Agilysys Inc

NASDAQ:AGYS

Earnings Call Transcript 2021-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2021 Third Quarter Conference Call. As a reminder, today's conference maybe recorded.

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

[Jessica Hennessy]

Thank you, Liz and good afternoon, everybody. Thank you for joining the Agilysys fiscal 2021 third quarter conference call. We will get started in just a minute with management's comments, but before doing so, let me read the safe harbor language. 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 in the forward-looking statements could include the continued effect of the COVID-19 pandemic on our business and the hospitality industry, the success of any measures we have taken or may take in the future in response to the COVID-19 pandemic. The timing of the reopening phase of the hospitality industry 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.

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 Chief Executive Officer]

Thank you, Jessica. Good afternoon and good evening, everyone. Welcome to our fiscal 2021 third quarter earnings call. Joining Jessica and me on the call today is Dave Wood, our CFO. For the third consecutive quarter, I am participating in this call from our Las Vegas office, while Dave is in our Atlanta office, and Jessica is in Dallas. We hope to get back to our pre-pandemic routine and conduct the next Q4 and fiscal year-end earnings call sometime around mid-May with all of us in one place in our favorite Atlanta conference room. We hope all of you and your families and colleagues are doing well during these challenging times.

Knock on wood, we've managed to work through the past 10 months with a steadfast focus on the health and safety of all our employees and everyone we serve with good results. The work-from-home arrangements have worked out well with no compromise on our pace of product innovation and level of customer service.

During this time, many of our employees have continued to travel to customer sites when customers have requested such help. For many different reasons, we are eagerly looking forward to a return to near normalcy, hopefully no later than the second half of this calendar year. The global hospitality industry continued to face difficult headwinds due to the pandemic as calendar 2020 wound down to an end, impacting our sales and revenue levels.

Fiscal 2021 Q3 revenue grew about 7% sequentially over Q2 to $36.7 million, a 13, that is 1-3, a 13% year-over-year decline compared to Q3 of fiscal year 2020. Product and services revenue grew 16 and 13, that is 1-6 and 1-3. Product and services revenue grew 16% and 13%, respectively, sequentially compared to Q2, but remained at 63% and 70% year-over-year of the levels achieved during Q3 of last fiscal year.

Both product and services revenue levels continue to also be affected by the reluctance of customers to accept product deliveries and start services implementations they have already signed up for. The number of implementations our services teams have been involved in per month has remained steady for the past couple of quarters, with only slight improvements during recent months.

Despite Q3 revenue being year-over-year $5.3 million less than Q3 of last fiscal year, GAAP gross profit was $3.1 million higher. Almost all of the $3.1 million increase in gross profit can be attributed to the amortization of previously capitalized software development costs, which affected Q3 of last fiscal year and was not applicable this Q3. That would imply gross profit was flat year-over-year when we compare Q3 of this year versus last year, despite a $5.3 million revenue decrease.

Loss of gross profit from about $7.2 million of decrease in products and services revenue was compensated by gross margin gained from the $1.9 million increase in year-over-year recurring revenue.

Given the pandemic caused hospitality industry business headwinds we have battled with during the past three quarters, the $1.9 million increase in year-over-year recurring revenue is remarkable. Our current pace of adding about $0.5 million per quarter sequentially to recurring revenue should increase significantly once business levels return to normalcy and growth resumes.

While on the subject of recurring revenue, recurring revenue reached a new quarterly record level of $22.8 million or 2.4% sequential increase over Q2 and a 9% year-over-year increase compared to Q3 of last fiscal year. Subscription revenue growth levels continue to outpace all other revenue categories, growing 18, 1-8, 18% year-over-year and reaching 41% of total recurring revenue, despite considerable pressure from an increased level of property closures, resulting in a significantly higher level of customer churn and associated loss of recurring revenue and a string of requests from customers for more one-time recurring fees relief and credits.

Despite all those challenges, the overall year-over-year recurring revenue growth of 9% and subscription revenue growth of 18% are good indicators of the mission-critical nature of our software applications and the continuing steady migration of our customer base to subscription-based licenses.

Thanks to our improving pace of product innovation and the increased availability of newly created cloud-native SaaS applications, which address current compelling hospitality industry needs, we have been successful in maintaining good subscription recurring revenue growth year-over-year.

Such modern software applications are already playing a major role in helping hospitality operators reopen safely and will become must have during the full reopening phase and beyond to make guest experiences attractive, safe and comforting. Superior customer service from technology partners like us has never been more important for hospitality customers and that fits well with what has become our natural DNA during recent years.

Now with respect to sales success levels. Sales measured in annual contract value of agreements one signed and closed during the quarter remained at only about two thirds of prior fiscal year levels. This has been a consistent factor throughout the nine months of this fiscal year compared to last year.

After a major dip in April and a promising recovery during the June, July timeframe, sales success has remained more or less stagnant since then. Sales related product demos continue at a healthy rate with many customers, both big and small impressed, surprised and even intrigued by our product innovation pace and our ability to be an effective end-to-end modular and integrated hospitality software solutions providers, but the decision making process and the final technology investment actions continue to be very delayed.

We remain optimistic that there will be a point in time this calendar year, when the pent-up demand for better technology will break through in a big way, but not sure yet when exactly that will happen. One silver lining in our sales success during the past couple of quarters has been SaaS subscription licenses related sales holding up well in comparison to last fiscal year levels with only slight year-over-year declines.

As of the beginning of this calendar year, we ended our seven-year partnership with a major point-of-sale product reseller, who had represented us in certain market segments in Europe and in all of Australia. This action was based on our preference to handle all aspects of customer interaction, including sales, implementation and support directly, which is our normal practice in all other regions.

We have had a direct presence in the EMEA region for many years now. We took steps to strengthen our team in EMEA recently, and we are in the process of establishing a direct presence in Australia, starting with a couple of recent new hires.

During the quarter, we increased our R&D resource strength by 9%, bringing the total number of R&D resources to about 850, that's 8-5-0. Other R&D resources who have accepted their job offers are in the process of joining us during the coming weeks and months. We expect R&D strength to reach about the 1,000% mark sometime before June, and then stay at that level for the foreseeable future. We don't expect to require any further significant R&D resource increase for the next 100 million or so of additional revenue growth during the coming years.

We expect to increase our sales and marketing spend starting later this calendar year. By then, our product sets will be where our aspirations have been at for a long time now and we will then be all set to launch a new, more sales and marketing-driven growth oriented business phase backed up by an experienced and sizable R&D team and implementation services and support personnel who are dedicated to a world-class service culture.

During the quarter, we made substantial progress with our core product improvement efforts. While the task of improving products never really gets completely done in an enterprise software company dedicated to continuous improvement like us, the huge core product modernization projects we got started on a few years ago, should be getting completed one-by-one at various times throughout this calendar year. We expect to see absolutely no trace of any old technology in any of our end-to-end hospitality software solutions product demos beginning the second half of this calendar year.

One of the crucial implementations recently completed, featured the first completely modernized InfoGenesis POS terminal we have released in multiple decades, which can now support devices across all major operating systems, like Windows, iOS, and Android, all from a single code base. This will open up a significantly large hardware and payment device selection for our customers to choose from. A few weeks ago, this new IG 12UX modernized terminal went live on iPad devices at a prestigious restaurant in Hong Kong. This is the very first time we've installed an IG POS terminal on iPad devices.

We expect this calendar year to feature several such crucial groundbreaking implementations of our various modernized cloud SaaS native on-prem capable core products, setting ourselves up for a promising future. Apart from the core products, the many add-on software modules continue to perform well from a sales standpoint as an increasing number of customers have adopted them to work with the new contact lists and other guest requirements.

New modules like rGuest Express Mobile check-in/checkout and the remote ordering application OnDemand, continue to see strong sales activity. Other major new software applications like Agilysys golf, spa and sales and catering have also seen increased customer interest. Beyond all such details, what I have found to be most encouraging during the past few months has been the positive customer reactions to our various end-to-end guest journey product demos.

As we work hard to establish Agilysys as the leading modern technology-based solutions provider for the hospitality industry, there is an increasing acknowledgement of our improved standing by many customers, including major corporations who have known us for quite a while.

Being able to deliver on multiple products all across the guest journey has now put us in a unique position to offer features like single itinerary visibility for both guests through the booking engine rGuest Book and for customers across many of the property management system and other display touchpoints they use frequently and aspects like the common profile capability, which provides algorithmic-driven recognition of a guest and their likes and dislikes and upcoming plans to use various resort amenities and provide guests the kind of personal acknowledgement offers and promotions that will play a big role in increasing guests loyalty in the future.

We have had three different customers sign up for the newly launched Agilysys Engage software module just in the past six weeks. Agilysys Engage helps customers manage their loyalty offers and promotions across all the amenities they provide to guests. This product has the enormous advantage of being aware of all the transactions and data from all the other point-of-sale, property management system, golf, spa, and other modules, and bring everything together for a customer to help them manage their various marketing initiatives. It will be difficult for many of our competitors who do not have the strength of being end-to-end with their offerings to compete effectively with such product offerings.

During Q3, we signed sales agreements, which added eight new customers, 42 new properties, which did not have any of our products before, but the parent company was already our customer and there were 53 instances of selling at least one additional product to sites, which already had one or more of our other products. These numbers are consistent with the number of such wins we've seen during the earlier two quarters this fiscal year.

Included among the sales wins during the quarter or a little bit before or after where the following listed in no particular order. One, a brand new state-of-the-art property in Orland Park, Illinois, the Araceli Hotel & Resort plans on opening its doors mid-2021 with the comprehensive solution set of Agilysys Stay PMS and InfoGenesis POS for their core operations, while also utilizing rGuest Express Mobile check-in/checkout, digital keys, rGuest Book, and Agilysys Pay to provide contactless capabilities and great experiences for their guests.

Number two, the 5-Star Colorado-Wyoming Luxury Retreat, Three Forks Ranch selected Agilysys Stay PMS, InfoGenesis POS and Eatec inventory and procurement management core products, as well as additional modules Agilysys Pay and Agilysys Seat to help improve their guest service.

Number three, after several successful years running their resort and casino with on-premise LMS/PMS, Graton Resort and Casino located in Rohnert Park, California upgraded their LMS solution to the cloud and added the booking engine rGuest Book to manage their operations.

Number four, Crystal Springs Resort is an expansive New Jersey property, offering a variety of amenities and after several years of success with our InfoGenesis POS solution, as well as previous additions of Agilysys Seat and OnDemand, their ownership decided to complete their suite of Agilysys products to offer their guests the best possible experience by adding rGuest Book, replacing a competitive PMS system with Visual One PMS, including Mobile check-in/checkout and SMS messaging for guests communications and in addition, Agilysys spa and sales and catering.

Number five, located on a private peninsula on the Chesapeake Bay, the Tides Inn luxury resort selected our new cloud-native Agilysys spa and golf along with retail and rGuest Book to manage guests activities throughout the resort.

Number six, the La Valencia Hotel located on the Pacific Coast with panoramic views of La Jolla Cove and just up the street from a prestigious golf course selected InfoGenesis POS and Agilysys Pay to process transactions across their property.

Number seven, a very new – very special new customer World Central Kitchen, are not-for-profit organization dedicated to providing meals to areas in need after natural disasters selected Eatec, our inventory and procurement application to manage their needs across the globe.

Eight and last and certainly not the least, we have made substantial improvements to our cloud browser-based data analytic software module Agilysys Analyze, launching a licensable professional version, which pulls in point-of-sale, property management system and other third-party data into a single data lake to help customers make comprehensive data-driven decisions from anywhere at any time. This professional version was purchased by four major customers just during the last four months. We expect Analyze to become another significant contributor to our increasing subscription recurring revenue base in the future.

Now moving on to financial guidance. While various pockets of the industry continue to show signs of strength through the pandemic and are performing quite well, the overall global hospitality industry remains very challenged and continues to struggle with the ongoing impacts of the prolonged pandemic.

Since around the June calendar 2020 timeframe, it is unfortunately been a story of two steps forward and two steps back, showing promise of improvement at various times, but quickly retreating due to the distressing state of this pandemic. We believe the light at the end of the tunnel has been ignited now, but the timing on when we will reach that light is still unclear. We expect the environment to continue to remain tough during at least the next couple of quarters with this upcoming January through March Q4 fiscal quarter being potentially the most uncertain that we have faced yet. So far in January, we have seen no improvement in our sales success close rate.

Good promising product demos continue to happen to various customers with excellent customer feedback about our products, integration, end-to-end capabilities, excitement around the contact list, data management, common profile and single itinerary type possibilities, which will help them greatly, but no change in the decision-making slowdown we have struggled with for more than three quarters now. Given the tough circumstances, we expect revenue during Q4 to be only sequentially flat compared to Q3. We anticipate resuming annual guidance beginning with fiscal year 2022.

Now turning to profitability levels achieved during the quarter. Adjusted EBITDA for Q3 fiscal 2021 was $7.6 million, about 10% higher than our original expectations and 135% year-over-year higher than Q3 of last fiscal year. We made good progress during the past few quarters with improving our internal operational efficiencies. Ensuring our focus areas do not get too scattered, operating efficiently, learning to do more with less while also not compromising on our crucial world-class customer service goals, being accountable for getting things done in as higher quality level with efficient use of resources as possible, all that and more constitutes a profitability mindset that we are becoming a lot better at.

We took on that culture shift challenge a few years ago, and now we are quite close to where we want to be. We had a few residual one-time cost saving items, which positively impacted the Q3 quarter. We expect adjusted EBITDA during Q4 to be around the $7 million level, just under 10% lower than Q3, mainly due to a couple of pending cost items coming back into the business and additional hiring, mainly in the product development R&D area.

Though the past few quarters have been extraordinarily challenging, we like our competitive and other business positioning now. We look forward to getting through the next couple of quarters with positive resilience and then actively participating in what should be a major growth phase for the industry. There is significant pent-up demand out there and we have done the hard and smart work during the past couple of years to deserve to gain a good chunk of it.

With that, let me hand over the call to Dave for further color on our financials and other business details. And I will then be back for a few closing remarks before opening up the call for questions. Dave?

[William Wood, Vice President and Chief Financial Officer]

Thank you, Ramesh. To echo Ramesh's comments, despite these challenging times, we remain confident in the strength of our business and specifically our team members who are continuing to push the company and innovation levels forward despite unusual or remote working conditions.

With respect to our financial results, beginning with our income statement. Third quarter fiscal 2021 revenue was $36.7 million, a 6.7% sequential increase over the fiscal second quarter of 2021 with all three product lines increasing sequentially over the prior quarter. The third fiscal quarter represented a sequential 13.3% increase in professional services, a 15.9% increase in product revenue, as well as a 2.4% increase in recurring revenue over fiscal second quarter of 2021.

As expected, third quarter fiscal 2021 revenue was a 12.7% year-over-year decrease from total net revenue of $42 million in the comparable prior year period due to the current economic environment resulting in lower product and professional services sales.

Recurring revenue continues to increase on the back of our subscription growth and represented an increase of 9% over the prior year. Total recurring revenue represented 62.3% of total net revenue for the fiscal third quarter, compared to 49.9% of total net revenues in the comparable prior year period. Recurring revenue of $22.8 million is at record levels and $1.9 million higher than the prior year.

We are also very pleased with our subscription revenue growth, which grew year-over-year 18.1% during the third quarter of fiscal 2021 to a record $9.3 million. Subscription revenue comprised about 41% of total recurring revenue compared to 37.7% of total recurring revenue in the third quarter of fiscal 2020.

Add-on software modules that build out our product ecosystem beyond the core point-of-sale, property management and inventory procurement offerings are adding scale quickly with roughly 23% of sales deals and value terms during the third quarter, containing at least one of these products compared to 3% in the same period last year. We continue to add well over $1 million in ARR for these new products in each quarter of fiscal year 2021.

As for product and services revenue, we currently have a backlog of hardware, software and services that remain at healthy levels. Sales continue to remain in the 60% to 70% range year-over-year as the hospitality industry continues to struggle with shutdowns and travel restrictions. Given the uncertainty hospitality operators continue to face, it remains difficult to predict when sales will return to normal booking levels. The timing of the return to pre-pandemic booking levels is anticipated to coincide with the return of competitive rip and replace type wins.

We believe these decisions will return when customers are comfortable making the big technology investment decisions that will come with the reopening phase. The uncertainty lies with when exactly this will begin.

Moving down to the income statement. Gross profit was $24.2 million compared to $21.1 million in the third quarter of fiscal 2020. Gross profit margin increased to 66% compared to 50.2% in the prior year period. This gross profit increase, despite a $5.3 million decrease in revenue was primarily due to a couple of factors.

Recurring revenue was a larger portion of total revenue and unlike the third fiscal quarter of 2020, this quarter was not impacted by roughly $3.1 million in capitalized software amortization cost. Overall, product mix shift to higher margin recurring revenue offset a reduction of revenue and third-party products and services.

Moving to operating expense. We had additional stock-based compensation that resulted in a significant increase in GAAP operating expense due to the valuation of stock appreciation right options ran into a broad array of key personnel this fiscal quarter. No additional options were granted to the CEO or Chairman of the Board during this cycle. The extent of the options granted to the management team and other crucial technical and non-technical key employees were higher than has been normal for us during the past, but were far less than in normal other software and technology public companies.

We have significantly expanded our talent base during the past couple of years, both in quality and increased number of resources. Our executive management, senior leadership and other key teams have remained stable during the past few years and that has been one of the reasons for our good performance, despite serious industry headwinds faced during the recent quarters.

We have hired the best and the brightest often competing against other technology organizations, not dependent on the hospitality industry and therefore not as badly effective. We want to retain employees through the most challenging time the hospitality industry has ever experienced.

Our medium and long-term future is going to be based on the software we have created during the recent two to three years and retaining the personnel that have been involved in the creation, implementation, sales and support of such software and technology and general management of the company is going to be an important element of our future growth and success.

Though the extent of the options granted was nothing too extraordinary, the stock-based compensation expense turning out to be much higher than expected was mainly due to the options valuation being driven high due to the timing of the shareholders approval and the share price performance during that time.

This is a much larger than usual non-cash charge, which will linger in our GAAP operating expense for the next four to five quarters, as we continue to recognize the expense according to the appropriate accounting standards. This has no operating impact on the company and will have little to no effect on other metrics, like adjusted EBITDA, free cash flow and adjusted EPS.

Looking further at operating expenses, excluding charges for legal settlements, impairment and restructuring, severance and other charges, the third quarter saw a slight sequential increase over Q2 fiscal 2021. Compared to the prior year period, operating expense saw 3% increase to $24.5 million from $23.8 million. This year-over-year increase in operating expense was due to a non-operating cash increase of $5.3 million related to stock comp – stock-based compensation.

Without the impact of stock-based compensation, our normal operating expenses decreased by $4.6 million over the prior year due to lesser incentive compensation and other more permanent cost-saving initiatives. Product development, sales and marketing and general and administrative expenses were 63.3% of revenue this quarter compared to 53.1% of revenue during Q3 of fiscal 2020. Without the impact of increased stock-based compensation, product development, sales and marketing and general and administrative expense were 48.8% of revenue this quarter.

Our net loss of $2.5 million is a slight improvement to the prior year third quarter loss of $2.6 million, while loss per share for both periods was consistent at $0.11. Adjusted net income and adjusted diluted earnings per share both showed significant improvement over the prior year third quarter. Adjusted net income of $5.5 million compares favorably to $1.3 million in the prior year third quarter and adjusted diluted earnings per share of $0.23 compares favorably to $0.05 in the prior year third quarter when normalizing for certain non-cash and non-recurring charges.

For the 2021 third quarter, adjusted EBITDA was $7.6 million compared to $3.2 million in the year-ago quarter. The adjusted EBITDA improvement continues to represent the overall health of the business and the available cost styles for sustainable long-term profitability.

Moving to the balance sheet and cash flow statement. Cash and marketable securities improved by $6.9 million in the third fiscal quarter of 2021. Cash collections has consistently been a highlight of our business in a tough environment. On an absolute dollar basis, we have accumulated 92% of the cash collections through the same period of fiscal 2020 on a lower revenue base. We continue to be pleased with our ability to manage our liquidity as we navigate these challenging times.

Cash and marketable securities as of December 31, 2020 was $92.6 million compared to $46.7 million on March 31, 2020. Free cash flow in the quarter was positive $7.8 million compared to $3 million in the prior year quarter. As Ramesh mentioned, we expect revenue to flatten out and remain near the same level in our fourth fiscal quarter of 2021 compared to the third quarter of 2021 with a corresponding $7 million in adjusted EBITDA as certain one-time cost reductions come back into the business and the R&D expansion is nearing completion.

With that, I'd now like to turn the call back over to Ramesh.

[Ramesh Srinivasan, President and Chief Executive Officer]

Thank you, Dave. Being an entirely hospitality industry-focused software solutions company, the last few quarters have tested us in every way possible, and we have good reasons to believe that has only made us stronger and better. While presenting short-term challenges and temporarily disrupting our growth, the recent circumstances have made our organizational culture and mindset change process happened quicker.

We have navigated through this pandemic without reducing our capability in any aspect of our business, which will be crucial for future medium-term and long-term growth. It is also likely that we gain significantly with respect to our various competitive advantage aspects.

As Dave mentioned, one of the highlights of our last three quarters has been the discipline across all departments and strong results shown in areas like cash collections. That cash collection discipline has cost us some loss recurring revenue and increased customer churn, but has improved the quality of our business content. That kind of extra discipline and good new muscle memory in how we do things, how we stay on the right track and always find the right balance between growth and profitability will be valuable for us in the future.

We've also successfully turned the corner with respect to profitability, and in these toughest of times have demonstrated the future earnings potential of this business. You should continue to expect us to maintain a 15, 1-5, a 15% plus adjusted EBITDA to revenue ratio during the next few quarters, and then improve on it in the future when the revenue growth phase returns.

The second half of fiscal 2022 should be the time when the business growth starts aligning well. That should be about the time when virtually all of our heavy lifting of the product development efforts will be completed. We will have a confident and experienced team ready to take us to the next level. We will have the cost room to increase our sales and marketing spend and the hospitality industry headwinds will be turning to be tailwinds with a ballooning pent-up demand for better, more integrated and comprehensive software solutions.

The post-pandemic stage in this industry is most likely going to require significant energy and investments devoted to guest-centric solutions and we have prepared ourselves well for that stage. We have kept our feet firmly on the product innovation and customer service gas pedals in the meanwhile, while also vastly improving all our business and organizational culture fundamentals.

With that, Liz, please open up the call for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Matt VanVliet with BTIG. Your line is now open.

[Matthew VanVliet, BTIG, LLC]

Yes. Hi. Thanks for taking my question and good afternoon. I guess, Ramesh, first wanted to dig in a little bit on some of the comments you made around existing customers seeing a lot more cross-sell, up-sell opportunities, is that where you're focusing the majority of your attention now as bigger projects are either being put on hold or just kind of on the back burner? And really, kind of how are you directing the sales team and the overall go-to-market motion in terms of kind of allocation of resources over the next several months?

[Ramesh Srinivasan, President and Chief Executive Officer]

Yes. Hi, Matt. Yes, thank you for the question. I wouldn't say we’re only focusing on existing customers, Matt. But among the four major categories of sales areas that we focus on, new logo, new site, meaning major customers who now use us for a new site, new products, meaning products we sell to current sites and, of course, other existing customers, sales categories like services and others we do.

We are focusing on all of them, but we are having less success with new sites. So some of our major customers who typically over the past couple of years have taken us from one new site to another where we have gained hundreds of new sites in the previous couple of fiscal years, that has definitely slowed down because those major customers are struggling in the pandemic now. So this is not the time for them to take us to new sites. So that part has slowed down.

But the other three areas we have kept our focus on them. New logos, like we told you, there our eight new customers who signed up this quarter and that is because of very focused sales effort. And the good news about all those eight customers is all of them are SaaS customers. All of them chose our SaaS products and some of them are very – at least a couple of them are very big deals, involving POS, PMS and all our additional products.

So we are keeping the focus on new customers as well and we also are keeping focus on new products because we just have so many new products to sell. That is also a part of our sales success that has done reasonably well. And existing customers, of course, continue to do business with us in terms of buying extra licenses or involving us in a services related project and things like that. So of the four categories, Matt, the only thing that has slowed down is new sites. There's no lack of focus in new logo, selling new products to current sites or other miscellaneous sales that existing customers tend to do with us.

[Matthew VanVliet, BTIG, LLC]

Okay. That's very helpful. And then you also mentioned a few, I guess, projects that you've gotten contracts signed. And it's just kind of TBD on when the project actually starts. Could you give us a little more detail around maybe the size and scope of some of these, maybe what the revenue impact either was or could be once those projects get started? And then any clarity or any information you have around projected timeline around those insomuch as you have some?

[Ramesh Srinivasan, President and Chief Executive Officer]

Yes. So typically those kinds of decisions where customers initially sign up for and then things go a bit south for them. Again, they are forced to close down for a while or their business goes down. I would say affects us by a few million dollars every quarter now, right, by a couple of million dollars kind of thing, that kind of revenue impact we do feel right each quarter.

In terms of timeline, when that will pick up again is difficult because with different customers, the part of it did pick up last quarter. So some of what was held up before between the April and say September timeframe, some of those customers did pick it up in the October through December, but still it is slow. It is still – we have more in the backlog, which we should be able to ship to customers and get services projects going, but it is delayed. Because customers, they think one thing when they are signing the deal, they are really intrigued by the products. They want to get going, but then things don't go well for them so they slow it down. That affects us I would say by a couple of million, a few million every quarter.

And once that starts picking up, I think is going to be a flood, right? It really is going to be a flood. It is going to be like the dam breaks out and then the pent-up demand really kicks in. The pent-up demand will be not only with respect to the backlog, but it will be respect to – with respect to the rest of the business as well. So that backlog of customers not picking up projects that they have signed up for is a small one.

The bigger part of it is sales demos that go very successfully and customers and the middle management, senior management are kind of very promising with their feedback, but then it gets stuck up in the approval queue. Because now approvals have to go to a very high level and it gets delayed. That is the bigger portion of the business pick up that we are eagerly looking forward to. And my guess, Matt is, I think we are a couple of quarters away before it really starts picking up. And when it picks up, I think it's going to pickup big time.

[Matthew VanVliet, BTIG, LLC]

All right. Great. Thank you.

[Operator]

Our next question comes from George Sutton with Craig-Hallum.

[George Sutton, Craig-Hallum Capital Group LLC]

Thank you. I think my first question is a little bit of a follow-up on what you were just saying, Ramesh, and that is, you talk about a major growth phase ahead and a ballooning pent-up demand. Is there any way to quantify that? Is there any way to talk about when in the reopening phase we would really start to see that impact?

[Ramesh Srinivasan, President and Chief Executive Officer]

Yes. So tough to quantify that George. It's not easy to quantify that because a lot of demos go very well, and some of those deals are pretty big-sized deals. And then we hear it's going to happen this week, it’s going to happen next week and it keeps pushing forward. So the one answer I will struggle to help you with is how do you quantify that? We don't know how to quantify that. It's going to be a major growth when it happens, mainly because of the feedback we are seeing with that new products. Many customers are surprised how well our products can help them, so tough to quantify that.

Now in terms of when the growth phase will come, my own guess is that the growth phase will start happening a little bit before the reopening phase. So I don't think it will wait for the reopening phase and then happen a few months later. I have a feeling it'll happen a few weeks or a couple of months before that. That is because once we are clear, the light is at the end of the tunnel. And we know when that light we are going to reach, customers will start making these decisions. They will start confirming these because a lot of this technology in need for the reopening and then growth phase thereafter.

So two answers to your question, George, quantifying that is difficult. Don't know how to put a number on it. But when the growth phase will start, it will happen a little bit before the reopening phase, not after.

[George Sutton, Craig-Hallum Capital Group LLC]

Got it. You mentioned you were moving away from a large reseller relationship. I'm wondering if you could talk about the logic of that, A. And B, the financial impact, both short and long-term that you're expecting from that move?

[Ramesh Srinivasan, President and Chief Executive Officer]

Yes. So what happened, I think it was sometime in the calendar 2014 timeframe, George, when we sort of walked away from the EMEA market and we handed it over to a reseller and a pretty good reseller. So they were – they did do an effective job of reselling our InfoGenesis POS product, especially in the stadium and entertainment market in the UK and other markets. Same thing in Australia.

In EMEA, we had a presence and walked away and handed it over to the reseller. While in Australia, we never had a presence. We just handed it over to the reseller directly somewhere around that timeframe. This is well before my time. And then the first – according to the contract and agreements we had with them, the first opportunity we really had to sort of end that reseller agreement was the end of calendar 2020. And therefore, we decided to end it then.

Now we reestablished a presence in EMEA in about the 2016 timeframe, and we have grown our team since then in the last few years. But there are certain segments of the market that reseller has been selling. Now by definition, based on how the agreement has been, the reseller agreement has resulted in very low pricing for us, extremely low pricing for us. And that is just how the agreement was done, right? Our margins were very low on that.

So number one, we have presence. Number two, we have hired in Australia now, and we've already talked to many of those customers who were dealing with the reseller, but will now be dealing with us. So what you should expect in the short-term is a slight revenue bump because instead of some of the customers paying to them and we getting a portion of it, the customers will be paying to us directly. While on the other hand, some of the customers might move away from us because they don't have a relationship with us. They don't know about our recent improvements. So there will be some customer loss as well. But we believe that the gain we get from revenue by the customer paying us directly will be slightly higher than the loss of certain customers.

And especially in Australia, our revenue has been very low. Now we have the products, we think there will be a short-term bump during this calendar year, but thereafter, it will contribute to very good revenue growth because we'll establish direct relationship with the customers and now they will come to know about all the other additional modules we have. So slight short-term bump this calendar year in revenue and significant revenue growth in calendar 2022.

[George Sutton, Craig-Hallum Capital Group LLC]

All make sense. Thank you very much.

[Ramesh Srinivasan, President and Chief Executive Officer]

Thanks, George.

[George Sutton, Craig-Hallum Capital Group LLC]

Appreciate it.

[Ramesh Srinivasan, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Nehal Chokshi, Northland Capital Markets]

Yes. Thank you. And good to speak with you guys this afternoon. So it’s not surprising at all that you guys are guiding for a flat revenue Q-over-Q, given the relatively poor travel data that's out there on a near-term basis. But could you give us a sense as far as how you would expect that to parse out between recurring and non-recurring elements?

[Ramesh Srinivasan, President and Chief Executive Officer]

Dave, do you want to take that or should I?

[William Wood, Vice President and Chief Financial Officer]

Yes, I can take that. Hey, Nehal. We expect recurring to continue to tick up slightly. We think it will be close to the increases that you're used to seeing. Subscription will probably still drag slightly less than the 20% because of the credits and some of the other one-time things associated with churn. But recurring revenue will continue to increase, and where you'll see a little bit of compression is on the product and services line.

[Nehal Chokshi, Northland Capital Markets]

Okay.

[William Wood, Vice President and Chief Financial Officer]

But all three product lines will stay fairly similar to what they are today with a little increase in the recurring line.

[Nehal Chokshi, Northland Capital Markets]

Okay. Great. And then on the December quarter results, the subscription revenue; that was up just $0.2 million Q-over-Q. And aside from the June Q numbers, that's, I think, one of the smaller sequential increases that you've seen on the subscription revenue. Was there any headwinds, or is there just seasonality in the December quarter, or was it just simply a very slow rate of new and upsell of the subscriptions?

[Ramesh Srinivasan, President and Chief Executive Officer]

Yes. It is still good growth year-over-year, Nehal. It's about 18% year-over-year growth, under the current circumstances, that is still good growth. Some one-time credits did temporarily affect that number, right? There is still considerable pressure from customers for one-time recurring revenue relief and credits, and much of it involves subscription payment as well. I mean, our recurring revenue is not transaction-based, Nehal, like you know, but still, we have to help customers out because this reopening is getting delayed. That is one reason. The one-time credits given to customers did affect that number to a certain extent.

And also, lower sales this year and delays in implementation of what has been sold are also contributing factors, right? But with respect to this, like with all other aspects of our business, we are setting ourselves up for much better growth in the post-pandemic future, a lot more products that are subscription-based now, a lot more products. Compared to two years ago, we have about 10 to 15 more products that are all subscription-based. And also some of the modernization efforts we are finishing of our core products is going to make many customers move from on-prem installs to subscription-based installs in the cloud and all that. All that is going to happen.

So I think the subscription revenue growth number is going to be a bit lower for the next couple of quarters, and then it is going to resume to be in the mid-20s like we were before and then go higher from there. So this quarter was affected by some one-time credits and the fact that our sales has been low for the last couple of quarters to kind of caught up with that.

[Nehal Chokshi, Northland Capital Markets]

Right. Okay. When I look at the historical subscription number, I see in 2017, you did have a $0.1 million Q-over-Q decline. December 2018, you had a $0.1 million Q-over-Q decline. December 2019, however, it was a $0.6 million Q-over-Q increase. So that's why I asked. I mean, is there some seasonality here that goes on in the December quarter with respect to subscription?

[Ramesh Srinivasan, President and Chief Executive Officer]

There's no seasonality, Nehal, in this. Other than for cash collections, certain quarters are better than the others. There is really no seasonality in our business at all.

[Nehal Chokshi, Northland Capital Markets]

Okay. And then you did mention that there are pockets of strength. Could you detail what those pockets are?

[Ramesh Srinivasan, President and Chief Executive Officer]

There are many – like I think we've said in the last couple of quarters as well, Nehal. There are many of the resorts and many of the casinos that we cater to that are doing well, especially the tribal gaming casinos. And a lot of the award, I would call drivable resorts, right, where people can drive to. Many of the golf resorts are all doing quite well, and they are continuing to make technology decisions. In fact, there are two major resorts in the East Coast that within the next few weeks should be live with virtually all of our products.

POS, PMS and all the other additional modules, they should be live. And both of them are regional resorts where people can easily drive to. They're all continuing to do well. And many tribal gaming casinos, regional casinos are continuing to do well. So those pockets of strengths are there in the business. However, like managed food service providers are really struggling, right, because the employee cafeterias and all that have not yet opened up. And we all know the story about cruise ships still. So some aspects of the business are struggling, but many aspects of the business are showing pockets of strength, which is what has sort of kept us going during these last three quarters.

[Nehal Chokshi, Northland Capital Markets]

Okay. Great. I'll get back into the queue.

[Ramesh Srinivasan, President and Chief Executive Officer]

Thank you, Nehal.

[Operator]

[Operator Instructions] Our next question comes from the line of Allen Klee with Maxim Group.

[Allen Klee, Maxim Group, LLC]

Good afternoon. Last quarter, you mentioned that your new demand software product could add a few percentage points to revenue in calendar 2021. Could you just give us an update on how that's been doing?

[William Wood, Vice President and Chief Financial Officer]

Hey, Allen. Yes, so last quarter, we said that the OnDemand product could add 3% to 5% of the subscription revenue growth. So the product is going well. We're still seeing very low cancellations through the free trial period. And as of right now, of the 200 properties and roughly 500 profit centers we mentioned on the call last quarter, roughly half, slightly less than half are currently live and using the product. So still significant ramp ahead for that one.

[Allen Klee, Maxim Group, LLC]

That's great. And then you also talked about your full-service PMS offering that you're working on that. And I guess by the end of the year that that should be in pretty good shape. Could you tell – in the past, you used to talk about that you had some beta trials from some large hotels. Is there anything that you can mention about that of anyone who's kind of working with it now that could potentially be a large opportunity? Thank you.

[Ramesh Srinivasan, President and Chief Executive Officer]

Yes. So when I listed a list of about seven or eight particular wins, you would have noticed a couple of them. At least three of them or so involve PMS as well. The Stay PMS product now is absolutely competitive. It is on par with any other PMS product there. And technology-wise and because it's a truly modern product, it's ahead of the other competing PMS products as well. So when you think about the number of demos we do and our sales pipeline, PMS is far above what it used to be, say, 12 months, 24 months ago. There's just a lot more major PMS opportunities that we are currently involved in.

Unfortunately, our PMS resurgence coincided with the pandemic. So even though in terms of number of demos and in terms of how customers view it, we have come a long way. We are a lot more competitive in PMS. Unfortunately, those decisions have got slowed down a bit. But we have definitely broken through. Like Crystal Springs Resort that I talked about during the script is a major PMS win for us. And before that, I also mentioned a couple of other stay wins that we had. That's one aspect of it.

The other aspect also, Allen, is the fact that the add-on modules around PMS have also seen a lot of success during the last few months. Mobile check-in/checkout and rGuest Service and all those products have done pretty well for us sales wise. In fact, that's what has really kept our flag flying even during these tough times.

And then some of the PMS supporting products like, spa, the new golf module and the new sales and catering modules, and then the Agilysys Engage product have all seen success during the past few weeks. So PMS and related products wise, Allen, we are in far better, exponentially higher position than we were 12 to 24 months ago. But it has not yet fully resulted in the kind of improved numbers you would like to see because of the sales decision slowing down because of the pandemic.

[Allen Klee, Maxim Group, LLC]

Great. Thank you so much.

[Ramesh Srinivasan, President and Chief Executive Officer]

Thanks, Allen. Appreciate it.

[Operator]

We have a follow-up question from the line of Nehal Chokshi with Northland Capital Markets.

[Nehal Chokshi, Northland Capital Markets]

Yes. Thanks. So you guys talked about how bookings have been at two thirds of prior fiscal year levels, and yet when we look at end markets, I think they're down 50%. So that looks very good. So my question is, is that, is this linearly translatable to what bookings level will resume to when the industry returns? I.e., are we going to be – if provided the industry returns to prior pre-pandemic levels, does this reflect that Agilysys business is actually 30% better than it was on a normalized basis? Or does this reflect more of the mission-critical nature of Agilysys solutions and that there's basically inelastic demand for the Agilysys solutions?

[Ramesh Srinivasan, President and Chief Executive Officer]

I mean, tough to put a number on it, Nehal, but the fact that our sales has been two thirds as good as the previous year, under the current circumstances is increasing, though we are not satisfied, right. We tend to feel bad about it that we are not – we should be able to maintain our sales levels no matter what the circumstances is kind of our ambition. So two thirds, we are not thrilled about. But you're absolutely right. In relative terms versus what the market has done, the fact that our sales has kept up two thirds the previous year is encouraging, right, is definitely encouraging.

And yes, we should do much better than the market once it resumes, just because I think we have improved our competitive positioning a lot more during these last 18 months than the previous 18 months. So can I put a 30% number on it? I'm not sure, Nehal, but we are very bullish about sales once the recovery reopening phase starts happening. I think we will do much better than the market and how the market does. That's what we think we will do, but don't want to make a promise on that, Nehal, don't want to get too ahead of ourselves.

[Nehal Chokshi, Northland Capital Markets]

Sure. Understood. And then it sounds like the level of optimism on a go-forward basis when the pre-pandemic, post-pandemic spending. That optimism remains the same as it was a quarter ago. It's just uncertainty as to when it will happen. Correct?

[Ramesh Srinivasan, President and Chief Executive Officer]

Correct. It has actually, Nehal, increased a bit from two quarters ago. And the main reason for why it has increased is our products are moving forward, right. The pace at which our products are improving every month is better than previous months just because the R&D team is a lot more experienced. Now we have hundreds of people who have been with us, say, for at least a couple of years who know our products inside and out.

And also, as our core product modernization efforts are entering sort of the ninth-inning now, the eighth or ninth-inning, and like I told you, the first modernized InfoGenesis POS terminal actually went live and is being actively used in a prestigious restaurant in Hong Kong. In fact, there are three levels to that restaurant, and we have not yet allowed to use the name of the restaurant. And they are on iPads. So that kind of product improvement is really helping us in terms of increased confidence in our products, right.

So in fact, many of our selling activities in Asia actually happens in that restaurant. And a couple of customers have seen the IG POS work on those iPads are pretty stunned by how well it is working and how sleek it is. So all that increases our confidence, right, that we will do better. So if you ask me, our confidence level is higher than to like the last quarter or the quarter before that.

However, the negative is the timing still discourages us. Every time we think we are close to the light at the end of the tunnel, it seems to be pushing back by another three to six months. So that part of it is a little bit of a downer, but our own confidence is definitely increasing with every passing month mostly because of how our products are being driven forward.

[Nehal Chokshi, Northland Capital Markets]

Great. Okay. Thank you very much.

[Ramesh Srinivasan, President and Chief Executive Officer]

Thank you, Nehal.

[Operator]

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Srinivasan for closing remarks.

[Ramesh Srinivasan, President and Chief Executive Officer]

Thank you, Liz. Thank you for your all your continued interest in Agilysys and your support and guidance. On behalf of our Board, our management team and the 1,300-plus team members, I'm very grateful for your attendance today and investments in Agilysys. Look forward to talking to you again around mid-May when we will be reporting our Q4 and full fiscal year 2021 results. Until then, take good care. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.