Jim Dennedy - President and CEO Janine Seebeck - CFO.

James Lee - Potrero Capital Research Phil Bernard - Eilers Research, LLC.

Good morning, ladies and gentlemen, welcome to the Agilysys Fiscal 2015 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. 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.

Although the Company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially.

Important factors that could cause actual results to differ materially from 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, Teria, and good morning everyone. We appreciate you joining us on the call today to review our fiscal 2015 second 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 operating income from continuing operations and adjusted income from continuing operations, 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 financial section of the press release issued earlier today. Our second quarter saw continued progress towards our goals of steady growth in our business, highlighted by higher recurring revenues, continued investment in our business to fuel that growth, and strong capital discipline.

Our innovative solutions allow operators to establish closer connections throughout the guest lifecycle, offering our customers better opportunities to grow their revenue and operate more efficiently. Our product portfolio continues to evolve in both scope and sophistication.

As we evolve our product portfolio, we made and continue to implement changes in our go-to-market strategy to ensure that we’re relying not just with our customers’ goals, but also with our goal of growing our Company, particularly, our higher margin recurring revenue business.

Although our preference for recurring revenue business and changes in our go-to-market approach may limit headline revenue growth statistics in the near-term. We look to the growth in our recurring revenue line and use of cash as key indicators in our business.

I remain confident that we’re in the right path towards accelerating our recurring revenue growth and add a significant value to our business. Turning to our financial results for the second quarter, total net revenue for the second quarter increased 6% to $26.3 million.

It is important to highlight that recurring revenues which were comprised of support, maintenance, and subscription services rose 7% to $13.8 million for the second quarter and also rose as a percentage of our total sales, representing over 52% of second quarter net revenues.

As mentioned earlier, the growth in recurring revenues have been largely driven by our success in growing our SaaS based business, a business that grew 14% for the quarter and 11% year-to-date.

Recurring revenues not only provides stability for our business through more predictable contributions to our future financial performance, but they also reflect our success in developing longer term relationships with our customers, which in turn helps us generate additional value for our shareholders.

On the expense and investment front, we remain committed to strong capital discipline, including the [ph] [thoughtful] use of our balance sheet, efficient use the working capital and strict management of operating expense.

Quarterly operating expenses which include product development, selling and marketing, general and administrative and depreciation expenses were relatively flat year-over-year, but declined as a percentage of net revenue to 63% from 66% in the prior year period.

On the product front, the fiscal second quarter was a productive period for us as we brought several new products to market. In late September we announced the availability of the latest version of our award winning comprehensive point of sales system at InfoGenesis.

This offering has been available as an on-premise solution or SaaS application for the past 14 years.

InfoGenesis is capable of managing any combination of dining, bar service and retail operations and offers features such as real-time reporting, packages and price fix menus, signature capture and multi language capabilities as well as the ability to interface with a wide range of host systems such as gift card and guest management solutions.

Improvements in this latest release target enablement of our payment gateway, analytics, table management, mobility enhancements, IG Flex enhancements and several other important operational updates. Also released in our second fiscal quarter of 2015 was rGuest Pay.

rGuest Pay is a payment gateway solution for both property management and point-of-sale products, that is a PCI certified for point-to-point encryption of cardholder data. Future value added offerings will include a rewards engine, store value payments, mobile payments and payment analytics.

With this solution, there are no volume tiers or transaction minimums and unlike many other payment gateway solutions, rGuest Pay is offered at a fixed annual per terminal fee, making our solution unique in the industry and offering an attractive value proposition for hospitality operators.

Also in late September, we announced the expansion of our rGuest product offering to include rGuest Seat, a comprehensive Web based and iOS app based table management solution that streamlines operations and enables restaurants to provide superior service.

The application can be bundled with other Agilysys offerings including point-of-sale, analytics, inventory procurement and work force management to round up the delivery at a rich guest experience.

We are confident that rGuest Seat will help restaurants increased bookings, optimize resources and personalize their engagement with guests, resulting in greater satisfaction and increased repeat business. We are pleased to have signed over 100 customers and look forward to continuing the rapid rollout of this exciting product.

For those not familiar with rGuest, it is our next generation platform upon which a new suite of products will be developed and delivered.

These new products including the recently released rGuest Pay, Seat and Analytics will provide enhanced integration in analytics capabilities to further drive business for our customers and revenue for our Company by integrating with all Agilysys and most non-Agilysys brand of products.

rGuest and our next generation property management system application, rGuest Stay enjoyed a very enthusiastic response at high-tech providing us with added confidence in its market potential.

By the end of the calendar year, we plan to have general availability of our property management system rGuest Stay followed shortly thereafter by our next generation point-of-sale application rGuest Buy. rGuest Buy is currently in beta testing and we expect it to go live in the Spring of 2015.

In the meantime, we’re pleased to report that we’ve our first live customer in production on rGuest Stay, reflecting the progress we’re making in bringing this exciting new offering to market.

The entire team and our customers are excited by the launch of these new solutions and we’re confident that the enhanced features and functionality they provide will enable hotels, restaurants, and other hospitality operators to increase efficiency, reduce fraud risk, boost profitability and improve the guest experience.

Further through tight integration with our analytics and mobile solutions, we allow our customers to offer more personalized service to create more lasting connection with guests to drive increased repeat business and greater wallet share. With that, let me turn the call over to our CFO, Janine Seebeck, who will review our second quarter results.

Janine?.

Thanks, Jim, and good morning, everyone. Our second quarter fiscal 2015 revenue of $26.3 million reflects a 6% increase compared to the prior year period.

Underlying the overall revenue growth was a 45% increase in our professional services revenue, mainly due to the timing of customer installation, including two large service projects with significant effort in the second quarter that resulted in approximately $1 million of revenue.

In addition, we have a healthy 7% revenue increase from our support, maintenance, and subscription business, which represents our recurring revenue. Within this service line, SaaS revenue grew at over 14% in the quarter and a 11% year-to-date, while traditional support in the quarter grew 4% over the same quarter a year-ago.

This was offset by a $900,000 decrease or an 11% drop in our product business, primarily of the result of reductions in proprietary product sales in the second quarter of fiscal 2015.

Moving down the income statement, while we were able to maintain a healthy overall gross margin of 63% for the second quarter of fiscal 2015, we did see a decrease in gross margin of 400 basis points, compared to 67% in the prior year quarter.

This was expected as we’ve the impact of amortization expense as some of our newer products were placed into service. Going forward, we expect gross margins to be inline with the first half of fiscal 2015 and remain in the low 60% range.

Operating expenses, which includes product development, selling and marketing, general and administrative and depreciation expense, were flat with the prior year at $16.6 million. Product development expenses decreased $500,000 or 8% in the second quarter of fiscal 2015 compared with the second quarter of fiscal 2014.

It is important to note that although we’ve increased our investment in the product development team, as the drop in the operating expense line item is due to a larger percentage of the development [ph] [team time] being spend on future generation product as we capitalized approximately $3.9 million during the three months ended September 30, 2014 compared with $2.9 in the prior year quarter.

As expected, overall total product development capitalization in the first half of fiscal 2015 was up approximately 34% year-over-year to $7.8 million as we continue to move forward with the development of the rGuest platform.

Going forward, we expect product development expense as a percentage of revenue to be in the mid 20% range through fiscal 2015. Sales and marketing expense decreased $243,000, or 6% in the second quarter of fiscal 2015 compared with the second quarter of fiscal 2014.

General and administrative expenses increased by $1 million or 20% in the quarter, primarily reflecting planned incremental expenses associated with ongoing investments in streamlining and improving our back-office processes, including our enterprise resource planning system replacement project that is expected to yield future additional operating efficiencies.

We expect these efforts to be completed during fiscal ’15 and then our G&A costs will probable at 20% of revenue thereafter. Operating loss in the current quarter was $1.1 million compared to the second quarter of fiscal 2014.

And on an adjusted basis, we reported adjusted operating income of $700,000 in the current quarter, which is also comparable for the second quarter of fiscal 2014.

Adjusted income from continuing operations in the second quarter was $700,000 or $0.03 per diluted share compared with adjusted income from continuing operations of $700,000 million or $0.03 per share last year.

Loss from continuing operations for the quarter of $1.1 million or a loss of $0.05 per diluted share compared to a loss from continuing operations of $1.3 million or a loss of $0.06 per share for the prior year period.

Moving to the balance sheet and cash flow statement, cash and marketable securities as of September 30, 2014 totaled $77.2 million compared to $99.6 million at March 31, 2014.

The decrease in cash reflects the cost for our July exhibition of technology supporting the launch of our rGuest Seat platform, rGuest Seat product as well as our ongoing product development investment.

Net cash used in continuing operations was $9.5 million, compared to net cash used in continuing operations of $7.7 million for the first six months of fiscal 2014. Adjusted for nonrecurring items net adjusted cash used in operations for the first six months of fiscal 2015 was $7 million compared to $6.7 million in the prior year period.

Total deferred revenues, including both paid and unpaid balances increased 23% to $23.9 million at September 30, 2014 compared with $19.5 million at September 30, 2013, which is consistent with our focus on generating increased higher margin proprietary products and subscription services sales.

In terms of our NOLs, we currently have $165 million on our book, for which we can contribute a full valuation allowance and which will help us remain viable for just taxes paid in foreign jurisdictions along with minimal state taxes for the foreseeable future.

With regards to our fiscal 2015 outlook, while the impact of our preference for recurring revenue business and changes in our go-to-market approach will limit headline revenue growth statistics.

We expect to achieve revenue growth inline with the overall industry rate of growth and to generate breakeven to slightly positive adjusted income and adjusted operating income from continuing operations for the full-year, inclusive of our accelerated investments and our sales force and new product development to support the rollout of rGuest.

In closing, the second quarter performance reflects the steady progress we’re making to restore our growth momentum and we remain encouraged about the opportunities ahead of us to further leverage our existing customer base and engage with new customers.

We’re well positioned to sustain long strong growth margins, maintain our prudent financial discipline, support initiative that will drive further operating efficiencies and continue to transition in our sales team and go-to-market strategy.

As we take all of this into account, we remain confident, we’ve taken the steps necessary to position Agilysys for sustainable growth and that we’re managing the Company for the long-term. With that, I’ll turn the call back to Jim before we move to Q&A.

Jim?.

Thank you, Janine. The past few months have been a productive time for us, not only on the operational and product development side, but also in our ability to sign agreements with both existing as well as new customers.

Taking a look at our largest revenue industry, the commercial and tribal gaming market, while new property supply growth has slowed, operators are increasingly depending on business expansion from non-gaming sources. Apart from Las Vegas and the regional markets, the Native American market is a key market for us.

Currently in 28 states this market generated more than $28 billion in gaming revenue in 2013 or about 70% as much as the entire U.S commercial gaming market combined. On the new customer front we were able to continue growing our customer footprint in the gaming industry which currently represents approximately 54% of our total revenues.

In mid-August we announced that the Golden Nugget Lake Charles selected a comprehensive software suite including solutions for property management, event ticketing, golf management, self-service check-in and document management.

We are also pleased that during the quarter Angel of the Winds Casino in Arlington, Washington selected Visual One to help them run their properties. Moving to the hotel, resort and cruise sector, this market represents approximately 21% of our total revenues and offers a significant growth opportunity for us both in the United States and abroad.

Overall this sector remains healthy. In 2013, global lodging industry revenues grew 5% to $163 billion with an average room rate rising approximately 4%. Guests and potential customers are expecting an experience that reflects their unique tastes, preferences and travel habits.

We are also pleased that during the quarter the Mandarin Oriental Hotel in Marrakech and Embassy Suites in Louisville, Kentucky both selected our InfoGenesis solution to support their food and beverage service at the properties. In the cruise sector, passenger growth has averaged 7% annually since 1990.

Cruise operators have seen the need to adequately support the increasing level of personalization and detail required to capture the highest level of guest satisfaction. Royal Caribbean Cruise lines recently selected InfoGenesis for their two newest ships, Quantum of the Seas and Anthem of the Seas.

This brings the total number of Royal Caribbean vessels that use Agilysys software solutions to 34.

The InfoGenesis solution with its scalable architecture and flexible configuration enables complex environments like Royal Caribbean’s two newest ships which we believe are the most technologically advanced ships in the industry to operate at peak efficiency and deliver the five star guest experience for which the company is known.

Looking at the food service management market, a market that represents approximately 15% of our business, we continue to introduce new best-of-breed solutions from automated web based ordering and handheld point of sale tools to online inventory and procurement applications that help food service operators improve accuracy, enhance guest service and increase their bottom line.

At the end of the first quarter we announced an expansion of our technology partnership with the Compass Group North America a leader in food service management and support services to rollout the software as a service base to elevate point of sale solution to additional customer sites nation wide including schools, healthcare facilities and other food service locations Compass serves.

With respect to the restaurant, university, stadium and healthcare sectors, we continue to see new openings and the desire for more sophisticated dining experience led by strong adoption in online ordering and reservations as well as mobile service.

On the new customer front, we announced in September that Farmers Restaurant Group the management and operations company behind the internationally renowned Founding Farmers and Farmers Fishers Bakers restaurant concepts selected our software as a solution version of WMx our workforce management solution to increase efficiency and streamline operations across its restaurants.

In mid-August we announced that the State University of New York at Cobleskill selected our Eatec inventory and procurement system along with our software as a service version of InfoGenesis to streamline its food service operations.

SUNY Cobleskill, part of the State University of New York system, has nine campus dining facilities that serve more than 3,500 meals each day. The combined power of these two products will enable the university to proactively manage its financials, conserve resources, reduce potential losses and provide more streamline service.

InfoGenesis will also integrate fully with the CardSmith campus card transaction processing system used by SUNY Cobleskill resulting in a web based meal plan and campus card processing solution that delivers a streamline customer experience.

In general the restaurant sector is expected to undergo a slight acceleration on the heals of an improving macro environment and though it is too early to call a sustainable trend, we are seeing early signs of an uptick in recent months. We have plans to increase our share revenue in this important industry.

One of the areas that we continue to see significant uptick by customers across just about every sector is a preference for software as a service. We believe there is good reason to continue to ramp our efforts and resources around SaaS given the greater adoption of cloud delivered solutions.

We are expanding and better aligning our sales force to sell and support SaaS subscriptions and though we are in the early stages of this effort, we are very encouraged with the initial progress.

It is important to keep in mind that even though this business should provide higher margin and higher recurring revenues we will give up some of the front end revenue we receive today from traditional on-premise sales. Across the hospitality industry, operators seek to deliver more than a satisfactory transactional experience with their guests.

Operators seek to enhance and manage the entire guest lifecycle over this day or dining experience. We have the vision, capital and solutions to deliver on this mission.

Looking ahead, through careful investment and superior execution, we feel confident in our ability to deliver added capabilities to our customers and drive increased value to our shareholders.

We are growing recurring revenues, securing new customer wins, bringing our next generation products to market and aligning our sales team and Go-To-Market strategy. Agilysys serves healthy underlying market’s that offers a significant market opportunity and a potential to expand across international markets.

With that, let’s open the call for your questions.

Teria?.

(Operator Instructions) And our first question comes from the line of James Lee of Potrero. Your line is now open..

Thank you.

Jim, last quarter you guys talked about sales reorg, and can you give us an update on what's going out there? Is it largely done? When do you expect your sales force to be fully productive?.

I think we have the structure in place and we recently hired new VP of Sales, Jim Walker to lead it. In terms of staffing and headcount we probably are two-thirds full strength right now with several open positions.

And as we’ve indicated, the sectors that we find more important to us to address where we want to increase our share participation would be in the restaurant segment and the core hotel segment..

I think last quarter you guys talked about how you expect your recurring revenue to accelerate in the second half of this year.

Is that still the thinking?.

Yes, it is. I’ll let Janine comment a little more on that..

Janine Seebeck:.

:.

Okay.

And as you start rolling out these new products, when do you expect your total revenues to start to accelerate?.

When you say total revenues, the headline other than just the recurring (multiple speakers), yes. As we increase new sales it’s pretty evident in this particular quarter, well you saw compression in the product sale component, that’s primarily where we recorded our traditional sales.

The product sale component suffered some compression about the same size as the SaaS component, the recurring revenue component grew.

But with the SaaS component being a smaller participant really just slightly less than 10% of our total revenues, it may be a few quarters before the growth and the size of the growth, the magnitude, the quantum, not the percentage but the quantum of growth in the SaaS line will begin to displace or more than cover any compression seen of the product line component of our total revenues..

Actually we just started seeing it first half both next for three years, is that overcoming …?.

Yes. Janine Seebeck Yes.

I’d say by the end of the -- yes, so I’d say by the end of the first half, so approximately this time next year you should start seeing that total revenues would then be growing at or slightly better than the market rate of growth and with acceleration beyond..

And then on cash flow, what's your expectation for a free cash flow this year.

How much more cash do you guys expect to burn before you start breakeven on a free cash flow basis?.

So when I think about the rest of the year, James, I think what's probably and in that kind of right where we are, $77 million to $80 million. So you know how we have the first quarters -- first half of the year is usually user of cash from a key free cash flow perspective.

Second half will kind of generate from operating but obviously continue to spend, we probably have another this year. We’re pretty much running at about $4 million a quarter on capital investment. I think that will continue through this year, and then there will be a decline a little bit into next year.

But I think from a free cash flow perspective we’ll still be a user this year -- net user, and I think we’ll still be a slight user in fiscal ’16, but you’ll see that number come down from where it is today and then you’ll really start to see cash flow generation, a free cash flow pop in our fiscal ’17 as we’ll continue to invest next year in kind of finishing out that rGuest platform..

So did you say the cash in this year is expected to be $70 million to $80 million?.

$77 million to $80 million. Yes..

Okay, so that means you -- and you ended the quarter at about $60 million cash.

So it’s likely to collect about $17 million to $20 million, in the second half?.

So, cash and marketable securities. So we exited this quarter at about $77 million for cash and marketable securities.

At this point I anticipate based upon the cash generation just from the timing of invoices that, that positive that we see in the next two quarters will be offset by the spend basically that’s going out the door for CapEx investment, for product investment and so the net will keep us pretty much where we are today from a free cash flow perspective..

Okay. You’re correct. I looked at the wrong number. Sorry. Thank you..

Yes, it’s all right. Yes..

Thank you. And our next question comes from the line of Phil Bernard of Eilers Research. Your line is now open..

Good morning, guys. Thanks for taking my question..

Good morning, Phil..

Hi, Phil..

Good morning.

How are you doing?.

Great..

Good, good. First question is about your professional services. Congratulations on a big jump there and you already mentioned that it’s related to the implementation of two large product offerings -- two large properties.

How do you expect this to grow moving forward? How should we view that moving forward?.

Yes, on the professional services there’s many companies that transition into a SaaS business. They also evolve their professional services. We continue to see the core professional services support looking like we currently have them today. We currently target large projects. We still target large projects with some in the pipeline.

So we still see professional services being a key component.

But we expect for the second half of ’15 and going into ’16, to grow the offerings of professional services more around business consulting to our customers trying to help them understand the data and use of the data that our systems co-act to not only go out and get more customers, improve the wallet share from the customers who visit, but continue to optimize their own, their business from an expense front.

So we see the product offering or the solution offering around services evolving. But we will continue to have those core implementation configuration and go live support services for our customers..

Just to confirm, I think the million dollars that we called out and discussed, that was very specific to a couple of big deals. I don’t think those are going to continue to recur on an even basis, they may pop from time-to-time. But when I think about run rate business, for the rest of the year it’s probably more at the normalized level.

And then as Jim, said as we transition to this next -- to the more of the consulting, we still have that core business and we may see some of these. But I wouldn’t anticipate that, that type of pop this quarter would continue in Q3, and Q4..

Perfect. Thank you for the clarification there. Another question, this is about your deal. So, I’m curious as your relationship with the operator network that some of these properties belong to, specifically, the Golden Nugget -- I think your deal with Golden Nugget in Lake Charles.

Do you guys currently have relationship with Landry's? If not, do you intend to extend your products to other properties within that group?.

We do have a relationship with Landry’s. We’ve had one for some time and we do look to expand with them as they launch new properties..

Are you able to speak on how many properties you may or what that -- I think there is about six Golden Nuggets? How many properties do you currently offer?.

So, I will have to get that. We’re in a majority, but I would have to get the data. I don’t have that on top of my head..

Got it. So the majority. Perfect, perfect. And I think that will do it for me. Thank you, guys..

Thank you..

Thank you..

Thank you. And at this time I’m showing there are no additional questions in the queue. I would like to turn the call back over to Mr. Jim Dennedy, President and CEO..

Thank you, Teria. Thank you for joining us on the call this morning. We believe Agilysys continues to improve our business. We will continue to focus our resources on the highest available opportunities and our chosen end markets and manage the business for the longer term to deliver sustainable value to our customers and shareholders.

In closing, I want to take this opportunity to thank the very talented and dedicated team at Agilysys. Their work drives our success. I also want to thank our many customers and partners who entrust us with their business. Thank you for joining us today..

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes the program. You may now disconnect. Everyone have a great day..