Jim Dennedy - President and CEO Janine Seebeck - CFO

Phil Bernard - Eilers Research Brian Kinstlinger - Maxim Group

Good morning, ladies and gentlemen, welcome to the Agilysys Fiscal 2015 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. 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. 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 differ materially from these in the forward-looking statements are set forth in the Company’s report on Form 10-K and 10-Q and news releases filed with the Securities and Exchange Commission. I’d now like to turn the call over to your host Mr. Jim Dennedy, President and CEO.

Thank you, Candice, and good morning everyone. We appreciate you joining us on the call today to review our fiscal 2015 third quarter results. Joining me today is our Chief Financial Officer, Janine Seebeck. Before we get started, just a quick reminder that on the call today we’ll be discussing some non-GAAP metrics, primarily adjusted operating income from continuing operations and adjusted income from continuing operations, which eliminates the effect of restructuring and other items that are either non-cash or non-recurring. Reconciliations to GAAP metrics are provided in the financial section of the press release issued earlier today. Total net revenue for the third quarter was $24.7 million compared to total net revenue of $25 million in the third quarter of fiscal 2014. It is important to highlight that recurring revenue which comprises of support maintenance and subscription services were $13.9 million for the quarter, an increase of 5% and also rose as a percentage of our total sales representing 56% of third quarter net revenue. As a part of those recurring revenues our subscription services revenues improved 16% year-over-year which is encouraging as increasing the subscription services component of our revenue mix is one of our top business objectives. Gross margin was 57% in the -- in fiscal 2015 third quarter, compared to 61% in the prior-year period. Adjusted loss from continuing operations of $1.3 million or a loss of $0.06 per diluted share compares to a gain of $700,000 and $0.03 per diluted share in the same period last year. This led to a net loss from continuing operations of $2.7 million, or a loss of $0.12 per diluted share, compared to a net loss from continuing operations of $1.7 million, or a loss of $0.08 per diluted share, in the prior-year period. Our third fiscal quarter results underperformed our plan for fiscal 2015. In our fiscal 2015 business plan we made specific changes in our go-to-market strategy to emphasize new logo and subscription business in the markets we serve. In our plan we expected the run rate business we do with our installed base to grow at a modest rate throughout the year. Our run rate business primarily includes customer product data [Indiscernible] and hardware replenishment. The run rate business is down year-over-year both in terms of the volume of deals and the value of those deals. We believe the run rate business in our installed base remains available, however we need to apply more resources to that line of business in order to secure it and deliver it. Secondly, our emphasis on the proceed of new logo and subscription business while successful has led to longer sales cycle and lower than planned initial deal size. Finally, our emphasis on a pursuit of new logo and subscription business led to certain changes in our selling approach, while adding additional selling capacity to the business our approach has experienced longer ramp times for new sales resources to reach their full effectiveness. We do believe however our third quarter fiscal results validate our business strategy. While the total deal volume in the current quarter remained at approximately the same level as the prior year period, the new logo deal volume and value are up by nearly double. Our subscription business volume and value is up by more than double in the third quarter versus the prior year period. While still just under 10% of total revenue, our subscription services revenue grew 16% in the third quarter versus the prior year period and is up 13% year-to-date. While we believe our recent quarterly results validate our business strategy, we are taking action to correct execution issues regarding the gaps in our run rate business by increasing our account management and sales retention to this line of business. Secondly, while the new logo and subscription business saw stronger participation in this quarter than the prior year period the longer sales cycle, lower deal size and delayed recognition of value per sold business requires additional selling capacity to capture the opportunity we see in the end markets we serve. To address an opportunity we see to make our services business in more strategic part of our revenue mix, we promoted Rehan Jaddi to Senior Vice President of customer support and solution services. A lot of customers recognize this for delivering peer leading deployment, support services. We are investing in our services business to deliver more strategic and higher value solutions to our customers. We are moving beyond the delivery of component technology deployment to managing the overall product, project and solutions for which our technology serves as the foundation for the project. We look for this revenue line to grow in future periods and return to the same or better levels of gross margins we have historically experienced. Consistent with our views on our views on our overall business strategy, confidence in our product strategy remains strong and we have made significant progress during our third quarter. Our most critical strategic projects remain on track and we have solid evidence of market adoption for our most recent innovations. In fiscal 2015 we continued to make significant progress in bringing to market updates for our current products that will help transition customers to our new rGuest platform, our next generation platform upon which a new suite of products will be developed and delivered. These new products including the recently released rGuest Pay, Seat and Analytics provide enhanced capabilities to further drive business for our customers and revenue for our company by integrating what all of Agilysys and most non Agilysys brand of products. rGuest Pay launched in the second quarter of fiscal 2015 provides a payment gateway solution for both property management and point of sale products that is PCI validated for point-to-point encryption of cardholder data. Our Solution has no volume tiers or transaction minimums and unlike many other payment gateway solutions rGuest Pay is offered at a fixed annual fee for payment taking endpoint, making our solution unique in the industry and are offering an attractive value proposition for hospitality operators. We are pleased with the initial performance of rGuest Pay and look forward to continuing the rapid roll out of this exciting product which includes “The Cosmopolitan of Las Vegas” which will be installed in rGuest Pay across its 2900 plus room property on the Las Vegas strip. This is a very important new win for us that validates our expectation for rGuest Pay. We also continue to make progress with rGuest Stay. Delivered as a Cloud based solution initially rGuest Stay offers instant scalability, operational efficiency, reduced technology footprint and the ability to upgrade capacity without business interruption which is especially beneficial for smaller to mid-sized properties. For larger hotels, destination resorts and complex casino properties rGuest Stay is designed so that future releases can be delivered as an on-premise solution for maximum control and seamless integration with existing technologies. Our product portfolio continues to evolve in both scope and specification. The evolution in our product portfolio and in our go-to-market approach aligns with our strategy to not only deliver on our customer promise, but also to enhance the competitiveness and value of our company. While the benefits in both potential of our strategy may not be evidenced in our current period’s financial results we remain confident based on the evidence we see in those results that the company has made progress towards achieving our longer term goals. With that let me turn the call over to our CFO Janine Seebeck, to review our third quarter and year-to-date results. Janine?

Thanks Jim and good morning everyone. Our third quarter fiscal 2015 revenue of $24.7 million is a 1% decrease compared to $25 million in revenue for the third quarter of fiscal 2014. This slight drop in revenue is largely the result of the near term impact of our strategy to focus on selling new logo and subscription based revenue. This drop offset the 5% increase in our support, maintenance and subscription services revenue which represents our recurring revenue and a 1% increase in our professional services revenue. As Jim highlighted, subscription revenue grew at over 16% in the quarter and at 13% through the first nine months of fiscal 2015. And though we will give up some of the near term product revenue we received today from traditional on-premise sales we believe there is good reason to continue to ramp up our efforts and resources around subscription based revenue given the results we are experiencing including longer term higher margin and higher recurring revenue. Moving down the income statement, overall gross margin fell to 57% for the third quarter of fiscal 2015 compared to 61% in the prior year quarter. Product gross margin decreased 760 basis points to 39% as a result of the lower proprietary product revenue and approximately 200,000 of incremental amortization expense of software products that were recently placed into service. Support maintenance and subscription services gross margin increased by approximately 150 basis points to 78%, while professional services gross margins decreased 800,000 and gross profit margin decreased to 11% as a result of increased labor cost required in the quarter to meet certain customer expectations which resulted in sub normal blended utilization rates. We expect gross margins for the fiscal 2015 to remain in the 60% range. Operating expenses which include product development, selling and marketing, general and administrative and depreciation expenses increased by 6% to $16.1 million compared to the prior year at $15.2 million. And as a percentage of net revenue operating expenses were 65% versus 61% in the prior year period. As expected, product development expense increased $900,000 or 16% in the third quarter of fiscal 2015 compared with the third quarter of fiscal 2014, primarily driven by our continued investment in engineering resources and to a lesser extent to certain research and development cost being capitalized as software development cost upon achieving certain milestones in the development lifecycle. We expect product development expense as a percentage of revenue to be in the mid 20% range through fiscal 2015. Sales and marketing expense increased $600,000, or 19% in the third quarter of fiscal 2015 compared with the third quarter of fiscal 2014 due to the continued implementation of our sales strategy as we continue to invest, align and ramp our sales force to better serve our customers and our long term strategy. G&A decreased $600,000 or 11% in the third quarter of fiscal 2015 compared with the third quarter of fiscal 2014. On the expense and investment front we remain committed to strong capital discipline including the thoughtful use of our balance sheet, efficient use of working capital and strict management of operating expenses. Operating loss in the quarter was $2.7 million compared to $3 million in the third quarter of fiscal 2014. And on an adjusted basis, we reported an adjusted operating loss of $1.2 million for the current quarter compared to a gain of $600,000 in the year ago period. Adjusted loss from continuing operations in the third quarter was $1.3 million or a loss of $0.06 per diluted share compared with adjusted income from continuing operations of $700,000 or $0.03 per share last year. Loss from continuing operations for the quarter of $2.7 million or a loss of $0.12 per diluted share compared to a loss from continuing operations of $1.7 million or a loss of $0.08 per share for the prior year period. Moving to the balance sheet and cash flow statement, cash and marketable securities as of December 31, totaled $74.1 million compared to $99.6 million at March 31, 2014. The decrease in cash reflects the cost for our July acquisition of technology supporting the launch of the rGuest Seat platform as well as approximately $12.5 million in spend for our ongoing capital product development investments. Net cash used in continuing operations was $7.5 million, compared to net cash used in continuing operations of $7.1 million for the first nine months of fiscal 2014. Adjusted for nonrecurring items, net adjusted cash used in operations for the first nine months of fiscal 2015 was $4.6 million compared to $5.5 million in the prior year period. Total deferred revenues, including both paid and unpaid balances increased 20% to $36.7 million at December 31, 2014 compared with $30.5 million at December 31, 2013, which is consistent with our focus on generating increased higher margin proprietary products and subscription services sales. In terms of our NOLs, we currently have $165 million on our book, for which we can attribute a full valuation allowance and which will help us remain viable for just taxes paid in foreign jurisdictions along with minimal state taxes for the foreseeable future. With regards to our outlook for the balance of fiscal 2015, we expect to generate full year fiscal 2015 revenue that is inline or slightly below the prior year, in addition reflecting our updated outlook for fiscal 2015 full year revenue, we now expect to record an adjusted operating loss for the year compared to our prior expectations of break even to modestly positive adjusted operating income for the full year. In closing, while the overall third quarter results were below our plan, they reflect the continued growth in recurring revenue, a vital component of our business. It also reaffirms the success we are having in growing our subscription business as reflected in the 13% increase in subscription services revenue year-over-year. Importantly, a healthy balance sheet including approximately $74 million in cash, cash equivalents and marketable securities provides us with the financial foundation to continue investing at an accelerated rate and a development of new products while also providing us with the flexibility to pursue appropriate non-organic growth opportunities. With that, I’ll turn the call back to Jim before we move to Q&A. Jim?

Thank you, Janine. Taking a look now at our markets, let me begin with our largest market by revenue, the commercial and tribal gaming market, while new property supply has slowed, the market remains healthy. On the new customer front we were able to grow our customer footprint in the gaming industry which currently represents approximately 54% of our total revenues. Late in calendar 2014, Monticello Gaming and Raceway selected InfoGenesis to help run its property in the 70 room Wild Rose Casino a full service casino resort company based in the Midwest, selected InfoGenesis, Flex and rGuest Pay. Moving to the hotel, resort and cruise sector, this market represents approximately 25% of our total revenues and offers significant growth opportunity for us both in the United States and abroad. New customers in this sector include the GEM hotel, a boutique hotel set in the trendy Chelsea section of New York which selected InfoGenesis Flex delivered as a subscription service and it’s a large Calistoga resort, a resort in the heart of Wine Country selected Visual One and InfoGenesis flex also delivered as a subscription service. Looking to export the $700,000 square foot athletic complex and convention center selected Visual One, InfoGenesis, and Eatec to manage their one of a kind property, the largest indoor sports complex in United States. We remained intent on transforming the guest service experience in the hospitality industry. Operators seek to deliver more than a satisfactory transactional experience with their guests. Operators seek to enhance and manage their entire guest lifecycle of this day or dining experience. We believe we have the vision, capital and solutions to deliver on this mission. Looking ahead, through careful investment and superior execution, we feel confident in our ability to deliver added capabilities to our customers and drive increased value to our shareholders. We are growing recurring revenues, securing new customer wins, bringing our next generation products and brining our next generation products to market. Agilysys serves healthy underlying markets that offer us a significant market opportunity and a potential to expand across international markets. We believe improving our execution against this strategy and developing our team of dedicated employees we’ll lead to improve financial results. With that, let’s open the call for your questions. Candice?

Thank you. [Operator Instructions] And our first question comes from the line of Phil Bernard of Eilers Research. Your line is now open.

Hi, guys. Thanks for taking my call. Two quick questions. First one is what’s your view for the industry and how do you guys expect to grow along with that?

Good morning. I’m sorry. This is Jim -- each one of the – we expect to one of the industries as we’ve indicated we think gaming itself is more of a finite market than some of the other industries we serve. We think that the spent in that industry is largely going to come from transitioning the customers in that market from competing products to our products. You do see some new property growth with Win opening the property in Boston. You had MGM open up property recently in Maryland. So there is some modest new growth that you will see, but I think that the overall market is rather limited in terms of its overall new property growth. However the spend if you look at RevPAR rates in Vegas in particular, I think RevPAR rates year-over-year in 2014 were up about 9%, and spend was up about 5%. So I think there is properties if you can provide them which we think we do and opportunity for them to get new wallet share and recruitment out of the guests or markets that they want to attract, I think that we can continue to enjoy modest spend growth in the gaming sector. I’ll turn next to the hostel, resort and cruise segment, so I think there is more opportunity for us to grow in those segments both in terms of the overall market rate of growth which we still see at about 5% to 7% in total for that particular segment. But more importantly, our analysis is that, that market is highly fragmented in terms of the number of suppliers that serve that market and we see a decent opportunity to continue to grow and take share in that core market. Moving to food service management, the food service management market, we have – we think a very strong position in terms of market share in that particular industry. I think we have the right technology to continue as those companies win competitive sourcing deals from venue they want to source to food service management versus doing it themselves the tools to help those companies whether it’s a frenzy [ph] Compass at Axa Aramark Guggenheim or others compete and successfully win business. As it relates to restaurant, that segment is probably the toughest in terms of competitiveness both from the industry itself and the suppliers to that industry. We see that industry has modestly higher growth rates, but the prices earned in those markets for the solutions that we sell are under steeper levels of competition. We are segmenting that market and going after the highest ends of the markets primarily targeting restaurants or restaurant groups that have at least five to seven properties either in a city or in a region and that we can serve complexity very well. When we look at what we do in other industries like gaming or the hotel, resort market we do complexity probably better than anybody else in the market. So for those restaurants or restaurant groups that have complex environment, we think we do very well on those markets and I think that’s how we’re going to distinguish ourselves from our competition.

Wonderful. I appreciate to breakdown my verticals as well. Next question is about gross margins, I know you provided a little bit of information about the increased labor intensity that may have been evolved this quarter over others. I was wondering if you could provide any additional information and provide some an idea for how we should view gross margins going forward.

Phil, it’s Janine, good morning.

Hi, Janine. Good morning.

Obviously for the rest of this year, I do think we still in and as I said in a 60% range. The projects that kind of caused those extra hours in Q3, we do think we’ll have some fall over into Q4, so still have some impacts, but I don’t expect that to be a full long-term impact to our results. From a product perspective, I still think there is a little bit of that mix as Jim talked about in his script with just a little bit of the longer ramp and the lower product that had a little bit of an impact. But all-in-all I think it will still blend to that 60% range through the end of the year.

And Phil, just for added color, when we talked about of execution gap earlier in the call beyond the run rate business that we’ve identified, service delivery, well, we think we delivered peer leading support services, execution against certain products, we identify the gap midway through our third quarter. When we promoted Rehan Jaddi, who has consultant – big time consulting experience with [Indiscernible] and Accenture to the level of Senior Vice President for Customer Support and Services Solutions, we think we’ve address the disciplined that we need it for the gap we identified in service delivery.

Great. That makes sense. Appreciate it. That’s it from me.

Thank you.

Thank you, Phil.

Thank you. And our next question comes from the line of Brian Kinstlinger of Maxim Group. Your line is now open.

Hi, good morning, guys.

Good morning, Brian.

Can you highlight how beta testing is going for your property management platform or just layout the timeline when is readily available for sale, I’m basically wondering is anything change and really what the response has been?

Well, the response Brian, thank you for your question, it’s been really pretty strong. We have multiple properties using the product in production today. One of the reasons why we have delayed if you will, declaring general availability is that we would like for a broader cross section of properties to be using the product to more completely test the full functionality that we have in the product that’s been released. When we achieve that particular outcome we’d be in a position to declare it generally available. I think, I don’t know, Janine if you want to add a more color to that.

Yes. I think that fair. And at this point, Brian we think that they will be probably first half of the calendar year.

And so, you characterize them right now still in public testing. Is that right, you’re requiring customers that can work with you to figure out and knows market, any kind of changes that need to be made to the software platform?

Correct. We would declare that current status what we would call release candidate stage. This is the candidate product that if we had a broader cross section that was more completely testing its functionality, we’d be in a position to declare at GA. But as we’re still installing it at multiple properties, we have some properties using it in production. So they’re not using it and test anymore. They are actually using it in product. And then we have other companies that were installing a properties, they were installing. Once we get a more complete test of the full functionality that’s been released we feel more comfortable declaring it generally available. Although we are in the market and we do have pipeline for selling it today.

And so when you say that, did that suggest you’ve got some hotels, but you want maybe some cruise lines and some other kind of verticals or is it a broader range of hotels and properties that you’re going to be install them?

It’s a ladder, a broader range of hotel properties.

Got it. Okay. And then, I’m wondering as you’ve talk about longer than expected sales cycles, I’m wondering if at all the new platform being closed for sale. I think your new logos as well as your existing customers know it’s coming, if that’s impacting the sale cycle right now as they want for this platform and maybe you’re reluctant to buy products ahead of that?

We’ve address that particular concern by what we would call giving our customers platform protection. So for instance, that they bought current end point product from us, the platform protection is they’re not buying a product. They’re buying property management services if you will. And we’ve given them a define migration path from the current end market product to the next gen when they are ready and we are ready to move them. The longer sales cycle I referenced is more attributable to the emphasis we’re placing on getting new logo business. Someone who is not currently doing business with us today, the courtship that it takes to secure their business is just taking modestly longer than what we had planned.

And so, do you think that as a result once the whole platform is readily available for sale, makes you think that acquiring new customers may take a little bit longer than expected? Or do you think that the product is strong enough given differentiated that maybe that won’t be the case?

Well, I think the product is plenty strong. It’s the relationship building throughout the industry that we did to develop. At the end of the day there’s whole concept I have around the lasting connections which is the purpose for our company is that I don’t think that people buy from companies or people buy just products. People buy from other people, particularly in this industry. And to the extent that we can develop those relationship with these properties and our target end market that they have the confidence that we’re not just shopping a product, but we’re there to deliver on a brand promise from Agilysys that we’re helping you serve the guest lifecycle of either this day or the dining experience. We’re not just about delivering a transaction. We’re going to help you recruit more revenue, develop more wallet share, get better recruitment. That takes a little bit more time to sell than just say, here’s a product. Please install and tested out and transitioning in a way from a current property management system product or a point of sale product particularly at the enterprise level at which we see is not a trivial discussion. It takes a while. Even in our installed base where we migrate customers from an existing or a competing system to our system. That sale cycle, the capital request getting those lines of business support behind it, it takes a little bit of time and we based our timing factors for new logo business as a modest increment to the sale cycle what takes within our existing accounts. And we were wrong it’s taking a little bit longer than our initial estimate.

And with that said, if I take a look at your salesforce, how many sales folks you have trying to capture new logos and then how many of those have been with Agilysys for less than one year?

With respect to the salesforce we ended our third quarter with about 20.25 [ph] in head count overall in the business. Of those 20 approximately 8 are focused exclusively on new logo business atonement of those 8, at last half have been with Agilysys for more than five years. The remaining half, have been with the Agilysys for under five years, I think a very small piece have only been. I think two people have been with Agilysys for less than 18 months.

Great. Last question with your balance sheet giving you lots of buying power. Maybe highlight your M&A strategy and if you take look at the business and what you’ve got. What kind of assets do you need to maybe complement your business and maybe give little bit value to cross-sell?

Well, I think if you look at our historical approach to M&A at least under the current leadership. We think we have great products that are foundational and the dining or this day experience, and we are looking to add component technology that help, complete or fill rest of what we would call that guest lifecycle management, so things around dining and table management. We look at payment as an integral part of this day experience or the dining experience. There is nothing like sitting in a restaurant or hotel and you’re waiting to try to tender out and leave. So helping to give our properties, those kind of capabilities where our M&A efforts will be focused. And I think historically we’ve always said, we want to look at talent, technology and market in that order. The talent that develops the interesting technologies or innovations that are market will use and if they deliver us new market opportunity. If it’s an end market or segment that we want to address, all the better and that’s how we look at M&A and our M&A strategy going forward.

Great. Thanks you, guys.

Yes, sir.

Thank you. [Operator Instructions]. And I’m showing no further question at this time. I’d like to turn the conference back over to Mr. Dennedy for any closing remarks.

Thank you, Candice. Thank you for joining us on the call this morning. We believe Agilysys continues to improve our business. We will continue to focus our resources on the highest available opportunities in our chosen end markets and manage the business for the longer term to deliver sustainable value to our customers and shareholders. In closing, I want to take this opportunity to thank the very talented and dedicated team at Agilysys. Their work drives our success. I also want to thank our many customers and partners who entrust us with their business. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day everyone.