Agilysys Inc (AGYS) 2017 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Agilysys fiscal 2017 first-quarter and full-year conference call. 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 Litgation 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 that could cause actual results to differ materially from 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 would now like to turn the call over to Mr. Jim Dennedy, President and CEO.

Thank you, Candace, and good morning, everyone. We appreciate you joining us today to review our fiscal 2017 first-quarter results. Joining me on the call today is our Chief Financial Officer, Janine Seebeck.

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

With that, let me provide a quick overview of the results for the quarter. Total net revenue for the first quarter increased 13% to $31 million, including over 31% growth in subscription revenues. However, due to the amortization of developed technology resulting from the general availability of rGuest Stay, as expected, gross margin in the quarter declined to 52.3% from 59.7% in the prior-year period. This led to our reporting operating loss of $2.1 million compared to an operating loss of $277,000 a year ago.

Adjusted EBITDA for the first quarter was $441,000 compared to adjusted EBITDA of $1.2 million in the same period last year. As a result, we reported a net loss for the fiscal first quarter of $2.3 million, or a loss of $0.10 per diluted share compared to a net loss of $200,000 or a loss of $0.01 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 and outlook for fiscal 2017.

The business remains healthy and growing. We continue to increase revenue; expand our customer base; increase recurring revenue, including rGuest-based sales; and strategically investing in our business while maintaining a healthy financial outlook. Our hospitality-focused business strategy allows us to leverage our iconic food and beverage and lodging solutions while bringing new innovations to market that will enable us to expand the business we do with our existing customers and develop new, strategic customer relationships.

In the first quarter, we secured 37 contracts with new customers compared to 45 new customer wins in the prior-year period. The total bookings value for our new customers secured in the first quarter of fiscal 2017 more than doubled in value compared to the value of new deals in the first quarter of last year. And this value accounts for over 35% of the total value of new deals for all of fiscal 2016.

With respect to our installed base, we ended the first quarter of fiscal 2017 with more than 36,000 point-of-sale endpoints installed, up 28% from the same period last year; and more than 240,000 rooms managed by our lodging solutions, up 4% from the first quarter of fiscal 2016. Our goal is to continue to grow both the total number of terminal endpoints and hotel rooms under management.

Turning to the end markets we serve, we continue to grow our dominant position in the casino and tribal gaming markets, and see significant opportunities to continue this growth through share gains as well as market expansion as the emphasis on non-gaming revenues increases. Our bookings in this vertical grew 175% in the first quarter of fiscal 2017 versus the prior-year period; and on a trailing 12-months basis, grew by 59%. Of the 37 new customers previously cited, we secured four new customers in the gaming market in the quarter with a revenue bookings value in excess of $3.5 million.

With over 1,500 casinos in the United States, and the ongoing mix shift of gaming industry revenue to non-gaming consumption, the pressure on operators to reduce expense while securing non-gaming revenues intensifies. Agilysys provides the critical systems and important innovations to address this challenge. Our property management, point-of-sale, and business intelligence solutions offer casino operators tools they need to better understand how their customers interact with the gaming floor and non-gaming amenities so they can more effectively market and serve customers and keep them coming back.

For example, KwaTaqNuk Resort & Casino in Polson, Montana, removed a competing solution and selected VisualOne property management system and InfoGenesis point-of-sale in June to streamline operations and enhance guest service at the 111-room property. The Nugget Casino Resort, in Sparks, Nevada, chose LMS hosted and rGuest Pay to manage lodging at their casino resort.

We have also seen growing success with new customer opportunities and deployments that displace incumbent providers. An example is our recent engagement with Tropicana Entertainment where their Montbleu Resort Casino & Spa and Lumiere Place Casino & Hotel properties adopted InfoGenesis in a subscription model, and rGuest Pay. Not only did this engagement displace a competitor, but it also serves as an example of a customer adopting both an iconic as well as an rGuest platform-based solution.

We secured more than five important LMS subscription wins, including several customer conversions from a traditional license and maintenance relationship. The LMS subscription wins and conversions are important to our business. We are keeping LMS relevant in a core market, and securing an installed base for rGuest Stay when it is ready for the casino markets.

The LMS and InfoGenesis win validate the strategy, through customer action, that the investment and release of rGuest platform-related solutions provides confidence in a longer-term strategic investment in Agilysys solutions for their hotel and food and beverage needs.

The hotel and cruise industry, which represents approximately 22% of our total revenues, also remains healthy. With over 53,000 hotel properties and over 5 million guest rooms in the US alone, we see a significant growth opportunity. The nearest-term opportunity will be in the food and beverage operations. This will give operators a positive experience in working with a hospitality-focused partner that will lead to greater opportunities in the hotel operations for rGuest Stay, Pay, Analyze, and other rGuest platform-based solutions.

We feel this vertical represents the single-greatest growth opportunity for us. While we have been successful in penetrating integrated resorts and luxury properties, we now have the tools necessary to effectively compete for business with chain hotels.

With rGuest Stay, we now have a lodging solution for the limited service hotel market, and we'll have a solution for full service later this fiscal year.

In the hotel market, we added 23 new customer wins during the first quarter of 2017 compared to 14 new customer wins during the first quarter of fiscal 2016. On those 23 new agreements, we recorded total revenue bookings value of approximately $3.8 million, more than doubling the bookings value year-over-year.

Recent wins to highlight include the Boca Raton Resort and Club, a Waldorf Astoria Resort, in Florida, which selected InfoGenesis point-of-sale and rGuest Seat solutions to manage their world-class oceanfront property; and the Portlander Inn in Portland, Oregon, which selected rGuest Stay. Furthermore, our teams are also successfully transitioning customers from our iconic brands to the rGuest platform, and establishing a framework for future transitions, as in the case of Wild Dunes Resort.

Wild Dunes Resort in Isle of Palms selected InfoGenesis point-of-sale, InfoGenesis Flex and rGuest Pay to streamline food and beverage operations. Wild Dunes Resort is managed by Destination Hotels, which uses our solutions at several of its other properties. And just last month, Grand America Hotels & Resorts, in Salt Lake City, selected a comprehensive Agilysys solutions suite -- including InfoGenesis point-of-sale, rGuest Pay, rGuest Seat -- to streamline food and beverage delivery at 20 restaurants in six locations.

Looking at the RUSH and food service verticals, which combined represent approximately 26% of our total revenues, we see healthy fundamentals and a potential for significant growth. For example, in our RUSH vertical, the University of West Georgia recently selected Eatec inventory and procurement system to streamline food service operations in 14 locations, including residential dining halls, campus restaurants, and convenience stores. They will also use Eatec to support campus catering and concessions.

Operators of all sizes are looking for point-of-sale solutions that will handle loyalty programs and online order prep platforms, while delivering timely and useful analytics.

Moving on to the status of our solutions, we continue to make progress in updating our iconic solutions, and bringing to market our rGuest platform-based solutions. We recently announced the general availability of rGuest Stay, our cloud-based property management system. Today this solution is available to limited and select service hotels and chains, a large and growing hospitality segment. Future releases of rGuest Stay will support the needs of full-service hotels, resorts, and gaming properties.

RGuest Stay operates as an open-system, standard-space platform that provides publicly addressable interfaces to more easily connect iconic Agilysys solutions and most third-party solutions to the rGuest hospitality platform. The rGuest platform-based solutions makes data about guest consumption patterns more available to the operator to ultimately deliver a more customized guest experience.

More recently we announced that rGuest Analyze, our business intelligence solution, is now packaged with InfoGenesis point-of-sale, enabling hospitality operators to use existing point-of-sale data to increase revenue, more effectively manage costs, and enhance guest satisfaction.

Another key component of the rGuest platform, rGuest Pay, continues to grow, with 97 agreements in the first quarter of 2017 compared to 35 agreements in the first quarter of fiscal 2016.

RGuest Buy is also gaining traction. Just last week, we announced the general availability of this self-service kiosk solution that extends point-of-sale reach, improves guest service, and reduces staffing needs. Research showed that over 60% of consumers would use a kiosk to place orders and pay for food in restaurants and food service venues. We are confident our kiosk solution will help us more successfully address high-volume food-service operations, a large and growing hospitality segment. And as we mentioned previously, Compass Group North America began live trials with two large, multinational organizations -- one in the financial services sector, and one in the life sciences sector. These trials are progressing well.

We will continue to invest for growth in our solutions, including key enhancements to our iconic offering that keep them market-leading and further facilitate the eventual migration to the rGuest platform. Current and potential customers are comfortable buying solutions like LMS, VisualOne, and InfoGenesis because they see the potential value available to them, as they will later shift to rGuest platform-based solutions.

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

Thanks, Jim, and good morning, everyone. Our first-quarter fiscal 2017 total revenue was $31 million, representing a 13% increase from total net revenues of $27.5 million in the comparable prior-year period. Products revenue, which is comprised of hardware and on-premise software license sales, increased 8% to $9.5 million and represented 31% of total revenue during the quarter. This reflects an increase in hardware sales associated with our proprietary software sold as a subscription-based service, as well as increases in hardware replacement sales for iconic products.

It is important to note that while subscription-based license sales yield initial revenue of lower-margin hardware, they provide us with higher-margin subscription revenues in future periods.

Support, maintenance, and subscription revenue, or recurring revenue, remained flat at $14.9 million compared to the first quarter of fiscal 2016; while our subscription-based revenue grew by 31%, and accounted for approximately 20% of support, maintenance, and subscription revenue compared to 16% in the fiscal 2016 first-quarter. In the quarter, we experienced a decline in our remarketed support revenue, resulting in the overall year-over-year flat recurring revenue. We expect that the support, maintenance, and subscription revenue for the year will show annual growth trends in the 4% to 6% range.

Professional service revenue grew 72% to $6.5 million compared to $3.8 million in the first quarter of fiscal 2016, reflecting a better utilization of our services resources. RGuest platform revenue comprised 5% of total fiscal 2017 first-quarter revenue.

Moving down the income statement, cost of goods sold increased approximately 33% to $14.8 million. The increase is largely due to the start of amortizing software development cost, as rGuest Stay reached general availability. And total gross profit fell 1.3% to $16.2 million in the first quarter of fiscal 2017; while gross profit margin fell by 740 basis points to 72.3%, driven by the impact of the software amortization cost and the growth in lower-margin professional service and hardware revenue.

Looking at operating expenses, which included product development, selling and marketing, general administrative and depreciation expense, the first quarter saw a 9.4% year-over-year increase to $18 million. Operating expenses represented 58% of total net revenue versus 60% in the prior-year period. As expected, product development expense of the first quarter of fiscal 2017 increased 9.4% year-over-year to $6.9 million, and represented 22% as a percentage of total revenue in the first quarter of both fiscal 2017 and fiscal 2016.

Product development expense continues to be driven by our ongoing investments in resources related to both rGuest and iconic product enhancements to expand the customer experience across our installed base, as well as our future offerings with existing and new customers.

Sales and marketing costs increased 26% year-over-year in the first quarter of fiscal 2017, primarily as a result of increasing commission expense in line with booking achievements, specifically subscription-based bookings, whose total contract value increased 250% year-over-year; and to a lesser extent, due to the timing of tradeshows and marketing initiatives.

General and administrative expenses decreased 6% versus the first quarter of fiscal 2016, primarily due to our continued efforts to improve efficiencies and streamline back-office functions.

We reported an operating loss of $2.2 million for the first quarter of fiscal 2017 compared to an operating loss of $277,000 in the prior-year period. Net loss for the first quarter was $2.3 million, or a $0.10 loss per diluted share compared to a net loss of $200,000 or a $0.01 loss per diluted share in the first quarter of fiscal 2016. Adjusted EBITDA decreased approximately $700,000 in the first quarter to $441,000 versus $1.2 million in the first quarter of fiscal 2016.

Moving to the balance sheet and cash flow statement, cash and marketable securities as of June 30, 2016, was $55.3 million compared to $60.3 million at March 31, 2016. The decrease in cash reflects approximately $3.7 million of spending related to ongoing product development investment.

Net cash used in operations was $1.0 million, a decrease of approximately $846,000 versus the prior-year period. Adjusted for nonrecurring items, net adjusted cash used by operations for the first quarter of fiscal 2017 was $530,000 compared to net adjusted cash used by operations of $1.6 million in the prior-year period. In terms of NOLs, we have approximately $185 million on our books for which we can attribute a full evaluation allowance, and which will help us remain liable for only taxes paid in foreign jurisdictions, along with minimal state taxes for the foreseeable future.

Looking ahead to the balance of fiscal 2017, we continue to expect full-year revenue growth in excess of the market rate of growth, and expect our bookings will continue to favor subscription-type contracts, allowing us to take the hardware and professional services revenue upfront and spread the software license revenue over the term. As such, we currently expect fiscal 2017 full-year revenue will be approximately $132 million to $136 million, reflecting an estimated 10% to 13% growth over fiscal 2016.

As it relates to margins, it is important to remember that we have been recording development costs for our solutions, such as rGuest Stay, as software development costs on the balance sheet. However, as these solutions begin to reach general availability, as was the case in the first quarter of fiscal 2017, we begin to amortize these development costs in a linear fashion on our income statement. That will be the case with rGuest Buy, as well, which we announced last week as also under general availability.

As such, we expect gross margins in the low-50% range due to the non-cash developed technology expense coming off the balance sheet. On an adjusted EBITDA basis, we are expecting to end fiscal 2017 with more than double the $4.3 million of adjusted EBITDA realized in fiscal 2016.

Given our desire, and that of our customers, to advance the development of the rGuest platform, we will look to continue making investments in product development as we bring to market additional features and functions that will enable us to address a growing number of markets sooner. As such, we anticipate total product development capital investment in fiscal 2017 will be in the $10 million to $15 million range compared to fiscal 2016's total capital investment of approximately $21 million.

Our continued product investments may also -- may lead to modestly negative free cash flow in fiscal 2017, with a projected end-of-year cash balance of greater than $55 million. As we mentioned on our prior call, we are also pursuing several larger-than-average-sized engagements that may require us to further accelerate the product roadmap or invest in additional operating expenses ahead of recognized revenue in fiscal 2017.

In summary, we continue to make progress on returning Agilysys to balance top- and bottom-line growth and profitability, and will look to bring that into greater focus over the balance of fiscal 2017 as we continue to prioritize our efforts behind the most significant drivers of engagement growth and demand.

With that, let me turn the call back to Jim for some quick comments before we open the call for your questions. Jim?

Thank you, Janine. Before we turn to your questions, I would like 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.

Secondly, Agilysys will continue to invest for growth, operate efficiently, and engage our customers wisely. I remain confident that through investment and innovation, Agilysys will be a formidable competitor, a better partner for our customers, remain an interesting company for our employees, and a profitable investment for our shareholders.

With that, let's turn to call over to Candace for questions. Candace?

(Operator Instructions). Allen Klee, Sidoti.

Hi, good job on the quarter. In terms of -- I guess to start with, in terms of the faster growth in professional services, I know products is more related to some of the new product offerings that you have. But maybe can you comment on professional services -- what's going on there?

Sure. So, Phil, this is Janine. I think in the quarter what we saw was definitely some clearing of some of the backlog as we started to grow our bookings over time. You've seen the number in professional services going up quarter-over-quarter, sequentially. I think we definitely saw that this quarter was a little bit higher than kind of what we expect the run rate to be. But definitely we're expecting professional services to be at a higher run rate than what you would've seen in Q1 of last year, as we continue to close more of the subscription deals and be able to take the hardware and the professional services upfront.

Okay. (multiple speakers) Go ahead -- sorry.

Just to explain the business a bit, as we sell, demand for our solutions -- whether it's premise or subscription-based -- you are building a backlog of professional services demand that we need to address. And what we saw in the first quarter was some changes that under the leadership of Rehan Jaddi and [Rob Jackson], in our services organization, we were able to get greater resource utilization out of the team. We think that that greater utilization, in terms of billable hours per month, is going to be sustained throughout the year; and that we should see, based on our previously recorded demand and our bookings data, continued higher levels of professional services revenue for the rest of the balance of the fiscal year.

We did have an outsized bump in Q1 as the changes that they made in their organization helped retire more backlog. But now we're getting down to a more normalized level of just a higher level of service revenues in every quarter we see going forward.

Great. Thank you. And then for subscription revenue, you mentioned that while the SaaS grew but something else declined to result on the whole thing flat. But I missed what you said about the other thing that declined. And then did you say the whole segment, you expect to be up 4% to 6%?

That's correct. Allen, basically we have -- within our support, it's obviously made up of our annual recurring proprietary maintenance, as well as remarketed support, which we book as a net upfront revenue. So those are things like third-party hardware contracts we sell to some of our third-party hardware contract maintenance contracts -- that line item actually declined year-over-year as we're moving away from more -- less of that i-Series LMS on premise. So that line item -- the decline in that basically offset the growth we saw from subscription-based revenue in the quarter. But I am expecting, even with that line having some impact, that we'll still hit 4% to 6% for the year, for the whole line item.

Okay. And then as we think about margins -- and I know, in the near term, product and professional, as you are getting these subscription products that you get more of an impact upfront. But how do you think about the timing of how those margins change, or how that kind of inflects over time?

So, Allen, I think what you're asking is obviously we've got items coming off the balance sheet. It was about $31 million that came off in Q1 related to Stay; and then Buy will have another $10 million or so that is coming off in Q2 that will start to amortize. That obviously has an impact on margin -- it was a five-year amortization, so you have to assume that's going to come in. We do assume that it will take a little bit of time for revenue to ramp to offset that. And that probably won't happen until the second half of our fiscal 2018, so you will start to see that normalize. So I think there's definitely a timing impact as we start to show the costs technically ahead of kind of the key parts of the revenue as we've now gone generally available.

Does that answer your question?

Yes. Thanks. Then you talk about the dollar amount -- the total dollar amount of total contracted value of subscription business that was up 250% year-over-year. Do we know what the dollar amount of the contract value is?

We do; we haven't disclosed those numbers. We haven't made those numbers, on a quarterly basis, available generally.

Okay. And then of the new rGuest products, could you give us a sense -- you did a good job of kind of what's been coming out and stuff -- just going forward over the next year or so, kind of what we could look forward to?

In terms of product revenue growth, or product revenue contribution from the rGuest products?

Or kind of new things that you're thinking about.

Oh, I see; in terms of new developments. I think when you look at the portfolio today, we're centrally focused, and we spent a lot of time getting the Buy, Seat, and Pay products out. The Stay product is the central investment that we then recently released for limited and select service. It's now evolving, primarily Stay and Buy, going forward. So as you think about the evolution of Stay, it's addressing a market that's now bigger than limited select service. While limited and select service is a big market, even if you discount the US alone as we make continued enhancements to rGuest Stay that include, let's say, full-service hotels -- that opens up a larger market. Full-service hotels and chains, that gets you into the Tier 1 chain hotel market. And then we start encroaching into the territory that we already serve in the resorts and the casinos.

So the near-term opportunities over the next, let's say, 12 months will be introducing new feature sets within Stay to address greater and greater market opportunity for us in the core hotel market.

The same is generally true for rGuest Buy -- rGuest Buy utilizes the back-end engine of InfoGenesis. So our customers don't need to do anything if they've already been on InfoGenesis to use the rGuest Buy technology. What rGuest Buy technology does is it presents a new terminal face to the users, first focusing on let's say the guest service associate -- so a new terminal itself for the guest service -- at the same time, creating this kiosk product that will allow for a guest-facing interaction with the ordering system or the menu system.

So within the Buy product there is really going to be sort of two introductions. Introduction one will be opening up new opportunities where we can install guest-facing ordering components that will do two things: one, we think it helps order demand increase; and, secondly, it takes meaningful expense off the floor by not having a guest service attendant or cashier at every terminal. That's going to dramatically help our customers, particularly in the high-volume managed food service segment.

The second thing we're doing is by allowing this interface to the back-end engine of InfoGenesis is again around the kiosk concept: create more opportunity for our casino customers, our hotel customers, to place points of interaction for guest self-ordering more abundantly throughout the property. That will expand generally the addressable market. Because if you can put for $2,500 a terminal out there on the floor someplace, you remove probably more than 10 times that expense and a guest service associate attending an attended terminal. You also increase the frequency of traffic that's going to be order placing.

Now the last part of this is then replacing basically the InfoGenesis terminal at the restaurant itself. And when you look at that evolution of both the kiosk, guest self-ordering, and then a terminal replacement over time, our product introductions around the rGuest Buy -- that will happen over the next 12 months as well. So that's sort of the progression.

In terms of net new products around that, it's largely going to be those introductions on essential Stay and Buy. But then adding more knowledge or insight around the analytics products so that operators can see what is happening, not only in their day-to-day operations, but also how to use the guest consumption data that they're collecting to drive greater recruitment, more wallet share, and deliver an overall greater guest experience at their properties. So those are the central areas where we see new product investment or evolution over the next 12 months.

That's helpful. Thank you. And then last quarter, you talked about that there could potentially be some transformational type of opportunities out there. How do you think about that today?

So these are the large deals that we track in our pipeline, but we hold them out. Jim Walker and I sort of hold them else separately. And we talk about those in our weekly cadence calls as separate, large deals, step function change opportunities within the business. We have about half a dozen of those on which we are working. And through the summer -- it's only been two months since our last call, so over the last two months -- some of those projects have advanced materially. Others, based on summer vacationing and customers just generally not being available through the summer, the projects are still there. We expect activity around those projects to pick up later this month and into the fall.

But, again, those large opportunities remain available to us. It's continuing to address their needs -- any special configuration requirements or -- and these larger enterprises, they have complex networks. And it's understanding what we need in order to have line of sight from the endpoint out through their proprietary networks to our data center, to make the whole solution operate effectively for them. So those large deals are still there. We still anticipate that landing several of these will cause needle-moving changes in our business.

Now, that said, I also want to describe how some of these enterprises work. Some of these enterprises work in a way where you land a deal and you get the entire enterprise deal. And they will make a wholesale shift in what they use for their point-of-sale operations right away. Others tend to give you, let's say, a hunting license, if you will. And they give you the stamp of approval, and then you need to go out and target each one of the franchisees in their universe, and secure business with the franchisees separately in order to secure all those properties.

The ones who are likely to move first, or at least the deals that are furthest along right now, are the ones that are more decentralized decision-making franchisee-based. And those are the ones that just happen to have spent more activity throughout the summer, and ones that we think will get approval on sooner rather than later. But that also means it's not going to be a large enterprise deal announcement. It's just going to give us the opportunity then to go sell these franchisor groups of owners on doing business with Agilysys. That's the way the big deals in the large businesses is shaping up.

Okay. Thank you. And then, in your beginning text, you talked about some competitive wins. And could you maybe just go over a little bit of kind of why you were able to displace an incumbent -- what you think you had versus them?

Sure. I think it really boils down to, first off, service and support; our ability to deliver a higher level of support in terms of business support. We need new terminals. We have a surge in business. We have an event upcoming. We need you to be responsive to our business needs. And we are able to address that more quickly than our competitors.

The second area around support is when there are outages, like there often are in this type of technology, is that our ability to respond to outages more quickly and get them back into operating service faster is also something where we excel relative to our competitors. That said, the underlying technology itself, whether it's InfoGenesis compared to any of the other providers of point-of-sale services in the space -- or LMS or VisualOne -- the product capabilities themselves are, by default, superior to our competitors. But I think what we are hearing is being a more responsive partner has actually been more important to them in their decision-making to switch than the feature set and availability that might be superior in InfoGenesis or LMS or Pay, or what have you. Once they begin using the product, they then understand why the response and services can be so high -- because the product is just easier to use, and more suitable to hospitality operations. So that is the feedback that we are hearing from why we are winning these competitive displacements.

Okay. Thank you. Congratulations on the quarter.

(Operator Instructions). Phil Bernard, Eilers.

Hi, guys, thanks for taking my call. Well-done, and a good quarter. I will try and make this quick. I'll start with the support and subscription revenue. You guys provide some more information on terminals installed and rooms managed for POS and your property management systems. Was wondering if you'd be able to speak to the mix between licensed and subscriptions terminals and rooms, and how see that -- how that has evolved over the last year to half, and how you see that changing going forward, and maybe provide some color on yield as well.

Phil, that's a great question. I would tell you, from a terminal in a room perspective, it is still -- because the bulk obviously is still pretty much legacy on-premise where it's probably still much heavier weighted -- 80% to 90%, depending of that would be on premise. Obviously more of the new deals that are coming in and moving to the installs are definitely a heavier shift towards subscription.

We haven't given that full data yet. But I think that's something that as we continue to transform into subscription business, and we see more and more of the terminals in the rooms come in in that fashion, I think we'll be able to start sharing that data with you. I think today it is still pretty heavily weighted. Although I would tell you the new opportunity and the new logos are definitely much more heavily shifted, at least 60%/40%, maybe even a little bit more than that, towards SaaS-based.

Got it. Okay. That's good news going forward. And then my last question, an update on your progress with the Drury install, and maybe some commentary on how that's going, and what the response has been from them?

The Drury installs are going extremely well. I think we have two properties live, and we are working on a third. The rollout schedule that we had planned for them, we're still on track for that. We always felt like it was going to go somewhat slow in the beginning, and then the pace would pickup.

The feedback that we're hearing -- particularly from the lead or the head of IT for Drury -- has said this has been the smoothest PMS replacement that they've ever seen. Not only from doing the record counts and reducing the number of records down to a more sensible level of unique records in their database -- so they went from several million down to a couple of million. And through that transformation we identified many records that were duplicates of the same individual. But then once we've transferred those records over into our new rGuest PMS, rGuest Stay, the transfer of records, the transfer of information, the migration of forward reservations into Stay has gone far smoother than they ever anticipated. And we think that that's all good news. It's a reflection not only of the technology; but I think it's a reflection of our people.

Our people really understand not just the technology, but how an operator needs to function. And so when they think about data migration, it isn't just moving a thing from cell A1 to cell A1 in a new concept of a new system. It's understanding what a reservation record looks like, so you can move the whole thing over and make it make sense in the context of the new system. And I think that is a testament to the quality of the people we have in the organization.

Got it. Appreciate the extra color. So service continues to be a source of competitive advantage for you guys, it seems.

It always is. When I look at an enterprise product, there's two components to the enterprise product, and it's the developed technology plus the services. But within the services, there's three central pieces of services that you're delivering. It's the support services for the use of the product. It's the professional services for the implementation, the understanding, the how to run your business on the product. And then it is the corporate services, all around provisioning and getting the right products at the right time to you; that the invoicing is correct, that it's easy to do business with.

So when you think about an enterprise product, out of the four components I highlighted, three of them are service-related. And if all you focus on is the technology, you're missing three of the four things that an enterprise customer relies on a provider for support, for the entire solution. And it's all around services. So you're absolutely right that by focusing on our service and how we distinguish ourselves with a product that is superior in the marketplace, because of our engineering services being so high quality, it makes for an easier sale and greater growth rates in the business.

Got it. So quarterbacking off of that point, and moving over to a specific vertical -- gaming, there seems to be -- there continues to be some growth within that sector; however, it would probably come from competitive replacements. Do you see yourselves in a position to be able to grow the business within that vertical?

We do. It's not only from competitive place and displacement, but it's also through innovative thinking on how we can help operators address more of the non-gaming spend that is going on at their property. When we talk about the rGuest Buy technology, or we talk about InfoGenesis Flex, the mobile tablet -- it is giving our operators more product or more solution endpoints from us. So we're basically expanding the footprint of what you would traditionally think would be available on the number of point-of-sale in points per venue and sort of almost doubling that.

So if you then double that, but you give it to, let' say, a guest services associate poolside, or in an area where walking around and servicing the guest is the situation, versus the guest being seated at a specific table and you do a lot of back and forth, what we've noticed -- and I've talked to our friends at the actual property themselves. So when I go to the MGM properties, or I stay at Vdara, I actually ask the server: is this more effective for you? How does it work for you? And what they're telling us, and what they see in their venue revenues, is that it makes them 25% to 30% more efficient in terms of order delivery or order taking.

And the guests are happier because instead of everybody coming to the well and putting drinks all in at the same time, that guest services associate can take three or four orders and be sending those as they are ordered to the well. So there's not a huge queue-up by the time the guest service associate gets back, the orders, in many cases, are already available for them to take back to the floor. So it increases order flow. It gets the drinks to the guest more quickly. And the overall experience is higher.

So through that we're expanding some of the footprint that otherwise would be more limited by offering them innovation and service that then uses our technology to provide that delivery.

Now, that said, that's expanding the addressable market within the market we already own. But because of our ability to do that, we then can explain this is why you should use Agilysys technology versus a competing technology, and we're winning the competitive displacements at the same time. So that's what's happening within the business and the competitive dynamics, and why we think growth in gaming remains available to us.

Got it. Great. Well, that is it for me. Thanks, guys.

Thank you. And that concludes our question-and-answer session for today.

I'd like to turn the conference back over to Mr. Dennedy for closing remarks.

Thank you, Candace, and thank you all for your interest in our company. 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 2017 second-quarter results call. Thank you.

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