Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal Year 2018 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. [Operator Instructions] And I would now like to introduce your host for today's conference, Mr. Norberto Aja. Sir, you may begin.

Thank you, operator and good afternoon, everyone. Thank you for joining the Agilysys fiscal 2018 third quarter conference call. We will get started in just a minute with management's presentation and comments. But before doing so, let me read the Safe Harbor language. 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 can 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, our guidance relating to revenue and adjusted earnings from operations, and statements we make regarding our ability to achieve revenue growth, profitability and improvements in financial results and shareholder value. 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 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'd 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 third quarter results and our path forward. Joining me on the call today is Tony Pritchett, our Chief Financial Officer. Revenue as compared to last fiscal year's third quarter decreased 6.4% to $31.3 million leading to a GAAP net loss of $1.9 million or a loss of $0.08 per share compared to a loss of $1.7 million or $0.08 per share in Q3 fiscal 2017. This drop in revenue was primarily due to lower product sales which decreased 18.5%, as well as lower professional services revenue which decreased 17.6%. The increase in momentum we continue to see in our business everybody is yet to be manifested in our top line revenue numbers. In spite of that our adjusted earnings from operations metric for the quarter which is a measure of revenue minus all expenses, minus all capital expenditures improved over the comparable period last fiscal year. If we exclude the one-time capital expense of $700,000 incurred to double the capacity of our India Development Center which commenced operations during June 2017. We expect to finish this fiscal year at the lower end of our previous guidance of $130 million to $134 million, and expect to achieve the stated goal of Q4 FY18 being our first quarter of positive adjusted earnings from operations. Our India Development Center currently has about 200 employees on board, more than 90% of them in technical R&D related positions. We expect to reach out new capacity of 330 employees before the end of June 2018. We expect greatly increased cost effective R&D to be a major growth driver for us during the short, medium and long-term. The hospitality industry remains hungry for a world-class software…

Thank you, Ramesh, and good afternoon, everyone. Our third quarter fiscal 2018 revenue was $31.3 million, a 6.4% decrease from total net revenue of $33.4 million in the comparable prior year period. The decline in topline largely reflects a decrease in product revenue and services revenue, however both grew sequentially compared to Q2 of this fiscal year. Total revenue related to our rGuest platform comprised approximately 8% of total fiscal 2018 third quarter revenue. With regard to endpoints, we currently serviced about 255,000 rooms in around 44,000 terminal endpoints, compared to 244,000 rooms and 38,000 terminal endpoints in Q3 of last year. Looking at revenue in greater detail, product revenue decreased by $1.9 million compared to Q3 fiscal 2017 or 18.5% to $8.2 million and represented 26% of total revenue during the quarter. The decline in product revenue is mostly attributable to hardware. Support, maintenance and subscription services revenue are recurring revenue, increased $1 million or 6% compared to the third quarter of fiscal 2017, attributable mostly to SaaS revenue. Total recurring revenue represented 55% of total net revenues compared to 48.5% of total net revenues in the third quarter of fiscal year 2017. The recurring revenue growth was driven by a 26% increase in SaaS revenues compared to the third quarter of fiscal 2017. SaaS revenues comprised around 29% of total recurring revenues compared to around 24% of total recurring revenues in the third quarter of fiscal 2017. We are pleased with this growth in our SaaS-based recurring revenue and as we continue to expand our customer base, our recurring revenue will continue to grow both, the SaaS revenue and the recurring license maintenance revenue. Professional services revenue decreased $1.3 million, or 17.6% compared to the third quarter of fiscal 2017. $1.1 million of this decrease is due to…

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

You have a longer term growth target of revenue I think of around 10% to 20%, what has to happen, what factors have to change between where you are now to make you more comfortable that you think you will be at that level?

We are getting close Allen, the business momentum that we have now, the number of sales and other discussions we are having with customers; that momentum translating itself into revenue growth, we feel that we are quite close and then we can sustain it quite well in the future as well. For example, just a couple of areas; number one, our current customers -- many -- I mean hundreds of customers use only one of our products, in order to sell more to them our product innovation velocity, our product innovation speed has to increase a bit more than what it is now. There are many product aspects here in the process of improving that will give both customers a reason to buy from us and they want to buy more from us because like -- one major customer told us they want to reduce the number of small vendor we are dealing with, it is just us getting a few more of the product innovation aspects done. Now the big hotel chains that we are working with but the shift to the new calendar year is when their budgets open up. So that is going to give us a drive for our revenue growth. We have enormous opportunities in international regions and in each of those regions there are a couple of more product gaps that have to be filled in order for us to really make a difference in Asia and EMEA and we are well on our way towards doing that. We have opportunities in FSM, in food service management, for which again there are a few more things we have to get done in InfoGenesis and our rGuest Buy before those opportunities kick-in. So we are making progress towards that, the business momentum is there, our customer conversations are positive, we are not losing too many deals we are participating in, it is just that there are just a few more of these final steps in the product, in the services teams we'll have to get done and we feel good about how close we are now.

For the Indian Development Center, can you comment a little what you're seeing out of it so far and how that potentially translate into higher sales?

Allen, if I have to pick among all the factors that will drive higher sales and higher revenue from sales; if I list out all the factors and if I'm allowed to pick only one I would pick product delivery velocity because currently it is almost an internal challenge for us, the more we can get done in our products the more we can grow the company and in order to get that done we have to do it in a cost effective manner as well. So what is going on with our India Development Center is, we have grown it to about 200 people in the last 7 months or so. So the average experience level there with our products is about somewhere between three and four months. So every passing week their productivity, their understanding of our products and what our customers' needs are is increasing every week. Some products they are making a bigger difference than the other and also we have made the transition from what was a very costly contract personal base for us and we are making that transition to the India Development Center which also is making progress every week. So in terms of products India Development Center is contributing to every product we have, both are well established set of products and our rGuest set of products and their contributions and productivity levels are improving every week.

And then with the large hotel customers, can you comment a little more on what's going on during -- what is anything else you need to do and how to think about how that could grow overtime?

In two ways Allen, number one, currently our large big hotel chains are mostly focused on the InfoGenesis product; so we have an opportunity there to introduce our other products to them which we are in the process off. For example, rGuest Buy is now in the lab stage with one of those major hotel chains. So we do have an opportunity to introduce other products as we make the relationship stronger. But even before that our current implementations of InfoGenesis where we are replacing competitor systems in those hotel chains, our initial implementations have gone well and as they continue to go well it becomes easier and easier to convince the other ownership and the other hotels in that chain which are beginning to pick up our product one by one and that pace has definitely has picked up in the last three/four months because our initial implementations have gone quite well and now we expect that pace to pick up in international regions as well. And the fact that the budget cycle has now changed to the start of the calendar year is also very helpful.

I heard you say that you plan to spend more time internationally; could you talk a little about just -- what the strategy is there?

I mean well more than 90% of our revenue as you know, Allen, comes from the North American region, it comes mostly from the U.S. So in the Americas we have to grow the opportunities and pay more focused attention on each of our sales opportunities in the U.S. We are just about getting some of our product gaps fixed in order to get going in Canada, so that's going to be a major area of growth for us and we have opportunities to get started in the Latin American region as well. So those are pretty big tasks that we need undivided attention on which is what Don is going to be focused on, and while he does that I'm going to be spending relatively more time focusing on Europe and Asia and making sure that we push that forward so that our revenue growth possibility there are also driven forward. We have good leadership there that is running well but relatively I'm going to be spending a bit more time in international regions than I have been doing so far.

Regarding Don, your new head of America sales, he looks like a very good hire. Any thoughts about just what this change in approach could be for sales?

Yes, Allen, we agree with you, Don is a very good hire and the management team really liked him a lot and our board liked him a lot and we are really excited about the hire. Number one, he'll bring a lot more energy to our sales activities because I think one of the aspects of revenue growth for us, he is just driving sales with a more passion and energy and making sure that we are uncovering all the opportunities and paying complete attention to it and he obviously has a terrific track record of success in Micros [ph], highly respectable company that really did well, that grew from our kind of size to a $1 billion company and Don was part of that group. So he understands revenue growth well, he understands what it takes for a company to get better and grow. And also he is a very good team player, very cohesive and he will build great relationships internally with our product development, product management services teams; so he makes our team more cohesive and he brings a lot more energy to the sales team and he arguably is the most knowledgeable person in this area now in our management team as well. So yes, we are very happy about hiring him.

For your adjusted number that you guide to -- EBITDA minus CapEx and capitalized software; what do you anticipate changing by the end of the year compared to like where you are now that will turn that positive?

As you've seen throughout the year our cost structure has changed a bit and especially as it relates to current cost that was compared to Q4 of last fiscal year our cost has come down and these amount and especially as a percentage of revenue. So we're looking into the quarter that we're about to enter or we're in right now, our fiscal fourth quarter of 2018, there is a component of revenue that obviously impacts that and then there is a continued decline in our cost structure that leads us to positive adjusted earnings from operations. One component that goes into that number, keep in mind is TP&E and development of software. I mean as we've transitioned our expensive external contract developers to internal resources, especially in India, that brings the amount of investment required to develop our software products down, that trend should continue.

So when you think of it sequentially there are three aspects to that AOE; one is revenue, one is overall expenses and one is capital expenditure. We obviously expect sequentially revenue to be higher in Q4 and we expected expenses to be down and also capital expenditures to be down.

I know you don't pay taxes today, I heard you say something about your NOLs that you can use the 100% of them; is there anything else in the new tax code that we should think about for -- that could have an impact on potential tax rate when you turn profitable?

Since we have such a large NOL carry forward and the one that we have today doesn't expire until 2031, they start to expire in our fiscal 2031. We should benefit from that NOL for quite a while now. So if we turn profitable we'll have years of benefit from that NOL carry forward. So the new tax legislation doesn't affect us all that much, there was a nuance [ph] in the tax law that caused us to recognize our tax benefit this quarter, specifically related to indefinite live intangibles but effectively we've got large DTA on the books, it's fully valued at this point so we'll continue in the current kind of situation we are today where we benefit from not paying much in taxes, especially in the U.S.

[Operator Instructions] And we do have a question from the line of Phil Bernard with Eilers & Krejcik. Your line is now open.

You mentioned the market increase in competitive replacement to sales contracts this year roughly one every week. Just curious if you could speak to any trends that you see either with respect to markets or our product verticals?

Product verticals I would say mostly in the InfoGenesis POS area, that's where most of our competitive replacement comes in. Here and there lower percentage, we do have BMS [ph] replacements where on visual one product replaces a competitor product as well. So I would say a big majority of the replacements do come in the InfoGenesis POS area. And so just giving you a slightly broadened commentary on that, we are in a very unique space in this marketplace which is why we are so bullish on Agilysys in the not too big, not too small place, we are almost the only player, we have much bigger competitors than us who are in the $1 billion kind of annual revenue and there are customer services issues associated with those competitors because of which customers want to switch to us. And then again, we have a bunch of smaller competitors who are struggling to scale and so there are issues associated with that when customers want to get more done and they are not able to scale they like to switch to us. So that's where our competitor replacement opportunities come from. For now I would say they are mostly in the point of sales side and a little bit on the property management system side as well; but in future quarters I expect that to pick up on the PMS side as well.

And we do have a follow-up question from the line of Allen Klee with Sidoti. Your line is now open.

With products sales how do you visualize the trend in that going forward?

Allen, product sales are tough, I mean that's the last couple of millions of our quarterly revenue every quarter, it's the toughest part of us trying to grow revenue. When you think about product sales, basically the way that typically works is we execute a contract with the customer and we deliver the product and then there is other times when customers will execute a contract and they don't want the product at that point of time and so it's delivered at some point in the future. So there is a lot of different dependencies when it comes to product sales and how that actually impacts our current quarter revenue but overtime what we expect is that we'll continue to grow our customer base, we'll continue to sell into our existing customer base. And most of our sales -- most of our contracts with customers include one product or another thinking about product revenue. So it's a matter of really growing our customer base and penetrating our existing customer base even more and as we grow our customer base [indiscernible].

Do you provide any sense of like a pipeline of like deals you're working on or like -- or that -- any type of qualitative thing like that of a pipeline that gives you with sense of how you feel now, maybe versus how you felt a quarter ago or a year ago of the future outlook?

Absolutely. We do manage that very closely, internally though we don't discuss that number externally. Yes Allen, in our weekly sales schedule call we go through those numbers in a great degree of detail and to just -- and we don't discuss for the exact numbers outside but just to give you a qualitative idea of that compared to six months ago and even compared to say the September/October timeframe, the graph has definitely picked up, there is no question about that, there is just a lot more activity, our pipeline is really beginning to turn the corner and there is just a lot more activity for us to work on now than we had three to six months ago. Qualitatively there is no question about it and it is just a matter of time before revenue actually catches up with that. We are definitely working on a bigger pipeline and more opportunities now globally, not just in the U.S., especially in Asia and in U.S. we definitely have a much more -- much aider [ph] pipeline we are working with now than say six months ago.

Thank you. And I'm showing no further questions at this time. So I would like to return the call to Mr. Ramesh for any closing remarks.

Thank you, Samra [ph], thank you for your help with the call. And as always, thank you all for joining us this afternoon and for the confidence you have placed in us. We sincerely appreciate it. We look forward to speaking with you again when we report our fiscal 2018 full year results. Thank you so much.

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.