管理層發言
Good day, ladies and gentlemen, and welcome to the Agilysys 2026 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, Vice President of Investor Relations and Operations at Agilysys. You may begin.
Thank you, Lisa, and good afternoon, everybody. Thank you for joining the Agilysys Fiscal 2026 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 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 provided guidance levels, increase implementation efficiencies, the company's ability to convert the backlog into revenue 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. Welcome to the Fiscal 2026 Third Quarter Earnings Call. Joining Jess and me on the call today at our Atlanta headquarters is Dave Wood, CFO. I hope all of you are staying warm and safe. As is our usual practice on these calls, let me cover sales and selling success first before discussing revenue, profitability, guidance increase and other business updates. We measure sales in annual contract value, ACV, terms. Q3 fiscal 2026 was the second-best Q3 October to December period sales quarter. This was the best Q3 sales quarter on record for the hotels, resorts and cruise ships, HRC sales vertical, highlighted by several significant new customer wins including Bolt Farm Treehouse in Tennessee, a 5-star luxury nature immersive wellness retreat property that selected Agilysys' property management system, PMS, Agilysys' web booking engine, Spa and 5 other Agilysys software solutions. To provide their guests the seamless exceed expectations experience we are looking for and Sands resort in Northern Myrtle Beach, South Carolina, who also selected various software solutions from our ecosystem of products, including PMS to help improve guest experiences at their Oceanfront Gateway property. Q3 sales also included a couple of big brand properties switching from a competing system to the Agilysys' POS platform ecosystem. Casino gaming, our strongest sales vertical for several years now, witnessed a relative sales slowdown during the months of October and November, pulling down global sales levels during those 2 months but recovered well during the month of December. With respect to overall global sales, this was the best December month in our history. On a year-to-date basis, Foodservice management, FSM, sales over the first three quarters of fiscal 2026 is already higher than full year sales during each of the previous two years. Full fiscal 2026 may possibly end up being the best ever sales year or come close to it for FSM, which relies mostly on selling the point-of-sale, POS, family of products. While cumulative international sales over the first 3 quarters is already close to making fiscal 2026 the second best international sales year with one full quarter remaining, Q3 international sales were somewhat lackluster. International sales will continue to experience this sort of up and down trajectory as we continue to establish our reputation across the globe and steadily exchange our current reliance in international regions on hit or miss big deals to a more consistent mix of small, medium and big wins like we see in the domestic market. Cumulative subscription SaaS sales during the first three quarters of fiscal 2026 is already at 95% of previous best full year sales which happened to be last fiscal year. Fiscal 2026 year-to-date subscription sales is up 37% year-over-year. Calendar 2025 was the best calendar sales year in our history. Our win-loss ratio in competitive deals remains impressively high and far ahead of normal established enterprise software norms. During fiscal 2026 Q3 October to December, we added 16 new customers, excluding Book4time. All of them were fully subscription-based and involved an average of about 5 products per day. 9 of these new customers included purchase of PMS. In addition, 13 new customers signed up for Book4time Spa. We also added 91 new properties, which did not have any of our products before, but the parent company was already our customers. Of the 120 new properties added during the quarter, across new customers, new properties of current parent customers and Book4time, 118, meaning all but 2 were either partially or fully subscription-based. With respect to new product sales, there were 109 instances of sales to properties, which have at least one of our other products already in use. These 109 instances involved sales of a total of 248 new products. Before moving on to revenue details, a quick word on the Marriott PMS project. We are happy to report that this project is being expertly managed by customer personnel and is making good progress. PMS pilot property implementations have been completed successfully across the U.S. and Canada. We are now in the exciting process of getting going on the implementation waves, which are expected to keep increasing in size and scope during coming months. We continue to exclude the Marriott PMS project from all our sales and backlog numbers. Now with respect to revenue and profitability. Fiscal 2026 Q3 revenue was a record $80.4 million, the 16th consecutive record revenue quarter, 15.6% higher than the comparable prior year quarter. Product revenue was $10.7 million, which was about the same as Q3 last fiscal year, slightly ahead of our expectations. Product backlog at the end of Q3 was about 85% of the previous Q2 quarter exit value and almost double the level it was at the end of Q3 last year, giving us good visibility for the rest of the fiscal year. Fiscal 2026 Q3 October to December services revenue was $17.7 million, 22% higher than the comparable prior year quarter and in line with our expectations for this quarter. This quarter was a record high for normal projects implementation services revenue. The sequential quarter-to-quarter decline was mostly due to the Q3 holiday period quarter being typically more challenging than Q2. We saw significant improvement in the management of projects during this period compared to the holiday season last fiscal year. We continue to make good headway in improving software implementation efficiencies and finding ways to reduce customer implementation delays. Services revenue backlog at the end of Q3 was less than at the end of the previous quarter, which is a good indicator of improving implementation efficiencies. The quicker we implement the project signed up by sales, of course, the better off we are. Fiscal 2026 Q3 recurring revenue was a record $52 million, 17.2% higher than the comparable prior year period. Recurring revenue was 64.7% of total revenue this quarter. Within recurring revenue, subscription revenue was a record $34.9 million, 23.1% higher than the comparable prior year quarter. This was the 17th consecutive quarter of subscription revenue year-over-year growth of at least 23%. Subscription revenue quarter run rate has doubled in the last 2.5 years and has increased from 63.8% of total recurring revenue in Q3 last year to 67% of total recurring revenue this quarter, the highest percentage level reached so far. Annual maintenance revenue was also 6.8% higher than Q3 last year. The current subscription growth levels are coming, for the most part, from new incremental projects and are not dependent on cannibalization of annual maintenance generating on-premises installations. Subscription revenue pertaining to point of sale, POS, and POS-related modules grew by 20% year-over-year, improving from the mid- to high teen growth levels reported during the past few quarters. We are taking normal growth strides again with our POS business with the modernized versions making an increasingly greater positive impact in the field. Subscription revenue pertaining to PMS and PMS-related modules grew by 30% year-over-year. Add-on modules across both PMS and POS, including Book4time constituted 37% of total subscription revenue. Despite all the challenges associated with the holidays filled October to December Q3 period, fiscal 2026 Q3 was the best quarter on record with respect to the sum of annual recurring revenue, ARR, of all subscription projects implemented. The extent of subscription ARR installed during fiscal 2026 Q3 was 40% higher than during the comparable period last year. The increased velocity of project implementations has a lot to do with the modernized products becoming exponentially easier to implement over time, greater use of AI tools to improve implementation services efficiencies and far higher starting levels compared to the same time last year. While we continue to expand team sizes as business levels improve in areas like sales and services, we are currently well staffed for the most part to fuel continued business expansion during the short and medium term. In general, the use of AI tools continues to improve various business areas, including product development and quality assurance initiatives, AI-driven product enhancements, implementation services efficiencies, marketing, sales initiatives, finance, customer support and legal. One other quick reminder, virtually all our software licensing is based on the number of rooms for PMS and related modules, number of terminal endpoints for POS and number of sites or locations or profit centers within sites for inventory procurement for food and beverage products. Virtually all our software license structures are not based on the number of users. As customers increase their operational efficiencies using AI and we ourselves continue to embrace AI tools more and more, all of that is great for our business. An excellent services implementation quarter has pushed down combined product recurring and services revenue backlog levels, excluding the Marriott PMS project to about 90% of previous record levels, leaving us with considerable room to achieve our ongoing revenue and profitability growth goals. We started fiscal year 2026 with a full year revenue range expectation of $308 million to $312 million, then raised it to $315 million to $318 million, and we now expect fiscal 2026 full year revenue to be $318 million at the top end of the recent guidance range. Similarly, we started the year expecting subscription revenue year-over-year growth of 25%, then increased it to 27%, then again to 29%, and we are currently expecting the year-over-year growth to be 29% as stated previously, not including any significant subscription revenue contribution from the Marriott PMS project. No change in the 20% adjusted EBITDA by revenue expectation we started the year with. With that, let me hand over the call to Dave for further color on the business and financial details. Dave?
Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. Third quarter fiscal 2026 revenue was a quarterly record of $80.4 million, a 15.6% increase from total net revenue of $69.6 million in the comparable prior year period. One-time revenue consisting of product and professional services was up 12.7% over the prior year quarter and in line with our expected 5% to 10% increase in one-time revenue for the fiscal year. Recurring revenue was up 17.2% on the back of strong subscription revenue growth. FY '26 year-to-date revenue is $236.4 million, up 17.4% over the prior year-to-date period. Q3 sales kept us on pace toward reaching the higher end of our annual revenue targets. Through the first 3 quarters of FY '26, subscription bookings have increased by 37% compared to the same period last year. Despite increasing subscription revenue growth guidance from the original 25% to 29%, the subscription backlog is still about 88% of its all-time high. Thanks to our robust backlog and strong sales momentum, we continue to have considerable insight into our business for the final quarter of fiscal year 2026 and into fiscal year 2027. Professional services revenue increased 22% over the prior year quarter to $17.7 million as we continue to see year-over-year improvements in backlog deployment compared to the low point during Q3 fiscal year '25. Professional services revenue remains a good leading indicator for future subscription revenue growth as the vast majority of services revenue is contributed from normal implementation type projects and activities. Professional services performed much better than expected in Q3 fiscal year 2026. We expect Q4 FY '26 professional services revenue levels to return to the $18 million range like prior quarters. Total recurring revenue represented 64.7% of total net revenue for the fiscal third quarter compared to 63.8% of total net revenue in the third quarter of fiscal 2025. Subscription revenue grew 23.1% for the third quarter of fiscal 2026. Subscription sales and backlog remain at healthy levels, rising by 14% over the elevated FY '25 exit rates. Subscription revenue is trending comfortably towards our 29% subscription growth guidance with organic growth trending near 25%. Moving down the income statement, gross profit was $50.2 million compared to $43.9 million in the third quarter of 2025. Gross profit margin was 62.5% compared to 63% in the third quarter of fiscal 2025. Gross margin was down slightly due to margins associated with one-time revenue, while we continue to ramp up our newly hired professional services team members. Combined, the three main operating expense line items, product development, sales and marketing, and general and administrative expenses, excluding stock-based compensation, were 41.2% of revenue in the fiscal 2026 third quarter compared to 42.1% of revenue in the prior year quarter. Excluding stock-based compensation for the third quarter of fiscal 2026, product development increased slightly to 19.3% compared to 18.2% of revenue in the prior year third quarter. General and administrative expenses reduced for the quarter year-over-year from 11.7% to 11.2% of revenue and sales and marketing decreased from 12.2% to 10.6% of revenue. Operating income for the second quarter of $11.7 million, net income of $9.9 million and gain per diluted share of $0.35 were all well above prior year third quarter income of $7.4 million, $3.8 million and a gain of $0.14. Adjusted net income, normalizing for certain non-cash and non-recurring charges of $12.2 million compares favorably to adjusted income of $10.7 million in the prior year third quarter and adjusted diluted earnings per share of $0.42 increased compared to the prior year quarter of $0.38. For the 2026 third quarter, adjusted EBITDA was $17.3 million compared to $14.7 million in the year-ago quarter. FY '26 adjusted EBITDA continues to pace with our annual guidance of 20% of revenue. Through the first three quarters of the fiscal year, adjusted EBITDA of 19.5% of revenue and trending just north of 20% full year profitability guidance. Moving to the balance sheet and cash flow statement. Cash and marketable securities as of December 31, 2025 was $81.5 million compared to $73 million on March 31, 2025. As a reminder, we paid down our credit revolver by $24 million in the first half of the fiscal year, leaving us debt-free now. Free cash flow in the quarter was $22.7 million compared to $19.7 million in the prior year quarter. As we said in the past, adjusted EBITDA and free cash flow over a full fiscal year after normalizing the impact of CapEx continue to be good proxies for the financial health of the business. For our fiscal year 2026, we are maintaining guidance for subscription revenue growth at 29% and based on our current backlog and sales momentum. This quarter, we are also raising our top line revenue guidance to $318 million. Adjusted EBITDA of 20% remains the same for fiscal year 2026 as we continue to evaluate various strategic growth initiatives. In closing, we are extremely pleased with how our business has performed during the first three quarters of fiscal year 2026 and how it's shaping up going into our last fiscal quarter. With that, I will now turn the call back over to Ramesh.
Thank you, Dave. In summary, the business continues to march along the revenue and profitability growth paths we have created for ourselves like a relentless well-oiled machine. The modernized cloud-native product ecosystem and our top-notch sales leadership teams are opening up many exciting hospitality industry doors for us that were inconceivable a few years ago. The multiple growth path ahead of us is based on a solid foundation of a world-class product set and an ecosystem of hospitality software solutions that, taken together, has virtually no match in the industry. We only need some of these growth parts to work out well to feed our increasing revenue and profitability growth ambitions. What gives us our current growing competitive advantages has taken us several years of sustained high-quality product development work to build and will be very tough to duplicate anytime soon. We are not seeing any signs of anyone else even trying to create such an ecosystem. And our pace of innovation is only getting faster with the availability of AI-based tools that are increasing development speed and providing us with product enhancement possibilities that did not exist before. And there is absolutely no question about the fact that the total addressable market remains huge relative to our size and growing. There are several PMS competitors whose installed base is currently many, many times our size. The extent of growth possibilities ahead of us in the coming years, especially on the PMS side of the business, which is completely software-based, is staggering. I could sit here and bore you with details of various sales successes accomplished during this quarter, including a global POS hunting license master sales agreement signed with one of the largest hospitality corporations in the world, major PMS and multiproduct ecosystem deals signed with several casino gaming corporations, including for a big water park project, expansion of business with several Ivy League universities in the SSM vertical, and I could go on. But for me, personally, the most heartening and promising highlight of the quarter was a couple of our best and biggest customers willingly taking reference calls with a couple of other big prospective customers. Talking about our development velocity, pace of innovation, willingness and ability to bring the product enhancement dreams of customers into reality in a matter of weeks and months, world-class levels of consistent customer service, thereby providing prospective customers the reasoning of why we are increasing the best technology provider partner any hospitality corporation can hope for. One other significant highlight during recent months has been two of our major customers currently using multiple Agilysys products, including POS and PMS, are in the process of taking on a couple of major brand flags, but have turned down and refused to take on the brand's mandated PMS product insisting that they will need to stick with Agilysys' PMS even after the brand flag changes to maintain the kind of experience that guests have become accustomed to in the recent past. New nuggets like this, which may appear minor details for now, are significant indicators of a promising future that is just beginning to take shape. The competing PMS products have been influenced in the field for decades, but we are well and truly climbing the charts now. We remain confident in the current state of our business and our ability to continue driving top line growth while simultaneously improving profitability levels. It is highly likely that the next couple of fiscal years will turn out to be the most exciting ones in our history with increased top and bottom line growth expectations. We are excited and cannot wait to share fiscal 2027 guidance levels with you during the next earnings call, likely around the middle of May. With that, Lisa, let's open up the call for questions.
分析師問答
Our first question for today will be from Mayank Tandon of Needham.
Ramesh, I wanted to start with your comments around some weakness that you saw in the gaming and casino space during the months of October, November. I wonder if that coincides with the government shutdown? And if that is the case, just given maybe some of the thought right now of a potential government shutdown in the next few weeks. Could that be something that might cause some of that December momentum to maybe slow down again? Just curious on some of your thoughts around that, what were the reasons and if that is the reason then something that we should be at least aware of as we go into the next few weeks and months?
I wouldn't speculate about the temporary slowdown. It lasted only a couple of months and was likely due to the strong performance of casino gaming sales over the years. It picked back up in December. There are various reasons that could have contributed to this, but we can't pinpoint them. I'm inclined to see this as just a temporary dip. The holiday season can sometimes slow things down for us, but we returned to normal levels in December. Therefore, I won't speculate on any specific causes.
Understood. Okay. I thought I would just ask just to get any insights into it. For my follow-up question, I wanted to just see how much you could share in terms of your expectation on the Marriott PMS mass rollout expectations? Do you have a sense of timing? I know it's underway in some capacity. And then also maybe if you could comment on, should we expect any impact on margins in the short term as you begin the mass rollout? Or has that already been absorbed into your expectations?
Yes, regarding Marriott, we're cautious about sharing too many specifics as that information should come from the customer. However, I can say that the pilot phase was extremely successful and our products performed well. I want to emphasize how effectively this project is being managed. Having been in enterprise software for nearly 30 years, I can confidently say this is one of the most collaborative projects I've seen from a customer. The pilot phase has successfully concluded, and we are now moving into the implementation waves, which means the number of properties going live will gradually increase over the next few months. This is an exciting time for us, and we are optimistic about what this calendar year and the upcoming fiscal year will bring. Most costs and other factors are well accounted for. While I don't want to jump ahead and provide profitability guidance for FY '27 at this stage, it's reasonable to assume that if this year sees a 20% adjusted EBITDA by revenue, next year will be even better. I can't specify how much better, but we anticipate our profitability levels will continue to rise each fiscal year. There may be some quarters where we need to invest more in infrastructure, which could affect profitability temporarily, but overall, I expect FY '27 will be higher than this fiscal year, with this project being one of the contributing factors.
Next question is coming from the line of Matthew VanVliet of Cantor.
I wanted to narrow in a little bit on the international performance this quarter. You mentioned maybe a little lackluster. Curious if there was anything specific there, the holiday season maybe just put more of an impact on selling than it historically has in the U.S.? Or are there more sort of selling capacity additions that you expect to make in the team maybe in local markets where you're seeing traction that could help revive the performance in the fourth quarter and into next fiscal year?
Yes. Matt, so let me address the sales capacity frame. We have no sales capacity issues in any of our verticals, Matt. We have done a lot of sales hiring during the last year. And sales capacity-wise, we are in good shape. We are focused more on sales productivity increases. And in any of the verticals, including international, if we find that sales capacity reason, we will quickly hire. So we are ready to hire. We did a lot of hiring last year. But at the moment, there is no sales capacity issue, not only in international, but in any of our other verticals. So that's not an issue. Now as far as international, I wouldn't assign any particular reason to it, like holidays or anything. We are now working on more bigger-sized deals internationally than we've ever done before. We've never had this kind of a big customer in terms of multi-product ecosystem. It's definitely working very well internationally. There are multiple bigger opportunities we are working on now. But it is going to be a little bit up and down quarter-wise internationally. We've had a great year so far. Like we told you just in three quarters, this is already almost our second best fiscal sales year. We are doing well but you should expect some of these quarter-by-quarter ups and downs because currently, international sales is still dependent on the bigger ecosystem deals where we have a significant competitive advantage, not enough singles and doubles, if you will, to even it out. So these kinds of ups and downs could happen, Matt. But overall, international sales, this is going to be a very good year for us.
Helpful. And then as we get into the end of the year and you finalize all of the fiscal '27 outlook, curious on how you're doing at the very top of the funnel, how much of an impact have Joe and Terrie had since they've been in their roles now for a little bit in terms of generating that initial demand, generating the brand awareness that maybe was lacking in certain markets in the past?
Yes, Matt. When considering our sales pipeline, you can categorize it into two main sections. One includes the singles, doubles, and triples, which are usually counted in the pipeline. This segment remains steady and continues to progress. On the other hand, we struggle to include some of the significant opportunities that individuals like Joe Youseff have been effectively opening for us. These opportunities are developing and advancing through the sales process, but we don’t incorporate them into the pipeline because we're unsure of the value to assign to them. These represent the substantial deals we are pursuing. We announced one of these in the last quarter. Thanks to Joe and his team, as well as the sales team, these larger opportunities are emerging positively. Aside from these significant prospects, which are at an all-time high in our company’s history, the regular singles, doubles, and triples pipeline is steadily progressing and increasing.
And the next question is coming from the line of Allan Verkhovski of BTIG.
Could you discuss how AI capabilities across the platform are resonating with customers? What shifts you're seeing in the competition as a result and maybe how that's potentially impacting sales cycles? And then I've got a quick follow-up.
AI is becoming integral to our business. We haven't observed any notable advancements in AI from our competitors. With our products now modernized and between 2 to 4 years old, we have a great opportunity to integrate AI further. We focus on two main areas: enhancing our internal operations with a dedicated team aiming to incorporate AI throughout the organization, and improving our products with various AI implementations. This includes natural language processing in our data analysis tool and automatic voice recognition in many of our applications. For example, guests can easily book spa reservations or order food and beverages through our kiosks and web booking engine. We are also using AI for intelligent room upgrades and image recognition in kiosks. Recently, we received an innovation award for our AI tool that simplifies the booking process for complex packages, allowing guests to manage everything without contacting our call desk. These developments enhance our competitive advantage, and while not all of them are released yet, they are contributing to strengthening our market position.
That's helpful color. And then as my follow-up, the reiterated guide for 29% subscription revenue growth for the fiscal year suggests about 20% growth in Q4. Can you just talk through what's driving that implied deceleration for Q4? And then as we think about growth for next year, excluding potential contribution from the Marriott, what would you highlight as we consider extrapolating that Q4 implied growth for next year?
Thanks, Allan. Yes, the implied growth will be a little bit north of 20% for Q4. And a lot of that is just related to the Book4time acquisition. The core business is still growing at north of 25% or 25%, but the Book4time year-over-year comps are kind of pulling that down into the lower 20% range. And really going into next year, I mean, no change to how we talked about the story in the past. I mean, we'll stay in the 20% range with obviously some of our larger projects on top of that.
The next question will come from the line of Brian Schwartz of Oppenheimer.
Ramesh, I wanted to switch over to the POS business. That business seems to be improving here in the numbers that you're showing. And I know it's not like there's a lot of new opportunities that come up every year in the U.S. because those are longer duration contracts so it sounds like your win rates are going up there. My question for you is maybe you parse what's driving that? Is there something changing in the go-to-market you're doing? Is it the maturity of the POS? The modern product now? Or is it the reference ability like winning the Boyd Gaming that's having an impact on the win rates in POS? And then I have a follow-up.
Brian, I wouldn't say that the waiting time or the sales process time is any higher for POS. If anything, it's actually a bit faster than POS than PMS. But our POS business, like we explained to you like a year, 1.5 years ago, went through a tough phase when we were going through the modernization process. When we had an old system, and we completely modernized it and we had to do it part by part. But that is all done. Now the modernized solution has been in the field for now pretty close to two years, probably a quarter short of two years. It has settled down well and we are one of the very few vendors, Brian, maybe a couple of vendors who are capable of providing guest-facing and staff-facing feature sets where normally POS is a staff-facing system, but now more and more guest facing, like you can order food on your phone, you can go to a kiosk and all that for us, they are combined into one system. And when a waiter is carrying an iPad in the hand, so we support iOS, Windows and Android, all in one code base. There are no competing systems to that. Now this did not show up as an advantage till recently because the modernized system had to settle down. Now that it has settled down, it gives us a massive technology advantage over competing POS systems. So we do expect our POS business to continue to do well. The fact it has improved from subscription revenue growth rate used to be in the 15% to 19% for a year or so is now back to 20% is a good sign, especially in FSM. We are expanding the business to higher education and health care as well and not just depending on business and industry. So the POS opportunities are growing as much as our PMS opportunities are growing. The only difference is PMS carries with it a much larger ecosystem. There are about 20, 25 additional modules around PMS while POS has a smaller ecosystem, about 5 or 6 products around it. That's the main difference you're seeing in terms of PMS growing faster. Other way, there's a lot of promise in our POS business. We have turned the corner like Boyd Gaming, like in FSM, we are winning a lot of competitive deals now. And there is a lot of market share we still have to take from our competition in POS as well. So I wouldn't understate the promise of our POS business in any way.
And the one follow-up I had is maybe following up on Mayank's question in the beginning. Just kind of understanding on the gaming segment for the business. Is it your expectation that maybe the slower demand that happened in the beginning of the quarter that got caught up in the month of December, do you feel like all that demand got caught up in that December? Or are there opportunities that there still could be some catch-up demand in the gaming segment as we enter here the first half of the calendar year?
Thank you, Brian. There is still a significant amount of catch-up to be done. Not everything was caught up in December, which returned to a state of normalcy. December was a strong month for gaming sales. I wouldn't dwell too much on the slowdown we experienced in October and November. I can't pinpoint the exact reasons for it, and there's no benefit in speculating. Gaming continues to be a robust sales area for us and has performed well for several years. It’s possible that a slowdown was expected in October and November. We have some theories, but it's not worth spending time on those guesses. So, to answer your question, while December did improve, not all of the previous demand was recovered. To clarify, we did not lose deals; we occasionally lose some opportunities across all our segments, particularly on the lower end. However, there haven't been any significant losses. Many deals were postponed, some of which we reconciled in December, with more to be addressed in the coming months. Not everything was caught up in December.
Our next question will be coming from the line of George Sutton of Craig-Hallum.
Ramesh, there was a good amount of discussion in your script on the implementations, and it sounds like that has started to improve. I know one of your challenges had been if you're out selling new business and you're behind on implementations, you have to push out the schedule of rollout. Now that you've done a better job on implementations, I'm curious, is that making its way into your ability to pitch new business?
Yes. To a certain extent, yes, George, but it was never coming in the way of sales, right? Our implementation efficiencies, we've always wanted to improve it. Now AI is helping it a lot. A lot of the configurations, product to product integrations and all that can be done much faster using AI tools, and we are beginning to get all that into the field. Now to answer your question, what I would say is implementation efficiency is getting better is helping us with converting bookings to revenue faster. Normally, it's a one or two quarter gap between selling and implementing, which is what creates revenue. So that is becoming a bit faster because implementation efficiencies have increased. Now one other way it actually helps increase sales is when your implementation efficiencies increase and you can implement using lesser hours, our services costs decreased, and we become even more competitive because we are not the lowest priced vendor. So that way, it is contributing to improve sales. So just to summarize, implementation efficiencies increasing thus help increase sales because our services costs reduce. That is on the one hand. On the other hand, the fact we can implement faster reduces the time it takes between booking and conversion to revenue.
Got you. You mentioned earlier about reference challenges, particularly that you had relatively new products in the market at the time, which meant you didn't have reference customers. You noted that some of your largest customers are now taking reference calls. Can you provide a bit more detail about that process?
Yes. Generally, the number of customers willing to take reference calls is increasing, particularly for our modernized solutions. In the past, we lost many customers who would take reference calls for our older versions, which we no longer sell. We've had to rebuild our pool of reference customers, and it is growing significantly every month and quarter. More customers are now open to discussing our modernized solutions. Additionally, customers are receiving real value from the ecosystem; they previously managed relationships with several vendors but are now working with just one vendor. The automation in our modernized solutions is yielding tangible business results, leading customers to speak positively. Furthermore, the profile of customers willing to provide references is becoming increasingly prestigious, with more well-known companies open to discussing their positive experiences and our ease of partnership. Overall, our situation with reference customers is improving greatly each month.
And our next question will be coming from the line of Nehal Chokshi of Northland Capital Markets.
Yes. Thank you for the question. Just following up on that prior questioning here. As you know, your best and biggest customer's willingness to take prospective customer calls as similar size this past quarter was one of your biggest takeaways. Is this because it's a newfound willingness from these customers? Or is it because you now have these new big type of prospective customers in your pipeline that necessitate getting these large reference customers to take those calls?
I don't think it necessitates it, Nehal, but it is just a better situation we are in now. Because a lot of the successes we've had, Nehal, in the recent past, let's say, the last few quarters have involved ecosystem, multiple products working together has produced great value and by nature, they tend to be the bigger customers who have used our ecosystem products, and they are willing to take calls and tell them how much value they have created. So both the quality of the reference calls in terms of real value that they have got and also the prestige level of the customer, the bigger sized customer taking the calls are both being very helpful for us now.
And is there anything to do with the indication that you now have a lot more grand plan type of customers in the pipeline, too?
Yes, generally, I mean, our pipeline involves both customers. There are some I wouldn't call it grand slam, there are some bigger sized customers, Nehal, in the pipeline, and there are also the single doubles and triples in the pipeline. So our pipeline continues to have a good mix of both. And the reference customer availability has increased now for our modernized solutions.
Our next question will be coming from the line of Stephen Sheldon of William Blair.
Matthew Filek on for Stephen Sheldon. It looks like professional services gross margins came in around the mid-20s this quarter, which was just a bit lower than we had expected. Curious if that was related to the use of more costly third-party labor to support product implementations or if there were other factors at play driving that compression?
Matt, with all the hiring we've experienced over the past year, we still have plenty of capacity on that team. Due to the holidays, billable hours and utilization are somewhat lower than in other quarters, reflecting a bit of seasonality in the numbers, but we have not used third parties. Most of our professional services are provided by Agilysys' employees, so the decrease in utilization is mainly due to the holiday period.
Okay. Perfect, Dave. And then just one more, if I may. In the past, I think you have talked about product development spend declining from the low 20s to mid-teens as a percentage of revenue over time. And given you're now seeing a boost in product development speed from leveraging AI, could that operational leverage materialize sooner than initially expected? Just curious on when exactly we may start to see that play out, especially in light of the AI efficiency benefits?
Yes, as the advantages of AI in efficiency grow, so does the pressure for innovation from customers. Many of our customers utilizing our updated solutions are generating numerous new ideas and enhancements. We are accomplishing more now than ever before, thanks to AI tools, but finding operating leverage through reduced R&D investment in our products is still somewhat unpredictable. This is mainly due to the high demand for innovation, as there are not many tech vendors innovating in this area. Our products, which have been in the field for two to four years, are relatively young, and that pressure for ongoing innovation is increasing. We anticipate that in FY '27 and beyond, we will begin to see an increase in our operating leverage. However, the expectation to innovate at a quicker pace remains quite significant.
Thank you. And this does conclude today's Q&A session. I would like to turn the call back over to Ramesh for closing remarks. Please go ahead.
Thank you, Lisa. Thank you all for your interest in Agilysys and support. Best wishes to all of you for a very happy, healthy, safe and successful 2026. Look forward to catching up again around the middle of May when we will be reporting Q4 and full fiscal year 2026 result and providing guidance for fiscal year 2027. Thank you.
Thank you all for joining today's conference call. This does conclude today's meeting. You may now disconnect.