Categories Earnings Call Transcripts, Health Care

Agilysys, Inc (AGYS) Q2 2023 Earnings Call Transcript

Agilysys, Inc Earnings Call - Final Transcript

Agilysys, Inc (NASDAQ:AGYS) Q2 2023 Earnings Call dated Oct. 25, 2022.

Corporate Participants:

Jessica Hennessy — Senior Director of Corporate Strategy and Investor Relations

Ramesh Srinivasan — President and Chief Executive Officer

Dave Wood — Chief Financial Officer

Analysts:

Matthew VanVliet — BTIG — Analyst

George Sutton — Craig-Hallum — Analyst

Nehal Chokshi — Northland Capital Markets — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2023 Second Quarter Conference Call. As a reminder, today’s conference call may be recorded.

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

Jessica Hennessy — Senior Director of Corporate Strategy and Investor Relations

Thank you, Justin, and good afternoon everybody. Thank you for joining the Agilysys fiscal 2023 second quarter conference call. We will get started in just a minute with management’s comments. But before doing so, let me read the Safe Harbor language.

Some statements made on today’s call will be predictive and are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial guidance. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially. Important factors that could cause actual results to vary materially from these forward-looking statements include the continued effects of the COVID-19 pandemic and other global economic factors on our business, our ability to continue profitable growth, and the risks set forth in the company’s reports on Form 10-K and 10-Q, and other reports filed within the Securities and Exchange Commission.

As a reminder, any references to record financial and business levels during this call refer only to the time period after Agilysys made the transformation to an entirely hospitality-focused software solutions company in fiscal year 2014.

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

Ramesh Srinivasan — President and Chief Executive Officer

Thank you. Jess. Good evening. Welcome to the fiscal 2023 second quarter earnings call. Joining Jess and me on the call today at our Atlanta headquarters is Dave Wood, our CFO.

Let me first cover sales and what we’re seeing in the overall market, before moving to revenue and other details. We measure sales or selling success based on annual contract value of sales agreements won and signed. After five consecutive quarters of solid good sales quarters as reported during the previous earnings call, this July to September Q2 of fiscal 2023 was a great sales quarter, possibly representing the first phase of growth breakthrough, we have been building towards for a while now. Despite a slow start in July, Q2 was our highest sales quarter in more than six years.

This good sales momentum has carried into October as well. While the gaming casinos and Europe EMEA sales verticals set new quarters sales records, we also saw good momentum in other verticals with the exception of Asia. Though fiscal Q2 was again slow with respect to Asia sales, the number of prospective customer meetings and product demo requests have increased significantly in Asia as well during the month of October.

Our general sales trends have picked up significantly since the beginning of August. We have not seen any noticeable effects of the negative macroeconomic headlines during the past few months. From our window, we are seeing ample evidence that the shifting demands and compelling hospitality industry needs for technology solutions will thrive and expand despite the macroeconomic challenges. We think this industry has been underserved for a long time from technology and functional innovation standpoints. It is seeing that opportunity that drove us to make the kind of research and develop investments that we did during the past five plus years.

Hospitality customers need now more than ever before world-class, cloud-native, integrated, configurable, innovative software solutions to make operational management easier for their team members and create memorable experiences for their guests even when they are short of staff. Given the current and growing status of our state-of-the-art software solutions, which have been carefully crafted to fulfill the real and immediate needs of this industry, we are cautiously optimistic that our current sales momentum can be maintained and improved upon even if the economic headlines don’t lend the helping hand during the short and medium term.

Our total addressable market remains huge relative to our size and that should also help serve as an adequate shock absorber to possible upcoming macroeconomic bumps in the road. We continue to increase sales and marketing investments as you can see in the GAAP P&L statement operating expenses table in the earnings announcement. Q2 sales and marketing expenses increased 55% year-over-year compared to Q2 last fiscal year.

We are in the process of opening a Middle East office and have hired a local sales leader in Dubai recently. We see good medium-term potential in the Middle East region, which is already a big hospitality market and is gearing up for another major expansion. We’ve had precious little presence there till now. Many big prospective customers in the Middle East region are eager for good world-class technology provider alternatives after relying on only a couple of vendors for several decades.

Our participation in the June HITEC Show in Orlando, the recent G2E Gaming Show in Las Vegas, the No Vacancy Show in Australia, and a Hospitality Stakeholder Conference in Dubai. The last two involved our attendance for the first time ever and the customer responses to our recent innovations that we show, has given us further confidence that our current sales momentum can be sustained and improved further.

Modernized Visual One hotel property management system PMS, which we have rebranded as Versa is now live across seven customer sites. Visual One PMS has had a presence among hundreds of multi-amenity resorts for several decades. We took it up for a complete ground up rewrite three to four years ago and completed this major task earlier this calendar year. The V in the new name Versa is a nod to the heritage of the old V1 or Visual One name. While the inspiration for the name Versa comes from this cloud-native product’s current versatility to support both cloud SaaS and on-premise implementations of a single code base. After not being one of the leading players in the PMS space for a long time, it feels good to launch ourselves in the huge PMS global marketplace, with not just one, but two cloud-native world-class solutions, Stay, which is a cloud-only product, and Versa, which can support both cloud and on-premise installations of the same code base. This, of course, is an addition to LMS, which continues to stay strong in the domestic market, especially among bigger gaming casino hotels. All the 20-plus PMS add-on experience enhancer software modules are already or will be soon integrated with all these three core PMS products.

During Q2 fiscal 2023, July to September, we added 13 new customers, of which 12 were fully subscription deals. The deal size per new customer during Q2 was almost twice as big as the previous quarter. We also added 70 new properties, which did not have any of our products before but the parent company was already our customer. The total number of current parent customer additional properties added during the past two quarters has been at the fastest pace since the start of the pandemic about two and a half years ago. Business levels and the pace of technology decisions among multi-property bigger customers are improving. Of the 83 new properties added during the quarter, across new customers, and new properties of current patent customers more than 85% were either partially or fully subscription-based.

With respect to new product sales, there were 75 instances of selling at least one additional product to properties, which already had at least one of our other products. These 75 instances actually involved a total of 186 new products sold to current customer properties, meaning some of these new product sales instances involve selling multiple products so, an average of 186 divided by 75, about two and a half new products sold per new product sales instance. The average deal size this quarter across these 75 instances of new product sales is among the highest we’ve seen. In annual contract value terms, this was our best quarter in three years for total value of new customers, new properties and new product sales combined.

The number of new products installed per customer property site has grown from about 1.6 to about 2.1 during the past two years. With about 25 additional software modules available in our sales tool box now, we obviously have a long runway of growth available to us just based on our current customer properties.

One other interesting detail for you, the number of properties currently using four or more of our software modules has more than doubled during the last one and a half years. So, one slight negative about sales this quarter, was the addition of only five core PMS customer properties. We are not losing sleep over that though. We are only beginning to scratch the surface of the PMS addressable market in front of us. This quarter fiscal 2023 Q2 was our best quarter in more than six years in terms of sales measured annual contract value of PMS and related add-on attachment modules.

The state-of-the-art PMS solutions are in the early stages of establishing themselves, and we are clearly moving in the right direction. We are now competing with our PMS products in more multi-property bigger opportunities than ever before. As the number of reference customers on the newer state-of-the-art core PMS products and additional software modules increases, our success rate with such opportunities will improve significantly. Increasing PMS sales will also help us sell more additional software modules, because there are just more of them available for PMS than for POS.

Across all products combined, Q2 fiscal 2023 was our highest quarter ever with respect to subscription sales bookings measured in annual contract value terms and it was about 15% higher than the previous best quarter which was Q2 last fiscal year.

Now, onto revenue. Fiscal 2023 Q2 revenue was a record $47.7 million, the third consecutive record revenue quarter close to 26% higher than the comparable prior-year quarter, but sequentially only slightly higher than Q1. We remain well on track to achieve our full fiscal year revenue targets. One-time product and services revenue combined at $18.7 million, was 35% higher than the comparable prior-year period, but down compared to the sequentially preceding Q1 fiscal 2023 quarter. We expect one-time revenue consisting of product and services revenue to remain in the $19 million to $20 million range each quarter for a few more quarters in line with our expectations going into the fiscal year that the overall revenue guidance was based on.

Having said that, services revenue and margin levels were disappointing this quarter. Services cost levels remained at the same level or slightly less than the sequentially preceding quarter, but services revenue was close to $600,000 less. Disappointing? yes. But concerning? no. We’re currently working through a tough transformation period. Transforming from an older technology on premise-based software provider to one, which is based on an innovation-driven subscription license model, which as all of us know is among the toughest transitions for an enterprise software organization to go through. In addition, we are also transforming from a one or two product installed services project management unit to one that handles complex multi-product, integrated implementations routinely, while also dealing with far higher customer expectations. We also experienced a slower start to the quarter for project implementations. All that added up to a lower-than-expected fiscal 2023 Q2 services revenue and services margin levels. We expect both of those metrics to improve gradually during the medium to long term.

One other interesting services related detail for you. This fiscal 2023 second quarter was our highest quarter with respect to services sales bookings, apart from one quarter in calendar 2019, before the pandemic. Fiscal 2023 Q2 recurring revenue grew to $29 million driven by just under 29% year-over-year subscription revenue increase over the comparable prior-year quarter. In percentage terms, the 21% year-over-year total recurring revenue growth from Q2 of fiscal 2022 to Q2 of fiscal 2023 is also the highest such percentage increase in more than six years. Quarter subscription revenue has now grown to 49% of total recurring revenue.

Subscription revenue generated from add-on software modules, most of which were developed ground up during the past few years constituted 16% of total subscription revenue this quarter compared to 11% during the full previous year fiscal 2022 and 10% during the fiscal 2022 second quarter. Each of these innovative additional software modules which are becoming increasingly better integrated with the core point of sales, property management, and inventory procurement systems has now stabilized in at least a handful of customer sites and providing good value. Feedback on these additional attachment experienced enhancer modules has been positive, particularly the reduced need for the customer to manage complex integrations across multiple software providers, increased operational efficiencies, and incremental revenue generation opportunities enabled by these modules.

Overall, recurring revenue was 5% sequentially higher than the previous quarter and about 20% higher than the comparable prior-year quarter. We have added more than $1 million in recurring revenue sequentially quarter-over-quarter for the fourth consecutive quarter. There were only two such quarters in our software solutions for hospitality history before.

Adjusted EBITDA for the quarter was $7.4 million and 15.5% of revenue a slight improvement over the sequential Q1 quarter and in line with our expectations for the first half of fiscal 2023. Our overall profitability levels continued to be challenged by the current need to carry dual costs across R&D services and support for supporting our previous generation older products and the newer state-of-the-art technology innovations which we’re currently implementing across the globe. We expect our profitability levels to improve in the medium to long term as we make progress with this difficult transition and the need to support older product versions diminishes.

Free cash flow for the period was $2.3 million, slightly lower than the comparable prior-year quarter of $3.2 million. Consistent with the normal pattern of our business, we expect free cash flow during the second half of each fiscal year to be better than the first half. Cash collections remained strong and at record levels.

Capital expenditures will increase during the second half of the fiscal year, which is unusual for us. We planned before the pandemic to move to a world-class high-tech facility in Las Vegas, our largest single geographic market, and we expect to make that move sometime before mid-calendar 2023. We will be working through the outfit process for this facility the rest of this fiscal year, costing one-time additional capital expenditures.

With that, let me hand the call over to Dave. Dave?

Dave Wood — Chief Financial Officer

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. Second quarter fiscal 2023 revenue was a quarterly record of $47.7 million, a 26% increase from total net revenue of $37.9 million in the comparable prior-year period. All three product lines increased compared to the prior-year period, with product revenue up 44.5% and professional services revenue up 24.2% over the prior year. Recurring revenue was also up 20.8% with subscription up 28.6% over the prior-year period.

Sales in fiscal 2023 Q2 are our highest for a single quarter in well over six years and included record subscription sales. Q2 FY23 sales were 13% over Q2 fiscal year 2022, which was our highest sales quarter in the previous fiscal year. While up significantly over the previous year, one-time revenue, consisting of product and professional services declined sequentially. Product revenue declined slightly, mostly due to timing of delivery related to new sales. The product backlog increased 17% compared to last quarter and is north of 80% of record levels. Professional services revenue declined sequentially due to remaining implementation challenges, because of the breadth of our multi-product installs as well as some delays in projects during July as a result of our extremely busy customer sites. August through October have resumed to a normal implementation schedule. We continue to staff the team in order to meet higher revenue levels and decreasing our backlog as customers go live in multi-product installations. Professional services sales increased by more than 25% compared to last quarter, and this increase along with the decline in services revenue drove services backlog back to new record levels.

Total recurring revenue represented 60.8% of total net revenue for the fiscal second quarter, compared to 63.4% of total net revenue in the second quarter of fiscal 2022. Increased revenue from professional services implementations and product revenue coming back into the business drove the change in revenue mix compared to the prior fiscal year.

We’re also happy with our subscription revenue growth, which grew 28.6% during the second quarter of fiscal 2023. Subscription revenue comprised around 49% of total quarter recurring revenue compared to about 46% of total recurring revenue in the second quarter of fiscal 2022. Add-on software modules comprised 16% of subscription revenue in Q2 fiscal year 2023 compared to 10% in the comparable prior-year quarter and continue to be a meaningful contributor to subscription revenue.

As Ramesh mentioned, the penetration level of our add-on software modules still has significant room for growth within our existing customer base. Moving down the income statement. Gross profit was $29.4 million compared to $24.3 million in the second quarter of fiscal 2022. Gross profit margin decreased to 61.5% compared to 64% in the second quarter of fiscal 2022. The gross profit margin decrease was primarily due to product and professional services revenue coming back into the business causing it in a shift in revenue mix.

Combined, the three main operating expense loans, product development, sales and marketing, and general and administrative expenses, excluding stock-based compensation were 46% of revenue, consistent with the prior quarter and in line with our FY23 plan. As a reminder, share-based compensation should remain in the 6% to 9% of total revenue for the entire fiscal year 2023. Operating income for the second quarter of $2.9 million, net income of $3.6 million and gain per diluted share of $0.12; all compared favorably to the prior year’s second quarter gain of $1.1 million, $1 million and $0.02 per diluted share, respectively.

Adjusted net income normalizing for certain non-cash and non-recurring charges of $6.3 million and adjusted diluted earnings per share of $0.24 compared favorably to adjusted net income of $4.6 million and diluted earnings per share of $0.18 in the prior year second quarter.

Fiscal 2023 second quarter adjusted EBITDA was $7.4 million compared to $6.3 million in the year ago quarter. As we discussed on the last call, we expected adjusted EBITDA would be lower in the first half of the fiscal year. Adjusted EBITDA during the first half came in slightly ahead of plan at 14.8% of revenue. Adjusted EBITDA this quarter was 15.5% of revenue.

Moving to the balance sheet and cash flow statements, cash and marketable securities as of September 30, 2022 was $96.2 million compared to $97 million on march 31, 2022. The primary reason for the cash balance decreased compared to the beginning of the fiscal year despite our profitability levels were due to the timing of payments in Q1 related to the bonus, dividend, and inventory payments, which came due during the April to June timeframe; however, we generated roughly $1.3 million in cash during the second fiscal quarter.

Free cash flow in the quarter was $2.3 million compared to $3.2 million in the prior year quarter. As we stated in the past free cash flow in the first half of the year is significantly impacted by working capital fluctuations, mainly due to amortization of our calendar year annual maintenance invoices, timing of bonus payment along with paying down accounts payable as a result of higher inventory levels.

In closing, we are pleased with our second quarter financial results and remain comfortably on track to meet our FY23 financial plan.

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

Ramesh Srinivasan — President and Chief Executive Officer

Thank you, Dave. In summary, overall we are pleased with our continued business progress. We think that there is a high probability that the significant increases in selling success we’ve enjoyed during the past close to three months. Mark the first phase of the growth breakthrough we have been building towards. This sales surge also drove the combined product recurring revenue and services backlog to close to peak record levels, giving us increased confidence and comfort in the revenue guidance provided at the beginning of the fiscal year. We continue to expect fiscal 2023 annual revenue to be in the range of $190 million to $195 million driven by year-by-year – driven by year-over-year subscription revenue growth of approximately 30%. We also continue to expect EBITDA levels for the full year to be better than 15% of revenue, despite the first half of fiscal 2023 being less than that level.

We’re continuing to invest in increasing our sales and marketing efforts to keep the current sales momentum going and to move it up to the next gear. While our increased marketing efforts both in terms of quality and quantity, we’ll take a bit more time to show measurable increase sales results. We are already seeing positive responses to the improved messaging, more focused market development, higher quality public relations efforts, and more frequent attendance in trade shows, some of them are seeing us participate for the very first time.

Despite all the pressures the current transformation causes and need to maintain increased cost levels to support all and invest in and grow the new, we remain a disciplined growth business unit that will not get too far ahead of its keys at any point in time. We will continue to remain proficient at walking and chewing gum at the same time.

With that, let’s open up the call for questions, Justin.

Questions and Answers:

Operator

And thank you. [Operator Instructions] And our first question comes from Matthew VanVliet from BTIG. Your line is now open.

Matthew VanVliet — BTIG — Analyst

Yeah. Good afternoon and thanks for taking my question. Nice job on the quarter. I guess, first half would be curious to hear how the launch of in sort of rebranding of Versa PMS platform is progressing out there, do you feel like you have some customers waiting to see that fully deployed and get kind of proof concept at other properties or is it just sort of pent-up demand taking time to work its way through the sales cycle and then any kind of next level or I guess layer deeper extra detail in terms of any geographic dispersion in terms of US versus Europe versus APAC in terms of performance of that product?

Ramesh Srinivasan — President and Chief Executive Officer

Yeah, hi, Matthew. Before I answer the question on Versa Matthew one thing I want to confirm with you is the reception for stay, the demand for stay cloud PMS product also remains good, but let me focus since your question was about Versa let me answer that. So Versa I would say is ahead of schedule, Matthew. There are about seven customer resorts who have gone live and have all settled down quite well during the last six months or so.

So, from the beginning of this calendar year, we have been installing that product and it has settled down quite well. Just to give you a snippet of information for you. If you take our V1/Versa sales and we always measure sales in annual contract value like you know, this is our best sales quarter for that in three and a half years, but just that product alone.

So the reception is good and we are now getting some reference customers as well because seven of them have gone live, and about half of them are now referenceable because they have settled down well and there are a couple of pretty interesting global big PMS sales deals we are working on where Versa is the product being looked at, that is across APAC and across the US as well.

So I would say the short answer to your question Versa is ahead of schedule. We are happy with the way it is progressed with the current installs and for example, this sales quarter was our best V1/Versa sales quarter in about three and a half years. So it continues to go well. But it is still a young product, it is only less than a year old, so we are focused on settling it down and improving it further.

Matthew VanVliet — BTIG — Analyst

Very helpful color. And then as you look at the I guess sort of like chain hotel or maybe urban hotel locations that were seemingly sort of most impacted by the pandemic. Curious, how you’re seeing progress there, are they looking to make investments now that business travel has picked up quite a bit, they’re staring the macro and macro headwinds potentially impacting their business and getting a little skittish on future investments. Just curious how that segment of the business has been performing over the last couple of months?

Ramesh Srinivasan — President and Chief Executive Officer

It’s been performing well, Matthew. I wouldn’t say it’s back to pre-pandemic calendar 2019 levels, but it is definitely at the best level that we have seen it be since the start of the pandemic. So the business from the hotel chains are already our customer and a couple of similar customers has picked up and was one of the big contributors towards having our best sales quarter in six-plus years. So, the business from such chains has improved now not yet back to calendar 2019 levels.

Matthew VanVliet — BTIG — Analyst

And then one last one if I could, adding to the leadership team over the last year plus. I think a lot of effort and you highlighted the sales and marketing expenses going up, but curious how you feel like the additions to the marketing team and just sort of the overall branding and visibility of the company out there is going so far. How much more work do you have to do or is it now about execution on the sales front that you’ve gotten a better visibility in the market? Thank you.

Ramesh Srinivasan — President and Chief Executive Officer

Thank you, Matthew. It’s going very well. I mean, the addition of Terrie O’Hanlon and the team that she’s brought in and marketing is doing terrific work right the kind of quality work that we have never had before. To be honest with you as far as this company is concerned, we’ve focused so much on the product part of it, we just not paid enough attention to marketing at all and Terrie and the team have made a dramatic difference. And all the new sales staff and our new VP of HRC sales Andrea Bitz have made a big difference then HRC also had that is Hotels, Resorts, Cruise ships, the vertical that we call HRC also had a very good quarter in terms of sales this quarter.

So to address your question, the way growth always happens is you invest more and we’ve made a big investment in sales and marketing when you compare Q2 to Q2 fiscal 2022 to fiscal 2023, our sales and marketing costs have gone up by 55%. So we have done the investment. Now it’s a matter of executing for the level of investments we have done and that is going very well. And once we reach the next stage of growth, we obviously will invest more in sales and marketing as well. So, now it is a matter of executing on what we have invested, which is going well. And once we reach the next level of quantum growth, we will think about investing more in sales and marketing as well.

Now some of the things that we’ve done, the top of the funnel that we measure in marketing, the marketing qualified leads, and what we call sales accepted opportunities, SAOs the top of the funnel is really doing well. The top of the funnel now is bigger than it has been before, but ultimately it’s all about final sales results. This quarter with sales that we saw, I would attribute it a bit more towards the product improvements that we have done if I have to give credit and also to the increased sales presence the increased number of sales personnel we have, our increased participation in trade shows, not just in the US in APAC and EMEA as well. And market development outbound efforts, which have been more targeted; both marketing campaigns and market development efforts have been very targeted.

So we think it’s a culmination of all that we’ve seen a real pickup since August, the rest of the brand image changes us really presenting ourselves as a more modern company which was long overdue. Those positive effects will take a bit more time to show up really in our results. So, currently, our focus is our sales marketing efforts are going better than ever before. Our demos today are really I mean orders of magnitude better than we’ve ever had before. Now it’s a matter of also focusing on implementations making sure those go better, having more reference customers for our newer products, and then the growth cycle will kick in and then we will continue investing in sales and marketing more as well. That’s a long-winded answer to you, Matthew.

Matthew VanVliet — BTIG — Analyst

Very helpful, thank you.

Operator

And thank you, and one moment to our next question. And our next question comes from George Sutton from Craig-Hallum. Your line is now open.

George Sutton — Craig-Hallum — Analyst

Thank you. Nice results. So I wonder Ramesh if you could just give us some quantitative numbers relative to the quota-carrying reps that you have relative to where you were. Any sense on the number of at-bats, you mentioned a bigger funnel, any update on your win rates are they consistent in that 70% ballpark, just curious if you can give us some more numbers around the growth?

Ramesh Srinivasan — President and Chief Executive Officer

I don’t know if you have exact numbers on that George, I can only give you a qualitative answer about the number of sales accepted opportunities and marketing qualified leads increasing. We are not yet evolved to a stage where we can share those exact numbers with you outside. But to answer the second part of your question, our win-loss ratios continue to be good. So when you look at all our competitive wins that is new customers, new products and new properties, it still remains, we win the majority of those deals.

And if you just take new customers alone, we win a very good portion of those deals also as long as we can get them to the demo stage, right. Once they reach the demo stage and they take a look at the products, the end-to-end functionality that we offer that it’s tough to compete against us now, once we get them to that stage, our win-loss ratio continues to be very good.

George Sutton — Craig-Hallum — Analyst

I was particularly interested in what you said about Asia given how challenging Asia has been for you, you mentioned that’s picked up in October. Can you just give us a more specific sense of what you meant by that pickup?

Ramesh Srinivasan — President and Chief Executive Officer

Yeah, there are two things that I was trying to convey that I did not say explicitly, number one, George, is the quality of the Asia sales team has improved dramatically some of may – several of the recent sales leadership additions we have made, we may not have announced it publicly a sales leader in Singapore, or a sales leader in Australia, and then sales engineering strengths that we have added to Asia, they’ve all been excellent recruitment pickups for us. So, number one is a very strong sales team there and I would say the first time since I’ve been here, that the Asia sales team is really a full level of high quality, that’s number one.

Number two, what we have noticed in October and probably including September as well if the activity in Asia has really picked up and there are at least a couple of reasonably big interesting opportunities that we’re working on now that we feel we have a reasonable chance of winning in Asia and the number of opportunities, the demos the conversations we have with new customers, prospective customers have increased significantly in the last couple of months compared to the previous months since the start of the pandemic. So that activity level has increased, and we are hoping very soon, you will – we will see it in the sales numbers as well.

George Sutton — Craig-Hallum — Analyst

Okay, just one other question. This would be for Dave, who has been too quiet on the Q&A. And I wonder when we talk about the need to support older versions of the product. Can you just talk about what that means? Are you going to see step function reductions in costs over time as those fall off or is it going to be a more gradually lower expense base over time?

Dave Wood — Chief Financial Officer

Yes, I think it’s, I mean it’s consistent towards what we’ve said in the past, I mean, R&D as a percentage of revenue will stay in the 26% to 28%, and starting next year, you’ll see a real gradual decline. So we kind of topped out around the 30% of revenue for R&D expense, it’s coming down into the 26%, 28%. I don’t think you’ll see any kind of big step or cliff it will just incrementally get better as revenue grows and keep in mind we’ve also said we can handle, another $50 million to $100 million of revenue on this team. So it will be a gradual step down.

George Sutton — Craig-Hallum — Analyst

Got you. Okay, thanks, guys.

Operator

And thank you, and one moment for our next question. And our next question comes from Nehal Chokshi from Northland Capital Markets. Your line is now open.

Nehal Chokshi — Northland Capital Markets — Analyst

Here we go, can you hear me now? Thank you and congratulations on moving from good to great sales quarters. I know you addressed the third and be within the script, I think I just missed it. So, apologies. Could you just walk through again why Services businesses has not performed the way we had expected, is it in terms of the delivery implementations?

Dave Wood — Chief Financial Officer

Yes, so I mean it’s just a lot of – it is just taking longer for these multi-product implementations and then kind of a secondary factor was July was just generally a little bit slower of a month. I mean, we said on the call that August through October have kind of return back to normal, but it’s the multi-product implementations are more challenging and we remain staff to do a lot more billable work than we do today, but we’re pretty much just got a slow start to the quarter in July revenue was a little bit lower than expected.

Nehal Chokshi — Northland Capital Markets — Analyst

I see, okay. And is this effectively your reason why you’re only reiterating guidance as opposed to raising guidance given that you would have gone from good to great in terms of sales/booking quarters?

Ramesh Srinivasan — President and Chief Executive Officer

Yeah, so Nehal as far as the guidance is concerned, the fiscal year is going exactly as we planned as we thought it would, and it is proceeding towards whatever assumptions we made when we initially provided the guidance those assumptions are working out. And it is gradually improving and we are beginning to do well and we are confident now. We’ve just had two three good sales month and we’re hoping that trend continues and that this will start up a new trend for us and we are comfortable. We are confident about the guidance provided and we’re always realistic with whatever guidance we provide. This fiscal year is going along exactly the way we thought it would. It is building up nicely for us.

Nehal Chokshi — Northland Capital Markets — Analyst

Okay. Presumably in order to make this guidance, you don’t need to build additional backlog here, you’d like to get drained as you go through your fiscal year, correct?

Dave Wood — Chief Financial Officer

Yeah, I mean we feel really, really comfortable with where our backlog sits today and the visibility it gives us into the second half of the year and the way to look at the second half is products and professional services kind of goes up and down amongst the quarter but it will remain about in the second half, about $38 million and then subscription keep incrementally going up quarter to quarter.

So, the simple way to look at the second half is one-time revenue being product and professional services will remain in that $37 million to $38 million range and recurring revenue will go up by about $4 million.

Ramesh Srinivasan — President and Chief Executive Officer

And we have to continue to add to the backlog Nehal it’s a continuing story, right, both increased consumption of the backlog and adding to the backlog are both important functions. So we have to keep our focus and just continuing doing more of what we are doing well.

Nehal Chokshi — Northland Capital Markets — Analyst

Okay. Understood. I think you already sort of spoke to a little bit that you’ve had a lot of capacity. And you talked about going from good to great sales quarters, does this mean though that the productivity of the new sales reps is now at mature levels already or is there still a lot more ramping about to go here?

Ramesh Srinivasan — President and Chief Executive Officer

I think if you measure it in terms of sales success right, not just in terms of sales activities yes, the productivity levels are mature and they all contributing. But in terms of sales success, right, how much each of them actually closes depends not only on the sales team but on the rest of us as well and that we are focused on improving the number of reference customers we have on the new state-of-the-art products.

All of them have been implemented but we have to build the number of properties that use those products and then you have to increase customers being delighted with them and willing to talk about that. So that part has to increase as well that in turn will increase sales productivity in terms of how much sales is closed. So, I wouldn’t call that close to the peak, but the activity level is very good and we are very happy with how the sales team is progressing now.

Nehal Chokshi — Northland Capital Markets — Analyst

But to be clear, when I say the closing of the sales rate –

Ramesh Srinivasan — President and Chief Executive Officer

Nehal? He probably dropped off, right. Let me just, I’m assuming the rest of you can hear us.

Nehal Chokshi — Northland Capital Markets — Analyst

Sorry. Yeah, no, I cut out there for a second. The question was that – sorry, got distracted.

Ramesh Srinivasan — President and Chief Executive Officer

So, let me pick it up, Nehal and help you out. We can sell more with the current level of sales staff we have and the current level of sales and marketing spend. I think that’s where you’re going towards, that is a matter of us implementing better increasing the number of reference customers and just making the current state-of-the-art modern technology solutions we have more spread out in the space so that more people come to know about it. So, with the current sales staff, if that is your question, yes we can sell close more deals and once that reaches the peak, we will add more to our sales team as well.

Nehal Chokshi — Northland Capital Markets — Analyst

And I now remember exactly what I was trying to go. The close rates remain good, it’s just that the increased number of assets that you have generated hasn’t gone through the full lifecycle of the pipeline yet and that’s more or less what you’re waiting to see if that close rate that your mature sales teams have had translates with the new sales team, Is that correct?

Ramesh Srinivasan — President and Chief Executive Officer

That is correct. With the additional sales members are also beginning to contribute. Well, and we need to increase at-bats and the more successful implementations we have with the new products, the more at-bats will come.

Nehal Chokshi — Northland Capital Markets — Analyst

Great, thank you, and congrats.

Ramesh Srinivasan — President and Chief Executive Officer

Thank you, Nehal

Operator

And thank you. And I’m showing no further questions. I would now like to turn the call back over to Ramesh for closing remarks.

Ramesh Srinivasan — President and Chief Executive Officer

Thank you, Justin. Thank you all for your interest and attention please, enjoy the holiday season and have wonderful travels. We look forward to talking to you again in about three months from now when we will report on fiscal 2023 third-quarter results towards the end of January. Thank you.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

Here’s a look at Dollar Tree’s (DLTR) expectations for the remainder of the year

Shares of Dollar Tree Inc. (NASDAQ: DLTR) were down over 1% on Wednesday, a day after the company reported earnings results for the third quarter of 2022. Revenue and earnings

Target Corporation (TGT): A look at how the retail giant is shaping up against an inflationary backdrop

Shares of Target Corporation (NYSE: TGT) were up over 1% on Wednesday. The stock has dropped 30% year-to-date and 35% over the past 12 months. Last week the company reported

Is Zoom Video Communications (ZM) a good investment after Q3 earnings?

Zoom Video Communications (NASDAQ: ZM) expanded its customer base at an accelerated pace during the COVID crisis and soon became the preferred video conferencing platform for businesses and millions of

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top