AGYS

Good day, ladies and gentlemen, welcome to the Agilysys 2027 first quarter conference call. As a reminder, today's conference may be recorded. I would now like to turn the conference over to Jessica Hennessy, Vice President of Operations and Investor Relations of Agilysys. You may begin.

Thank you, Lisa, good afternoon, everybody. Thank you for joining the Agilysys 2027 first 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 U.S. Private Securities Litigation Reform Act of 1995, including statements regarding our financial guidance. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially.

Important factors that could cause actual results to vary materially from these forward-looking statements include our ability to achieve the increased guidance levels, continue to improve profitability levels, the company's ability to maintain sales momentum, utilize AI to continue to increase competitive advantages, and the risks set forth in the company's reports on Form 10-K and 10-Q, and other reports filed with the Securities and Exchange Commission. As a reminder, any references to record financial and business levels during this call refer only to the time period after Agilysys made the transformation to an entirely hospitality-focused software solutions company in fiscal year 2014. With that, I'd now like to turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilysys. Ramesh, please go ahead.

Thank you, Jess. Good evening. Welcome to our fiscal 2027 first quarter earnings call. Joining Jess and me on the call today is Dave Wood, CFO at our Alpharetta Atlanta headquarters. Let me cover sales and selling success first before discussing revenue, profitability, the decision to raise guidance levels provided a couple of months ago, and other details. We continue to measure sales in annual contract value terms and exclude subscription sales pertaining to the Marriott property management system, PMS project, from the overall sales numbers. FY 2027 Q1 was an excellent overall business quarter for Agilysys, including with respect to sales, revenue, and profitability, each of which set a new Q1 quarter record. This was the best sales success April to June Q1 period on record.

In fact, it was the best sales quarter in our history outside of the Q4 January to March sales period, which has tended to be the strongest during the recent several years. The last two quarters taken together constituted the best ever six-month sales period in our history. Fiscal Q1, April to June, was an excellent sales quarter for several verticals. This was the best sales quarter ever for the Asia Pacific region and the highest Q1 sales period for each major domestic vertical, casino gaming, hotel resorts cruise ships, HRC, and food service management, FSS. Sales success this quarter featured three major seven-figure multi-product ecosystem wins, two in the casino gaming vertical and one in Australia. All three were won battling against our main most often seen competitor.

A major casino resort currently under construction in the Las Vegas Strip chose Agilysys for point-of-sale, POS, property management system, PMS, and several other software modules. Another major casino resort based in Arizona, who had been the customer of our main competitor for about two decades, chose to switch to Agilysys lock, stock, and barrel across POS, PMS, and other software modules. Despite these two big wins in the U.S., the main highlight of the quarter probably was a nine-property resort group in Australia deciding to switch to Agilysys PMS and other related supporting modules after being with our main competitor for more than a couple of decades. We were originally not included in this particular RFP process.

It took a good reference recommendation from one of our current customers in Australia, along with dedicated, persistent efforts by the sales team to get included in the game at the last minute. From that point forward, we surged forward quickly, thanks to the superiority of our best-in-class software modules and the obvious strengths of the end-to-end ecosystem, along with excellent product demonstrations and presentations conducted by our talented personnel in the Asia Pacific region. Finalization of the customer selection process was completed in just a few weeks after that. Our sales win-loss ratio remains high and impressive. Getting more at bats remains our main challenge, and we are getting better at being more persistent in getting included in more selection processes, backed up by a growing number of positive reference customers for the modernized solutions.

A couple of significant customers, including one in the U.K., recently reported achieving excellent revenue improvements directly attributable to the use of the Agilysys ecosystem of modern, interconnected solutions, especially the ability for their guests to book packages online, a recent award-winning innovation, which would be virtually impossible for our competition to duplicate anytime soon. We expect our sales levels to continue running forward with increased momentum as such differentiating value creation success for customers become more well-known. Given the nature of our B2B business, even one such story that a customer is willing to talk about openly is worth a million in marketing spend. While this was another excellent business quarter in various ways, I would be remiss if I don't remind everyone that it is always best to judge our business progress on an annual basis. There is no guarantee that each upcoming quarter will be a record.

We can, however, state with a high degree of confidence that fiscal 2027 will be a record best year for sales, revenue, and profitability. This is a business that should be judged on annual results and full-year guidance levels. With respect to sales deals won during Q1 fiscal 2027, April to June, we added 15. We added 15 new customers, excluding Book4Time, all of whom signed subscription license-based sales agreements. These 15 new customers licensed an average of close to six products each. We also added 87 new properties, which were not using any of our software solutions before, but the parent company was already a customer. Of the 102 new properties added during the quarter across new and current customers, 101 were either partially or fully subscription license-based.

In addition, there were 106 instances of selling software solutions to properties which were already using at least one of our other products. These 106 deals involve the sale of a total of 206 products. Additional product adoption by existing customers continues to be a big contributor to sales and revenue growth. The Marriott TMS project continues to make good progress and remains on plan. It is remarkable to watch and learn from the success we have seen with this huge technology transformation project, one of the biggest ever attempted in the hospitality industry. We are proud to be associated with it and to be playing a leading role in it. Our AI adoption strategy is making good progress and is being executed as planned.

We have been intentional and deliberate about first establishing the necessary cost controls, customer data protection and operational discipline, guidelines, and guardrails, thereby creating a foundation that will allow us to continue accelerating AI adoption with confidence. At the Inspire customer user conference during April, earlier this year, we had announced the development of 30+ AI-based features. That is 30. 30+ AI-based features. Several of these features are in the process of being deployed at pilot customer properties, while the remaining are nearing development and testing completion, as scheduled and on plan. Many of these features require not just AI, but an integrated ecosystem of modern software solutions. Modules like PMS, POS, spa, golf, inventory, all communicating with each other real-time or close to real-time. That is a strength very few competing providers can offer.

We are seeing a need for AI for property-wide features, not just within point solutions. To enable such AI features at scale, we have built a central orchestration layer for all AI processing. This layer routes requests to the appropriate LLM for making intelligent decisions, optimizes token usage, and ensures adherence to our AI governance principles around security, privacy, compliance, and responsible AI norms. As we continue to scale up, we expect this central orchestration layer to provide the necessary controls around internal cost management, customer value creation, and managing monetization levers. Development of the couple of fully AI-native modules, CRS and Revenue Intelligence, is progressing on plan. We expect initial beta implementations at customer sites later this fiscal year. The initial versions of both these modules are designed to work within the scope of our product ecosystem.

With respect to revenue and profitability, Q1 fiscal 2027 overall revenue was $87.7 million. A record for the 18th consecutive quarter and 14.3% higher than the comparable prior year quarter, driven by 26.1% year-over-year growth in subscription revenue and 8.3% growth in professional services revenue. This was the 19th consecutive quarter of more than 23% year-over-year subscription revenue growth. Growing subscription revenue at such a good clip consistently for about five years has been quite an accomplishment. Overall recurring revenue was a record $57.7 million, 18.8% higher than the comparable prior year period and 65.9% of total revenue. Q1 fiscal 2027 subscription revenue was a record $40.2 million and 69.7% of total recurring revenue.

The 26.1% year-over-year growth in subscription revenue was driven by 39.7% growth in PMS and PMS-related modules and 18.5% in POS and POS-related modules. Q1 fiscal 2027 is the first quarter in our history when total subscription revenue pertaining to PMS products was higher than that of the POS ecosystem. We expect subscription revenue growth in POS and related modules to remain in the high teens, low 20s kind of percentage levels for the foreseeable future. Add-on modules across both PMS and POS constituted 36% of total subscription revenue. Q1 fiscal 2027 annual maintenance-related recurring revenue was $17.4 million, very close to record high levels. Most of the subscription revenue growth is coming from new and additional projects and not based on cannibalization of annual maintenance.

We continue to allow customers to make their own decisions regarding timing of moving to the cloud. One-time product revenue consisting of perpetual software licenses and third-party hardware was $10.3 million, in line with our expectations. Hardware revenue remains at these levels despite excellent success in overall POS sales. In fact, the last two quarters have been two of the top three on record for overall POS sales, and the recent six-month period of POS sales has been the highest ever six-month period. Despite such POS sales results, hardware revenue remains at current levels. The current versions of the modernized POS solutions continue to carry a reduced hardware attach rate, since they also work on consumer-grade iPads and other smaller, less capital-intensive handheld devices. We continue to expect one-time product revenue to stay around this general range for the remainder of the fiscal year.

Q1 fiscal 2027 professional services revenue was a record $19.6 million, despite a big drop-off in customer-paid product development related services revenue, as those major projects are now past the coding phase and in the implementation stage. In addition, our services implement efficiencies have improved significantly due to the modernized solutions becoming exponentially easier to implement and through greater use of AI tools, which is a very good thing for us. We are now selling more software for every dollar of services sold, which is another good leading indicator of a maturing modern technology-based enterprise software business unit that is becoming more competitive even in price-sensitive markets. We expect professional services revenue to remain around current levels during the rest of this fiscal year and continue to grow in the medium and long term as the overall business continues to expand.

Despite excellent improvements in project implementations levels during the quarter and record implementation services revenue, strong sales success drove combined product services and recurring revenue backlog to record levels, giving us good ongoing revenue visibility. We continue to exclude the ongoing large PMS rollout from backlog calculations. Q1 fiscal 2027 profitability was above our expectations going into the quarter and fiscal year. Gross margin of $55.7 million is a record for any quarter in absolute dollar terms. An adjusted EBITDA of 20.8% of revenue made this quarter the most profitable Q1 April to June period in history. Given the better-than-expected start to the fiscal year, we are raising revenue guidance levels for fiscal 2027. We now expect full fiscal year revenue to be in the range of $368 million-$373 million compared to the $365 million-$370 million guidance provided a couple of months ago.

The new guidance implies an overall revenue growth level of 15%-17%. That is one-five to one-seven. Of 15%-17%. We are also raising the guidance level for full year subscription revenue growth to be at least 32% compared to the prior minimum 30% expectation. Given the good profitability start to the year, we have increased confidence that full year profitability adjusted EBITDA by revenue, even after accounting for any potential additional strategic investment needs that might emerge during the rest of the fiscal years, will work out to be 24%, in line with the guidance provided earlier. We continue to expect the adjusted EBITDA by revenue FY 2027 exit rate during Q4 to be close to the 30% mark. With that, let me hand over the call to Dave for further color on financial and other operational execution details.

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. First quarter fiscal 2027 revenue was a quarterly record of $87.7 million, a 14.3% increase from total net revenue of $76.7 million in the comparable prior year period. Q1 represented another quarter of strong momentum in the business. Sales levels were at first quarter all-time high. Total backlog, when excluding the large PMS rollout, remains at record levels, and Q1 revenue was better than we expected just a couple of months ago. Professional services increased 8.3% over the prior year quarter to a record $19.6 million. We are pleased to see our professional services gross margin remain above the 30% mark for the second consecutive quarter at 35.4%.

Total recurring revenue represented 65.9% of total net revenue for the fiscal 2027 first quarter, compared to 63.4% of total net revenue in the first quarter of fiscal 2026. As expected, recurring revenue continues to become a growing portion of top-line revenue and a meaningful contributor to gross margin and profitability expansion. Subscription revenue growth during the first quarter of fiscal 2027 was better than expected at 26.1%. Subscription sales and backlog levels, while maintaining low customer churn, have us set up well for execution on our FY 2027 plan. Moving down the income statement. Gross profit was $55.7 million compared to $47.3 million in the first quarter of fiscal 2026. Gross profit margin was 63.5% compared to 61.7% in the first quarter of fiscal 2026. Product mix will continue to drive gross margin to the mid to high 60% range.

Combined to three main operating expense line items, product development, sales and marketing, and general and administrative expenses excluding stock-based compensation were 42.8% of revenue in the fiscal 2027 first quarter, compared to 45.6% of revenue in the prior year quarter. Operating income for Q1 FY 2027 of $9.7 million, net income of $9 million, and gain per diluted share of $0.32 are well above the prior year gains of $4.5 million, $4.9 million, and $0.17. Adjusted net income normalizing for certain non-cash and non-recurring charges of $14 million compares favorably to adjusted net income of $9.3 million in the prior year period, and adjusted diluted earnings per share of $0.49 compares favorably to $0.33. For the fiscal 2027 first quarter, adjusted EBITDA was $18.3 million compared to $12.5 million in the year ago quarter.

We are pleased to see our profitability levels end up well ahead of the original FY 2027 plan for Q1, with adjusted EBITDA coming in at 20.8% of revenue. Adjusted EBITDA performed very strongly on the back of higher than anticipated recurring revenue levels while operating costs were in line with our expectations. Moving to the balance sheet and cash flow statements. Cash and marketable securities as of June 30th, 2026 were $123.7 million, compared to $116.9 million on March 31st, 2026. We remain comfortable with our current levels of cash. As it relates to free cash flow, we are pleased to see an increase for the first fiscal quarter. Free cash flow in the quarter was $7.3 million, compared to a loss of $5 million in the prior year quarter.

As a reminder, free cash flow is typically lower in the first half of the year due to working capital adjustments that normalize throughout the fiscal year. Adjusted EBITDA and free cash flow, after normalizing the impact of CapEx, continue to be comparable and good proxies for health of the business over a fiscal year. For fiscal year 2027, we are raising our revenue guidance to be in the $368 million-$373 million range. We expect product revenue to remain flat and continue to trend around $10 million per quarter or $40 million for the year. Professional services started strong and is still expected to grow in the 5%-10% range for the year. We are raising our subscription revenue growth guidance from 30% to at least 32% for the year due to faster deployment of the backlog than anticipated in the original guidance.

Subscription revenue growth in fiscal Q2 should be close to 30% growth range and continue to accelerate during Q3 and Q4. With respect to adjusted EBITDA, guidance will remain at 24% of revenue, even though Q1 profitability was better than expected. We still expect to exit FY 2027 at nearly 30% of revenue. Adjusted EBITDA excludes stock-based compensation, which will continue to be in the 5%-7% range for the year. In closing, Q1 represented an extremely strong start to the fiscal year, leaving us with plenty of visibility into the remainder of the year. With that, I will now turn the call back over to Ramesh.

Thank you, Dave. In summary, we are off to an excellent start to the fiscal year, which has given us sufficient confidence in our business health to be able to raise revenue guidance levels. The Marriott PMS project continues to make very good progress. Other customer stories of real, tangible value gain from switching to and using the Agilysys ecosystem of hospitality solutions are increasing both in quality and quantity. The availability of AI tools came at just the right time for us. We continue to release AI-based features at a steady rate, with appropriate guardrails and control mechanisms in place, further augmenting the value of the modern ecosystem of hospitality-focused software solutions that have been built diligently over the past several years. The hospitality industry is showing every sign of being hungry for such a modern, AI-enriched, interconnected ecosystem of software solutions.

Being focused only on the huge total addressable market of hospitality, with no other distraction or competing investment objectives, is also turning out to be a significant competitive advantage for us. Our competitive positioning continues to get better, as is reflected in the sales and revenue results. Many of the operational and revenue improvements customers have made recently through use of various modules within the ecosystem cannot be replicated by our competition anytime soon. The competitive advantages being built are based on a strong modern technology ecosystem foundation that is going to remain difficult to recreate for the foreseeable future by the competition, with or without the help of AI tools. Overall, we continue to be very well-positioned for continued disciplined revenue and profitability growth. With that, Lisa, let's open up the call for questions, please.

Thank you. If you would like to ask a question, please press star one on your telephone. You'll hear an automated message advising your hand is raised. If you would like to remove yourself from the queue, please press star one again. We ask that you wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. First question of the day will come from the line of George Sutton of Craig-Hallum. Please go ahead.

Thank you, Ramesh. Nice results. We now have a couple of tangible examples, Marriott and the Australian deal, where you weren't included in the original mix, but once you got in front of them, you were able to win the business. Can you just talk about how common it is that you're not getting invited into these mixes, and how are we trying to squeeze that percentage down?

Hi, George. That percentage of us not getting included in RFPs is very low with POS, like we already know. With respect to PMS, I would say that percentage is going really down in domestic regions, U.S., Canada, but still remains uncomfortably high in Europe and APAC. That percentage is beginning to reduce now with more and more good stories about customers using our PMS and the other add-on modules, and getting good results. That percentage is going down, but it's still higher than what we would like in APAC and EMEIA.

Understand. You gave a little bit of a hint, I think, relative to expenses as the year goes on. You're including in the guidance the potential for some strategic investments, I'm wondering if you're highlighting potentially accelerated work on CRS or RMS, or was there something else that might account for those strategic investments?

Not trying to indicate any particular investments. With the AI tools that we now have, we don't expect any significant quantum investments, quantum increase in headcount or any other investment for CRS, Revenue Intelligence, or for any of the other products, or if we win another major deal. We don't expect any more of those quantum jumps that we needed to do with our cost in the past. I think our cost will grow up incrementally as required in sales, services, R&D, and other areas. We were not trying to hint at anything in particular, George. All we were trying to say is we are comfortable with the 24% adjusted EBITDA by revenue, and even if here and there something pops up, we don't expect us to change that number.

Understand. Appreciate the answers. Thank you.

Thank you, George.

Thank you. One moment for the next question, please. Next question will be coming from the line of Mayank Tandon of Needham. Please go ahead.

Thank you. Good evening. Ramesh, regarding the comment about the backlog converting faster, which drove the upside this quarter and also the raised guidance, would you be able to unpack how much of that is from the Marriott PMS rollout going better than planned versus how much of it is coming from the ramp-up of other accounts outside of Marriott? Just trying to separate the impact of these two drivers of the model. If there is upside to the model going forward, what is that source of upside potentially? Is it going to be continued backlog conversion on the core, or would it really come from the Marriott rollout going better than planned?

We are not trying to differentiate between the two, Mayank. Let's just break this down. The numbers are going up because of better sales performance. We are selling more to current customers and to new customers. That's the main reason for us, the numbers going up. By backlog conversion, what we mean is a general improvement in implementation services efficiency. Our modernized products have been now in the market for, say, one and a half to four years or so. They are becoming easier and easier to get implemented. That is the general backlog conversion we were talking about. As far as the Marriott project is concerned, Mayank, it is going on plan. It is going per schedule. Quality of the project-wise, it's making excellent progress. Everything is going according to schedule.

By backlog conversion, what we mean is, the implementations are going quicker now after the sale, even if it is a complex ecosystem sale, because the products are settling down quite well. The main reason for the numbers going up, I would say, is better than expected sales success, and everything else is becoming more efficient in the organization as well.

Got it. I had to try to ask, I appreciate the response. I wanted to just ask you about the international, given this flagship win in Australia. Is this a precursor to maybe more such large property wins? I know in the past you've talked about the challenge being getting your name out. I'm just curious if you're seeing any signs across not only Asia Pacific, but the broader international market that gives you comfort that this could be maybe more of a catalyst going forward in terms of winning large multi-product opportunities like the one you did in Australia.

Yes, Mayank. Each one of these wins does form a catalyst in itself. In fact, the reason why we won this particular deal is because the previous big deal we had won in Australia, and that previous customer had had good visibility to our products and ecosystem and the gains they are getting from their pilot properties going live. It is their recommendation that even got us into the gate here. Each one of these big wins, whether in Australia or whether in any other place, does create a catalyst effect because the products are now at a stage where they actually create good value for them. It is real, that it creates real value for them, they are able to talk about it to other customers. That definitely helps.

All this will continue one upon the other to speed up, we just need a lot more of this. In terms of concerned international markets, it still remains, Mayank, that we don't have enough singles and doubles. We need to increase that as well. These large deals, definitely one upon the other, have an exponentially increasing effect.

Understood. Very helpful. Thank you so much, Ramesh.

Thank you, Mayank.

Thank you. One moment please for the next question. Next question's coming from the line of Matthew VanVliet of Cantor. Please go ahead.

Yeah, thanks for taking the question. Nice job on the quarter. I guess, first, going back to the commentary that property management was ahead of POS for the first time. I guess, how much of that was the contribution from Marriott included there? And then, how much, if any, of the raised guidance for the year is just maybe Marriott being slightly ahead of progress, in terms of revenue contribution, than what you were originally expecting?

The Marriott project did contribute, no question, Matt. We are not breaking down that number. PMS and PMS-related add-on modules, the subscription revenue that we get from that has been increasing over a period of time. Like, we have shown 30%+ year-over-year percentage improvements for a while now, for quite a few quarters, even before the Marriott project really started going up. Marriott definitely contributed, no question about it. The momentum that we have with PMS and related modules has been happening for quite some time now, even before these projects started.

I think it's a general trend because PMS carries with it a lot more add-on modules, about 15-20 of them, while around POS, we have about four or five add-on modules. It stands to reason that subscription revenue increases in PMS is going to happen more and more. Also in PMS, we start with a very low market share, Matt. You should expect the PMS increases are due not only to Marriott but to all the other projects that are going on as well.

Helpful. I guess as you look at some of the investments you've made around the implementation team and the broader professional services group, from both headcount and process improvements over the last few years, I guess, how much are those contributing to the ability to grow that revenue even as the wind-down of the one-off projects around Marriott as sort of part A and part B, is there an inclination to add more capacity there given you're at record backlog now, and bookings continue to have such strong momentum. Do you need additional headcount, or is this just the normal cadence of project timing and with that is just a reflection of booking success more so than needing to invest additional headcount?

Currently, we are in a good place, Matt, when it comes to headcount across all departments. Not only services, but also in sales and also in R&D and also in other areas. We are in a good position with respect to headcount and more operating leverage. We can drive more revenue, all kinds of revenue, including subscription revenue. We are in a good place to drive additional revenue, additional projects with the kind of headcount investments we have today. We will continue doing incremental increases. That is across all departments. Because the business is growing, we will continue doing incremental additions to our headcount as we go along, but no quantum increases in investments are needed anymore, unlike it used to be in the past. We're in a good position now. We will continue incrementally increasing our capacity, but we don't need to do anything special.

No major cost increases are required in order to fuel the growing success that we are having. While you think about the fact that our implementation and other efficiencies are getting better, the first thing that should come in the mind is product. The product quality is so much better today compared to three, four years ago, not only in terms of best of breed each individual product, but the strength we bring as an ecosystem of solutions that no other competitor has invested this kind of money in. Both the products individually and the ecosystem put together give us tremendous competitive advantage with which our current sales team can sell a lot more, and the products are so much more well-settled in the field that our implementation teams can execute a lot faster.

All of that starts from the product quality and the advantages it is giving us. To answer your question, in short, no great quantum investments are required to push it further. We will just keep doing the incremental additions as we go along.

All right. Perfect. Thank you.

Thank you.

Thank you. One moment for the next question, please. Next question will come from the line of Stephen Sheldon of William Blair. Please go ahead.

Hey, thanks for taking my questions. First one here, there's been more debate between investors on software insourcing versus outsourcing, especially with AI-supported coding efficiency that could help enterprises arguably build their own custom software. Ramesh, just wanted to get your take on that topic. Seems like the Marriott PMS contract that you're implementing right now would be a clear signal towards outsourcing in enterprise hospitality. How concerned are you about hospitality customers trying to build their own software stacks? Have you seen any signals that some might lean more that way in the future? Are the signals continuing towards more enterprise software outsourcing? Just would love to get your take on what you're seeing out there.

Yes. Hi, Stephen. First, I always want to be careful while answering questions about AI. I never want to sound tone-deaf. It's not as if we are not watching what is going on in the world. So far, I don't think it'll happen anytime in the foreseeable future, not seeing any signs or any signal of insourcing. I don't expect it much in enterprise software, not just for us, Stephen, but in general, on behalf of all enterprise software technology providers, I don't expect it. For example, you take a medium-sized resort, that is using our software now, if you look at the annual recurring fees they are paying us, if you take that recurring fees and, say, invest it in creating your own team, I don't think that money is enough to pay for three developers and three testers, right?

It is not enough to do that. By the way, AI is not cheap. AI takes a lot of cost as well. That particular resort, instead of spending that relatively small amount, tens of thousands of dollars or maybe $100,000, $200,000, instead of doing that, they get the benefit of tens of millions of dollars' worth research by providers like us who also use AI. I don't think they will get into their own insourcing because it is just too bigger task, it is too complex task just for one product. You add PMS, POS, and 30 additional modules that have to work together, it's too difficult a task for such a medium-sized resort to take up. If you even go to the bigger customers, those customers need the benefit of innovation across the industry.

There is no big customer who just wants the benefit of their own innovation, their own ideas. I don't think they have enough of those ideas to run. They want the benefit of what the other big customers are doing, and that's our job. That is why we spend tens of millions of dollars gathering all the innovation ideas, putting it together in a product. A customer pays us a fraction of the cost that it takes us to create it, and they get the benefit of it. That's how enterprise software works with or without AI. So far, we are not seeing any signals. In fact, the last six months is the best six-month period we've ever had with sales before. We've never had such good back-to-back good sales quarters before. We are in fact seeing opposite signals.

We think the sales division are getting sped up, or what is the word for it? Speeded up or getting faster now because of all the AI-based innovations we are doing, customers want the benefit of that. We are seeing the opposite effect, I don't want to sound tone deaf. All I can tell you is we are not seeing any signals of any such insourcing.

Very helpful, I agree with your take. I guess as a follow-up with win rates remaining high and the biggest bottleneck right now being getting in front of more prospective customers, has it impacted your thinking about sales capacity additions over the rest of the year? I know you pushed the pedal a lot there last year, I guess with the success you're having and a lot of opportunity out there, why not push the pedal there even more, going forward?

We will, Stephen. I know that's a conversation Dave and I have with Joe almost on a weekly basis. Anytime Joe needs and our international leaders think they need extra capacity, we will approve it in a matter of two hours. We won't hesitate to increase our sales and marketing spend at all, the catalyst has to be more value creation for customers. We need the good news to spread. Like I told you, one of our U.K. customers used the S.P.E.N.D. It's called the S.P.E.N.D. It's a package implementation process that you can do directly through the booking engine that a guest can go create an automated inventory for a package. No one else can come close. Even if you give the idea, a competitor cannot create that. That has created so much value for them, they are willing to talk about it openly.

Our user conference has more such stories. We need to spread those stories first, Stephen. Currently, we have good geographical coverage domestically and in all the countries we want to focus on internationally. We are well-placed as far as our sales team capacity is concerned. We will continue to increase it as we feel the need arises. We won't hesitate from doing that, but we are doing it the right way now. We are creating the success stories first, and as we feel the demand is increasing, we will absolutely not hesitate to spend more in marketing and sales.

Makes sense. Thank you. Great quarter.

Thank you, Stephen.

Thank you. One moment please for the next question. Our next question is coming from the line of Nehal Chokshi of Northland Capital Markets. Please go ahead.

Thank you. My congrats to the strong quarter. Ramesh, you talked about how you're having improved service delivery efficiency, which is making Agilysys more competitive in price-sensitive environments. How much are these price-sensitive environments, how much of a portion of that $16 billion TAM are these price-sensitive markets?

I can't put a number on it, Nehal, good question. I think a large part of it is quite price sensitive, especially in international regions. The more our services becomes more efficient, Joe will tell you, as our revenue leader, he will tell you that more we can reduce our quotes, especially with respect to services, the more of those deals we will win. I can't put an exact number on it. I've not done that kind of analysis, Nehal, but at least half of it, right? At least half of the $16 billion total addressable market, I think, is price sensitive, especially in international regions. We are getting there. We are becoming more and more efficient, where we are going to become more and more competitive in those markets.

Where those potential customers are price sensitive, is it the same competitive landscape, or are you going to be looking at a different set of competitors?

Same kind of landscape, Nehal. If we look at our win ratio is very impressive. In enterprise software, I don't think it can get much better than that. We remain disciplined with our pricing. We don't run to the bottom. We're just not that kind of company. When you look at the reason for the losses, the number one reason always comes out as pricing. Of all the reasons, that's by far number one. More we solve that issue, the better off our sales success efforts will be.

All right, great. Thank you. Congrats again.

Thanks, Nehal.

Thank you. One moment please for the next question. Next question is coming from the line of Brian Schwartz of Oppenheimer. Please go ahead.

Yeah. Hi. Thanks for taking my question this afternoon. Good job on the quarter, guys. Maybe just starting out with the top line, with the guidance raise on that. I don't know if you can parse it or what your commentary would be, but how much of that raise is related to the faster conversion, the backlog, versus improvements with sales cycles or deal sizes or just the sales efficiency of the business?

Yeah. Hey, Brian. Pretty much the entire raise is related to subscription revenue, which like Ramesh said, is a mix of stronger sales than expected and stronger backlog conversion. Product and professional services should stay in our original guidance of flat for product year-over-year and 5%-10% growth for professional services. Obviously, the current guidance provides for a little bit of pullback in professional services in Q3. All of the guidance raise was related to the better subscription sales and backlog deployment than we expected just a couple of months ago.

Thank you, Dave. One follow-up for Ramesh on the big PMS deployment. Is there anything that you can share with us from a learning standpoint, what you've learned so far from those early initial deployments? How are those lessons influencing your implementation efficiency, the resource requirements, and how you think about the future rollout timelines? Thanks for taking my questions.

Thank you, Brian. The main lessons we have learned, if I just put it in a few major categories, one thing we have learned is to get better at change management. These products are not rocket science, right? Hospitality software is not rocket science. Our customer users do learn the product quite fast and in a matter of a few months, settle down well. The difficulty is in moving from where they were. Now, the main PMS vendors, the technology providers in this place, have been dominant for 15-20 years. These are all very well-settled products, and they carry with them very well-settled practices for a long time. It's the change management that proves difficult for us, and we are getting better and better at it. Data migration, moving from one system to the other.

There are 100 good things the new products will give them, but there are 10 crucial things they are used to doing that they now have to do in a different way. We are providing for that more and more in our PMS products. Handling change management and reducing that level of friction there is in moving from one system to the other is one thing we are getting better and better at. This big PMS rollout we are involved in, we've also learned very good lessons from a great customer like Marriott. That's one. The second thing we are focused on is making the integration strengths among our ecosystem products a lot better. One of the main reasons customers choose us is the strength of our ecosystem, and we have to bring that to the surface, the advantages of the ecosystem.

We are now really focused on making sure our products create value across each other, so that the joint value that the products create cannot be duplicated by competitors. That's another area that we are really, really focused on to get better at. We are always focused on better customer user training to make sure they understand the products quicker, use of AI tools to make the grunt work of implementation faster so that we can use more of the hours to actually train the users in the new system. A lot of lessons like that we are learning, and we are becoming better with every passing month.

Thank you. One moment, please. Next question will be coming from the line of Billy Fitzsimmons of Piper Sandler. Please go ahead.

Perfect. Thank you for taking the question. Ramesh, appreciate the detail on the kind of AI adoption strategy. I have to imagine it's still pretty early here, and we'll get more data points as customers go under beta. As we think about your new AI tools at a high level for those 30+ AI products, how should we think about the eventual ARPU uplift from these versus some of your existing modules and your historical cross-sell averages? Then any early feedback from some of those initial pilots.

The initial feedback has been good, to answer your last question first. AI is really adding strength to the strengths we already have. Okay, let me go to the first part of your question. Unfortunately, we are not going to be able to give you a separate AI-related ROI, because the way we are thinking about AI is not like a separate thing we are selling. Excuse me. It's a natural part of all the product features. A lot of the product features. Now, some of those AI features will carry an additional monetization cost because we have to pay extra costs for that. A lot of the features are making our products easier to buy. We are not thinking of it as an entirely separate thing that we can assign a separate value to.

Like, the way we think of AI, we break it up into four major parts. One is hyper-personalization. Like, we now provide our customers guest insights. We provide an automated itinerary agent. Like, if you go to a hotel resort and book a package, it'll automatically create an itinerary for you. Now, it's not a separatable feature. We already had that itinerary thing, but now the agent makes it a lot faster. We have a bunch of agentic process automation, check-in agent, book offers agent. That's an agent will do a lot of the work for you. That's all not a separate thing, but it's all part of the product. Revenue Intelligence and CRS that we are going to introduce, we will be able to assign separate monetization to. A lot of our UX in our products are all AI-based now, conversational food ordering, conversational reservations, a housekeeping assistant.

Those all add value to the product. We are thinking of AI as an integral part of our thinking. It is going to be difficult for us to give you a separate ROI on that, but we will try. Once Revenue Intelligence and CRS and all that really hits the market, we will try and provide you those numbers as best as we can. Currently, we are focused on all the guardrails. What kind of LLM do we use for what kind of purpose? How do we manage costs so that it doesn't go out of control? We are setting all those guidelines and guardrails now, and the 30+ features we announced during our user conference are all sort of hitting the market now during these months, July, August, and September.

Makes sense. I appreciate the commentary there. If I could sneak in a second one, obviously a notable milestone here with PMS surpassing POS. Good to see the growth in PMS, but there have been a couple of questions on that already. I actually thought the color on how POS and related modules should still remain in that high teens to low 20s growth for the foreseeable future. I know that's long-term directional color, but can we talk about maybe the assumptions that underpin that? Is that just TAM expansion potential, new customer adds, kind of what you've seen historically and extrapolating that forward? How do we think about the sustainability of growth in that market?

POS will also continue to grow, Billy. Our market share is not great in POS, even in the markets where we are strong at, like food service management, our market share with POS is quite low. Even in areas, international regions, Europe and APAC, our POS market share is quite low. POS, we are relatively a lot more well-established compared to PMS, where we are the underdog really coming up now. We are well-established with POS, but there's still a lot of areas of growth there as well. I think we should be able to maintain that high teens, 20, kind of subscription revenue growth in POS as well, Billy. That should continue to hang around that kind of range, is what we expect in POS. There's still a lot of growth left in POS as well.

Perfect. Appreciate the commentary, Ramesh.

Thank you, Billy.

Thank you. One moment for the next question. Our next question is coming from the line of Allan Verkhovski of BTIG. Please go ahead.

Hey, thanks for taking the questions. Ramesh, last quarter you indicated that the Marriott rollout could take around two years or possibly longer. Given the strong results again this quarter, along with Marriott's recent commentary suggesting the rollout could be closer to one year, can you update us on how your current view of the rollout timeline is different from your view three months ago?

I think you're seeing too much meaning into various comments, Allan. The project is going well, no question about it. The project is making good progress. All the technical aspects have been proven out quite well. Marriott and all the other vendors. We can't take all the credit for it. All the other vendors have done a superb job as well. The project is going well. It's still a long way to go, and a lot of the complex properties are coming up now.

Far, most of the implementations have been select service, and now the major properties, the full service, the premium properties, are all coming up, and they will bring their own challenges. We are still expecting the timeline to be somewhere in the next 18-24 months, sort of completion time work is where we are working towards. The project is going well. There is enough reason for optimism, but we are not expecting the kind of super fast implementation timeline that you are thinking about, Allan.

Got it. Okay, that's helpful. Just as a follow-up for you, Dave, if I can. On the 15 new customers that were added this quarter, looks like that was down sequentially on like past Q1 periods. Can you provide more color on what drove that? You highlighted several notable wins in the prepared remarks. Any additional context on factors such as customer size, mix, or timing of deals would be helpful. Thanks, guys.

Yeah, no, the customers was on the lower end at the 15, but the way we think about the business, as long as it's in that 15-20 range, we're pretty good. It kind of keeps us at or ahead of our FY 2027 plan. The number is a little bit low, but deal sizes were really large. Ramesh made a comment about how many seven-figure deals. Number was maybe one or two low, but the deal sizes are so much bigger, there's no area for concern. As long as we stay in that 15-20 range, we're in a very comfortable spot for our FY 2027 plan and beyond.

Thank you. One moment, we have a follow-up question. That follow-up question is coming from the line of Nehal Chokshi of Northland Capital Markets. Please go ahead.

Thank you. Two-part question, actually. The first part is, the three $1 million software deals, would you consider these customers as the dolphins and sharks, or are those bigger than the dolphins and sharks that you've talked about in the past?

They are a lot more than $1 million, Nehal, so I just called it seven figure. Please don't think of them as $1 million. Good question. If I assign the terminology of whales to the big brands, I would put this in the category of reasonably big sharks, Nehal, yeah.

Got it. Are there any major RFPs in the tens of millions of dollars ACV range that you're aware of at this point in time?

I'm not going to go into that, Nehal. We are not going to discuss it RFP by RFP now. There are sales opportunities. See, I'll give you this kind of answer, Nehal. The last six-month period is the best six-month period we've had in sales in our history, and our sales pipeline now is larger than what it was before that six-month period started. We're doing well with sales pipeline, and our sales pipeline consists of all kinds of opportunities. If you go back to your ocean analogy, it has all kinds of sizes of fishes out there. I won't go into specifics on the RFPs, Nehal, but you can rest assured that the opportunities vary from the large to small in the sales pipeline, yeah.

Great, thanks. I do love your sea animal analogy, I keep on using it. Thank you.

I have to come up with a better one, Nehal, sometime soon.

I'll try.

Thank you. There are no more questions in the queue. I would like to turn the call back over to Ramesh for closing remarks. Please go ahead.

Thank you, Lisa. Thank you for all your interest and support. Please take good care, enjoy the rest of the summer, and we'll catch up with you again soon. Thank you.

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