Agilysys Inc

NASDAQ:AGYS

Earnings Call Transcript 2022-Q3

[Operator]

Good day, ladies and gentlemen and welcome to the Agilysys fiscal 2022 third 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]

Thank you Josh and good afternoon everybody. Thank you for joining the Agilysys fiscal 2022 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 forward-looking statements include the continued effects of the COVID-19 pandemic on our business, global supply chain challenges 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 would also like to note that any references to record financial and business levels during this call refer only for the time period after Agilysys made the transformation to an entirely hospitality-focused software solutions company in fiscal year 2014.

With that, would like to now turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilysys. Ramesh, please go ahead.

[Ramesh Srinivasan, President, Chief Executive Officer]

Thank you Jess. Good evening. Welcome to our fiscal 2022 third quarter earnings call. Joining Jess and me on the call today is Dave Wood, our CFO.

If I were to summarize the quarter results and the current state of our business progress in one sentence, I would call it a rollercoaster recovery delayed by a quarter or two. This feels like we are caught in a pandemic-induced storm, can see the bright sunshine and glorious days at the next turn on the rod. But the path to get there has to be traversed on a rollercoaster. Some months during the recovery period have seen high sales success and great business progress and then some months seem to get overtaken by tough news headlines, infection spikes, heavy travel restrictions especially across international borders, COVID testing requirements, back to increased work from home policies and staff shortages at customer sites.

The answer to the question, have we made significant progress across calendar years 2020 and 2021, would be definitely yes. But has the progress been smooth, consistent and predictable, the answer would be no. Thanks to the successful of product modernization and innovation efforts over the past few years, we continue to operate at record highs in the gaming and destination resort market areas, which also happened to be the dominant areas of our business, constituting more than 70% of our overall sales and revenue levels. However, medium to high business environment challenges remain in Asia, Europe, managed food services, cruise ships and hotel chains.

Despite all the hospitality industry challenges, our product strength continues to drive consistently good progress in subscription recurring revenue. One-time product and services revenue recovery have been delayed by a quarter or two due to postponed projects. More than 90% of our new customers and new sites this fiscal year have preferred cloud SaaS solutions leading to a reduction in perpetual license sales, affecting one-time software product revenue. Amidst all that, business basics like free cash flow continue to be healthy and at good levels.

Now that would be the short summary. Let me elaborate on the details a bit. Let me cover sales first before moving to revenue. All sales numbers referred to here are measured in annual contract value terms. Our sales success story has remained consistent during the first three quarters of fiscal 2022. Driven by the distinct competitive advantage our products currently give us and strong demand, the first three quarters of fiscal 2022 have been our best period of sales success in gaming and destination resorts in the U.S. by a fair distance.

Our integrated end-to-end cloud native ecosystem of hospitality software solutions, which help hospitality operators adapt quick to evolving guest preferences, generate additional revenue, reduce labor requirements and increase operational efficiency continue to drive demand in market verticals where businesses are enjoying good success. We are fortunate that our two strongest areas, gaming and resorts, have also been the two markets which have recovered the best so far.

On the other hand, we have seen only a partial recovery in hotel chains with city hotels not yet at pre-pandemic levels while resort focused full-service hotels are faring better and a similar partial recovery in the cruise ships market. Managed food services and international regions remained significantly affected by all the up-and-down uncertainties the pandemic continues to cause. Sales year-to-date this fiscal year in managed food services has been at only around 60%of pre-pandemic levels.

While the business and industry, B&I, subset of managed food services continues to struggle due to extended work from home policies across many large and small corporations, the higher education and healthcare portions of this vertical have continued to have high demand for omni channel point-of-sale, POS, software solutions. Our ability to enable staff-facing POS terminal functions, guest facing features through the buy kiosk and guest-driven remote ordering through on-demand and support for all types of payments, including room charging, use of loyalty points, order-only, pay-only, order- and pay in both full and fast casual service, all of this in one integrated platform for all types of use cases is a growing competitive advantage for us in this vertical.

What respect to international regions, our sales levels in APAC this fiscal year have been at only about 40% of pre-pandemic levels. International travel restrictions continue to have a serious detrimental effect on the hospitality industry across APAC countries. However, overall sales across EMEA have performed better and are currently operating at pre-pandemic levels.

With respect to subscription recurring fee-based software sales, with one quarter still left to go, fiscal 2022 is already our best year ever in EMEA, which is a strong indicator of our increasing presence as a software solutions provider in the region. Despite all these various remaining short term business environment challenges, overall global sales levels across all verticals during the first three quarters of fiscal 2022 were at more than 90%, of the levels seen during the pre-pandemic fiscal 2020 two years ago.

With three months still left to go in the fiscal year, as of the end of December, this is already our best year with respect to global sales pertaining to subscription recurring fees. Now that fact deserves to be repeated. Thanks to the current availability with us of modern SaaS-ready software solutions across the entire band of hospitality industry needs, despite all the challenges in multiple market verticals, we have sold more subscription-based recurring fees in annual contract value terms in just three quarters of this fiscal year than any other previous full fiscal year. That is terrific progress in our business that we have worked hard to achieve during the past few years.

While there is a clear shift towards cloud SaaS products among new customers, our modernization efforts have given us the flexibility to offer the same cloud-native solutions in an on-premise perpetual license model as well of the same code base, without having to create different products and software modules for that purpose. We are happy to have had the luxury of designing these new software modules and modernizing the core platforms with that flexibility in mind, giving us the ability to support both forms of implementation without any additional R&D costs or delays in development.

Total sales of property management systems, PMS products and related additional modules during the first three quarters of fiscal 2022 have already surpassed sales levels during all of pre-pandemic fiscal 2020. With respect to signed sales agreements during Q3 October to December, we added 11 new customers with four of them including a SaaS-based core PMS product in their list of products chosen. 62 new properties, which did not have any of our products before, but the parent company was already our customer. And there were 87 instances of selling at least one additional product to properties which already had one of our other products. Once again, more than 90%of the 11 new customers and 62 new properties added during the quarter were either partially or fully subscription fee license-based.

While the number of new customers signed during the quarter was below expectations, the overall sales from new customers in annual contract value terms was again high, thanks to high average deal sizes. New customers buying multiple SaaS-based software products and modules have become the new norm for us. Overall, new customer sales measured in annual contract value terms during the first three quarters of this fiscal year is the highest levels we have seen in five years. The first three quarters of fiscal 2022 have also been our best ever in annual contract value of sales of additional products to current sites, what we normally refer to as new product sales. All of that has been driven by the R&D investments over the past few years and our continuing relentless product innovation drive.

Some of the new customers who signed with us during the quarter include the Hideout Resort in Texas who purchased modernized V1 PMS, InfoGenesis POS, rGuest Book direct channel booking engine, Eatec inventory management and rGuest Seat for managing reservations. The Breakers in New Jersey who purchased Stay PMS and InfoGenesis POS for managing their boutique beach hotel and wedding venue. And the Lake House New York on the shore of the Canandaigua Lake purchased InfoGenesis POS and the pay module to manage their F&B needs.

Now on to revenue. The revenue narrative falls into two distinct categories, one, recurring revenue, including subscription revenue and two, one-time revenue consisting of hardware, one-time perpetual license software and services. Subscription revenue continues to drive our overall recurring revenue to march forward at record levels. Given excellent customer retention levels and continuing good progress with adding new customers, new sites with current customers and selling more new products to current customer sites, that should come as no surprise.

The subscription revenue backlog continues to also build to record levels due to project delays. We expect the current momentum in the most crucial portion of our business, subscription recurring revenue, to accelerate further when the business environment improves across all the hospitality market verticals we currently operate in.

Overall, recurring revenue was $25.1 million this quarter, getting us to the $100 million total ARR exit run rate level for the first time in our history. Of this, $11.7 million consisted of subscription revenue, a bit more than 46% of overall recurring revenue. Each quarter of fiscal 2022 has been a record for subscription revenue, with this quarter growing by 25% compared to Q3 of last fiscal year and by 48% compared to Q3 of fiscal 2020 two years ago before the pandemic. Overall, total recurring revenue was 5% sequentially higher than Q2, 10% higher than Q3 last fiscal year and 20% higher than Q3 of fiscal 2020 two years ago.

Fiscal 2022 third quarter overall revenue was $39.5 million, our highest level since the start of the pandemic nearly two years ago, but still below expectations and at the low end of revenue guidance. Q3 revenue was 4% sequentially higher than Q2, 8%, higher than the comparable quarter last fiscal year and 6% lower than Q3 from fiscal 2020 two years ago, which was our last full quarter not affected by the pandemic and that $42 million was a record for quarterly revenue.

The main challenges during this quarter were with one-time revenue. Apart from possible exceptionally large on-premise software customer purchases, which would happen from time to time in the future, we expect one-time software revenue to remain at current levels as more new customers and new properties select subscription fee-based options.

Hardware revenue increased sequentially from Q2 as the supply chain situation improved, but was still below our expectations going into the quarter. Overall, hardware and software product revenue taken together of $8.1 million was 11% sequentially higher than Q2, 7% higher than Q3 last fiscal year and 33% below Q3 of fiscal 2020. We expect hardware shipments and related revenue to return to normal levels during Q4.

Services revenue continues to be challenged by project delays. Q3 services revenue was $6.2 million, 5% sequentially lower than Q2, about the same as last fiscal year and 30% lower than Q3 of fiscal 2020 two years ago. It's been a strange situation of good sales levels but low implementation levels for a few quarters now. Hospitality customers see the value in the integrated end-to-end modern technology-based software products and modules, want to get going, improving their operations and increasing guest experience levels and are signing sales agreements at a reasonable pace without significant delays. However, when the project starts, staff shortages and conflicting priorities have made it difficult to get software implementations complete in a timely manner.

The recent extensive spread of Omicron and the resultant extent of customer and our staff falling sick for a week or two each had a significant negative effect on Q3 services revenue. The fact that many of the current projects involve multiple products tend to be complex implementations and for the most part, involve new and recently extensively modernized software products have been additional challenging factors causing implementation timing delays. We are seeing improvements in these areas, have seen an increased urgency to get projects implemented during the past few weeks and are cautiously optimistic that the coming months are going to be better.

Adjusted EBITDA for the quarter was $6.6 million and about 17% of revenue, slightly higher sequentially compared to Q2, 13% less than Q3 of last fiscal year and 104% better than Q3 in fiscal 2020. Q3 was our highest quarter we can recall with respect to cash collections which is arguably the second best indicator of overall business health after subscription revenue growth. Cash balance increase of nearly $16 million in fiscal 2022 so far is our highest cash increase during the first three quarters of the fiscal year in more than seven years, excluding the convertible investment cash gain during fiscal 2021.

The acquisition of ResortSuite closed early January, as previously announced, for approximately $25 million. Consistent with our revenue structure, ResortSuite comes with a mix of one-time software product, services and annual maintenance recurring revenue, which should all together add up to slightly more than $1 million per quarter for the next few quarters, of which about 70% should be annual maintenance recurring revenue. Only a handful of technology providers in the hospitality industry currently have the experience and the expertise to offer robust, comprehensive, end-to-end integrated property management PMS solutions and we are happy two of them are together now.

The acquisition-related execution steps have progressed well. The teams are coming together well. Customers have been positive with our combined increased ability to bring them the solutions and innovation pace they need to keep up with their guests and operational demands. And the industry community in general has provided good positive feedback. This acquisition makes us significantly stronger in the multi-amenities resort vertical where advancements like common guest profile and common itinerary management are fast becoming must-have features and there are very few technology providers who can make that happen.

This acquisition opens three major opportunities for us. One, use of the ResortSuite product set to fill in some of the gaps in our product portfolio. Two, incorporate and interface with many of the integrated resort application innovations ResortSuite has done well with over many years. And three and the most crucial, the revenue synergy opportunity to offer ResortSuite's base of approximately 150 customers the option to move to cloud-native modernized applications during the coming months and years. This should give us an additional way to improve subscription revenue levels during the next couple of years.

With that, let me hand over the call to Dave for detailed commentary on the financial results and additional color on our business progress. Over to you, Dave.

[Dave Wood, Chief Financial Officer]

Thank you Ramesh. Taking a look at our financial results, beginning with the income statement. Third quarter fiscal 2022 revenue was $39.5 million, a 7.6% increase from total net revenue of $36.7 million in the comparable prior year period. The increase in topline revenue largely reflects a 6.6% increase in product revenue and a 10% increase in recurring revenue. Product revenue improved sequentially over the previous quarter by 11%.

The measures we put in place during the previous quarters to mitigate supply chain risk such as increasing our inventory on hand significantly reduced but did not eliminate the impact of the issues still prevalent in our market. Our inventory levels have increased by over 175% since the start of the fiscal year, while logistical challenges with delivering products to the end customer resulted in a reduced topline Q3 product revenue.

Recurring revenue increased by 10% compared to the prior year period and remain at record levels. Total recurring revenue represented 63.7% of total net revenue for the third fiscal quarter compared to 62.3% of total net revenue in the comparable prior year period. Recurring revenue of $25.1 million is $2.3 million higher than the prior year and up $1.1 million sequentially.

We are also pleased with our subscription revenue growth, which grew year-over-year 24.9% during the third quarter of fiscal 2022 to a record $11.7 million and 5.5% sequentially over the second quarter. Subscription revenue comprised about 46% of total recurring revenue compared to 41% of total recurring revenue in the third quarter of fiscal 2021.

The momentum in our add-on software modules that build out our product ecosystem beyond the core point of sale, property management and inventory and procurement offerings continued through our third fiscal quarter, contributing to 6% of total sales this quarter. We continued to add over $1 million in ARR sales bookings for these new products in each of the last seven quarters. Add-on software modules made up 11.7% of subscription revenue in the third fiscal quarter of 2022, despite many of these sales remaining on the backlog due to outlet closures and labor shortages at our customer sites.

Moving down the income statement. Gross profit was $24.7 million compared to $24.2 million in the third quarter of fiscal 2021. Gross profit margin decreased to 62.6% compared to 66% in the prior year period. The change in gross profit was primarily due to a change in revenue mix as the extent of product revenue increased compared to the prior year third quarter.

Moving to operating expenses. Operating expenses, excluding charges for legal settlement, severance and other charges in the third quarter, were relatively flat with a slight increase of 2% over Q2 fiscal 2022, mostly due to incremental investments in sales and marketing and certain one-time expenses in G&A. Compared to the prior year period, operating expense saw a 7% decrease to $22.7 million from $24.5 million. This year-over-year decrease in operating expense is due to stock-based compensation expense returning to normal levels from the previous grants.

Product development, sales and marketing and general and administrative expense were 56% of revenue compared to 63% of revenue in the third quarter of fiscal 2020. For the remainder of the fiscal year, we expect the sum of product development, sales and marketing and general and administrative expense to remain close to this level as a percentage of revenue.

Q3 fiscal 2022 net income of $1.1 million is a sequential increase from the previous Q2 net income of $0.5 million, with earnings per share also increasing to $0.04 compared to $0.02. Adjusted net income of $4.9 million is down from $5.5 million in the prior year third quarter and adjusted diluted earnings per share of $0.19 decreased from $0.23 in the prior year third quarter when normalizing for certain non-cash and non-recurring charges. The reduction in adjusted net income and adjusted diluted earnings per share is partially due to some cost-saving measures that were in place during the prior year and a return of normal business operating expense during the current period.

For the fiscal 2022 third quarter, adjusted EBITDA was $6.6 million compared to $7.6 million in the year ago quarter. Adjusted EBITDA remains a strength of the company and above 15% as a percentage of revenue, even as we continue to invest in sales and marketing despite slower revenue conversions on the increased level of subscription sales bookings.

Moving to the balance sheet and cash flow statement. Cash and marketable securities improved by $8.7 million in the third fiscal quarter of 2022 to an ending balance of $115.1 million. Cash collections continues to be a strength as cash has now increased by $15.9 million since the beginning of the fiscal year, which is also the best nine-month cash collection period in our history. Free cash flow in the quarter was $9.9 million compared to $7.8 million in the prior year quarter.

Our sales momentum continued through the fiscal third quarter with our best nine-month stretch in subscription sales. Point-of-sale, property management and add-on software modules continue to drive sales back to pre-COVID levels while certain regions and business verticals remain significantly depressed by the current economic environment. The quality and extent of our backlog remain as strong as ever across all product lines. As the industry continues to recover and the residual challenges are addressed, we expect our increased investment in sales and marketing to result in sustained revenue growth and profitability levels.

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

[Ramesh Srinivasan, President, Chief Executive Officer]

Thank you Dave. In summary, despite the various pandemic-related challenges which remain across Asia, Europe, managed food services, cruise ships and hotel chains, we expect Q4 to be our best revenue quarter yet, getting us to the lower end of the fiscal 2022 full year total revenue guidance range. We expect continued sequential improvement in subscription recurring revenue and overall recurring revenue, expect services revenue to improve from current levels and expect a close to pre-pandemic normal hardware product revenue quarter.

Adjusted EBITDA should remain at slightly higher than 15% of revenue, including the neutral effect of the ResortSuite acquisition. We came into the fiscal year expecting business levels to pick up significantly during the second half. That recovery has been delayed but the overall recovery direction remains positive and promising. Our products are where they need to be now. Our win-loss ratio and average deal size remain excellent. We are now investing more in sales and marketing while holding the already high R&D levels steady. Now it is a matter of the hospitality business environment improving in all the affected areas and this rollercoaster ride we have all been on for more than a year to start smoothening out and the progress becoming predictable and consistent.

Josh, please open up the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Matt VanVliet with BTIG. You may proceed with your question.

[Matt VanVliet, BTIG]

Good afternoon everyone. Thanks for taking the question. I guess, Ramesh, first on the overall sort of delayed project backlog continuing to make strong progress on new sales. But as that gets more and more backed up, curious on your commentary around the first couple of weeks of January, seeing a little bit of relief there? Any color on sort of how many projects or what mix of the backlog might finally be being put into motion? Is it still primarily your customers' limitations around staffing or opening of properties? And then kind of as a secondary question, if hypothetically everyone said, okay, we are ready, let's start the projects today, how long would it take to really kind of flush out the backlog in an ideal situation? Thanks.

[Ramesh Srinivasan, President, Chief Executive Officer]

Yes. Hi Matt. Thank you. So a quick comment on the delayed project backlog. Last few weeks, we have seen positive signs that has since January started and we got past the holiday season and the holiday season, Matt, also added a little bit to the staff shortages because many companies and for all the right reasons, decided to give their staff a break, much overdue break, during the holidays and that also added up to some of the delays. But starting the beginning of January, we have seen real positive signs.

So for example, our services staff are pretty much booked now in implementation projects for the next six to eight weeks. And that's a very positive sign for us. So we are seeing positive signs of all the pending projects picking up now and we have noticed that in the last two, three weeks and we are hoping that there is no new variant setback or anything like that. That's what we are hoping for. But so far, so good in January, the projects are really beginning to pick up.

Now as far as the mix of backlog is concerned, Matt, a lot of the backlog mix tends to be towards the PMS side of the equation because the POS projects are simpler and have gone through fairly well during the last few months. What has got held up is the relatively more complex PMS software modules, multiple product implementations, which require a bit more work to get it done. So a lot of the backlog mix that is pending now that is beginning to get picked up now, have to do with subscription fees, subscription revenue and have to do with the PMS side of our product equation.

The customer limitations that you mentioned in terms of staff shortages have been a problem, but we have seen that they are now getting better, right. They are now able to focus on the software projects as well now that December is behind us. And to a certain extent, our products have been in the field for a while now. A lot of the new modules and the new software products that we were releasing towards the second half of calendar 2021 have all been in the field, 10 to 15 customers have already gone live. So they are also becoming easier to implement and much better to integrate. So all of this together gives us comfort that services revenue should do much better in Q4 than it did in Q3 and also a lot of our backlog should start getting released. And how long will that take? All the backlog getting released is probably a three to six month process.

[Matt VanVliet, BTIG]

Great. That's helpful. And then you announced a couple of new PMS deals in the quarter. I guess on one of the larger ones there, what are you replacing? I guess, how are those conversations progressing now that you have got sort of the new version of the product fully ready and a lot of these add-on modules are particularly useful in that sale. I guess, how competitive do you feel like that product is now versus what's available in the market more broadly?

[Ramesh Srinivasan, President, Chief Executive Officer]

Our PMS products now, especially Stay PMS, which has been in the market in its current state for more than a year now and Visual One, which has been completely modernized and the first three instances of the modernized Visual One being implemented are all slated for February and March. So we have one customer going live mid-February, one more towards the end of February and one more in March. So they will be the first three customers going live on modernized Visual One.

So between Stay PMS and modernized Visual One, we are very competitive in the marketplace now. It truly is a matter of getting more add backs and getting more chances to demo the product. And of course, LMS always has its market in the gaming sector and among very big properties. Where there are thousands of rooms properties, LMS is always there. We have modernized the UI of LMS very well. But in the general hotel resort segment where our market share is very low on the PMS side and we really need to make progress, Stay and Visual One now, both of them modernized, both of them cloud-native, Visual One can also be implemented on-premise, we are in good shape as far as competitive advantage is concerned.

Now Matt, what adds to that competitive advantage is the fact that we have end-to-end hospitality starting from a direct channel booking engine, all the way through all the needs, the 17 additional software modules we have that are non-core gives us an enormous advantage. Because the products come with an open API architecture, so we can integrate it with third-party modules that some of it even our competitors provide. But the fact that they already come integrated is giving us a tremendous advantage.

Now for good or for bad, many of our major competitors did not focus on that. They focused on core products coming with good API architecture so that it can be integrated with other modules. Now we have not only done that. We have also come out with the additional modules that are well integrated. So customers come looking for one product and they end up buying seven products and they love the fact it is well integrated.

So the quick answer to your question, the products by themselves are very competitive now and the fact we also provide the additional modules gives us absolutely an extra leg in PMS side.

[Matt VanVliet, BTIG]

All right. Wonderful. I appreciate your answering all the questions. Thank you.

[Ramesh Srinivasan, President, Chief Executive Officer]

Thank you Matt.

[Operator]

Our next question comes from George Sutton with Craig-Hallum. You may proceed with your question.

[George Sutton, Craig-Hallum]

Thank you. Ramesh, I wanted to bring together two things that you said previously that are actually working for you right now and they are your two largest. But you have also said that the flywheel that you see is a couple of quarters away. So I wanted to bring those thoughts together and maybe look out two, three quarters. How much different might the business start to look at that point? Do you see all of your horses, as you called them, coming together in that kind of a time frame? And then can you give us a better explanation of what you mean by the flywheel effect?

[Ramesh Srinivasan, President, Chief Executive Officer]

Yes. Hi George. Thank you. So the two horses, gaming and resorts, of probably six or seven we depend on, are working extremely well. So when we look at gaming and resort sales levels, we are at record levels. We have never had a three-quarter stretch where we have done this well in gaming and resource.

Now in terms of the other five horses, call it, right, Asia, EMEA, hotel chains, cruise ships and managed food service providers, EMEA is beginning to work reasonably well. They are back to pre-pandemic levels. Asia is still struggling because a lot of border closures and international tourism is struggling there. And managed food service providers, of course, are struggling because there's still a lot of work from home going on in big and small corporations.

So those five horses we expect will start working well in the next two, three quarters because the world is getting better, right. Hopefully, the Omicron gets over fast and the herd immunity stage has reached quickly. And like U.K. has now done, more and more countries open up and we just get going with our lives now. We hope that happens within the next three to, say, nine-month period and that is what will really get the other horses kicking for us as well because the products are now there. Compared to the start of the pandemic to now, our products have made enormous advances. Now it is a matter of the market picking up as well.

Now the last question you asked about the flywheel, it is a matter of all these new products that we have, all the new PMS modernization we have, getting installed in the field, which is already happening. We are making good progress, creating more reference customers and then spending more in sales and marketing, spreading our message around getting more add backs, it's all a good virtuous cycle that we are seeing the beginning signs of, especially in gaming and resorts that we think will really pick up speed in the next three, six months or so.

[George Sutton, Craig-Hallum]

So just as a follow-up, relative to your add back theme. I am curious how many add backs do you think you are not getting today that you ultimately could be getting as you make these additional investments?

[Ramesh Srinivasan, President, Chief Executive Officer]

I think we could easily double the add backs we are getting today. So when we look at our pipeline, which is how you measure the add backs. And we measure our sales pipeline by annual contract value, like we always do, our current pipeline can be doubled with getting more exposure, which we have been a little bit slow about because we wanted these new products to settle in the field, but we are now getting a lot more aggressive with, we should be able to double our pipeline in the next nine months or so. That should be possible, as far as just add backs are concerned. Then it is a matter of winning those deals and really doing better than the competition.

[George Sutton, Craig-Hallum]

Super. Thank you very much.

[Operator]

Thank you. Our next question comes from Allen Klee with Maxim Group. You may proceed with your question.

[Allen Klee, Maxim Group]

Good afternoon. Question is on ResortSuite. Did I understand that most of their revenue is kind of software and maintenance type? And that when you mentioned $1 million in revenue per quarter, is that excluding any potential synergies you could get? And can the synergies go both ways in terms of you upselling your products to them, but also their products getting upsold to you guys? Thank you.

[Dave Wood, Chief Financial Officer]

Hi Allen. Yes. Just to confirm, the ResortSuite is mostly on-prem. It's a little over $1 million a quarter in revenue and about 70% of that is recurring on-prem maintenance. So there's absolutely significant synergies with us. I mean just from their 150 customers, there's a subset of those customers that are looking for native cloud products. And that right there creates one to three times ARR opportunity for us. And there's also all the other modern cloud products we have developed over the last two years that certainly create an upsell opportunity into the market. So when we look at it, it's largely on-premise and there's certainly a subset that's looking to go to subscription and looking for our modern cloud products.

[Ramesh Srinivasan, President, Chief Executive Officer]

And one thing I would add, Allen, is that please remember this acquisition was all about revenue synergies. That's what it was all about. And the revenue synergies we get by selling a lot of our products, about 20 additional modules to their customers, especially on the POS side where our POS product is a lot stronger, it's much higher than the other way around. We are not going to get much revenue synergies by selling their modules to our customers. There are not many of them. The synergies the other way around of selling our products to ResortSuite customers is going to be multiple times higher.

[Allen Klee, Maxim Group]

Thank you very much.

[Ramesh Srinivasan, President, Chief Executive Officer]

Thanks Allen.

[Operator]

Thank you. Our next question comes from Nehal Chokshi with Northland Capital. You may proceed with your question.

[Nehal Chokshi, Northland Capital]

Yes. Thank you. Staying on the ResortSuite. Ramesh, you mentioned that fills some gaps in the PMS suite. What are those gaps?

[Ramesh Srinivasan, President, Chief Executive Officer]

For example, for a lot of our key resort customers, they have a specific ski resort-based product that so far we have not built in our product suite. They have now other than ski, just coming to the normal resort customers, they have created excellent mobility-based options like a resort app, for example, like you go to a resort and you get an app and that covers all your needs across booking engine, across spa, golf and everything else.

So that kind of resort app, a lot of the mobility options they have created are very sleek and very creative, highly innovative. So those kinds of products have high demand with the customers. So what we are doing now is making sure that we also have that kind of a resort application, resort app, that connects to our products as well. So that kind of modules that ResortSuite has created are excellent additions to our product suite as well.

And also in the club membership area, where you have owner portals, right, where you have certain resorts that consists of villas which are owned by different people, in those kinds of areas, ResortSuite has developed very good applications that we are still a few months away from getting done. So we are learning a lot of lessons there as well. So in terms of PMS innovation, there's a lot of sleek things that ResortSuite has done that we are now integrating with our product set as well.

[Nehal Chokshi, Northland Capital]

Got it. Okay. That's very helpful. In response to Allen's question, you implied that the synergies really coming from, that you are also selling into the ResortSuite customer set, which could be potentially consistent with the start of a roll-up strategy. Is that actually how we should be interpreting this acquisition?

[Dave Wood, Chief Financial Officer]

Yes. Absolutely, Nehal. I mean, it will be incorporated into the business. And just to clarify, the revenue synergies are not only on what we can sell into their product base, meaning new products, but it's also on converting on-prem products to our cloud platform. But yes, this is absolutely a roll-up strategy. The teams are already integrating through our normal services and support and G&A teams.

[Nehal Chokshi, Northland Capital]

I mean, to be clear, when I said is this a start of a roll-up strategy, meaning that there are other relatively small targets like ResortSuite that you would expect to be able to acquire at an attractive multiple and then get revenue synergies out of that by selling the more complete suite of Agilysys products into those?

[Dave Wood, Chief Financial Officer]

I wouldn't look at it as a start of a roll-up strategy. Certainly, our M&A discipline hasn't changed at all. This one was just a good fit based on revenue multiple, the products, obviously the talent and the people and it was a profitable company. I Our M&A strategy and roll-up strategy hasn't changed from what you are familiar with. This one was just the right fit at the right time.

[Ramesh Srinivasan, President, Chief Executive Officer]

And we will remain opportunistic, Nehal. This was a perfect fit. I mean, starting from their CEO, Frank Pitsikalis, all the way down, just a perfect culture fit. We really like each other. We like working with each other. They are in the perfect sweet spot, very creative solutions, excellent customers set, many big names in their customer set. So this is just one of those absolutely perfect fit and we sort of hit it off from day one and this got done over a five or six month period. But overall, we will remain very opportunistic and very disciplined, like Dave said, right. We are not going to get too caught up in this M&A thing, but we will remain disciplined. If good opportunities like this come up, we will absolutely take a serious look at it.

[Nehal Chokshi, Northland Capital]

Okay. Great. And then my last question is that, I believe that you guys have been hiring sales capacity at a reasonable clip. Where is your sales capacity today relative to a year ago and two years ago?

[Ramesh Srinivasan, President, Chief Executive Officer]

In terms of quota-carrying sales personnel, we probably increased by about 15% during the last five months or so. So probably closer to 20% is where the increase has been compared to nine months ago or one year ago and we are aiming to do a lot more. So compared to where we were one year ago, we should be 50% to 75% higher in the next six months or so. We are continuing to hire and most of those hires have worked out well, One or two of those hires have not worked out well for us. But we are continuing to hire in sales and not only in sales, in marketing. Within the next six months to 12 months, we expect to double our marketing budget and our marketing resources and to carry that forward as well. So sales and marketing is going to be a much bigger team six to 12 months from now. And we are doing the hiring every day, every week as we go.

[Nehal Chokshi, Northland Capital]

Okay. So it does bring up a follow-up question for me then. I think what I heard you say is that sales capacity is up about 20% from a year ago. But when I look at the subscription revenue, it's up 25% year-over-year. The revenue was up 6% Q-over-Q. And you can expressly say that backlog was also up for the subscription ACV, which then would imply that subscription bookings is trending well above 25% year-over-year. So in my book, that basically means that you are actually getting more sales per mature rep than you were a year ago, a lot more. Is that a correct assessment?

[Ramesh Srinivasan, President, Chief Executive Officer]

Yes. Correct. So that is correct, Nehal. In terms of, for example, I will just try to break down the math a bit. Our subscription fees sales in just three quarters this fiscal year, just from April through December, with January, February, March, not even happened yet, is the best year we have ever had by quite a distance. Now that is not fully reflected in the subscription revenue yet because of the project delays and the building backlog, which is again at record levels. So you are right. Our growth has been good, mostly driven by products.

So to answer your question another way, even if we don't do any expansion of sales, we expect to increase our software selling because the products are much better and we have given a lot more ammunition to our current sales staff to sell a lot more. So yes, our sales staff are contributing a lot more, especially with respect to subscription software sales. And you add more salespeople, it further adds to that.

[Nehal Chokshi, Northland Capital]

Okay. Great. Thank you Ramesh.

[Ramesh Srinivasan, President, Chief Executive Officer]

Thank you Nehal.

[Operator]

Thank you. We have another question from Allen Klee with Maxim Group. You may proceed with your question.

[Allen Klee, Maxim Group]

I know you have answered this, but your guidance implies to get to consensus, it's like over 10% of sequential revenue growth in your fiscal fourth quarter. And that's even if you back out the $1 million contribution from ResortSuite. So could you just simplify, if you were going to say what was behind that sequential increase? Is there one or two things that you could sort of mostly point to that's going to be that driver?

[Dave Wood, Chief Financial Officer]

Yes, Allen. So most of the sequential increase, when you think about, call it, $4 million to $5 million, is about half of that is product revenue. And the product revenue is a mix of, obviously, a strong backlog and the sales momentum we are seeing through the quarter. The other 50% is largely professional services and recurring. The professional services are largely, like Ramesh talked about, we are seeing installations and customer and labor shortages loosen up a bit. So think of it as half products and half services and recurring.

[Allen Klee, Maxim Group]

Thank you.

[Operator]

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Ramesh for any further remarks.

[Ramesh Srinivasan, President, Chief Executive Officer]

Thank you Josh. Thank you all for your time this evening and your continued interest in Agilysys. We look forward to speaking with you regarding our fiscal 2022 Q4 and annual results in a few months from now, around the third week of May. Until then, please continue to stay well. Thank you.

[Operator]

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