Agilysys Inc (AGYS) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Agilysys fiscal 2016 third-quarter conference call. (Operator Instructions) As a reminder, this conference is being recorded.

Some statements made on today's call will be predictive and are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Also, 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 could cause actual results to differ materially from these in the forward-looking statements are set forth in the Company's report on Form 10-K and 10-Q and news releases filed with the Securities and Exchange Commission.

I'd now like to turn the call over to Mr. Jim Dennedy, President and CEO.

Thank you, Tricia; and good morning, everyone. We appreciate you joining us on the call today to review our fiscal 2016 third-quarter results. Joining me today is our Chief Financial Officer, Janine Seebeck.

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

Beginning with a brief overview of our financial results, total net revenue for the third quarter increased 27% to $31.3 million compared to total net revenue of $24.7 million in the comparable prior-year period. We are pleased with both the overall result as well as the fact that we saw growth within each component of reported revenue.

Product revenue was up over 65%; recurring revenue, or support, maintenance, and subscription revenue increased by almost 7%; and professional services revenue grew 26% versus the comparable prior-year period. For the first nine months of fiscal 2016, total revenue increased by 18% versus the comparable prior-year period, driven by growth across all three of our revenue components. Importantly, our subscription-based recurring revenue continues to grow, posting a 24% year-over-year increase for the third quarter of fiscal 2016 and representing over 18% of total recurring revenue and 9% of total revenue.

Taking a quick look at the rest of our key financial metrics, gross margin for the quarter was 53% compared to 57% in the prior-year period, while adjusted EBITDA was $600,000 compared to an adjusted EBITDA loss of $300,000 in the same period last year. We reported a net loss for the fiscal 2016 third quarter of $1.7 million or a loss of $0.07 per diluted share, which compares favorably to a net loss of $2.7 million or a loss of $0.12 per diluted share in the prior-year period.

Janine will provide a more extensive review of our financial results, including the income statement and balance sheet as well as our expectations for the balance of fiscal 2016 and initial outlook for 2017.

As we look at our overall business, we continue to make progress towards our goals of evolving our solutions, growing our revenue and improving our financial health. Key enhancements to our traditional solution offerings, such as LMS and InfoGenesis, and an improved go-to-market strategy are primarily responsible for the growth we've realized in our third quarter and for the first nine months of fiscal 2016. The product enhancements not only keep our traditional solutions relevant in the market but also serves as a strong foundation to transition our customers to the new rGuest platform-based solutions.

Examples of our solution enhancements include hosted LMS. While traditionally offered only as an on-site deployment, hosted LMS is now also offered in an above-premise subscription format. We've also introduced new versions of InfoGenesis and InfoGenesis Flex, both of which are fully integrated with rGuest Pay, rGuest Seat, and rGuest Analyze.

As we make further gains in leveraging our entire portfolio solution by offering new hosted solutions and creating a tighter integration between traditional solutions, such as InfoGenesis and LMS, and the rGuest platform, we are creating a positive impact on our business today while paving the way for greater and seamless adoption of rGuest platform-based solutions in the future. Agilysys created a powerful hospitality solution offering that we are confident will enable us to continue to gain share across all our various lines of business, both with existing and new customers. This path offers lower solution lifecycle costs, reduced overhead, improved security, and added capabilities to help our customers improve recruitment, grow wallet share, and strengthened the connection with their guests.

Examples of our success in creating a transition path between traditional solutions and the rGuest platforms include the Odawa Casino Resort in Petoskey, Michigan, who selected a suite of products including VisualOne, InfoGenesis, and rGuest Pay. Our work with Suncadia Resort in Cle Elum, Washington, is another great example, as they selected a solutions suite including InfoGenesis point-of-sale, InfoGenesis Flex, and rGuest Pay to streamline food and beverage operations, enhance guest service, and provide secure credit card payments. Also, Chesapeake Beach Resort in Islamorada, Florida, selected both VisualOne traditional and hosted InfoGenesis to manage their sprawling property, which includes a casino, three restaurants, and various public areas.

Hosted or SaaS-based solutions are also playing a key role in the ongoing evolution of our offering. For example, South Seas Island Resort, one of Florida's largest resorts, chose InfoGenesis as a hosted solution. More recently, we announced that Brigham Young University in Hawaii chose an InfoGenesis hosted solution to help manage its food and beverage operations for more than 2,800 students across its campus in Honolulu.

And we are pleased to announce that Tropicana's Belle of Baton Rouge in Baton Rouge, Louisiana, selected a hosted InfoGenesis point-of-sale solution along with rGuest Pay. Not only was this a great win for us as it relates to advancing our hosted solutions footprint and growth of the rGuest platform, but it also showcases our continued ability to expand market share through a competitive displacement.

A key component of the rGuest platform, rGuest Pay, continues to grow at a robust pace, with another solid quarter of agreements in the third quarter of fiscal 2016 bringing the total to more than 250 agreements this fiscal year alone, and more than 300 deals since the launch of the solution in the latter part of fiscal 2015. The rGuest Buy solution received a significant boost recently when Compass Group North America began live trials of this innovative solution with two large multinational organizations: one in the financial services sector, and one in the life sciences sector. RGuest Buy is our self-service guest-facing kiosk solution that helps reduce the time it takes to serve guests, improve guest convenience, and reduces staff demand -- all using a simple interface.

We believe rGuest Buy offers a truly unique value proposition for organizations such as food service operators seeking to increase service efficiency and capture increased consumer opportunities. While platform-based in rGuest, the rGuest Buy solution leverages the highly scalable and reliable InfoGenesis backend engine, delivering guest-facing innovation while protecting current and prior investment in the best-in-class InfoGenesis point-of-sale technology.

I want to point out that our growth with first-time customers, deployments that in many cases displace an incumbent provider, continues to accelerate. More importantly, it is growing in terms of contract size and average dollar amount. We secured 38 contracts with new customers to bring the year-to-date total of new logos to over 110.

While this is a lower rate than the approximately 225 new customers with whom we closed contracts in fiscal 2015, the total bookings value for our new customers secured in fiscal 2016 to date has almost doubled compared to last year. And the average contract value of subscription-based bookings per new customer when has more than tripled in the quarter.

Examples of new logo agreements secured in the third quarter include the iconic Dunes Inn Wilshire and Dunes Inn Sunset properties in Los Angeles choosing the rGuest Stay property management solution, which also highlights the traction we are gaining from our rGuest platform. In addition, Rock Gaming's Greektown Casino-Hotel in Detroit selected a hosted LMS solution and a traditional InfoGenesis and rGuest Pay solution to manage its 400-room hotel and 100,000-square-foot gaming space.

We are pleased to see that an increasing number of customers recognize us as the leader in the effective use of cloud-enabled solutions specifically tailored toward the needs of hospitality industry. These customers value our peer-leading deployment and support services and the performance and innovation of our solutions.

Regarding the installed base, we currently have more than 33,000 point-of-sale endpoints installed, up 21% the last nine months. Additionally, the number of hotel rooms our property management solutions helped manage is up 3% to more than 235,000 rooms over the same period last year. Our goal is to continue to grow both the total number of terminal endpoints and hotel rooms under management as well as the average yield these deployments generate.

Shifting to the health and current state of each of our business verticals. Commercial and tribal gaming, which represents over 50% of total revenue, remains a primary focus for us as it continues to show healthy growth. This growth is evidenced in our key customer wins, including Saratoga Casino and Raceway in Saratoga Springs, New York, which selected a comprehensive Agilysys solutions suite including VisualOne, InfoGenesis Flex, and rGuest Pay to boost efficiency and guest service at the popular destination attraction.

In the hotel, resorts, and cruise vertical, which represents almost 25% of our revenue, we continue to make progress in bringing to market solutions that deliver improved guest recruitment, increased wallet share opportunities, and enhanced operational efficiencies while strengthening guest connections with more personalized services. In the food service management vertical, which represents approximately 13% of our total revenues, we see continued opportunity to increase our market share and deliver an array of best-of-breed solutions to the food service industry.

Finally, moving to restaurant, universities, stadia, and healthcare -- or RUSH -- the industry continues to rapidly evolve, with new openings to meet growing customer demand for more sophisticated dining experiences. Operators of all sizes are looking for point-of-sale solutions that will handle loyalty programs, online ordering platforms, and timely and useful analytics capability that help them streamline and leverage everything from inventory to guest interactions.

Next month we will host the 2016 Inspire Users Conference and Executive Summit in Las Vegas, affording our participating customers an opportunity to learn more about our vision for the future and share information about how to achieve success using the complete portfolio of Agilysys solutions.

In addition, building upon our inaugural success last year, the Agilysys Executive Summit of Inspire will provide a special track for senior-level executives that will cover a variety of strategic topics, including new trends in business efficiency, payment and security, infrastructure frameworks, and operational cost management. To demonstrate the power of end-to-end hospitality solutions, a Partner Pavilion will also showcase products that integrate with Agilysys solutions to deliver increased value across the property.

In summary, we had another important and solid quarter and are on track to achieve and, in some cases, surpass our full-year target. I am pleased with the performance of the Agilysys team as we continue to drive growth across our business and remain focused on finishing the year strong.

We are executing on our vision to enable customers of all sizes to deliver the best guest experience by leveraging either an on-premise or cloud solution that provides a more insightful and capable platform for management, staff, and a better guest experience for their patrons.

With that, I would now like to turn the call over to our CFO, Janine Seebeck, who will review our financial results before opening the line for questions. Janine?

Thanks, Jim; and good morning, everyone. Our third-quarter fiscal 2016 revenue was $31.3 million, a 27% increase from total net revenue of $24.7 million in the comparable prior-year period. Revenue for the first nine months of fiscal 2016 grew 18% over the first nine months of fiscal 2015.

Looking at revenue in greater detail, products revenue increased 65% or $4.7 million to $11.9 million or 38% of total revenue. Hardware-related revenues grew 75% and software-related revenues grew 45% over the prior-year period. The hardware growth included one large hardware refresh as well as new hardware sales related to our proprietary software sold as a service.

Support, maintenance, and subscription revenue increased 7% or $976,000 to $14.9 million compared to the third quarter of fiscal 2015, largely as a result of our continued focus on selling hosted, perpetual, and subscription-based services. Subscription-based revenues grew by over 24% in the third quarter versus the prior-year period and by 27% on a year-to-date basis. Professional services revenue grew 26% to $4.5 million compared to the third quarter of fiscal 2015.

We are pleased to see growth across all three reporting revenue lines; in particular, we are pleased to see continued growth in our recurring revenues, which, as Jim mentioned, accounted for 48% of total net revenues for the third quarter and 50% of total net revenue for the first nine months of fiscal 2016. Moving down the income statement, cost of goods sold totaled $14.8 million or a 39% increase versus the prior-year period. While our total gross profit increased $2.4 million or 17% for the third quarter of fiscal 2016, we experienced a decline in gross margins to 53% for the third quarter of fiscal 2016 from 57% in the prior-year period.

The decline in gross margin was primarily the result of a higher proportion of total revenues coming from product sales, which contributed 38% of total net revenues compared to 29% in the prior-year period. Product gross margins were 41% in the third quarter of fiscal 2016 compared to 39% in the prior-year period.

A portion of the growth in hardware sales is as a result of the positive growth we are seeing in our subscription bookings, which, as Jim noted, have more than tripled over the same period a year ago. The increase in subscription-based license sales yield initial revenues from lower-margin hardware and reduce our upfront higher-margin proprietary software revenue, deferring the higher-margin software revenue to be recognized over the term of the subscription agreement.

As a result of the mix shifts discussed above, we expect full-year fiscal 2016 gross margin will now be in the mid-50% range. Operating expenses of $18 million, which includes product development, selling and marketing, general and administrative, and depreciation expense, were 8% higher than the $16.7 million of expense in the prior-year period. However, operating expenses were 57% of net revenues for the third quarter versus 68% in the prior-year period.

This led to an overall operating loss of $1.7 million for the third quarter of fiscal 2016 compared to an operating loss of $2.7 million in the prior-year period. As expected, product development expense remained at similar levels to fiscal 2015, increasing by 4% to $7 million in the third quarter of fiscal 2016 from $6.7 million in the third quarter of fiscal 2015.

We continued our investments in resources around both rGuest and non-rGuest product enhancements to expand the current customer experience across our installed base as well as our future offerings with existing and new customers. For the balance of fiscal 2016, we expect product development expense to be in the mid-20% range as a percentage of revenue, comparable to fiscal 2015 levels.

Sales and marketing costs increased $900,000 or 25% year-over-year in the third quarter of fiscal 2016, primarily reflecting an increase in commission expense in line with revenue achievements during the quarter. General and administrative expense increased 7% for the fiscal third-quarter 2016 compared to the prior-year period, primarily due to a $200,000 loss and disposal of internal-use software related to our support ticketing system and increases in legal and professional service fees.

And we saw a $300,000 year-over-year decline in amortization of intangibles during the quarter, primarily due to a reduction in expenses related to assets becoming fully amortized and assets being replaced or repaired during fiscal 2015, including our internal ERP replacement projects. Net loss for the quarter was $1.7 million or a $0.07 loss per diluted share compared to a net loss of $2.7 million or $0.12 loss per diluted share in the third quarter of fiscal 2015. Adjusted EBITDA for the quarter was $600,000 versus a loss of $300,000 in the third quarter of fiscal 2015.

Moving to the balance sheet and cash flow statement, cash and marketable securities as of December 31, 2015, was $65.7 million compared to $75.1 million at March 31, 2015. The decrease in cash reflects approximately $13.5 million in spend for our ongoing product development investments. This was in part offset by a much higher than normal collection level for our annual support contracts, which are billed in the third quarter, as I will touch on in a moment.

Cash provided by operations was $8.3 million, an improvement compared to net cash used in operations of $7.5 million for the nine months of fiscal 2015. Adjusted for nonrecurring items, net adjusted cash provided by operations for the nine months of fiscal 2016 was $8.9 million compared to net adjusted cash used by operations of $4.6 million in the prior-year period. We are pleased that we generated both net cash and adjusted cash from operations, as this has historically been a period where Agilysys has been a user of cash.

It is important to note that a significant portion of the cash flow improvements in the quarter was driven by a change in timing around the collections of our annual support billing and, to a lesser degree, to a prepayment from a large upcoming engagement. Earlier collections of these accounts receivable led to a shift forward in the resulting cash inflows. As such, we expect to be a user of cash in the fourth quarter -- so, really, just a timing issue in that we collected more cash earlier than typical.

We continue to expect that we will end the year with over $55 million in cash and cash equivalents. And in terms of our NOLs, we currently have approximately $175 million on our books, for which we can attribute a full valuation allowance and will help us remain liable for only taxes paid in foreign jurisdictions, along with minimal state taxes for the foreseeable future.

With regards to our outlook for the fourth quarter of fiscal 2016, we expect to demonstrate a continuation of the growth trends we have seen through the year and are raising our outlook for full-year revenue by $7 million to a range of $117 million to $119 million. We are also reaffirming our expectations that in spite of some gross margin compression, full-year adjusted EBITDA will more than double over fiscal 2015, and that we will end the year with over $55 million in cash and cash equivalents as a result of our favorable results and improvements working capital management.

Looking to fiscal 2017, which begins on April 1, we wanted to provide some perspective on our thoughts for how this business will continue to grow. We currently expect fiscal 2017 revenues to increase between 8% and 12% over our current fiscal 2016 guidance. In addition, we expect to significantly decrease our capital investment cycle while further improving operational efficiencies as our next-gen product development cycle stabilizes. Together with top-line growth, these initiatives will help us generate breakeven to modestly positive free cash flow for fiscal 2017.

In closing, we are pleased with the results for the quarter and the progress we are making across many areas and initiatives, both from a financial perspective as well as operationally. The underlying drivers remain healthy, and we continue to gain share as we further invest resources in our business.

With that, let's turn the call over to the operator for questions. Tricia?

(Operator Instructions) Phil Bernard, Eilers & Krejcik Gaming.

Congratulations on a solid quarter. Well done. It looks like we're making some progress here. First question: product sales made a strong bump, and you're mentioning that had to do with the sale of remarketed goods. I was wondering whether -- how you continue to see that going forward, and whether you continue to -- I guess it has to coincide with large contracts. How do you see that going forward in the next quarter and then in 2017?

I'll give you some color on what happened in the quarter, and Janine can maybe provide some more details. But typically products, both proprietary and remarketed, are a good percentage of our overall revenue. It's not the majority, but it's a good percentage of our overall revenue.

In this particular quarter, remarketed products were about 25%, 26% of total revenue for the quarter, when it's typically in this 15% to 18% range. It was benefited by one fairly large hardware deal, but the majority of it was driven by our subscription bookings, where we are taking the hardware portion of the total deal today; and then the subscription service portion of the deal for the software-related services are stretched over time.

To the extent that our bookings continue to express preference for subscription-type contracts, we see that trend continuing. And for that reason, when Janine expressed be forward view of what fiscal 2017 is going to look like in terms of a growth rate range of 8% to 12% next year, we see that continuing to be driven by the types of bookings that we've seen in our fiscal 2016 to date. We see that trend continuing into 2017.

So, Phil, just add onto that -- to think about your question -- I do think that the mix of revenue will probably be similar as we move into the fourth quarter. And as we drive into 2017, as Jim mentioned, I think we're seeing this trend, as we're seeing a lot of the deals Jim mentioned on the call are subscription-based, where under the rev/rec rules, we can take the hardware on delivery, obviously, upfront. But we are spreading that software license over the term.

So it'll take longer for us to see that software revenue hit. Where normally we used to take an upfront pop for that, I do think we're going to start to see that mix shift. You know, the third quarter was the first quarter where we really saw that have a bigger impact. I would say that I think the fourth quarter is showing that similarly, and we are continuing to drive that as we're planning for fiscal 2017.

Okay, great. And then down to recurring revenue: what is the mix between support and maintenance and the SaaS-based revenue?

So it's -- the mix is still consistent. Of the total revenues, when you look at it, I think subscription is about 9% of total revenue, which is probably about 20% of the support and maintenance line itself. So you're still probably looking at about an 80%/20% split within that line item, SaaS -- support versus subscription.

Got it, got it. And do you expect that to -- the subscription base to trend up, I'm assuming, into 2017?

We do expect it to trend up. As I was mentioning, you know I don't think it's going to pop huge, right? It takes longer to bring that in with the contract term coming in. But we definitely think that we'll continue to see trends at similar or slightly higher percentages than what you see today on those growth rates.

Great, great. And on the call, if I heard correctly, I think you mentioned, Jim, 235,000 rooms through your hotel management. How many of those are on the hosted -- either rGuest Stay platform or the hosted LMS platform that you guys recently developed?

The hosted LMS is a relatively new introduction. We have about half a dozen customers that are on the hosted LMS product. So we're talking something in the maybe total 1,000 rooms at most on hosted LMS.

The rGuest Stay wins have largely been smaller deals to date. So we're talking somewhere in the less than 500 total rooms on rGuest Stay.

Now, as we talked earlier this year, in July we one that business with Drury that we announced. When that starts rolling out, and we look for that to roll into pilot sometime later this spring, you're talking about a population universe that's 125-plus properties and more than 15,000 rooms. So it will just take a little bit more time before that rollout starts to occur. But that's what the forward pipeline looks like.

Got it, got it. And most of those are a hosted version? Those are all rGuest Stays?

Yes, on rGuest Stay, the only way we are offering it today is in a cloud-based delivery format. There's no on-prem delivery solution available for rGuest Stay today.

Got it, got it. Could you speak to the average yield? I know there's two buckets, more or less; and I know I'm oversimplifying this -- but the average yield for a licensed on-premise product versus a hosted product? And maybe provide some added detail, if you can, now that you guys are doing so well.

When you say the average yield -- can you state that question again?

Right, right -- so average yield, I guess, per room, either -- per day or whatever metric you guys are using. Average yields per room per quarter or per day. And I understand that that may be different based off of each contracted property, but I'm assuming that there's an average difference there between the licensed on-premise and the hosted cloud versions?

Correct. You know the easiest way to think of it -- if we look at the market statistics today, and we try to price just around the market and a slight premium to it, the per-room per-day -- it's really a per-room per-month pricing on the subscription format -- will vary by property type. So your limited select service property types, the per-room per-month subscription fee is going to be somewhere in that $5 to $7 per room per month. And as you get into full-service and then the resort gaming space, you're going to be in the plus-$10 per room per month for a subscription.

The comparably priced license, if you will, so you then have to ramp that up to, say, an annualized cost. So we generally have been using nominally $8 per room per month, which gets you about $1,000 per year per room for your average hotel. So that's sort of the average, down-the-road value.

If you are on an on-prem license deal, again, it's going to be segmented, price is going to be segmented by property type. So your limited, select service, full-service, and then high-end resort gaming -- you're going to range anywhere from, let's say, a $75, $80 per-room license with 20% maintenance added to that; up to, let's say, $175 to $200 per-room license with, again, 20% maintenance added to that.

And that's an annual number, correct?

The maintenance would be an annual number. The license was going to be the upfront, basically, capital or license purchase. Make sense?

Yes, absolutely. That's upfront 20% maintenance. Great.

The way many of our properties are looking at this is -- you look at the five-year total lifecycle ownership, or seven-year total lifecycle ownership, where you might pay -- again, let's just -- sorry. Having a little bit of difficulty with this cold.

No worries.

Let's say it's somewhere like the $80 to $90 per room for a license. You then add 20% maintenance for seven years, and you compare that to, let's say, your $8 per room per month or about $100 per room per year. And you do your evaluation based on that math. Now, that's just on the software technology itself. Included in the subscription service, all of the infrastructure that you have to acquire to run the software on at your property, your own personnel to manage that infrastructure -- which is all part of the subscription service if you acquire it from us in a subscription format versus a licensed format.

Beautiful. Are those -- as the economy is moderately recovering, to basically flat, to who knows in the next year, do you see a pricing trend upward, flat, downward? What are you guys seeing?

We've been able to hold pricing. We typically are pricing at a modest premium to what we see as average pricing in the market, and we are able to get that. The quality of the software, but more importantly, the quality of the services and the people that we deliver in support of those operations permit us the opportunity to charge at a slight premium to market for our solution and services. We see our ability to price at that level continuing.

The bigger trend that we see in hospitality operators, across every one of the segments we service -- whether it's casinos, or hotels, resorts, food service -- they want to get out of, basically, the technology management business and stick to their core knitting, which is in the hospitality service delivery, whether it's food service, or restaurants, or stadia, or whatever. And so they would like for us to manage more and more of that technology-related services.

Some of our long-time customers who still are using LMS are asking us, we'd really like you to just manage the whole infrastructure. We're not ready to go cloud yet or put it above-prem, but we like to contract or more of your professional services to manage that infrastructure, because we'd rather just focus on providing exceptional guest service. That is the trend that we see across all segments, which allows us to deliver greater services and higher-value services to our customers, which is going to help with pricing and margins for the business generally.

Great, great. Moving over to POS, I think I may have missed the number. Did you mention how many POS terminals you guys have installed?

We did; a little over 33,000.

33,000.

And that number year-to-date is up by more than 20% over --

Where we exited.

-- where we exited fiscal 2015.

Okay, great. And what would be an average revenue per terminal per month for that, again comparing licensed versus on-premise?

So, again, it's going to have similar metrics. If you are buying at, say, per-terminal per-month, again, depending on segment that we serve, there's going to be more value derived from the point-of-sale services as you go from, let's say, basic restaurant and food and beverage operations up to managed food service and corporate cafeteria, corporate dining, stadia, marina, and up to gaming. So the easiest thing to use is a sort about $100 to $125 per terminal per month for at least our distribution of the 33,000 endpoints that are in the market today.

If you were to look at just your core restaurant -- and when we look at the market, and you drive just at the core restaurant market and the competitors that are participating there, an average restaurant is probably only going to be paying, say, $50 to $55 per terminal per month. We don't look at that as great margin opportunity for us. The higher-margin market opportunity for us is to stay at the luxury resorts, the complex casinos, the complex hotel properties, the complex food service, where we are getting a higher yield per-terminal per-month for point-of-sale-related subscription services.

Got it. So not necessarily going after fast casuals. I know that that has been something that you guys have discussed a little off and on over the past year -- but sticking with the premium clients.

Correct. You know, it's staying at that high-margin market opportunity, where for the complexity of the solutions that we can deliver -- we do complex really well, and we make complex simple through our solutions. But for an average restaurant that might not have that complex an operation -- they're not changing menus that often; they are not changing pricing that often.

We have very complex operations where, in a hotel, if they are offering a conference or some kind of convention, they may want to update pricing frequently. And to be able to turn that frequently is, again, an added complexity that an average restaurant doesn't value. So they are not going to pay for it.

Got it.

Yes, we don't -- go ahead.

Continuing on the food service, one of the products that you guys have been working on over the last year is rGuest Buy. I was wondering if we could get an update on that?

So the rGuest Buy product went live earlier in January, and the product is working extremely well -- well enough that our largest customer chose to implement rGuest Buy at size and scale with two of its largest and most important customers of its own. We mentioned that in the call; one is a financial services and one is a life science customer.

And the rollouts at these two large customers are in the plus-100 endpoint range of size. So you pilot maybe 10 or 12 endpoints in a location; and within a very short period of time, they like the technology. It's stable; it's reliable. The order then closely followed behind that -- said, okay, let's go deploy this at scale within the next two months.

So within the next two months, we're going to be deploying this at scale with large multinationals in a very short period of time. It's a product and a solution that the team -- across the entire Company -- has done just a fabulous job. And we see a great market opportunity for rGuest Buy for the remainder of this fiscal year. But really, there's a bright future for it in our fiscal 2017.

Okay, great. As far as revenue-generating capability, how does that compare to a POS? I'm trying to think of a comparable service in the industry.

There's two ways to look at it, Phil. One says, well --

I know this is annoying; I'm sorry. (laughter)

No, no, no, no -- one way to look at it is, well, it's a more simplified terminal. So you have fewer terminal-related services on that endpoint. And that's one way to look at it.

The other way to look at it is while it's a more simplified view, it's also taking an extraordinarily expensive human operator out of the operations on the other side. So its value-add to the customer is really, really high. So you're putting guest enablement in place.

Yes, it may be a simplified view, because you don't have as complex terminal options; but you're eliminating a really expensive human cost, human resource expense, on the operator side. And so that terminal becomes a lot more valuable in that case. So our yield per terminal is approximately the same for a kiosk as it is for a straight terminal.

Okay, great. Moving forward from that -- I guess, in line with that, your product development expense, R&D, it's been in line for the last year. Do you continue to see that trending flat, maybe down, as you are coming, I guess, out of a development cycle?

So what Janine forecasted -- forecasted. What she guided to in our fiscal 2017 forecast is, again, 8% to 12% revenue growth. But we also have been indicating to investors on calls throughout the year -- when we did the Needham conference earlier in January, we indicated that an investor should expect positive free cash flow from the business for next year.

So that means we're not only going to be operationally cash flow positive, but you should expect us to be free cash flow positive in fiscal 2017. That necessitates basically a step function reduction in CapEx in order to achieve that. So when you think about CapEx running at levels this year of high teens, we're going to be somewhere half that value in our fiscal 2017 projection.

Janine, do you want to comment any further on that?

No, I think that's a fair statement.

Okay, great. All right, I will stop bothering you guys. Thank you.

(Operator Instructions) Allen Klee, Sidoti & Company.

I was just curious if you could comment on your sales force, and how you think about where it is, and where you'd like it to be?

We think our sales force right now is basically at full strength. We are in the mid-30s, which is down a couple headcount from where we were in the prior-quarter results. But I think we would consider ourselves to be at full strength for our quota-carrying sales team right now.

Okay. And then can you just comment on how you think about the competitive environment and how you distinguish yourselves?

Well, in terms of the competitive environment, we think we compete extremely well. We think some of our largest competitors, who have been servicing this hospitality market for a long time -- in our judgment, what we hear from the customers, is that we tend to value this hospitality industry greater than potentially our competitors do. Our competitors that service hospitality also service retail and the core restaurant market. And our chief competitors with whom we compete in hospitality -- the hospitality operators feel like our lead competitors value retail and restaurants more than they do core hospitality.

In terms of how we distinguish ourselves, I would say we distinguish ourselves on our service first. The technology component of what we deliver, whether it's licensed or subscription, is an important parameter. But in any enterprise product, it's the developed technology plus these services you deliver that the enterprise customer is buying. And unless you are sensitive to the customer's business support, not just supporting the technology if a user is having particular difficulty with point-of-sale or property management-related services not being available, but scaling to the business needs.

So when Vegas has Fight Week, and all of a sudden, you know, all of our customers need N-number of additional terminals; and we need all hands on deck to support them because the volume of business is increasing, the way we respond to those customers is why they choose us. Not only is the technology itself more scalable and more reliable, but the fact that we care about their business more, and we scale quickly to their needs when demand rises for them -- that's one of the biggest characteristics that we offer that our customers say they value in doing business with us.

Okay, thank you. And then you serve four verticals, and I was just curious of -- in the near to midterm, which verticals you might see more opportunity?

Well, we see gaming as 50% of our business today. But as you look at gaming growth, the growth in gaming is largely coming from within. It's a mix shift within the gaming segment itself, away from gaming dollars and to non-gaming sources -- retail, food and beverage, hotel, events, that type of thing.

Within that mix shift that occurs, that mix shift now that's 60% to 65% of a gaming operator's revenue being non-gaming, is shifting in favor of technologies that we have that can support that revenue demand. That is going to naturally lead for greater demand for point-of-sale and hotel-related services, software services, the stuff that we provide. So we do see continued growth opportunity there, albeit it's sort of a finite market.

We actually have what we think is a 35%-plus share of that market. So our ability to grow into and still gain plus-50% share of that market still gives us good opportunity. It's going to give us good pricing power. But at the same time it's rather finite.

If we look at the core hotel market, it's a market in which we have what we would consider less than 5% share. But they still have a large market opportunity for growth, both in terms of the rate of growth, the number of rooms being added worldwide. We look at the core hotel market as a real great growth opportunity for our Company for the next several years. And that's the two areas we see leading growth for our Company.

Okay, thank you so much.

Yes, sir.

Anton Ain, Private Investor.

I just got actually a follow-up question to the competitive landscape. I mean, understanding your point about some of your traditional competitors -- Micros or Radian -- sort of not providing as good a service. But I noticed there are a bunch of new upstart SaaS players, and then there are a couple of big players, Amadeus and Sabre -- they're trying to move into the hotel software space. So I'm kind of curious if you can comment on the competitive pressure you're seeing from those new players?

Sure. I'll start on the point-of-sale area first. We do see a number of cloud-based point-of-sale providers executing in tangential markets. We don't see them in the complex hospitality environments we serve today.

We think they can get there, but there is a significant amount of learning that must occur for them to not only understand the hospitality operator, but then codify into their software those scenarios that a hospitality operator would encounter that's more complex than what they do today. We pay attention to those folks quite closely, because we think we can learn not only what they're doing from how they service their industry today from a pure cloud-based perspective, but also be aware of how close they're getting to us in terms of satisfying complex hospitality scenarios.

We are not that that concerned about it, as we've been doing hosted point-of-sale for more than 13, 14 years. So it is an area that we have been able to compete effectively and have great experience in doing multitenant hosting. I won't say it's true cloud quote/unquote at every layer of the solution delivery, but it's cloud enough that it gives us the scale and economies to compete in that space.

As it relates to hotel systems, we do see the same data that you identified in terms of other competitors in the RFP process in which we've participated over the last year. And all I can say in response to that is that we have competed and won successfully in those engagements -- maybe not the entire engagement like we have with our friends in St. Louis, but we've been successful in getting pilots selected where our rivals that you have mentioned have not.

Thank you. And I would now like to turn the call back to Mr. Dennedy for any closing remarks.

Thank you, Tricia. And thank you for your interest in our Company. We really do appreciate the questions.

I want to take this opportunity to thank the very talented and dedicated team at Agilysys. Their work truly drives our success. And I want to thank our many customers and partners who entrust us with their business.

We believe Agilysys continues to make progress as we focus our resources on the highest-value opportunities in our chosen end markets and manage the business for the long-term to deliver sustainable value to our customers and our shareholders. We look forward to updating you on our progress during our fiscal 2016 fourth-quarter and full-year results call. Thank you.

Ladies and gentlemen, thank you for your participation. That does conclude the call. You may all disconnect. Everyone have a wonderful day.