Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal Year 2018 Second 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. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Norberto Aja, Investor Relations. Sir, you may begin.

Thank you, operator and good afternoon, everyone. Thank you for joining the Agilysys Fiscal 2018 Second Quarter Conference Call. We'll get started in just a minute with management's presentation and comments. But before doing so, let me read the Safe Harbor disclosure. Today's conference contains forward-looking statements within the meaning of the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements could be identified by words such as anticipate, intend, plan, goal, believe, estimate, expect, future, likely, may, should, will and other similar references to future periods. Examples of forward-looking statements include among others, statements we make regarding guidance relating to revenue and adjusted earnings from operations, expected operating results such as revenue growth and profitability, cash balances, market demand, cost efficiencies and financial results. Forward-looking statements are neither historical facts nor assurance of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial conditions to differ materially from those indicated in the forward-looking statements today include, among others, our ability to achieve operational efficiencies and meet customer demand for products and solutions and the risks described in today's news announcement and in the Company's filings with the Securities Exchange Commission, including the company's reports on Form 10-K and Form 10-Q. Any forward-looking statement made by us in today's conference call is based solely on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement that may be made from time-to-time whether as a result of a new information, future developments or otherwise. Today's call and webcast will also include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release, as well as in the Company's website. With that, I now like to turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilysys. Please go ahead, Ramesh.

Thank you, Norberto, and good afternoon, everyone. Thank you for joining us on the call today to review our fiscal 2018 second quarter results and our path forward. Joining me on the call today is Tony Pritchett, our Chief Financial Officer. Let me begin with a quick overview of the second quarter results, before discussing progress made against our various strategic initiatives. Compared to last fiscal year's second quarter, total net revenue decreased 7.8% to $30.1 million, that is three zero, $30.1 million, leading to a GAAP net loss of $3.2 million or a loss of $0.14, that is one four, $0.14 per share, compared to a loss of $2.4 million or a loss of $0.11 per share in fiscal 2017 Q2. Notwithstanding the softness of the revenue results, largely due to lower third-party hardware sales, in our current form as a pure-play hospitality software solutions company for the past four or so years, we were able to achieve our best ever quarter in terms of adjusted earnings from operations. As discussed earlier, the adjusted earnings from operations measure is a close proxy for free cash flow on an annual basis. This measure also improved by 67% on a sequential basis from the first quarter of this fiscal year. Our continuing initiatives to lower cost as a percentage of revenue and realign our overall operational structure to significantly reduce spend in non-growth areas have resulted in significant improvement in adjusted earnings from operations, despite the lower revenue level for the quarter. We expect to end this fiscal year with a cash balance that is at or slightly above current level. And if things turn out as planned, our next fiscal year, fiscal 2019, should be significantly better than fiscal 2018 in many aspects, including from a cash flow perspective. In…

Thank you, Ramesh, and good afternoon, everyone. Our first quarter fiscal 2018 – our second quarter fiscal 2018 revenue was $30.1 million, a 7.8% decrease from total net revenue of $32.7 million in the comparable prior year period. The decline in top-line largely reflects a decrease in product base revenue of 31.8% on the back of a significant decline in hardware equipment sales. Revenue from third-party products was down 42%, compared to Q2 of last year, while revenue from proprietary software products was down just 3%. Going forward, we see no reason to believe hardware sales won't get back to historical growth levels. Looking at revenue in greater detail, product revenue decreased by $3.4 million or 31.8% to $7.3 million and represented 24.3% of total revenue during the quarter. Product revenue in the quarter did not follow the typical range of 60% to 70% hardware and 30% to 40% software instead, software revenue this quarter was much closer to a 50% split with hardware within product revenue. Recurring revenue increased $1.2 million or 7.6%, compared to the second quarter of fiscal 2017, largely driven by new customers using our on-premise software products, as well as an increase in SaaS-based recurring revenue. The recurring revenue growth was driven by a 28.8% increase in SaaS revenues for the second quarter. SaaS revenues comprised 29.2% of total recurring revenues, compared to 24.4% of total recurring revenues in the second quarter of fiscal 2017. We are pleased that SaaS-based recurring revenue continues to grow at a faster pace than our overall recurring revenue. Support, maintenance and subscription services revenue represented 56.8% of total net revenues, compared to 48.7% of total net revenues in the second quarter of fiscal 2017. Professional services revenue decreased $0.3 million, 0.3, or 5.6% to $5.7 million reflecting the impact…

Thank you. [Operator Instructions] And our first question comes from the line of Allen Klee from Sidoti. Your line is open.

Hi, good afternoon. For product sales, can you go into a little about, maybe what happened in the quarter and what do you think you have to change? Or maybe what the challenge is in closing sales? Or just any color at all to how we should think about that going forward? Thank you.

Yes. Hi, Allen. Good to talk to you. With respect to the quarter, Allen, we had a much – more than expected number of deals pushing that got delayed that we thought would close in the quarter that got delayed out of the quarter. I would say that was the main reason. And the secondary reason overall, not just talking about the quarter is that, a lot of the improvements, product improvements, services improvements that we've been working on, we realized that it will just take a couple more quarters before it really starts making a difference in the marketplace and creates a strong enough pull for us, right. So those were the two main comments on that. Number one, a number of deals pushed that we didn't expect to push out of the quarter and number two, a lot of the improvements we are making in terms of creating a competitive advantage for ourselves will take just a bit more time before it makes a difference in the marketplace.

Okay. And then, what are you thinking about kind of the approach to your sales team and a new head of sales in terms of how you think any changes that you would like to see?

Yes, without commenting on any particular change, Allen, I would say in general, what we have been working towards in the last two, three quarters since the beginning of this calendar year is driving some culture changes, right? We want to become a lot more energetic, a lot more customer-centric, very focused on customers and generally, more passionate, more enthusiasm, more execution and innovation-oriented. Just driving a lot of those changes. We just want more energy within the company. And also lot more internal teamwork, right? We want sales and R&D and services to be on the same page to work together to help the company and the customer. So a lot of the changes we have done during the last ten months or so have all been driving the company towards that. And as far as the sales team is concerned, there have been no major changes in the sales team other than the leadership change. We plan to invest a little bit more in our sales in terms of more quota-carrying sales reps all over the world. And we'll do that gradually along with our product improvements as our products become more and more competitive and more and more we have an advantage in the marketplace, we will make sure we drive that sales as well. But at the moment, we are looking at all regional coverages. And we want to make sure that we are covering the market well, and we are driving our sales forward with a lot of energy.

Okay. Do you have numbers on the number of hotel rooms and point-of-sale devices for the quarter? And do you have any goals on how you would like to grow them?

It’s about 250,000 rooms and around 42,000 terminal end-points. And as far as growth goes, as revenue grows, so do our end-points. So, on average they should grow on a similar – kind of similar trajectory.

Okay, thank you. Can you talk a little about your payment gateway and to the extent you think that that gives you a competitive advantage?

Yes. Our payment gateway more than it giving us a competitive advantage, Allen, what it does is it makes our product development efforts a lot more effective. Instead of developing payment gateway-related modules in each of our products, both in property management and in point-of-sale, we are able to make that a common module, so it makes it a lot more – much higher velocity development and we don't need to do it in each of our products. That's the main advantage it gives us. And therefore, our reaction to the marketplace is a lot quicker than otherwise. So that's the biggest advantage we get with a common pay gateway and we are now, I would say, in the 7th, 8th, 9th inning of creating a lot of the pay-at-the-table and EMV enhancements and working with a whole lot of other gateways and processes and getting ready for various markets, including Canada and even various markets in the U.S. A lot of those efforts that have gone on over the last few quarters are kind of towards the end now. So we should be in very good shape with respect to our payment gateway going into the next fiscal year.

Okay, great. And then, with the large hotel chain opportunity, what are the factors that you think are key in terms of winning business there and accelerating adoption?

Yes, sure. So as you know, Allen, once we are named as one of the preferred vendors for a major hotel chain, there is still a little bit of selling to do with each of their individual hotels and their franchises and there is still work left to be done there. And with a couple of major hotel chains that we are making good progress with, a lot of their budget cycles align with the calendar year. So we expect hotels going live with our solutions to really accelerate towards the beginning of next calendar year, which is the last quarter of our fiscal year. So we expect that to keep going forward. We are making good progress with the couple of hotel chains that we are already signed up with. And there are a number of other significant size hotel and cruises and resorts opportunities in our HRC vertical that we are making reasonably good progress with. So there is a lot of promise in terms of how HRC as a vertical will drive our revenue growth forward during the coming quarters.

Okay. Any comments on how you are thinking about expanding sales internationally?

Yes. So internationally, along with our hotel, resorts, cruise vertical, international represents a major revenue growth area for us. We are pretty well positioned in Asia, because we have a significant presence there. And the fact our India development center has about 130 employees helps a lot, because the more you can help a market locally, the better off you are. So Asia, we are well positioned and I think, we are much closer to revenue growth in Asia, compared to Europe. Europe, we will grow along with the opportunities. There are a couple of opportunities we are working on that is going to help fuel growth in Europe and we will grow our sales staff along with the growth. We will be disciplined with that growth effort. And as far as Latin America is concerned, that is an area where we have to get started, where we hope to get started during the next couple of quarters.

Okay. Any comment on the progress on the rollout of the various rGuest solutions? And how you see that – how them happening?

Yes. So as far as rGuest is concerned, I will say, Buy is the farthest ahead. rGuest Buy is making very good progress, especially with a couple of big food service management customers. Stay is working well in limited services hotels. And our major install with one major customer there is going well, well. And we are now planning to expand the product to other limited service hotel opportunities as well. Now as we need a couple of more – few more quarters before we are ready with the full-service hotels as far as rGuest Stay is concerned. So I would say Buy is the farthest ahead. Stay is doing well in limited services hotels. And Stay, like I told you is making good progress as a common module.

Okay, and in terms of the productivity you're seeing out of the Indian IT center, how do you feel about that now?

Yes, India development center, like you know, like in terms of managing – creating and managing a captive development center, I have had a couple of previous experiences with us. And I would say this is going better than expected. We've been there now for about four plus months and it's quite remarkable how much impact they've already made and that will only exponentially continue to increase as we go forward.

Okay. And then, in terms of how I think about the longer-term business model here, can you – I think I've heard you say in the past some things about like how the company could – you think in the long run have margins similar to like large enterprise software companies. But is there anything about the company? Could you maybe define that and - or if there is anything different about, I don't know the hardware component here or something that makes you think it would be a little different?

Yes. Allen, what we've said and what we continue to expect is that, we can get to a point where we can grow revenue 10% to 20%. We don't see that there is anything standing in our way, notwithstanding the current year lower guidance. We are going to have some bumps in the road, but we should be able to get to that 10% to 20% growth rate on revenue. And as far as earnings go, our margin – we've really given an indication that we can be profitable and that we can earn somewhere between 10% and 15% of revenue on the bottom0line and the bottom-line being our adjusted earnings from operations metric. And we feel like those numbers are reasonable based on other similar companies to us, other enterprise software companies, software and SaaS companies. So there is plenty of them out there in the market that are growing revenue and are profitable and that's what we're modeling ourselves after.

Thank you. [Operator Instructions] And our next question comes from the line of Phil Bernard from Eilers & Krejcik. Your line is open.

Hi guys. Thanks for taking my call. I am not hearing, can you hear me?

Yes, Phil. We can hear you. Nice to talk to you.

There we go. It looks like recurring revenues continues to grow pretty well year-over-year and sequentially. What is driving most of that in terms of what product and what customer segment?

Yes, I mean, all our products drive that. All our products, all our software sales involves recurring revenue. And they could fall in two buckets. Some customers prefer on-premise solutions, which normally involves a license and maintenance and a lot of customers growing, more and more customers prefer the SaaS solutions where they pay us a SaaS recurring revenue. So both those buckets, license maintenance and SaaS revenue contributes to our recurring revenue growth and we continue to expand our customer base. Every quarter, we are adding more customers to our customers list and that will continue to grow recurring revenue, both the SaaS revenue and the license maintenance revenue.

Okay, okay. So there is not one customer segment as in hotels or casino or restaurants that's pushing further or stronger than the others?

In general, like Tony was describing, our revenue growth, we expect during the next, call it one to two years, a lot of our growth is going to come from the Hotel, Resorts, Cruise segment. A lot of our revenue growth is going to come from international and as we continue to innovate more, we expect more growth from Food Services and the Gaming segments that we are in as well. And all the revenue growth carry a recurring revenue competent as well. So, because we are a software company, every sale we make contributes to the growth of recurring revenue.

Got it. Got it. And...

And we expect our SaaS recurring revenue to grow at a faster rate because that's where the world is going towards -- more towards the cloud and SaaS-based solutions.

Sure, sure. And then, you guys have been very gracious with your time. So, I'll leave it with this one. It looks like sequentially margins within the subscription, maintenance and support vertical came back a little bit sequentially though they were up year-over-year. How do you look at margins within that business going forward?

Yes, they vary – not much, Phil. They vary a point or two quarter-to-quarter and that's really due to the timing of when customers go live and certain GAAP accounting entries when we have certain things deferred on the balance sheet for various reasons. That margin over time should grow, because it's a pretty scalable revenue line. We don't have to incur as much cost as we grow revenue. There is a lot of capacity in our datacenters. As the SaaS revenue grows and we have more customers installed and our support team that supports the phone calls from customers, that's a pretty scalable team as well at this point. So, you should see that margin kind of creep up over time.

Got it. Great. That’s it for me guys. Thank you.

Thanks, Phil.

Thank you, Phil.

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Mr. Ramesh, President and CEO for closing remarks.

Thank you, Danielle. And as always, thank you all for joining us this afternoon and all the confidence you have placed in us with your investments. We sincerely appreciate it. We look forward to speaking with you again when we report our fiscal 2018 third quarter results. Thank you.

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