Agilysys Inc Q2 FY2024 Earnings Call

Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2024 Second Quarter Conference Call. As a reminder, today's conference may be recorded. I would now like to turn the conference over to Jessica Hennessy, Senior Director of Corporate Strategy and Investor Relations at Agilysys. You may begin.

Thank you, Victor, and good afternoon, everybody. Thank you for joining the Agilysys fiscal 2024 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 effects of global economic factors on our business, the hospitality industry's need for technology solutions, our ability to drive sales, our ability to increase profitability, and our ability to improve services margins and manage increased cost investments 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 the fiscal 2024 second quarter earnings call. Joining Jess and me on the call today at our Alpharetta, Atlanta headquarters is Dave Wood, CFO. As has become the regular practice in our earnings calls, let me cover the selling success summary first, before moving on to revenue and other details. We measure our sales success in net annual contract value (ACV), of sales agreements won and signed. Fiscal 2024 Q2, July to September, was one of our best-ever sales success quarters. Overall, fiscal 2024 April to September was our best first half of fiscal year sales, comfortably better than the first half last year. Fiscal 2023, last year, was of course our best-ever full year of sales, and we are off to a significantly better start halfway through this year. July to September was a good sales quarter for virtually all the sales verticals across gaming casinos, resorts, cruise ships, hotels, managed food service providers, and international regions. Sales from non-gaming resorts, hotels, and cruise ships were particularly stellar and increasing because our market share levels in these areas are still low, with major growth possibilities ahead. April to September was also our best first half thus far for international sales across Europe and APAC. As of the end of September, year-to-date APAC sales were already close to the full-year sales level reached across all of last fiscal year. Our competitive positioning strength is increasing with every passing month. An end-to-end ecosystem of software solutions, the breadth and depth of feature sets offered, with more getting added at increasing rates, now that most of the product re-engineering efforts are done and over with, all based on state-of-the-art cloud-native technology, which can also work well in on-premise installations, which several hospitality customers still prefer, all that is becoming increasingly compelling value creators and unique selling propositions for us. The significant pick-up in selling success, which started around the month of August calendar 2022, has continued unabated through the recent July to September period, 13 months later. We've not seen any noticeable negative effects of macroeconomic challenges. The hospitality industry is global, huge, and has a high need for technology and innovation to help with growing needs, to improve operational efficiencies, enable ease of use for staff users, and help create far better guest experiences that are possible today. We cannot say the technology providers of this industry have done too well keeping up with the innovation needs due to, among other reasons, a lack of focus on end-to-end hospitality needs and far less than needed research and development investments. In the meanwhile, the digital transformation revolution around hospitality is accelerating, raising the expectations of property employees and guests. We think we have done well executing on our strategy to fill the gap and expect our escalating product and technology-driven competitive advantages to continue to drive good business momentum in this huge total addressable market space. We think that momentum will have good staying power even in a possible challenging macroeconomic environment. In line with that assessment, thus far, we are not seeing any growth-threatening clouds in the sky. Our sales win-loss ratios continue to be at impressive levels. One of the highlights of sales success during the first half of fiscal 2024 was the rapidly increasing sales productivity of quota-carrying sales personnel hired during the past couple of years post-COVID. To place this in context, the average Agilysys tenure of our quota-carrying sales personnel is around 7.5 years now. Of them, slightly less than half the personnel have joined us after COVID, and the average Agilysys tenure of this group is only about a year. During the first half of fiscal 2024, this group of sales personnel has already won sales measured in annual contract value amounting to close to twice as much as they did all of last fiscal year. While we continue to make prudent and appropriate decisions with respect to increasing sales force strength, the current sales staff still have additional capacity to not only maintain momentum but also grow sales from current levels. In addition, the number of marketing-generated sales accepted opportunities focused on new customers and new properties, generated by innovative and effective marketing efforts, continues to improve. During recent months, this number has been twice as high as it was at the same time last year. While our competitive strengths with point-of-sale (POS) solutions continue to improve by leaps and bounds and remain our mainstay, sales wins during the first half of fiscal 2024 have also included several significant Property Management System (PMS) wins. A notable win during Q2 was Black Rock Oceanfront Resort on the Western Coast of Vancouver Island in British Columbia, Canada. This iconic property selected Agilysys PMS and several experience-enhancer add-on software modules for their stunning multi-amenity oceanfront resort. There are now close to 20 properties live on the modernized ground-up re-engineered Visual One PMS rebranded as Versa and released for production deployment about 18 months ago. We are still in the early stages of establishing our state-of-the-art technology-based cloud-native PMS value proposition in the field. There is a long runway of PMS and related modules growth ahead of us. During Q2 fiscal 2024, July to September, we added 17 new customers, of which 76% were fully subscription agreements. 17 new customers is within the 15 to 20 new customers per quarter range, which has been one of the drivers of our revenue growth in the recent past. New customer deal sizes remain at impressively high levels. We also added 70 new properties, which did not have any of our products before but the parent company was already our customer. The average deal size of new property deals this quarter was about 25% higher than the previous couple of quarters. Of the 87 new properties added during the quarter across new customers and new properties of current parent customers, more than 90% were either partially or fully subscription-based. In addition, there were 67 instances of selling at least one additional product to properties that already had one of our other products. These 67 instances involved a total of 142 new products sold to current customer properties. The average deal size across these 67 instances of new product sales was about 40% higher than the sequentially preceding Q1 quarter. Now on to revenue. Fiscal 2024 Q2 revenue was a record $58.6 million, the seventh consecutive record revenue quarter, close to 23% higher than the comparable prior year period. The year-over-year quarter revenue increase of $10.9 million is the highest we've ever seen. Overall revenue during the first half of fiscal 2024 was 20% higher than revenue during the first half of fiscal 2023. Fiscal 2024 Q2 recurring revenue grew 18% year-over-year and 6.6% sequentially quarter-over-quarter to a record $34.2 million, driven by a 29% year-over-year increase in subscription revenue. Subscription revenue constituted 53.6% of total recurring revenue compared to 48.9% in Q2 of last year. The year-over-year growth in quarter subscription revenue compared to Q2 of last year was a record $4.1 million, consisting of record year-over-year increases in both POS and PMS and related modules. Quarter-over-quarter sequential growth of subscription revenue of $1.6 million and overall recurring revenue of $2.1 million were both our best such sequential increases. Subscription revenue generated from add-on experience-enhancer software modules, most of which were developed during the past few years, grew at a slightly better rate year-over-year than the overall subscription growth of 29%. The value of these modules and the end-to-end ecosystem we have built over the past few years goes far beyond such numbers. These add-on modules working in conjunction with each other and with the core POS and PMS products are helping customers make tangible measurable improvements in their operations. We heard several such customer stories about positive measurable impact on hotel operations during the recent gaming show and in Customer Advisory Board meetings held in Las Vegas, and these stories were shared with other attending customers. Each of these modules is competing on their own at best-of-breed solutions and bringing tremendous value when used, enhanced, and innovated together. Services revenue was a record $11.7 million, 44% higher than the comparable prior-year quarter. The increasing pace of implementations being handled by services teams augurs well for upcoming recurring revenue growth. We continue to make good progress with implementing relatively newer software products and modules at a quicker pace now, handling complex multi-product implementations and managing the balance between majority cloud and several on-premise installations. Services margins improved to 23.6%, but still fell short of our 25% expectation. Improving services margins from current levels remains one of the few business objectives we are falling short of currently. We remain focused on taking all necessary steps to improve services margins without affecting customer satisfaction levels. One-time revenue consisting of product and services revenue added up to a record $24.4 million, about 30% higher than the comparable prior-year quarter. Revenue levels during the first half exceeded our initial expectations and we are happy to be in a position to raise full-year fiscal year 2024 revenue guidance range to $235 million to $238 million. The rate of project implementations has picked up well and subscription revenue growth during the first half of the year was better than we anticipated. We think subscription revenue growth during the full-year fiscal 2024 will be 28%, significantly better than the previous guidance of 25%. Adjusted EBITDA for the quarter was $8.1 million and 13.7% of revenue, a couple of percentage points better than the sequential prior Q1 quarter and ahead of our expectations going into the fiscal year. We've done well managing through a difficult period of increased cost investments, which were required to drive medium-term revenue growth. Increasing revenue and stabilizing cost levels should help us improve profitability consistently going forward. We now expect EBITDA by revenue to be 14% for the full-year fiscal 2024, one percentage point higher than the 13% guidance provided at the beginning of the year. With that, let me hand over the call to Dave for further color.

Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. Second quarter fiscal 2024 revenue was a quarterly record of $58.6 million, a 22.8% increase from total net revenue of $47.7 million in the comparable prior year period. All three product lines increased compared to the prior year period, with product revenue up 19.8% and professional services up 43.8%. Recurring revenue was also up 18%, with subscription up 29.1% over the prior year period. Sales momentum continued throughout Q2, with total exit backlog remaining strong at near record levels despite revenue being above our expectations. We also remain pleased to see our professional services backlog remain about the same for the second quarter in a row despite strong sales, as implementation efficiencies and effectiveness of the services team have continued to improve. Product revenue increased 19.8% over the prior fiscal year to $12.6 million. Our point-of-sale business continues to perform better than expected, which is increasing our product revenue expectations for the year. We now expect product revenue to stay above $12.5 million during the last two quarters of the fiscal year. Professional services increased 43.8% over the prior fiscal period to a record $11.7 million. As previously mentioned, we are pleased that implementations are keeping pace with sales velocity and backlog levels have begun to stabilize at near-record levels. We expect professional services to continue to increase sequentially throughout the year and should grow above 30% for the full fiscal year. Most of our professional service revenue is related to projects contributing to the acceleration of fiscal year '24 subscription revenue. Development for large projects, with the corresponding subscription revenue happening in future years, has been less than 10% of revenue. Total recurring revenue represented 58.4% of total net revenue for the fiscal second quarter compared to 60.8% of total net revenue in the second quarter of fiscal 2023. Recurring revenue as a percentage of total revenue decreased slightly because of a 30.3% increase in one-time revenue consisting of products and professional services. Subscription revenue grew at 29.1% for the second quarter of fiscal 2024. Subscription revenue now comprises over 50% of total recurring revenue at 53.6% compared to 48.9% of total recurring revenue in the second quarter of fiscal 2023. Subscription revenue increased sequentially by $1.6 million and was better than the FY '24 expectation for sequential revenue increases. The subscription backlog remains strong, and we expect subscription revenue to continue to increase between $0.9 million and $1.2 million sequentially each quarter for the rest of the fiscal year. Q2 was higher than normal due to the timing of completion of a couple of large multi-product implementations that were in the backlog and being worked on during prior quarters. Moving down the income statement. Gross profit was $35.1 million, compared to $29.4 million in the second quarter of fiscal 2023. Gross profit margin was 59.9% compared to 61.5% in the second quarter of fiscal 2023. As expected, gross margin was affected in the first half of the year as we continue to ramp up the services team. Second half gross margin should get back into the 60% range. Combined, the three main operating expense line items, product development, sales and marketing, and general and administrative expenses, excluding stock-based compensation, were 46.2% of revenue, compared to 46.1% of revenue in the prior year quarter. Product development increased slightly to 22.8% due to previously discussed additional investments made to prepare for large future deployments, compared to 21.9% of revenue in the prior fiscal year. General and administrative expenses decreased to 12.7% compared to 13.7% of revenue in the second quarter of fiscal 2023. Sales and marketing increased slightly from 10.5% of revenue to 10.8% of revenue, mostly due to the timing of expenses. Operating income for the second quarter was $3.6 million, net income of $4.1 million, and gain per diluted share of $0.16, all increased compared to the prior year's second quarter gain of $2.9 million, $3.1 million, and $0.12. Adjusted net income, normalizing for certain non-cash and non-recurring charges of $6.6 million, was slightly higher than adjusted net income of $6.3 million in the prior year's second quarter, and adjusted diluted earnings per share of $0.25 was slightly more than $0.24 in the prior year period. For the 2024 second quarter, adjusted EBITDA was $8.1 million compared to $7.4 million in the year-ago quarter. Adjusted EBITDA in Q2 FY '24 was 13.7% of revenue. Profitability for the quarter was better than previous guidance of high single digits, largely due to higher-than-expected revenue levels. Profitability levels remain comfortably ahead of our prior FY '24 guidance of adjusted EBITDA as a percentage of revenue of 13%. Moving to the balance sheet and cash flow statement. Cash and marketable securities as of September 30, 2023, were $107.4 million compared to $112.8 million on March 31, 2023. We remain comfortable with our current levels of cash. Free cash flow in the quarter was a gain of $2.5 million, slightly above $2.3 million in the prior year quarter. For the year, we still believe adjusted EBITDA, less CapEx, will be a good proxy for free cash flows. For our fiscal year 2024, we are raising our revenue guidance range to $235 to $238 million, inclusive of an increased expectation of 28% subscription revenue growth. We are also raising our profitability guidance from 13% to 14% adjusted EBITDA as a percentage of revenue for the year. In closing, we are pleased with the sales momentum, professional service improvements, and revenue growth during the first half of the year. With that, I will now turn the call back over to Ramesh.

Thank you, Dave. In summary, we do understand the macroeconomic headlines and the drumbeat of predictions of possible expected headwinds. We do not want to sound tone-deaf to what we are hearing each day when we listen to the news and read what the economic pundits are saying. However, we can only report what our reality is. The truth is, we are not seeing any signs of slowdown in business momentum. To use a crude example, we are a relatively small fisherman now operating with state-of-the-art modern equipment, with huge growth potential in a large total addressable market pond with a lot of fish around of all possible sizes. It is possible that we may not feel any negative effects even if there are any ripples or the level of the water shrinks a bit, unless it becomes an enormous drought that overwhelms everything. We have met and spent time with many customers during recent trade shows and other meetings and have not heard of or seen signs of any reluctance on their part to make the required appropriate technology investments to meet their short-term and long-term business needs. In addition, the massive levels of product innovation we have worked through during recent years, including the creation of around 25 high-value creating additional experience enhancer modules, the real tangible value, the modular and integrated solutions are beginning to create for customers, all of that is also providing an additional blanket around us that should protect our growth prospects for the foreseeable future. And we will ensure we remain disciplined in managing growth, never getting too far ahead of ourselves. While our implementation services effectiveness and efficiencies have improved significantly during the April to September first half period of this year, the continuing sales success has kept aggregate recurring revenue, services, and product backlog total at a near-record level, giving us confidence in the raised revenue guidance provided. We will also continue to increase our sales and marketing investments as necessary to keep business momentum moving along. To repeat what we said last quarter, our overall business remains in excellent shape, and we are well-positioned for all-round progress and growth. With that, let's open the call up for questions. Victor?

And our first question will come from Mayank Tandon from Needham. Your line is open.

Thank you. Good evening. Well, first, congrats on the quarter and great to hear about the record sales performance. Ramesh…

Thank you, Mayank.

Great. Ramesh, let me ask you more just in terms of the growth rate. As you look ahead, how do you break that down between new logo wins, expansion with existing clients, and our full expansion? Could you maybe just parse it out between the three components as we think about growth going forward?

When we analyze the first half of the year, the sales from new customers, which we internally call new logos, were substantially higher this year compared to the first half of last year. This increase in new customer sales is a significant contributor to our growth. The addition of new customers is definitely a key growth driver. Another factor is the sales of new products, whether they are existing customers opting for new offerings or new customers signing up. Our deal sizes have become much more favorable; many customers now choose multiple products instead of just one, which is a positive development for our growth. Additionally, our presence in property management systems is improving. While our market share in PMS is still low, we are gaining more recognition in major PMS requests for proposals, and our product offerings have also become more compelling. This is helping to propel our growth, alongside the continued strength in point-of-sale systems. Current customers are investing more in us, whether by adding new sites or expanding services and product purchases, all of which support our growth. Importantly, our win-loss ratios have improved; we are winning more often without significantly increasing our sales efforts and spending. Participation in competitive bids now has a much better chance of success than in the past. Together, these factors are fueling our growth, which is primarily driven by product innovation. Our marketing efforts are also opening up more opportunities. Overall, it's a combination of all these elements.

That's very helpful color. And as a quick follow-up question, I wanted to focus in on the margins. So the outperformance that you saw this quarter and then that you're guiding to for the remainder of the year, how does that break down between gross margin expansion and leverage on the operating cost line?

Yeah, so gross margins were about 1 point ahead of expectations, largely just like we talked about due to the higher revenue levels. Certainly, the sequential subscription increase of $1.6 million was pretty accretive to the gross margin expansion. So think of it as kind of one or two points ahead on the gross margins. And then, our cost was pretty much settled coming into Q2. I mean, most of our investments for the rest of the year would be incremental. So the higher revenue, obviously, we didn't incur additional operating expenses. So most of it was the revenue overachievement and the expansion of the subscription revenue.

And, Mayank, what you should expect, like I mentioned in my comments, is margins, we typically measure our profitability as EBITDA by revenue, to improve consistently from here. We've gone through the tough phase when we had to make significant cost investments in order to drive medium-term growth and you're aware of that. So starting now you should see a consistent improvement in profitability during the second half of the year and into the next fiscal year as well.

That's great to hear. Again, congrats on the quarter and thank you for taking my questions.

Thank you, Mayank.

Thank you.

One moment for our next question. Our next question comes from Matthew VanVliet from BTIG. Your line is open.

Yeah, good afternoon. Thanks for taking the question. I guess when you made a couple of comments around, one, your win rates continue to be very strong, and then also the deals, especially in Europe and APAC, that you mentioned, strength there. So I guess as you think about sort of the big drivers there, and I know you went through a couple on the last question, but curious on how much, if at all, it's been mentioned that the win of the Marriott contract has sort of brought Agilysys more top of mind for potential customers? How much that's helping versus the re-platform product? And then the sales investments, especially in the international markets, driving that? Anything sort of additional on the international side that you would highlight that might be a little bit of a diverging or I guess at least different driver than in the US?

Our international and domestic market shares are relatively low, but our improved marketing efforts over the last couple of years are creating new opportunities for us. The impressive product demonstrations are helping us remain competitive. We need to focus on acquiring more reference customers. In various countries, we must strengthen our presence, as customers often seek reassurance from others who have used our products successfully. The product development is largely complete, and we are now shifting our attention to fieldwork in both international and some domestic markets. Our goal is to integrate these products into our ecosystem and build a strong base of reference customers, which will propel our growth. Our win-loss ratios are strong when potential customers see our product demos, and we stand out with our comprehensive ecosystem innovation. Right now, our priority is to enhance our field presence and encourage more positive customer testimonials for our products.

Very helpful. And, Dave, your comments seem to sort of imply that the majority of headcount additions for the full year have more or less been made here. So, one, wanted to just sort of confirm that's what your comments implied. But maybe more importantly, what would give you the confidence or the rationale to add additional headcount in the back half, especially as we think about the continued success of new business wins? Do you need some additional capacity potentially on the services delivery team, especially as the Marriott project ramps up, or where do you stand in terms of total capacity on the delivery team in light of the better bookings performance of late?

Yeah, so starting with the services team, I mean, we still have ramp left on the services team. I mean, they've done a tremendous job with revenue through the first half of the year, but there's still ramp left on that team, which their gross margin should continue to increase. But, certainly I think we're pretty settled, and we're pretty firm from a headcount, whether it's OpEx or delivery; we're pretty settled on headcount and, certainly for the revenue guidance we've given. But that's not to say that we wouldn't make more incremental investments as we see fit. Right? If other parts of the market start to open up or there's something, we wouldn't be foolish over that. But we feel pretty settled on where we sit from a headcount perspective at the moment.

All right, great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of George Sutton from Craig-Hallum. Your line is open.

Thank you. Ramesh, I appreciate the fishing analogy in particular. So you and I have talked about increasingly you are playing offense versus playing defense, particularly when you're out at a large trade show. I just wondered if you could walk through what exactly you mean by that and help translate that to part of why you're seeing the sales success and the increased guidance.

Yeah. So that comment about offense versus defense, like, when you compare us to a few years ago, right, during my initial days here, and even a couple of years after we got here as we started improving the products, whenever you meet customers in trade shows, the success of implementations tends to be measured by the low number of pending issues, pending technical issues. Oh, there are only 10 issues pending to be resolved. That's how they tend to be measured, and you're constantly playing defense with customers, making sure they stay with you despite the technical issues that are there. In recent shows, especially this year, in the various shows we have attended, there were more and more stories, and some of these stories were shared publicly in publicly attended sessions, where they were talking about, we moved from a competing system to Agilysys, we implemented their core PMS product and these two or three additional modules and these business parameters went up from this percentage to that. So they were actually happy to share those details with other customers, so that's what I mean by playing offense, that we no longer go into trade shows expecting to play defense like many enterprise software companies do, where customers are going to come and complain, and you're going to defend with them. Now we are looking for the positive stories that can be shared with other customers. So more and more we are switching to offense from the defense we used to be many years ago and the products are supporting that and our implementation services staff are supporting that. Our support is becoming better as we go along. So there are more positive stories for customers to share with others that provide an incentive for other customers to buy the products as well. That's what I meant, George.

That's great. So there were clearly some big large operators, particularly in the gaming space, that have had some cybersecurity issues. I know you've made a big investment in your capabilities on the cybersecurity side. Can you talk about any impacts that those have had to you and what happens when cybersecurity becomes part of a sales cycle, which I know is increasingly important? How are you doing in those situations?

There are several questions here, so let me address them all. First, there is no direct impact from the recent news you may have heard. Our knowledge of the incidents is consistent with what has been reported publicly, and we are not directly involved. However, we are available to assist customers in restoring their various products if they request our help. It's important to note that cybersecurity incidents are not uncommon in the hospitality industry. Over the past five years, numerous hospitality customers have experienced such events, as this sector deals with a high volume of guests and consumers, making it a target for hackers. Additionally, our revenue and sales growth are broadly based and not reliant on a few customers. Although there are delays in certain decisions as clients focus on enhancing their cybersecurity, these delays do not significantly impact our sales or revenue growth. Decisions may be put off, but they are not canceled, and these postponed decisions usually occur in the following months. We are committed to being there for our customers whenever they need assistance. We regularly help several clients throughout the year, and we have a dedicated team of security specialists. From a cybersecurity perspective, we have taken significant measures to protect ourselves. While perfection in cybersecurity is unattainable, we employ multiple layers of security within the company, provide rigorous employee training, and safeguard various aspects of our business. We collaborate with top vendor partners to invest in our protection continuously. Furthermore, our application design integrates input from information security personnel to ensure that our products cannot be misused in the future. While we acknowledge that there is no perfect solution, we are committed to doing our utmost to safeguard both our company and our customers.

Apologies, I'd love to just squeeze one more in. You haven't said a favorable thing necessarily about managed food service for a while, and this sounds like it was a pretty good quarter. Could you just give us a little bit more specificity in that specific area?

Yeah, so the FSM business, George, continues to recover and progress well from COVID time. But if there is a star in this particular first half of sales and Q2 sales, it is definitely resorts and cruise ships. So what we refer to as HRC internally, hotels, resorts, and cruise ships, was definitely the star performer compared to how much things have improved over the last couple of years. FSM, I would say, continues to show a steady improvement from the depth of the COVID days.

Thank you. One moment for our next question. Once again, one moment for our next question. All right, and our next question will come from the line of Brian Schwartz from Oppenheimer. Your line is open.

Hi, this is Ari Friedman sitting in for Brian Schwartz. Thanks for taking my question, and congrats on the quarter. I remember speaking about mid-size management companies and the opportunity there. And I was wondering what's like the usual product or module that they land with, and how does this compare to, say, like your other customers you currently have, and where do you see the opportunity ahead there?

Yes, hi, Ari. So as far as mid-size management companies, that is one area we continue to make good progress. I would say a good majority of the sales deals we are involved in with such companies tends to be on the point-of-sale (POS) side. And they tend to use the PMS that is suggested or recommended by the various brand names whose brand name tends to be used in those properties. So the best way I would describe it is our progress with mid-size management companies continues to improve. We are talking to more and more of them who are keen on looking at our latest product versions. It tends to be more on the POS side at the moment, and the PMS side continues to improve.

Got it, thanks. And then I guess like one other question is, you guys talked about strength in POS as well this quarter and last. I was wondering if you could like compare it to like maybe like a baseball analogy. What inning would you say we are in terms of like the growth and how much is left for POS?

Oh yeah, I mean there's a lot of growth, Ari, left for POS. We are doing well with POS. The competitive advantages of POS have been established with all the rewriting and reengineering we have done. We seem to be ahead of the competitors as far as POS is concerned because we've had a long track record with it, well-established product, a lot of good stories in the field. So POS has been a strength of ours and it continues to improve, but market share-wise, our POS market share is still very low in many areas. So there's just a lot of growth ahead on the POS side, though we are a bit more mature in how we compete in the market. On the PMS side, all the product re-engineering work is done. We've also created like 20 additional modules that are adding a lot of value, but we still have more field work to get done. The product work is done, but as far as establishing the PMS products in the field, having more customers sing the praises of the products, that I would say we are very early in the baseball game. We are in the first or second inning there and that still has to improve. POS, we are well established, high competitive strength, but still low market share in many areas, both geographical and sales verticals. PMS, all the product work is done. We are in the early stages of establishing ourselves in the field.

Awesome. Thank you so much.

Thank you, Ari.

One moment for our next question. And our next question comes from the line of Nehal Chokshi from Northland Capital Markets. Your line is open.

Thank you. And a great quarter. Nice to see this big revenue and a big guidance uptick. It sounds like this is being driven by an earlier and expected turn on of some large implementations rather than better-than-expected ACV in the September quarter. Is that correct?

No, Nehal. I would not say that it's correct. The subscription revenue growth was driven by a couple of large projects that went live, and we only recognize the revenue after they go live. But that has nothing to do with the sales progress we talked about. The sales progress has been broad-based, particularly high in the resorts, cruise ships, and hotels, while gaming casinos continue to perform very well. FSM is improving, and we had our best half of international sales ever. So sales are broad-based across all our verticals, but the sequential growth in subscription revenue this quarter was driven by a couple of large implementations that went live after we had been working on them for quite some time.

Okay, so to be clear, the main reason why you're raising guidance is because you did have a really strong ACV bookings quarter within the September quarter?

Yeah, Nehal, we have a strong sales quarter, and even despite the large revenue increase, I mean, keep in mind our backlog is still at near record levels. I mean, it's for most of our product lines, it's within the, it's either number one, two, or three as far as record levels. So despite the good revenue quarter, there wasn't a depletion in the backlog, which sales has gone really well as well.

Okay, so maybe an additional factor is that the rate of implementation has improved better than expected, and that's also a factor in the rate guidance?

Yeah. In the revenue doing well, subscription revenue doing well, recurring revenue doing well, the fact that implementation efficiencies are increasing, Nehal, because we had a lot of new products to establish on the field, we are getting more fluent with implementing those new products. We are also getting more adept at dealing with multi-product complex implementations. So yes, all that is contributing to recurring revenue. But us increasing the guidance of revenue also has to do with our sales doing very well and winning new opportunities at a faster pace.

Okay, can you give a little bit more color as far as how did ACV bookings actually trend in the September quarter more than just simply saying, one of the best ever quarters and for fiscal one-half, best ever? Because when you're growing 20-plus percent year-over-year, it's kind of like an expectation that every quarter is going to be kind of the best ever.

Regarding revenue, I understand your point, Nehal. Every quarter is typically anticipated to be our best as we continue to grow and perform well. In terms of sales, each quarter starts anew, requiring us to build from the ground up. Our ongoing sales success is largely attributed to the strength of our products and the fact that we have numerous offerings along with significant market share potential in various regions. This is one reason why we expect our sales to remain strong. We have indicated that this quarter has been one of our best, and the first half of this year has outperformed all previous first halves in sales, comfortably exceeding last year's figures. Last fiscal year, 2023, marked a record year for us in terms of sales, and this year's first half has shown an even stronger start than last year.

Okay, all right. Finally, made a comment last quarter. Sharks and dolphins are in the pipeline. How's the shark and dolphin pipeline looking this quarter, September quarter, relative to June quarter? Has it continued to trajectory up at a rapid rate? Do you have any graduation of those within the September quarter? Any detail on the sharks and dolphins narrative would be great.

Yes, I mean, George will also like this analogy, Nehal. Sharks and dolphins continue to play a big part of our sales. So we do have the entire gamut of sales opportunities in terms of the size of customers. But during the first half of the year, April through September, there were several sizable sales wins that we had, which were the resort or the cruise ship; they were sizable companies, and they also bought multiple products from us with good deal sizes. And that trend, I don't think, there is going to be any slowdown of that trend. When we look at our sales pipeline, there are quite a few doubles and triples that are possible in that sales pipeline. So yes, we do have sizable opportunities, whether you refer to them as doubles and triples or sharks and dolphins, they are there. They were there in the April through September first half, and they continue to be in our pipeline going forward.

And they've increased in amount in terms of numbers? On a queue?

More and more, yes. We are getting increasing significant opportunities, mostly because the opportunity sizes are bigger; Nehal, mostly because they tend to buy multiple products from us. The deal sizes are higher.

Got it. Understood. Thank you and congrats.

Thank you. Thank you, Nehal.

Thank you. And with that, I would now like to turn the conference back to Ramesh for closing remarks.

Thank you, Victor. Thank you all for your interest and participation. Enjoy the holiday season. We look forward to talking to you again in about three months when we will be reporting fiscal 2024 third quarter results. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.