys Spa, and we are happy to have them both. Integration to POS/PMS, everybody offers. That's not a differentiator, Nehal.

[Nehal Chokshi, analyst]

I see. Okay. When we looked at the spa market, it looked like Mindbody is a really big player in that space, but not necessarily in the hotel spa space. How do you guys view that competitor? And how will your PMS and point-of-sale competitors likely react to acquisition as well?

[Ramesh Srinivasan, executive]

Yes. Good point. We are only competing for the spa market within the market space that we are focused on: hotels, resorts, cruise ships. That kind of area is all we are focused on. We are not going after the general open-to-all spa product.

So within this hospitality, hotel, resorts, casinos, that kind of ecosystem, these are the 2 leading products, Book4Time and Agilysys Spa. And in this kind of a marketplace where we are focused on, the fact that both core POS, core PMS and the spa product comes from 1 vendor has its integration advantages. Though the other products are also integrated with POS and PMS. Our pace of innovation will be much higher just because we own both ends of that functionality space.

But we are only focused on the hospitality space. We are not going after the general spa business.

[Nehal Chokshi, analyst]

Okay. And then, Dave, last quarter, you guys lowered your overall revenue guidance due to the shift towards commodity products not needing the Agilysys terminals here. Does that continue to be a dynamic that potentially is weighing on total revenue? Because it seems like the Book4Time acquisition should bring more than the $5 million raise that you're raising the overall guidance by?

[Dave Wood, executive]

Yes. I mean the product revenue has and will continue to be a challenge throughout the year. I mean when we originally gave the guidance we were expecting to be down a little bit in product revenue, and we're trending -- last quarter, we said we're trending in the 5% to 10% reduction range. And at the moment, it's, like last quarter, it looks like we're trending closer to 10% down in products. So yes, most of the lower top line revenue numbers directly associated with the product revenue mix.

[Nehal Chokshi, analyst]

So what's the other portion related to if there's -- if it's not all product related?

[Dave Wood, executive]

Yes. I mean it's mostly -- I mean, with the product revenue had stayed consistent with last year, obviously, we would have been above our range at this point.

[Operator]

Our next question comes from the line of Brian Schwartz of Oppenheimer Company.

[Brian Schwartz, analyst]

Ramesh, one question on the acquisition. I'm just trying to understand the go-to-market strategy between the 2 sales forces. Is it your plan over whatever period of time to unify the 2 sales forces? Or are you planning to keep them both discrete?

[Ramesh Srinivasan, executive]

Yes. So I think the short answer to the back end of your question is we will be unifying both the sales forces. At the moment, the go-to-market strategies are a bit different because Book4Time is a smaller single-product company for the most part. So they have been very successful doing remote selling even to global customers, but they're selling 1 single product. So the approach, the go-to-market strategies have all been very different but very effective. .

While we, our sales is a lot more complex sale because we are trying to sell multiple products. Sometimes it is only 1 core product, but most of the time it is multiple products and a lot more complex sales and book for time has been used to so far. But over the next 6 months or so before we start the next fiscal year, we will be unifying the 2 sales forces as best as we can because now the combined sales force will have an ecosystem of products they can sell.

Now we are going to do our best, Brian, not to lose the aggressiveness, the advantages of the Book4Time sales force while we do that unification. But it is fair to think that over the next 6-month period, it will become a unified sales force going into fiscal 2026.

[Brian Schwartz, analyst]

And Ramesh, I wanted to ask you how you're feeling your comfort level with your services capacity. Because you're giving us a lot of feedback and data points that your backlog is near record levels. But then again, there's guidance that the service margin may come down in the second half of the year. So how are you feeling about the capacity and the ability to implement that backlog in a timely manner?

[Ramesh Srinivasan, executive]

We are feeling good about our services capacity, though we continue to increase it. So our services personnel capacity, you compare this September and to last September, and has gone up by 20%. And since September, we have continued to hire. So we are continuing to expand our services team.

But one thing to keep in mind, Brian, the services backlog number is going to increase as the business becomes better. As the business becomes not better -- bigger, right? Bigger businesses have bigger backlog. That's just the nature of how it works.

So when you think about a metric, if you make up a metric of backlog to revenue, services revenue ratio, it has been fairly consistent over the last 1.5, 2 years or so. If you just take the backlog and compare it to services revenue, it's around the same kind of ratio.

Now the backlog increasing is not just a matter of services personnel. It also is dependent on customer readiness. These are complex multiproduct installs. Customers sign for it, sign for a purchase of multiple systems, and then they realize there is more work to do, there is more preparation work to do. So those kinds of things also tend to increase the backlog and postpone implementations.

Now the positive aspects are, we are increasing services resources. They have gone up by 20% in the last year and will continue to go up in the next quarter or 2 because that business is expanding. The newer versions of the product have now been in the field for a while, the modernized versions, and they are becoming easier to install. So we are spending less nonbillable time on those implementations. So that also in a way is increasing services personnel strength that can focus on projects.

So overall, yes, we are watching the backlog increase. We are not extremely worried by it. It is in proportion to the services revenue going up. But we are taking steps to keep that backlog in control as best as we can. But please keep in mind, it's not all dependent on us. It's also dependent on customer readiness for products.

[Brian Schwartz, analyst]

And last question, 1 for Dave. Just in terms of the EBITDA guidance raise, is any of that have to do with a Book4Time? Or maybe another way of asking it is, is Book4Time, is that EBITDA accretive to the business this fiscal year?

[Dave Wood, executive]

Yes. It will be -- their profitability levels post acquisition are pretty similar to ours. I mean there's some slight nuances where they spend a little bit more on sales and marketing, a little bit less on product development. But it was breakeven before the acquisition and now it's slightly above our adjusted EBITDA even today. And we would have raised guidance on EBITDA with or without the Book4Time acquisition. .

[Operator]

Our next question comes from the line of Stephen Sheldon of William Blair.

[Stephen Sheldon, analyst]

So it sounds like you're bringing down the full year organic subscription revenue expectations you touched versus the prior guidance. I think it was over 27% before, now it's closer to 25%. So can you just talk about what's driving that? Is that tied to the slowdown in APAC that you mentioned, lower POS trends versus what you'd assumed? Just any color there on what changed versus the prior guidance.

[Ramesh Srinivasan, executive]

Yes. Stephen, so when you look at the first half subscription results FY '25 of a 28.5% year-over-year increase during the first half, was in line with expectations, if not slightly above that. So the first half subscription revenue of 28.5% growth worked out quite well even not including the Book4Time subscription revenue increase. .

Now the second half, you are correct, there were some concerns about that. And all of that almost is attributable to this POS transformation difficulties that we are going through that affected product revenue and that also affected POS sales during the last few quarters. Now Q2 was a good pickup in POS sales, but the effect of the last few quarters of going through this whole POS transformation from old to new and a combination of old and new parts has had an effect. But cannot exactly predict. The second half might still work out quite well based on our initial fiscal year expectations. But you're right, the concerns have been caused by this POS transformation process.

[Dave Wood, executive]

Got it. That's helpful. And then just in the APAC, I guess is there anything to call out there in terms of the market backdrop becoming more challenging? Any changes in execution? Or is that more just timing?

[Ramesh Srinivasan, executive]

I wouldn't say just timing. There are -- we are having up and down challenges in APAC. The deals are taking a lot more time. The good news is we are working on a lot more sizable opportunities in APAC than we ever have done before. Bigger customers are taking a look at our current ecosystem of products.

But there are bridges to cross there before we establish ourselves well. So it's a little bit up and down in APAC, and it's all a matter of establishing ourselves as a name, as a technology vendor who can be trusted who truly has the best state-of-the-art products today, who truly has an integrated set of system of products.

We are going through -- we are doing a lot of thought leadership work there. We have increased our marketing efforts. We are in the process of establishing ourselves. And we are competing against a couple of pretty big, well-established competitors there who have been well established for a couple of decades.

So it's a process that we are going through. APAC is a bit frustrating. It's a bit up and down. But we are making progress. We like the opportunities we are working on now.

[Operator]

Our next question comes from the line of George Sutton of Craig-Hallum.

[George Sutton, analyst]

Ramesh, I wondered if we could get a little more clarity on the Book4Time sales opportunity for your current customers. So you had mentioned and specifically called out a couple of large players like IHG and Accor. Given that the salespeople are selling remotely, is it realistic to think that they might have some permission at the level of some of these larger players? Or is this really more of a smaller or unit level type of an opportunity?

[Ramesh Srinivasan, executive]

Yes. The larger players, not only Book4Time George, but also Joe Youssef, who has joined as the Chief Commercial Officer, have a lot of influence, know a lot of people that you couldn't have said about Agilysys before. So those -- in terms of introduction, opening doors and all that, there are a lot of opportunities with the bigger players.

But the bulk of the opportunity has to do with independent, similar-sized resorts who are our customers, and a whole lot of other hotels and all in between. And there are literally hundreds of such properties. It's not only the sales team, it is also their customer success team that has very close relationships with a whole bunch of customers, with whom now introducing our products and talking to them about the POS, PMS and other products we have are definite good opportunities for us. That will continue building over the next 3, 6, 12 months. It is not just a matter of the bigger change.

[George Sutton, analyst]

Understand. And just one other for me. Coming off of the G2E show, and you obviously had a lot of demos, had a lot of meetings with customers, potential customers, any surprises there? Anything that you would want to kind of pass along at this point to us?

[Ramesh Srinivasan, executive]

No negative surprises. If any surprises, George, they were all positive. Because as an enterprise software professional, you're always ready for tough conversations with customers in those shows. And it was completely absent of tough conversations. Virtually all the conversations were positive.

First of all, it was a very busy positive show for us. We were busy from the beginning till the end. And all the conversations were about helping customers with their operations, about their interest in our ecosystem. It was literally night and day from 3 years ago when it was always mixed with some complaints, certain things we can do better and all that. This was almost uniformly positive. So that was a good positive surprise in the show. Busy and positive is a great combination.

And a lot of follow-up conversations have been happening since the G2E show. And we are feeling very, very positive. Any of these customers get together -- where customers get together are surprising even us as to how positive they are.

In fact, that's one of the reasons, George, for our next user conference, not a trade show, but for our next user conference, where hundreds of customer users are there, we are going to invite you and all the other analysts who are covering us, to come and attend the user conference. We feel confident enough that you will think much better of us, George, if you just sit in and talk directly to customers as well. So please mark it on your calendar. We look forward to seeing you at the next user conference, George.

[George Sutton, analyst]

Having done those, I definitely see why you're successful. So congratulations.

[Ramesh Srinivasan, executive]

Thank you, George.

[Operator]

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Ramesh Srinivasan for closing remarks.

[Ramesh Srinivasan, executive]

Thank you, Marvin. Thank you for participating in this call and for your interest in Agilysys. Please enjoy the holiday season. Merry Christmas and happy holidays. We look forward to talking to you again in about 3 months from now. Thank you.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.