Agilysys Inc (AGYS) 2012 Q4 法說會逐字稿

Welcome to the Agilysys fiscal fourth quarter 2012 conference call. 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 those in the forward-looking statements are set forth in the Company's reports on Form 10-K and 10-Q and news releases filed with the Securities and Exchange Commission. Today's live broadcast will be archived and available on Agilysys' website. During today's call all participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) This conference is being recorded. At this time I'd like to introduce your host for today's call, Agilysys President and CEO, James Dennedy. Please go ahead sir.

Thank you Laura. Good afternoon and thank you for joining today's call to review our unaudited fiscal 2012 fourth-quarter results. Joining me today is our Chief Financial Officer, Robb Ellis. Before we get started I'd like to remind our call participants that as usual we will be using a slide presentation as the basis for this review. And if they've not already done so they can access the slide deck from the investor relations section of our website at www.agilysys.com.

Also during today's conference call we will be discussing non-GAAP financial data including adjusted EBITDA, adjusted operating results and adjusted cash flows from continuing operations. Given the strategic transformation and restructuring actions we are adjusting certain items in presenting this information to enhance transparency and help communicate the relevant metrics by which we manage the business. All reconciliations to GAAP are provided at the end of this presentation as well as in the press release that was issued this afternoon.

As we announced this afternoon, starting today and going forward we will segment our revenue and cost of goods sold into three categories. Products, which includes Agilysys developed software products, remarketed hardware and remarketed software. Support, which comprises annual renewable maintenance and recurring subscription services, and Professional Services. This is a project based revenue such as installations and other one-time assignments.

As we shift the Company's focus towards relatively higher quality and longer-term relationships with our customers, we expect revenue from Support and Professional Services to grow faster than Products revenue. While Support and Professional services combined for 52% of fourth quarter revenue, they accounted for 76% of our gross profit during the period. On a consolidated basis, revenue from continuing operations increased 11% during the fourth quarter to $52 million from last year's $47 million. We generated increases in each revenue category with Support and Professional Services together growing more than 14% compared with last year. This is approximately twice the 7% growth rate in Products revenue.

While gross profit was higher consolidated margin contracted in the quarter. This was entirely due to lower margins on Products revenue versus last year as a result of a higher mix of remarketed to Agilysys developed products. Higher gross margins in both Support and Professional Services helped to offset the decline in margin associated with Products revenue. During the quarter we recorded restructuring charges totaling $3.5 million which was slightly below our original estimate and an additional $1.8 million of accelerated depreciation associated with facility closures. The expense reductions are on plan and Robb will cover this in more detail in a moment. Excluding restructuring, impairment and other unusual charges the adjusted operating loss from continuing operations in the quarter was $3.6 million compared with the adjusted operating loss last year of $2.9 million. Adjusted EBITDA for the quarter was a loss of $2.4 million compared with a loss of $1.8 million reported last year.

Another significant operational item to note from the fourth quarter is the decision to write down the book value associated with certain developed technology principally associated with Guest 360. This non-cash charge totaled $9.7 million and reflects our belief that the product development efforts should be directed to areas where we see the market trending. The platform selection and product design for Guest 360 was conceived more than five years ago. Since that time the market's requirement for a next-generation property management system have changed. We made the decision to pull the product from the market, reenvisioned current market requirements, and commit new capital investment to build a product more in line with the future direction of our market.

Our new strategic direction focuses on providing high-quality, feature-rich solutions that are inherently intuitive and meet the demanding needs of our market. The current trend is towards cloud-based and recurring subscription applications and services. Moreover this is an area where Agilysys can meaningfully add value by helping customers harness technology to manage operations as well as enhance their marketing efforts. Specifically future product development initiatives are being directed at improving and targeting guest specific service delivery in order to maximize the guests' experience and help our customers uniquely distinguish their brand and optimize their revenue and growth opportunities.

To that end last month we announced that Larry Steinberg has joined Agilysys as Senior Vice President of Technology. And we are pleased to announce the Board's recent decision to name him our Chief Technology Officer. Larry was formerly the Chief Technology Officer at Engyro which was acquired by Microsoft in 2007. Since the Engyro acquisition, Larry's work for Microsoft focused on developing applications targeting workflow automation, interoperability, cross-platform initiatives, and cloud and data center management. We are pleased to welcome him to our team and look forward to his contributions as we expand product development efforts for not only our next generation of solutions but also the products we offer the market today.

Looking at the big picture, I'm very pleased with our progress. In a relatively short period of time we have successfully transformed our business model and repositioned the Company for profitable growth. Considering the everyday disruptions that accompany relocating corporate services and bringing key management and staff up to speed I appreciate the professionalism our team exhibited in rising to the challenges and exceeding expectations. I am especially thankful for the staff that assisted in this transformation and transition but who are no longer members of the Agilysys team. With that I'll turn the call over to Robb for a review of the segment, balance sheet and full-year results.

Thanks Jim and good afternoon everyone. As Jim mentioned, in order to provide more visibility and clarity to the Company's financial results we've begun to report our revenue and cost of goods sold into three categories. Products, Support, Maintenance and Subscription Services, and Professional Services. We have also begun to split our recurring operating expenses into three categories. Product development, sales and marketing, and general and administrative expenses. This additional detail can be found in the income statements included in the press release and on our financial statements moving forward.

In addition, we will begin talking about adjusted operating income, adjusted net income, and adjusted earnings per share. Which excludes acquired intangible amortization, stock-based compensation, restructuring charges and other one-time charges. While utilizing our cash tax rate in determining adjusted net income. This in essence accounts for our normal operating results and is more in line with how other companies in our space report their financial results on a non-GAAP basis.

Moving to our Hospitality Business segment. While we saw substantial growth of 9% in our Support, Maintenance and Recurring Subscription Services revenue, and 24% growth in our Professional Services revenue, our Products revenue declined 37%. This equated to a Hospitality revenue decline of 9% during the quarter. This was solely due to our focus in selling higher margin traditional proprietary products and the movement from a traditional license to revenue model to a subscription-based revenue model. This movement to a more subscription-based revenue model can be seen through our Hospitality bookings for the quarter which grew more than 20% year-over-year. While our subscription-based revenue made up over 20% of the bookings in the fourth quarter of 2012 compared to approximately 10% for the same period in 2011. Essentially more than doubling our subscription-based bookings.

Despite the $2 million revenue decline, gross profit was off only $600,000 as margins expanded to 330 basis points due to the improved mix in revenue. For the fourth quarter gross margin was 66.3% compared with 63% in the previous year. GAAP operating results for Hospitality during the quarter include asset impairment and related charges of $9.7 million and $1.5 million of restructuring charges. Hospitality non-GAAP adjusted operating income improved to $3 million from $2.5 million in the fourth quarter of fiscal 2011. Adjusted EBITDA increased 13% to $3.6 million for the quarter, an improvement from $3.2 million reported in the final quarter of last year.

Moving to the Retail Solutions Group. Revenue increased 33% from last year. This growth occurred within our Products Revenue and our Professional Services revenue while being offset by a reduction in our Support, Maintenance and Subscription Services revenue due to the removal of nonprofitable support contracts. Gross margin expanded 130 basis points due to product mix, improved labor efficiencies and the elimination of the nonprofitable support contracts previously mentioned. Including $200,000 in restructuring charges and other non-cash charges related to stock compensation and intangible amortization, GAAP operating income grew to $300,000, reversing the operating loss of $500,000 last year. The improvement was driven by the higher revenue and gross margin expansion. Adjusted operating income in retail improved $1 million, finishing over $600,000 for the quarter. As a result of the improved operating income we reported adjusted EBITDA of $800,000 versus the EBITDA loss of $300,000 last year.

Moving on to Corporate. As Jim discussed at the top of the call, actual restructuring charges came in below our expectations during the quarter and totaled approximately $2.1 million for Corporate. For the year Company wide restructuring charges totaled $11.5 million, excluding the related charges of $4.4 million for the accelerated depreciation on three closed facilities. These charges are substantially lower than our previous fiscal 2012 expectation of $16 million to $18 million. We are expecting our restructuring initiatives to be completed in the first half of fiscal year 2013 and we estimate that an additional $600,000 of restructuring charges will be incurred during this time. These charges are in relation to the final severance payments for individuals that will be leaving the Company as a result of Corporate's relocation from Solon, Ohio to Alpharetta, Georgia.

We've started to realize benefits from the restructuring and cost reduction actions taken this past year and are on track to meet the previously stated annual savings of $14 million to $16 million. Adjusted operating expense was $7.2 million compared with $5 million in the previous year. This increase was a result of several one-time non-run rate items that are not expected to occur in the future. And the adjusted EBITDA loss of $6.8 million compares with the negative EBITDA in last year's final quarter of $4.6 million.

Turning to the Company's balance sheet and cash flow. Cash on hand at year end increased to $97.6 million, up from $84.1 million on December 31, 2011 and $74.4 million on March 31, 2011. For the full year, adjusted cash flow from operations which excludes one-time cash items associated with the Company's restructuring initiatives and the BEP/SERP payments was $16.2 million. This compares with adjusted cash used in continuing operations of $4.6 million in fiscal 2011. During the year we used $13.2 million in cash for our stock repurchase program which has been completed. We also used $5.9 million in cash for the restructuring, including $2.4 million for the termination of three leases. Our working capital from continuing operations has grown from $70 million a year ago to $76.3 million as of March 31, 2012.

Currently we have gross net operating losses of over $150 million which has a full valuation allowance on it as of March 31, 2012. This asset will be realized and utilized as the Company shows profitability in future periods and after sustaining profitability for a period of time, the valuation allowance will be reversed. The expected realization utilization of these net operating losses will result in a cash tax rate of approximately 5% for the foreseeable future. Which is significantly lower than the federal and state statutory rates. Our deferred revenue balance grew from $24 million in the prior year to $28.4 million as of March 31, 2012. While our sequential growth from the third quarter was $14.6 million and was the result of the collection of annual support and maintenance billings during the fourth quarter.

Now moving onto our fiscal year-end results. For the full year, consolidated net revenue increased 3% to $209 million with slight increases occurring in each of our revenue categories. Reported gross margin expanded to 90 basis points reflecting the improving mix of revenue. As disclosed during last quarter's call, we discovered some errors in the manner in which the Company had formally recognized revenue. As a result and to account for these errors which occurred in prior periods, we have adjusted reported revenue and margins for fiscal 2012. Revenue was reduced by $700,000, gross profit was reduced by $1.3 million and net income has been adjusted lower by $1.1 million. Excluding the negative impact from these prior period adjustments, full-year revenue grew 3.4%, and gross margin expanded to 38.7% or 140 basis points.

Adjusting our operating results to exclude the impacts from restructuring, impairment charges and nonrecurring items as well as equity compensation and amortization of intangibles, the operating loss in fiscal 2012 narrowed to $7.9 million. Compared with an operating loss of $13 million in the prior year, an improvement of $5.1 million. On an adjusted basis, we sharply narrowed our net loss to $7.2 million or $0.32 per share for the fiscal year compared with the adjusted net loss of $14.2 million or $0.63 per share in fiscal 2011, an earnings per share improvement of $0.31.

On a GAAP basis, we reported a loss from continuing operations of $34.2 million or $1.53 per share. Compared with a loss from continuing operations of $23 million or $1.01 per share in the previous year. Adjusted EBITDA for the year, excluding charges and unusual items was a loss of $4.6 million compared with a loss of $10.2 million in fiscal 2011. All of the reconciliations going from a GAAP reporting basis to an adjusted reported basis are included in this slide deck as well as in the press release.

Moving onto our outlook for fiscal year 2013. The reduction in volatility that resulted from the divestiture of the Technology Services Group combined with improved management controls of our operations has provided us with better visibility into the business. This is allowing us to provide high-level financial guidance for fiscal year 2013. For the full year, we expect revenue to be relatively flat as we anticipate seeing a continued shift from our traditional product license revenue model to a subscription-based revenue model. In addition, due a rollout delay of a significant contract within our Retail business unit, revenue growth will shift out to future periods and are anticipated to be recognized in late fiscal year 2013 and 2014. As a result, revenues are expected to be between $208 million and $211 million for fiscal year 2013.

On an operating basis, we currently expect to generate adjusted operating income of between $3.5 million and $4.5 million, an improvement over fiscal year 2012 of approximately $11 million to $12 million. This increase is a result of margin improvements, and the realization of the cost initiatives that occurred in fiscal year 2012 resulting in a more efficient operating structure for the business. This equates to an adjusted earnings per share between $0.16 and $0.21 per diluted share. An improvement over fiscal year 2012 between $0.48 and $0.53 per diluted share. I'll now turn the call over to Jim for a progress update on some recent product wins.

Thanks Robb. Now that the restructuring is largely complete, we are excited about the opportunities before us as we focus on enhancing our solutions portfolio and growing the most valuable components of our business. We are continuing to attract new customers and grow with existing ones. Landry's, a long time Agilysys customer, is a premier restaurant, hospitality, entertainment and gaming company, and owner of the Golden Nugget Casinos in Las Vegas and Laughlin, Nevada as well as Atlantic City. Last month it acquired the former Isle Casino Hotel Biloxi and has commenced a major renovation under its new banner, the Golden Nugget Biloxi. As part of the upgrades, Landry's intends to employ the same suite of Agilysys solutions on which they have come to rely in managing their other properties. We are well underway with implementing our lodging management system and related components.

Other recent contract wins include Gila River Gaming Enterprises in Arizona, which comprises three casinos under its tribal gaming enterprise. Gila has selected our SWS inventory and procurement solution for its food and beverage outlets as well as its central warehouse.

The Cancer Treatment Centers of America is replacing an existing competitors' point-of-sale system with our InfoGenesis point-of-sale solution plus eCash. eCash solution lets guests create and manage personal stored value accounts over the internet. Guests redeem the value of the accounts when purchasing items from the provider. Guests have the ability to add funds to their stored value cards over the web or at a kiosk. We are delivering the InfoGenesis with eCash solution under a subscription-based agreement with this customer.

In the cruise segment Royal Caribbean Cruise lines has recently selected our DataMagine web services module. The solution enables guests to register for activities and view signed sales receipts from purchases on the television in their state room. Having already selected Agilysys solutions to automate its point-of-sale and high risk activity liability waiver operations, this newest module permits this long-standing customer of Agilysys to enhance the unique service and guest experience for which it is known in the industry. On the retail side, global footwear company, Clark's, is undertaking a comprehensive store technology upgrade. Clark's recently partnered with Agilysys to provide a single source avenue for procurement of best in class hardware as well as integration, implementation and project management services. The company currently operates more than 250 retail stores in the United States and we are very pleased that it selected Agilysys as its systems integration partner. The common denominator which each of these customers wins is a desire to enhance the guest experience and promote a particular brand experience which is where we excel. With that we are ready to open the call for questions. Operator?

We will now begin the question-and-answer session.

(Operator Instructions)

Brian Kinstlinger, Sidoti & Co.

Good afternoon guys. The first question I had, when we look at the numbers towards next year you mentioned what you thought severance would be but are there any other restructuring impairments, costs related to divestiture not mentioned that you expect is going to occur through this year?

Yes Brian, I think the $600,000 that we mentioned will be -- will finish up the restructuring charges for next year so I don't anticipate anything else being charged out and hitting the income statement. Obviously we do have some cash accruals that we've been recording over the income statement will go out, but the income statement itself will only get to about the $600,000 charge.

Okay. And then like you mentioned there is really no revenue growth. Maybe go over the puts and takes between your three line items. Products, Support Services and Subscriptions and Professional Services, and where we will see growth and where we'll see the pull back in those line items.

I will take the first part of it Brian and I'll dish it over Robb for a few more details but I think what we saw in the second half if you will of fiscal '12 is what we expect will be the trend in fiscal '13 going forward. We saw some growth in the Products line item but more of the growth percentage occurred in the Support and the Services line items. More of the deals that we are seeing in our pipeline are stacking up as subscription-based services as opposed to one-time licenses. And that is going to continue I think to shape the business into fiscal '13.

I agree. I think if you look at the two different segments a little bit, Hospitality I think you're still going to see that movement of subscription-based products will be flat to negative. But we will still see the Support and Maintenance and recurring revenue stream for Hospitality specifically I would say close to double digits if not double digits and we will still see some growth in the Services side. On the Retail side the contract that I mentioned, the Support contracts that we've resigned because of the unprofitability of them, we are going to have -- they were in the revenue numbers in Q1 and Q2 for Retail last year so there's going to be some give-and-take on that one but the other lies I think it will be pretty much flat.

And what are software license Products, Support Maintenance and Subscriptions or Professional Services because it sounds like that's a piece that is going to be coming down. Is that under Products.

Software license would be in Products.

Okay. And then maybe for HSG versus RSG, outside of those clients that resigned to work at, maybe talk about the difference in the growth rates there, what you are saying, maybe what's going on in the economy. It seems to be a little bit weaker than maybe the last time we spoke so what's going on with customer behavior over that time please.

Well we see growth in Hospitality to be in the mid single digits. Mid-to upper single digits. And our bookings rate reflects that. We have a higher bookings rate of total contract value this year over last year that's a pretty meaningful increase, although as we say most of that is being evidenced in the subscription-based software deals. So the total value expressed on the P&L is smaller than we are experiencing in the revenue recognition line for, it's smaller than what we're experiencing in our bookings number. For Retail we think the growth rates in revenue are closer to flat to low single digits. We see increased competitive pressures in Hospitality where you are seeing properties make select investments to enhance the rate at which they will require guests and means to get at guests' wallet share more aggressively than in the past, but those investments are proven out with fairly detailed ROIs. The ROI calculations in the Retail space, while folks are investing in retail technology, it's largely around mobility and line busting and line queuing. It hasn't really reached out yet into new customer acquisitions or new means to acquire customers to come to property as we've seen in the Hospitality space.

Okay and then you mentioned it's kind of early to already say there's a delay in one new contract. That's not -- that's going to hurt earnings and revenue this year. Take us through what happened there. Is that the economy or is that changes in the company's business and give us a sense of which business that's in and what's going on.

Well the delay in the contract start is in the Retail business, and I guess out of deference to our customer in that regard I'd rather not discuss the elements of their business at that have caused them to delay this project. This project has not been removed from their budget but it has been delayed due to some internal planning on their side.

And you expect it won't happen this year?

I don't think we said it won't happen this year. I think we said it's been pushed out. The contract itself was supposed to be materially complete in this year. It was supposed to start and be materially complete in our fiscal year. And the process on the customer side to roll this out has caused somewhat of a delay and it will push to the later second half of this current fiscal year and into the next fiscal year.

Okay. Now if we look at the new three line items on the operating expenses that you've given for the first time where is there the leverage? Is that the G&A and then maybe talk about product development and how that spend might increase and how dependent is it on you increasing revenues or the fluctuations in revenues.

I think we're going to see some leverage. We've done a great job here in reducing the cost structures already and we do see that there is a lot of leverage in the G&A area going forward here as we grow the revenue line items. We still see sales and marketing probably increase along with sales as revenue is increasing, just on the compensation and so forth but is still should have a little bit of leverage to go. And on the product development side, I will let Jim talk a little bit about the initiatives, but we will have a little bit more product spend as we start going through our next gen product development and so we could see a little bit of an increase there. But most of the -- that project will be capitalized software, so the increase will not be as significant as if we were to expense it all.

Brian on the product development side and where there is leverage or where there is not, we spoke throughout fiscal '12 on our earnings calls about the integration effort that had been missing from the Agilysys business over the prior years from the acquired companies that comprise the Hospitality and Retail businesses. And what we advised investors at the beginning of fiscal '12 and throughout was that much of the noise you were going to see in the P&L, and that's evidenced in the P&L, are decisions related to not only relocating and transforming Corporate from a larger services group to a smaller services group and moving them to Atlanta, but also the effort to integrate the acquired companies. And through integrating the acquired companies you have to move to a more common platform development, you have to make some investment in product to move to a more feature rich set of solutions that will cause customers to upgrade and to get all on common platform. Those are the investments that we made in 2012.

The investments that we make in 2013 and beyond with our end market products, and I will talk end market before I talk next gen, are going to be those things that will continue to move the applications and the development platforms to current technology relevance and then providing additional features sets that will cause our customers to upgrade. Things like mobility and continuing to move the applications above prim. I'm hesitant to say cloud, but they will be investments made to move those products to an above prim delivery model consistent with the way the market wants to acquire technology as a service versus a nonprim licensed. With respect to leverage in that model, it will be difficult for you to see it on the P&L. Is it easier for us to see it in the bookings line. As you move to a subscription-based business relationship with your customers, the OpEx -- I guess the comps portion and the services that are related to installing it are going to be less tied to the revenue that is recognized and more tied to the bookings. So in a subscription-based business model someone signs a five-year deal for let's say $300,000 a year for an IG deployment, all of the work really to set up, configure, train is up front but that revenue is then recognized over a five-year horizon. So you will see somewhat of a decoupling of the upfront costs for install that will occur in comps and it will appear on a bookings basis, the operating leverage and product development, but you won't see it on a P&L basis for some future periods.

Okay. That's helpful. Couple more. First of all you mentioned you're capitalizing some of the software on next gen. Take us through your operating cash flow, CapEx and capitalized software plans maybe for the year since you provided full-year guidance.

The operating cash flow I -- we actually generated on an adjusted basis $16 million this past year, Brian, and a lot of that, I shouldn't say a lot of it, but about half of it or so was the result of our working capital initiatives in lowering our days sales outstanding, working with vendors to increase our days payable outstanding and so forth and lower our inventory. So we did generate probably have of that cash flow in that manner. There isn't much left in that regard for the upcoming year, but as we put the model together I would say for cash flow from operations I would say it would be the low double digits, high single digits area. And then on top of that, what we'll use that cash for, we're going to be able to generate enough cash to fund the product development initiatives that Jim was speaking about. So, net-net, cash flow from operations I would say single digits to low double digits and then free cash flow model taking out properties, plan and equipment expenditures, and our capitalized software expenditures, I would say would be right around breakeven.

Okay. And then finally just maybe update us on mobile point-of-sale you have got a few referenceable clients now, certainly some competition in the market. Where do you see that a year or two years from now in terms of scale for yourself?

When you look at it beyond two years out, it's really going to be inside of the enterprise platform that we are discussing this larger CapEx investment, so mobility is going to be embedded in. The investments between now and let's say that two-year period where we would launch the next gen app, we're basically making mobility enablement investments into our current products. So you have to think of it as a way to take let's say InfoGenesis or things that you could otherwise do with our property management systems and extend them to a hand-held device, whether it's a consumer hand-held device or it's something more customized for an associate working for one of the properties that's a customer of ours. Either way you're putting an application on that end point that is tailored to that user that will then interface through a gateway back to our core operating application in the backend. Those will be the investments that we see. We do see the market moving in that direction.

The challenge is when you put mobile associates together with a mobile device it's typically one to one, let's say you're at a, in a restaurant location or a food service location and it's a stationary terminal. There are many associates that could swipe in and transact. When you put a mobility component into the hands of an associate that is apron friendly, that mobile asset is at one to one, mobile asset to the individual. So as our customers think about deploying mobile technology we have to work with them to conceive the business model, how do you want to engage and where do you want to point of order to be versus quote, the point-of-sale or the final transaction. We have customers experimenting with these devices -- not free, but they're paying for it through investments they are making to understand how the consuming public most wants to transact with that property.

All right. Thanks very much.

Yes, sir.

(Operator Instructions)

Shai Dardashti, DCM.

Hi Jim, it's great to have this opportunity to talk to you. Thank you very much I appreciate it. I would like to actually focus on the trees, or focus on the forest and not the trees, and kind of have a big level picture.

Okay.

How much of your effort and your time right now is focused on restructuring effort and how much of your time and effort now is focused on growth effort?

Well Shai, I think the transition for myself a personally from focusing on restructuring the Company really transferred to Robb I would say in the November timeframe. Robb and Janine came in and very quickly took the helm of restructuring and relocating Corporate Services to Alpharetta. That allowed me to spend a lot of time with the products and markets in November and December and enabled us to take some of the actions within the operating units themselves through the first calendar quarter or in our fourth quarter of our fiscal year in January, February, March. Through that time period I also spent a significant amount of time speaking with customers about really what is needed in a next gen property management or hospitality application and spent a ton of time with our retail market at NRF and other trade shows understanding the direction of their needs. So I have really been more focused on the business beginning largely in December or January and I spend a ton of time right now working with customers and our sales team in identifying new revenue opportunities with our customers and our markets.

And if I look at Agilysys in 2012 on a forward basis, to what extent is the analogy to Micros in 2002 appropriate?

I guess I'm less familiar with what Micros look like in 2002. And I think if I were to look back at Micros' history they spent a good bit of their history acquiring titles and improving the acquired titles and a little bit less time on building new, and another data point was their acquisition of Torex recently where they are acquiring a company and a technology in a market abroad. I don't know if Robb wants to opine on his analogies that he's used with folks before about his past experience with Radiant and where they were when he joined the company. And where we are, because I think what I've heard from him is that we are approximately analogous and then we're going to focus on building up the assets that we have.

Yes, hi Shai, it's Robb. Jim is right. I look at us right now, we went through a really hard restructuring year here and we had a disposition of the Technology Services Group, we've refocused ourselves on Hospitality and Retail, and as I talk to individuals within the Company they have not had the attention that they've had from a management team, executive management team, in the past that they are right now. And they know that we are focused on Hospitality growth, we're focused on Retail growth and turning the business around here a little bit. I see that as we're refocused in these two areas. We have a very strong balance sheet. Almost $100 million in cash, so that puts us in a position where we can invest in our products and invest in the growth in our products which Jim has talked about already. It also puts us in a position that if something comes along that would be a good add-on acquisition that we are capable of doing that. So having that strong balance sheet keeps -- gives us a lot of room to grow here, so it will get the next year here, last year restructure. This year we're reloading up on the product development side and we're working on -- you talked about how much time is being spent on restructuring I would say I spent a lot of time in the past six months restructuring the Corporate Services Group and now we are also positioning ourselves to increase customer satisfaction through improving our cash processes, improving our processes across the board internally and really taking it to the next level. So I see ourselves as more of a -- like Jim said, I'm not familiar with the Micros story of 2002 but I am familiar with the Radiant story and I think we're in a position now that we can start trying to think of ways in which we can grow the Company.

A lot of what I'm getting at is that in 2002 Micros had a 5% operating margin and they had a 48% gross margin and now Micros has a 20% operating margin and a 56% gross, and for comparison Agilysys is in the same ballpark gross margin for the Hospitality segment. so, again, 20% operating margin might be aggressive but 2% guidance I think is missing the point. So what kind of operating margins are appropriate goal posts to expect at some point at an undefined time horizon?

I would say if you're just looking at the Hospitality division itself, without looking at Corporate, without looking at Retail, we think we can get to a high teen, low 20% operating margin percent in that segment. On the Retail side we are shooting really hard to go high single digits, low double digits on the operating margin side and then of course then you take the Corporate Services expenditures across the board there as well. As a Company itself, I would say with both Retail and the Hospitality Group, yes, we are at low single digits on the operating margin, we will continue to see that grow as we grow the Company. I would say because of the low margin area of Retail I would say that we will probably get up to the high single digits within the next say three to five years but we haven't really modeled too much anything past that.

And in terms of the growth on the horizon how much of the growth is organic and how much of the growth is possibly inorganic.

We haven't modeled any growth to date through M&A. It will be -- so I would call all of the growth that we are currently building into our three-year operating plan as organic growth.

And if I am trying to ponder how much growth could be acquired and there is $100 million of revenue and presumably not every single dollar can be spent with M&A so maybe there is $50 million or $25 million of M&A, how much growth could be purchased. Is it -- are the ratios 1-time sales, 2-time sales, 20-time sales, half a sale? What is a reasonable bell curve of how the cash translates to dollars of revenue being purchased.

I don't know that you can draw an exact equation on cash converting into acquired revenue. Any average that you may use is going to be inherently wrong when you actually buy the specific item that you acquire. Over the last nine months while the Company has undergone its transformation and business unit integration within Hospitality and Retail we have not been dormant in the strategic growth options. We have looked at properties. We haven't found anything that we thought would represent an efficient use of capital and give an appropriate return on invested capital given some of the prices that we've seen in the marketplace. So we have taken a pass on specific opportunities and I think what investors should take comfort in is that we are going to deploy the capital to the highest risk-adjusted return opportunities available to us and not buy growth for growth sake. We're going to buy intelligent growth that has a real return.

If I were to apply the current Agilysys enterprise value to sales ratio and assume that's the price where you could buy other things, am I being silly? Or that number does not have any economic relevance anywhere besides Wall Street?

What's your association? You're associating what to what? I'm sorry.

No, if I look at the price of sales of the Agilysys Corporation and I'm saying if you are trading at X percent of sales, you could buy something else for Y percent of sales. Is this analysis completely absurd where the current price of sales is not relevant in private owner valuations?

Well personally I think the Company is not being valued based on its intrinsic value. I think it's still being valued by the market on some of the parts basis. So I would think your analysis to say that our trading price to our sales or our revenue is not representative of what we found to be market in an M&A opportunity and anything that we would do would be inherently dilutive. I'm not allergic to doing something that might be inherently dilutive if I see that there is a clear return on invested capital opportunity. I'm not going to let that limit us but I think your analysis to say the Agilysys revenue to trading value would be something that we could acquire a title for or an asset for equivalently in the market is artificially low.

And what your thoughts on further buybacks given that the share price might be mispriced.

We have exhausted our current share buyback authorization and as it relates to future considerations on use of cash, we'd encourage the investors to consider whether it's our M&A or other return of capital to shareholders. We are going to continue to pursue the objectives that we think are going to give us the highest return on use of that cash as possible and right now we think investing it in the business is the best course of action.

Thank you very much.

Yes, sir.

Brian Kinstlinger, Sidoti & Co.

Great, just some housekeeping items. In your plan you provided obviously non, well adjusted earnings. Can you just go through the stock based comp you expect for the year and the amortization of intangibles, the two items that you're pulling out?

Sure give me a second here. The stock based comp that we anticipate for the year is about $2.6 million.

Okay.

And the amortization of intangibles our expectation is around $3.5 million.

So essentially you won't be GAAP profitable, is that right?

That is correct.

Okay. And then again for modeling purposes you have a cash tax rate of 5%, will the tax rate be different on the income statement on adjusted earnings or will you be using 5% on that?

It will be a little bit different. There won't be too much difference between our effective tax rate and our cash tax rate. The effective tax rate will still be single digits, there might be a 1% or 2% difference but because of the fact that our NOLs are fully reserved, the cash tax rate and the effective tax rate won't be dissimilar.

Okay. Thank you.

Showing no further questions. I will turn the floor back over to Jim Dennedy for any closing comments.

Thanks Laura. The Board, the Management team and I believe the Company has significant value creation potential. The Company has strong market leadership with compelling solutions for the Hospitality and Retail industries, developed and supported by the exceptional thinking from the smartest minds in our market, our personnel. The Management team and I thank all our personnel for the operational and corporate objectives we accomplished as a team in fiscal 2012. We extend that thanks to our customers and the market for responding so positively to our solutions and trusting us with their business. We are highly motivated by the many opportunities we see for our Company in the new fiscal year. We believe the best way to achieve increased value is to strengthen the operating and financial results of the Company by improving our focus on customer needs and solutions, emphasizing profitable growth, and making select investments to enhance our core offerings. We will invest in opportunities that drive the best risk-adjusted returns and meet the needs of our growing customer base. We look forward to reporting continued improvements in our operating results as the year unfolds. Thank you for joining us today.

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