Agilysys Inc (AGYS) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Agilysys fiscal 2014 third-quarter conference call. (Operator Instructions). And now I would like to turn it over to your host, Jim Dennedy. Please go ahead, sir.

Thank you, John, and good afternoon, everyone. We appreciate you joining us on the call today to review our fiscal 2014 third-quarter results. With me this afternoon is Chief Financial Officer, Janine Seebeck.

Before we get started, just a quick reminder that we'll be discussing some non-GAAP metrics on today's call, primarily adjusted operating income from continuing operations and adjusted income from continuing operations, which eliminate the effect of restructuring and other items that are either non-cash or nonrecurring. Reconciliations to GAAP metrics are provided in the financials of the press release issued earlier today.

With that, let me start by commenting on the results for the quarter and year to date, followed by a review of our growth and investment initiatives. Total net revenue for our third fiscal quarter of 2014 was $26 million versus total net revenue of $28.2 million in the comparable prior year period, a decrease of 8%. The year-over-year decline in third quarter revenue was driven primarily by a decrease in sales of lower margin remarketed products. Our third fiscal quarter of 2013 included $3.2 million of above average remarketed products revenue, which did not repeat in 2014. Normalizing the outside contributions remarketed product sales represented in our third fiscal quarter of 2013, total revenue for our third quarter of 2014 would have indicated an increase of approximately 4% while year-to-date total revenue would have increased by approximately 8%, led by an increased participation of higher margin support, maintenance, and subscription revenues in our revenue mix.

The revenue mix shift to higher margin proprietary product sales and subscription revenues is evident in the gross margin improvement in both the third quarter and first nine months, as fiscal 2014 third quarter gross margin improved 590 basis points to 60% and year-to-date gross margin improved 470 basis points to 64%. The margin improvement made more gross profit available on lower revenue for both the third quarter and year-to-date in fiscal 2014 versus the same period a year ago. Janine will comment further on our margin performance during her more detailed review of our financial results.

On the expense front, we remain committed to strong capital discipline, which includes thoughtful balance sheet deployment, efficient use of working capital, and careful operational expense monitoring. Operational expenses -- which include product development, selling and marketing, general and administrative, and depreciation expense -- decreased in the quarter by approximately 2% when compared to the third quarter of fiscal 2013. Our third quarter and year-to-date results reflect the parameters that guide our business: maintaining capital discipline and pursuing the highest value growth opportunities as we deliver solutions to transform the guest service experience to create lasting connections with our customers and for our customers with their guests.

While our results for our third fiscal quarter indicate a deceleration of revenue growth, the growing recurring revenues and the gross profit performance year-over-year, driven by our substantially expanded gross margins, reflects significant strength in the business. We remain steadfast in being selective in how we compete and grow. This means that from time-to-time, our strategy may not yield favorable headline results for year-over-year comparison on the quarters as we focus more on building longer term strength within the business to better position us to capture growth opportunities in our core and adjacent markets.

We see opportunities to grow in each of the segments we serve today and we see continued penetration within our existing customer base to sell multiple solutions with an increase in customers using more than one solution compared to a year ago. The continued expansion of both the commercial and tribal gaming segments, together representing approximately 50% of our total revenues, offers strong growth opportunities as reflected in our third quarter results, which included a large sale to the Comanche Nation of Oklahoma, to incorporate InfoGenesis and Visual One at four of their casinos in the beautiful Comanche Red River Hotel.

We see continued opportunity to increase our market share in managed food services as evidenced by our continued customer wins, including Banner Health and Fairbanks Memorial Hospital, who completed a new full install of InfoGenesis. So as this segment -- which includes the food service management companies, stadiums, arenas, higher education, and healthcare -- looks to consolidate, there will be opportunity for us to increase our penetration and grow the business from 29% of our total revenues it represents today.

The hotel and resorts segment, representing approximately 17% of our total revenues, offers robust growth potential, particularly on the strength of the US hotel market, which is expected to see several more years of improving occupancy rates and revenue per available room. In addition, we see incremental growth opportunity in the European and Asian markets where business is expected to remain strong.

Our third quarter results reflect this opportunity, where the Cheeca Lodge & Spa continues to grow its partnership with us in this important segment. This stunning resort, which has been a destination for luxury travelers for more than 50 years, added InfoGenesis Mobile to their InfoGenesis and Visual One investment to further enhance the guest experience at this legendary gem in the Florida Keys.

The cruise ship segment, which represents approximately 40% of total revenues, offers incremental additional opportunities as the industrial supply growth looks to increase modestly through the addition of higher value offerings, as many of the major cruise lines look to spin off their weaker-performing ships to achieve higher yields and higher margin.

And in the restaurant segment we continue to enjoy new customer wins like Crazy Pita, who selected InfoGenesis for its busy location in the heart of Las Vegas, as well as our recent agreement with the famous Rainbow Room in New York City. This New York City icon has entrusted their business to Agilysys and selected InfoGenesis, Eatec, and Visual One accounting and club management to help them deliver the services they have been known for since 1934.

While we had several significant wins in terms of bookings, as just discussed, several of the important wins were substantially large in size and scope. Their size makes it somewhat impractical for our customers to take delivery of all their ordered systems upon execution of the contract. Working in partnership with our customers on these larger sales, we established a rollout schedule to accommodate their implementation and go-live schedules. As a result, while these important customer wins represent a great financial opportunity for the Company, the contract terms and accommodated implementation schedule do not provide for favorable accounting treatment of the contracted business in the current fiscal quarter. We believe we made the best decision on these matters in the interest of our customers, our shareholders, and our Company.

The favorable market trends and our discipline in pursuing the highest value opportunities for our business gives us confidence we are realizing the benefits of our more focused business, stronger balance sheet, and improved operating structure. This confidence gives the business courage in pursuit of our growth initiatives by making important investments in our business to improve the quality of service that we provide and by pursuing select acquisitions to advance our product roadmap and expand our market reach. Through our investments in innovation and cooperative business approach, we see more opportunities to deliver increased value to the markets we serve and longer term beneficial results for the Company.

With that, I would now like to turn the call over to our CFO, Janine Seebeck, who will review our financial results. I will then provide some additional insight on the business before opening the lines for questions. Janine?

Thanks, Jim. Let me begin by reminding everyone that results of our fiscal 2014 third quarter, along with historical periods presented in our press release and discussed today, reflect the classification of the Company's former Retail Solutions Group as a discontinued operation following the sale of that business on July 1, 2013.

Beginning with the income statement, our quarterly revenue decreased 8% year-over-year to $26 million from $28.2 million in the prior year period. The decline in the third quarter revenue was, as Jim mentioned earlier, the result of a decrease in lower margin remarketed product sales in the third quarter of fiscal 2013 that did not repeat in the current year period. This is reflected in the 30% decline in product sales compared to the third quarter of 2013.

That said, we are pleased with the way our product mix is trending. Professional services revenue increased 7% from $3.5 million in the third quarter of fiscal 2013 to $3.7 million in the third quarter of fiscal 2014. More importantly, support, maintenance, and subscription revenues of $13.6 million grew 11% in the quarter from $12.2 million a year ago on the back of strong subscription services and proprietary product support sales. We are very pleased with this result as expansion in the recurring portion of our revenue is very important to the long-term growth and health of our business, and now represents over 52% of our total revenue compared to 43% in the same period last year.

Turning to gross margin, we saw an improvement of 590 basis points to 60% in the third quarter of fiscal 2014 compared to 55% in the prior year quarter, primarily driven by the favorable product shift noted earlier. Going forward, we expect margins for the fourth quarter of fiscal 2014 to remain close to our historical levels of around 60% as we continue to place into service certain capitalized software assets associated with recent and projected product releases.

Operating expenses -- which include product development, selling and marketing, general and administrative, and depreciation expenses -- decreased 2% from $16.3 million to $16 million. Product development costs decreased approximately 3% from $6.3 million to $6.1 million, but as a percentage of revenue, increased to 23% compared to 22% a year ago. Consistent with our strategy, overall spend in this area continues to increase as we capitalized approximately $4.3 million of software development costs for future use in the third quarter of 2014 compared to $1.5 million in the prior year period.

You will notice increases in amortization as well as an asset impairment charge this quarter. These are the results of a long-term strategy we have implemented in order to replace our current ERP system with a more cost effective solution that will yield us additional operational efficiencies going forward. The amortization expense increase will continue until we are live on our new ERP software in the first quarter of fiscal 2015. And we saw adjusted operating income from continuing operations improve by $800,000 year-over-year to $300,000, reflecting the progress we are making on the back of the recent sale of our retail business and strategic shift towards a hospitality-focused business.

Adjusted income from continuing operations of $200,000 or $0.01 per diluted share compared favorably with an adjusted loss from continuing operations of $800,000 or $0.03 per share last year. Loss from continuing operations for the quarter of $2.1 million or $0.09 per diluted share compares to a loss from continuing operations of $1.1 million or $0.05 per share in the prior year period.

Taking a brief look at the results for the first nine months of fiscal 2014, total net revenue increased 3% to $77.1 million from $74.8 million in the comparable prior year period. As was the case with our quarterly results, year-over-year revenue comparisons for the first nine months reflect the impact of lower margin remarketed product sales that were higher in fiscal 2013 than in fiscal 2014. In absolute dollars, gross profit improved 11% or $5 million to $49.3 million for the first nine months of fiscal 2014.

Gross margin for the first nine months of fiscal 2014 was 64% versus 59% in the comparable prior year period on the back of an 8% increase in higher margin recurring revenue. Operating expenses increased 3% to $48.2 million in the first nine months of fiscal 2014 from $46.8 million a year ago.

Adjusted operating income from continuing operations improved by $4.1 million to $2.6 million, up from an adjusted operating loss from continuing operations of $1.5 million last year. Adjusted income from continuing operations of $2.4 million or $0.11 per diluted share for the fiscal 2014 nine months compares favorably with an adjusted loss from continuing operations of $2 million or a $0.09 per share loss for the first nine months of fiscal 2013. Loss from continuing operations for the first nine months of fiscal 2014 was $2.3 million or $0.11 per diluted share compared with a loss from continuing operations of $5.2 million, or $0.24 per share in the prior year period.

Moving to the balance sheet and cash flows. Cash as of December 31, 2013, was $96.4 million and we are pleased to see improvements across our net cash used in continuing operations, where we had an $8.8 million improvement compared to the nine month period ended December 31, 2012. And on a sequential basis, we saw expected improvement in our adjusted cash used in operations, showing positive operating cash flow for the third quarter of fiscal 2014, primarily driven by the timing of annual support billings, keeping us on track to achieve full year breakeven to slightly positive adjusted operating cash flow in fiscal 2014.

Total deferred revenues, which include both paid and unpaid balances, increased 9% to $32.1 million at December 31 compared with $29.3 million at March 31, 2013. This increase is consistent with our focus on higher margin proprietary products and subscription service sales.

With regards to our NOLs, we currently have approximately a $155 million, for which we can attribute a full valuation allowance, and which will help us keep our cash taxes limited to taxes paid in foreign jurisdictions, along with minimal state taxes, for the foreseeable future. Overall, our third quarter results continue to reflect the ongoing transition in our business and clearly point to the potential our hospitality-focused business holds, as exhibited in our ability to deliver improved operating results, year-over-year gains in gross margin, and significant improvements in our adjusted operating income from continuing operations. Our results also reflect a disciplined approach to capital deployment and the continued health of our balance sheet, which is well-suited to support our business and long-term growth.

Despite our optimism and the continued improvements across many aspects of our business, we are revising our revenue outlook primarily as a result of the timing associated with certain customer-driven contracted opportunities, as Jim touched on earlier, where revenue cannot be fully recognized in the period in which the bookings occurred. We now expect our reported growth rate to be in line with or slightly below the expected annual growth for the industry of 5% to 7%.

We are, however, reaffirming our expectations of generating positive adjusted operating income from continuing operations for fiscal 2014. As we move ahead, we are excited with our planned investments around further leveraging our existing client base, expanding our penetration in the end markets we serve, and building our product portfolio. We remain confident in our business and our ability to continue making improvement in our operations.

With that, I would like to turn the call back over to Jim for a review of some of our most recent announcements as well as some closing remarks, after which we will open the call for questions. Jim?

Thanks, Janine. Before opening the call to your questions, I'd like to highlight several customer wins and product launches from the past few months and comment further on our strategy and capital discipline.

Let me begin by reviewing some of our more notable business wins. In the restaurant segment, we recently announced an agreement with one of our customers, Le Duff America, a Dallas-based restaurant group, to incorporate the Eatec inventory and procurement system, as well as the workforce management, WMx, to enhance efficiency and reduce costs across their 145 Mimi's Cafe locations. Le Duff America has been using Eatec and Workforce Management Solutions at 66 la Madeleine Country French Cafe locations nationwide for some time. And following their acquisition of Mimi's Cafe, we were able to grow this relationship across their new business offering.

This follows other important wins, such as the Crazy Pita and Rainbow Room, which reflect our focus to grow the restaurant vertical around the more full service, table service establishments. Full service restaurants offer considerable opportunity for us to work together with the owners to increase both traffic and profits. Our solutions are uniquely suited to assist this segment and gain maximum leverage from initiatives such as tasting events, menu makeovers, social media marketing, and loyalty cards.

In mid-November, we announced that Hotel Ella had selected InfoGenesis point of sale system to help find ways to increase efficiency and enhance guest service at this recently reopened luxury property in the heart of Austin, Texas. This agreement reflects our ongoing focus on the luxury boutique market, as well as the relevance and appeal of InfoGenesis point of sale to hotel operators for its wide array of features, high level of functionality, ease of use, and ability to quickly modify menus and pricing.

Also in November, we announced that Akaryn Hospitality Management Services selected the Eatec Inventory and Procurement System, along with the InfoGenesis point of sale, to improve operations at Thailand's Aleenta Phuket-Phang Nga Resort and Spa. This luxury beachfront resort, which is currently undergoing a $2 million rent expansion, was already using our VisualOne Property Management System.

And early in the quarter we announced that BAM Management selected Eatec and InfoGenesis to streamline operations at Monmouth Park Racetrack in Oceanport, New Jersey. The tight integration between Eatec and InfoGenesis was a key driver behind BAM's desire to choose Agilysys as their solutions partner. They saw clear efficiencies and cost reductions available across the 26 food and beverage outlets at the popular venue.

In addition to these important wins, we also added new customer wins in the hotel and resort segments with the Aventura Hotel in South Beach, the first of the Aventura-branded properties we have had the opportunity to serve, the beautiful Casa Ybel resort on Sanibel Island, and separately, Resorts World Bimini in the Bahamas. As you can see from these examples, our fiscal third quarter saw continued market share gains across both new and existing clients, as well as across our key industry segments resorts: hotels, managed foodservice venues, and, of course, casinos.

The third quarter was also a busy time for us as we expanded our products and services offerings. Earlier this month, we announced InfoGenesis Flex, a new mobility solution that offers full point of sale functionality on the Lenovo Thinkpad 2 tablet. InfoGenesis Flex provides a sleek and modern mobile alternative -- traditional point of sale installation in outlets with limited space, power, or network boards, and rounds out our technology offering for food and beverage outlets.

This follows the September introduction of our fully-featured mobile point of sale application, InfoGenesis Mobile, at the Global Gaming Expo in Las Vegas, as well as the introduction of Insight Mobile Manager and general availability of SWS Direct, an above premises procurement solution based on our market leading SWS Inventory and Procurement system.

Although we are still early in the sales cycle of our new products, we are encouraged by the traction we are seeing in our customer base, evidenced by the expansion of pipeline opportunities around these products. As we have mentioned in the past, demand for mobility solutions is a major theme for many of our customers and we see this trend continuing. The ability for our customers to empower their staff, to provide faster and more efficient service while improving their interaction with guests has become a critical focus for their business. We believe our customers are looking for more nimble, reliable, and value added alternatives to traditional point of sale, property management, work force management, and material management offerings, and these types of solutions meet those needs.

As we look forward to launching our next generation products, starting with property management in our next fiscal year, we took action at the end of the third quarter to strengthen our go-to-market team with the hiring of Michael Buckham-White to the role of Senior Vice President of Sales and Marketing. In this role, Michael oversees Agilysys' effort to strengthen our brand, further establish spot leadership within our segment, and enable us to implement new sales initiatives that will help us achieve our goals. He will also have oversight of the development and growth of Agilysys' partner ecosystem and channel strategy.

Looking ahead, we are excited by the progress we continue to make in the development of our next gen products as we bring them from private beta, public beta, and then to market. We are currently well underway in the development of our private beta stage and look forward to progressing to a public beta by the end of the third quarter of our fiscal 2015. We anticipate initial revenue from this substantial investment towards the end of fiscal 2015.

We are also excited about the healthy dynamics of the overall hospitality industry, both at home as well as abroad. The strong pipeline and healthy environment, together with our ability to deploy capital in attractive areas where we can invest and support our growth, provide us with great optimism about our future.

With that, I will now turn the call over to the operator for questions. John?

(Operator Instructions). Brian Kinstlinger, Sidoti.

Thank you. Just to start, a few high level on revenue. I'm wondering if there is a seasonal aspect to your business. We saw a big sequential downtick from September to December. I think the same thing happened last year as well. Is there something seasonal right now as we just look at your business as a standalone in hospitality?

Sure. Hello, Brian. It's Janine. I don't know that we would call it seasonal. I think -- we talked a little bit about it in the script, obviously. We had a couple of deals that happened and come up from time to time where our customers request some of the i-Series and other type big box hardware, and that did occur last year and didn't happen again this year. So that's really which driving it.

It's not part of our core business or what we do, but when someone asks us for it, we will obviously do it. They happen normally in that third quarter for us, just with IBM timing, but I wouldn't necessarily call it seasonal. It's just going to be -- sometimes they could happen from time to time.

Now, Janine, you mentioned the growth rate in line or below the 5% to 7% industry rate, does that apply just for fiscal 2014, or are you talking about 2015? And then is it more than lower remarketed services? Is there something else in there as well? I couldn't understand if you were saying it was remarketed.

No, I said -- yes, it's definitely just for this year, Brian. Obviously we've had some big deals that we've been able to close, but just due to the timing and the necessity of the customers of when they take possession with the rev rec rules, that stuff is going to fall out, so that definitely just applies to this year. Although we having given guidance for next year, we expect obviously to continue to see higher rates of growth going forward.

Well, if you were to receive the regular revenue growth that you would have otherwise expected to win for next year, coupled with these delayed revenue recognitions, should we see slightly abnormal growth for next year? Or is that not necessarily -- or is revenue recognition going to continue to be a problem?

No, I -- Brian, this is Jim. I don't think revenue recognition is particularly a problem. I think what our investors should expect is that we should continue to grow at a rate that's slightly better than the market rate of growth in this particular period when you compare year-over-year -- in particular, the remarketed product sale. There was an anomalously large deal in the December quarter of fiscal 2013, and we did have revenue that was up in the December quarter of 2013 over the September quarter of 2013 that make year-over-year comparisons disfavorable to our current third quarter of 2014.

We tried to give indication that, absent that, if you were to normalize that for the $4.5-ish million of remarketed products that we experience generally quarter to quarter, we would have seen an increased growth year-over-year in 2014 over 2013. We expect that trend to generally continue in our core business.

Okay. And then can you maybe touch on the two new mobile products you announced at the Analyst Day? Maybe how many -- how --- what's the adoption been like? Maybe a number of clients? What's the average deal size?

Sure, Brian. With respect to the mobility, as we indicated, we're still relatively early in the sales cycle. Those products were released at the early part of fiscal -- third quarter of our fiscal 2014. Average deal size has been in the $30,000 to $35,000 range. Most of these have been add-ons to existing implementation. The number of units sold in the third quarter was a little bit in excess of 150 units. We see greater volume in our pipeline.

However, some of the prerequisites to enjoy the mobility applications do require an upgrade to your existing InfoGenesis installation. And that upgrade, while you move from our prior release to a current release, needs to necessarily -- to occur before you can enjoy the use of our mobility products. So that somewhat retards a more -- a faster adoption, but we do think it is the appropriate thing in order to move the customers forward in the versioning of our products.

Is that upgrading the InfoGenesis part of their maintenance agreement, or is that at cost to them?

No, it is part of their maintenance agreement. It is not an additional cost, absent maybe some services if they require it, for us to do the upgrade versus doing it themselves.

Okay. And then what about -- I think since you've been at the Company you've talked about cross-selling. You mentioned during your comments about doing better on that front. Can you talk about today what percentage of your customers have more than one software app versus, say, last year?

Sure, Brian. In terms of our ability to increase our cross-selling, it is an element that we have been emphasizing since I have joined the business. We are still in that sub-one-third, or 33% range, but we were able to see a modest growth, sub-5%, in the number of customers increasing their use of more than one product in the installed base. And the emphasis in the selling compensation is going to continue to emphasize selling more than one title into our existing installed base.

Okay. And then, Janine, can you just touch quickly on the restructuring and asset impairment we are seeing -- while it's nonrecurring, about $0.5 million per quarter. I'm wondering, is that going to continue for a couple of more quarters? Is there still something related to the ERP system there as well?

Sure. The restructuring is actually just the timing associated with the charge that we took with the sale of the RSG business and because as employees stayed through the end of the year. Now that the TSA is completed, we are not anticipating any more costs with that restructuring. The asset impairment was a one-time and that won't repeat, but the actual intangible asset, where you see that amortization, that's going to incur again this quarter through to when we go live on our new ERP in May. So that will be there this quarter and a little bit into next, but not anticipating any other asset charges.

Great. Two last questions. The first one, what ERP system are you installing?

Sure. We are actually installing NetSuite.

Okay. And then the last question I have is what are the number of sales people you have? And do you think you need to make significant changes, meaning additions I guess, as a result of V.NEXT coming pretty soon?

Brian, that's a great question. One of the reasons we, towards the middle of the third quarter, went on a search for an executive that could not only unite the missions of sales and marketing at a level below the CEO, but also drive the development of the sales force not only to get more productive around the markets that we have in product today, but also to grow resources in anticipation of selling a product that its deployment in pricing and business model is somewhat distinct from the way we sell and service today.

So, from that perspective, there are two initiatives that I think are ongoing in the sales force. One is the continued emphasis in orienting our current sales force of slightly less than 20 people on continuing to cross-sell more products into that existing base that is only using one product from us. Second initiative is to go out and identify additional customers who we should be doing business with that aren't Agilysys customers today.

Part of that initiative is not only identifying those folks they can be superior at true business development but also can talk about and sell multiple business models, like a traditional license versus a SaaS, while we're going to educate the entire sales force to discuss both business models. So it's a development and a training aspect, as well as adding capacity to the team.

Great. Thank you, guys.

Robert Moses, RGM Capital.

Good afternoon, guys. Just a couple of questions for me. So, I guess the recurring revenue growth of about 11%, and the deferred revenue I think was about a 10% increase, seemed to be pretty good proxies for the health of the business. And I think I understand the remarketed side, which is just kind of lumpy and not almost pass-through margin. But getting to the question about this revenue recognition. Is it that it's just a much more complex deal and, per the accounting for software, just causes it to be more ratable? Or is it just when you can actually start the billing and actually recognize it in total? And maybe it's more complex than that. I'm just trying to understand that.

It's not more complex and it's a lot simpler than that, Rob. There were two deals that in size amassed almost $2 million

Okay.

Those two deals would have required our customers, towards the end of the calendar year in December, to bring on several hundred -- and take acceptance of several hundred InfoGenesis systems, as well as the other products that they ordered. They simply didn't have staff around to accept in store all those systems. In order to recognize it, we need to have shipped. So, while they were disfavorable contract terms with respect to the current accounting period, they are solutions that will be installed within the first half and they will certainly take acceptance of that equipment throughout the rest of this first quarter of the calendar year.

So, that's really what drove it. And we look at year-over-year bookings -- the bookings equivalency in the third quarter of fiscal 2014 was approximately the same size as the bookings value in the third quarter of 2013. However, when you account for $3.2 million being drop-and-ship hardware, you can pull all that stuff in almost immediately, and that's really the difference.

Understood. And that's really why you are tweaking -- if you are thinking about, rather than maybe 8% growth, something around 5% or whatever. It's more that nuance that really happened in the third quarter more than anything?

Correct.

Okay, great. That's fine. The second question just relates to the next gen, and I think you said basically you're out -- I mean, public beta, third-quarter, and then maybe revenue recognition be the March of next year -- so call it a year and a quarter. Is there anything you're learning either on private beta discussions with customers, industry trends, that would lead you to saying the opportunity is vastly different than when you started the project, either to the upside or downside? And while you don't want to give away any information to competitors that may be listening on this call, just any color you could give us in terms of the opportunity set would certainly be helpful.

Sure, Rob. With respect to the opportunity itself, I think the development approach that we are using and the incorporation of our customers into an advisory board around the development team, where we meet with them about every 6 to 8 weeks to show them the product, show them the progress, take their feedback on both design and functional requirements -- has led us to gain more confidence in adoption. But I think more importantly, with respect to market opportunity, the customer's suggestions for how we introduce features and capabilities has led us to a market opportunity in the limited service, roadside inn, business traveler property that we didn't necessarily anticipate would be a market opportunity before us, because that's not a core segment that we address today.

So, that encouragement by our advisors, who are mostly luxury resort properties and casinos, et cetera, to identify a development approach and a feature introduction would not only allow them to start using components of the services of this platform sooner, but also introduces us to a new market segment that we haven't been able to address well in the past. So that's probably been the best upside surprise to us.

That's great. Jim, appreciate it. Thank you.

(Operator Instructions). James Lee, Potrero Capital.

Hello. Just want to follow-up on the two deals that you guys weren't able to recognize. If you had been able to recognize those $2 million -- if those two just had been completed -- I guess if the point of sales system were shipping, would you have been able to recognize the entire $2 million in the quarter, and therefore the product revenue would've been $2 million higher?

Yes, if we were able to ship those products and our customers would have accepted shipment, which is typical for us, that revenue would have come in -- or a significant portion of that revenue would have come in, in our third-quarter.

And have those systems been shipped this quarter or do you expect them to be shipped this quarter?

We do expect them to ship this quarter, yes.

Okay. Then I want to move on to cash flow. I know you guys gave guidance for the year, operating cash flow, breakeven. How should we think about capitalized software, especially for next year? Should we start seeing that number trend down as you start rolling out the product or those products start -- get completed?

So, James, yes. I think for next year, I think it's probably going to stay at levels that we're looking at this year, as we'll be continuing through some of the development cycles. Because obviously we're going out with phase 1, but there is other things to move us up into different levels for different playing fields within that area. And so, for next year, I would assume it at similar levels and then we'll start to see it come down fiscal 2016.

Okay. What about operating cash flow then? Do you expect to be positive?

Yes. So, obviously, the objective is to continue to stay operating cash flow positive. Obviously putting as much of the funds back into the business, so we're not trying to make huge amounts of money down to the bottom line until we get the next gen out, but we will stay positive.

Okay. Would you have an idea -- so how much cash you would burn before you started getting breakeven on a cash basis?

That's about $15 million.

$15 million? Okay.

Yes.

And then on the -- you guys have a big exposure to the casino sides. We've heard recently or seen that some of the casinos are having slowdown starting in December. Have you started seeing that impact to your business?

We have not yet seen that impact our business, James.

Okay.

In our bookings statistics in both the second and third quarter, our casino segment led the way in terms of overall bookings value relative to the other segments in the business.

All right, thank you.

Okay, thank you, and I am showing no further questions in the queue. I would like to turn the conference back to your hosts for any concluding remarks.

Thank you, John. Thank you for your participation in the call today. I would like to take this opportunity to thank the very talented and dedicated team at Agilysys. My colleagues at Agilysys are the people responsible for our success and they are the foundation for our future. I also want to express my thanks to our customers, who entrust us with their business, and to our partners, who value our integrity. Agilysys is a much stronger company today and our balance sheet, positive operating income, and focused strategy make us a compelling partner for our customers, an exciting place for our people to practice their craft, and an attractive investment for our shareholders. Thank you.

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.