Good morning, ladies and gentlemen. Welcome to the Agilysys Fiscal 2016 First 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 protection 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 risk 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 within the Securities and Exchange Commission. I'd now like to turn the call over to Mr. Jim Dennedy, President and CEO. Please go ahead, sir.

Thank you, Vince, and good morning, everyone. We appreciate you joining us on the call today to review our fiscal 2016 first 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 noncash or nonrecurring. Reconciliations to GAAP metrics are provided in the financial section of the press release issued earlier today. Starting with a brief overview of our financial results, total net revenue for the first quarter was $27.5 million compared to total net revenue of $23.7 million in the comparable prior year period, representing a 16% increase. As we have highlighted on prior calls, it is important to focus on recurring revenues, which are comprised of support, maintenance and subscription services, which reached a quarterly record of $14.9 million in the fiscal first quarter compared to $13.8 million for the same period in fiscal '15, an 8% improvement over the prior year period. Our subscription revenues increased 23% year-over-year and comprise 15.5% of total recurring revenues compared to 13.6% of total recurring revenues in the first quarter of fiscal 2015. Gross margin was 60% in the fiscal 2016 first quarter compared with 62% in the prior year period. On a sequential basis, gross margin improved by 900 basis points from 51% in the fourth quarter of fiscal 2015. Adjusted EBITDA for the quarter was $1.2 million compared to an adjusted EBITDA of $500,000 in the same period last year. We had a net loss in the fiscal 2016 first quarter of $200,000 or a loss of $0.01 per diluted share, which compares to a net loss of…

Thanks, Jim, and good morning, everyone. Our first quarter fiscal 2016 revenue was $27.5 million, a 16% increase compared to total net revenue of $23.7 million in the comparable prior year period. Looking at revenue in greater detail, products revenue increased $2.8 million or 45.6%, primarily due to increased sales related to our on-premise proprietary solutions, which is consistent with our key initiative to increase market share as we continue on the path of launching our next generation rGuest platform. Professional services remained relatively flat compared to the first quarter of fiscal 2015. Support, maintenance and subscription service revenues increased $1.1 million or 7.8%, largely as a result of our continued focus on selling hosted, perpetual and subscription-based services. We are pleased to see the growth trends in our recurring revenue. Our efforts to focus on this high-margin business led to quarterly record revenue of $14.9 million or 54% of our total net revenue for the first quarter. A vital part of recurring revenues are subscription-based revenues, which increased by 23%, accounting for $2.3 million or 15.5% of recurring revenues compared to a 13.6% of recurring revenues in the year ago period and 8.4% of total revenue compared to 7.9% in the year-ago period. Moving down the income statement, overall gross margins were 60% for the first quarter of fiscal 2016 compared to 62% in the prior year period. The gross margin decline for the fiscal 2016 first quarter was a result of gross margin decreases across support, maintenance and subscription services, as well as professional services, which more than offset improvements in gross profit margins and products. Going forward, we expect fiscal 2016 overall gross margins will be consistent with fiscal 2015 levels, in the high 50% range. Operating expenses, which include product development, selling and marketing, general and…

[Operator Instructions] Our first question comes from Stan Berenshteyn of Sidoti & Company.

So now you've signed up 45 new clients in the quarter, is there any indication that these clients will do follow-on upgrades in the recent future? And also just additional modules or more hardware orders?

Stan, that is the intent. When we signed these customers up, most of them acquired multiple solutions in the initial purchase. So for instance, let's say, an rGuest Stay with an rGuest Pay or an InfoGenesis with a Pay. It is our intent that we would then reapproach these folks to acquire, let's say the analytics product or the Seat product and any other additions. We don't have necessarily pipeline activity that we disclosed at that level, but it is our intent to continue to upsell them on other solutions as the solutions they initially acquired basically are in success with those.

Okay. And along those lines, what drove product sales? Was it replacement cycles by existing clients? Or was it really by new client sales?

Most of the product sales in the first quarter were driven by existing customers and a product refresh cycle or hardware refresh cycle.

And is there a typical time period for product refreshes that you are finding for your clients that -- 5 years, 7 years, what -- how can we think about a typical replacement cycle for your clients?

Not everybody operates on the same refresh cycle. We've have had some operators using hardware for almost 7 years, which is unusual. Most are in the 3- to 5-year replacement cycle. There are some things that are happening in the market, vis-à-vis the Microsoft Windows XP support, that are driving some changes and demand for hardware replacement in order to maintain PCI Compliance with PCI standards that are going to be strengthened all the more in October when EMV comes in. So some of the product sales in this period are driven by some of that activity, and others are sort of a more natural hardware refresh cycle.

Got it. Got it. So hospitality industry, it's obviously very fragmented. But looking at your client base, about half your sales are coming from maintenance, can you give us an understanding of the opportunity you're seeing to sell -- upsell rGuest to the existing client base?

Well, as we indicated through a couple of examples on the call today, when customers have upgraded, let's say, lodging management for Visual One, so the latest release, they are undertaking an evaluation of our payment solution product and many have valued that payment solution product and when they've made the upgrade to the next version of LMS or the next version of Visual One, are also taking the rGuest Pay component with it. When we've been successful in either up-selling or displacing a competitor to the latest version of InfoGenesis, we have the opportunity to not only sell Pay but also Analytics and Seat as well. So those upsells are happening. However, the Pay, Seat and Analytics products are all subscription services-based. None of them are offered as a licensed business model with our customers. So while we're experiencing that success, the incremental revenue that's recognized in any period is going to be smaller than you might anticipate from a product sale.

Right. And what kind of lift to sales are you seeing on a percentage basis as you make these upgrades?

On a total contract value basis, it's easy to express. And we've talked about a -- the customer last period that was an InfoGenesis license customer that migrated to an InfoGenesis subscription arrangement with us and in so doing, also added rGuest Pay and Analyze to their order. They were approximately a $40,000 a year maintenance paying customer. And through the convergence to a subscription and adding 2 new solutions to their portfolio. They're now approximately an $85,000-a-year subscription paying customer. The deal size on a total contract value basis was a 5-year deal. That's fairly typical.

Okay. And now that you're going to market with rGuest platform, can you tell us what competing platforms your clients are considering and maybe why they have opted to go with rGuest?

I think I'm happy to talk about competing solutions. The competitors in the marketplace that we see on a regular basis would be the good friends over at Infor [ph]. We also see the folks at Oracle MICROS, the PAR Springer-Miller HBO product we see on a pretty regular basis. We hear feedback on our products that they have -- it's easier to use. It's easier to deploy. But I think the thing we're hearing most from that installed base to the customers who are making that selection is that, we're an easier company with which to do business, both from engineering services, professional services and corporate services. So it's not just a feature set buy, it's more of a relationship buy between the 2 companies. And that's the level at which I think we're winning, while the product is itself competitive.

Right. And just a final question. I know Janine just touched based on this, talking about product development and that R&D will probably be in the mid-20% range as a percentage of sales. I guess, I just want to know how we should go about looking at this with rGuest already being developed for the most part? Are you guys targeting a certain amount of spend and, therefore, it comes out to be 20% of sales? Or do we expect the absolute figure to scale up and kind of remained 20% of sales as sales increase?

Stan, for fiscal '16, I think what we're talking through is that it's about a 25% of sales. Obviously, as we move towards the rGuest platform, we're still managing end market in rGuest. I think as we get to better scale, you're going to see the dollar start to kind of level out, but I think that it's, this year, still that investment to get you to that 25%, and then you'll start to see it trend down as a percentage of revenue as we look into the out periods.

[Operator Instructions] Our next question comes from Phil Bernard of Eilers Research.

One more question on the 45 new customers you signed up. Can you talk a bit about the distribution of sales between the product sales, license versus the subscription?

We can. I've got some numbers here in front of me. So I want to sort of run through it in a little bit granular detail. Of the 45 new customers, 23 of those signed on as subscription services and 22 signed on as licensed customers of the new and the 45.

Okay. Great. With -- just to get an idea of what type of systems you're replacing, at the Canary you mentioned that you did replace the system. Are you able to comment on what system you're able to replace, specifically? I know that's kind of an extreme granularity there, I'm sorry.

Yes. We prefer not to discuss the systems we're replacing. When we talk to our customers about the use of their names in our earnings release, we're very delicate to understand it. We just want to say that they selected us and that's about it. We don't want to attribute the reasons for why and we want to be respectful of our customers' wishes on that basis. But we have indicated to them that we would say it was a competitive replacement. We're just not going to say who.

Got it. No, no, I understand that. With respect to the bump in product sales, I thought I heard mentioned in the call that some of that may be related to signing up new clients on the rGuest platform. Is there an associated product sales that goes along with an implemented or initial implementation of the rGuest platform?

So from a product perspective, basically, it's twofold, right? So for example, when someone buys rGuest Pay there is a hardware component. So there is some product revenue associated with that. But what we're also seeing is what you're seeing is more multi product sales. So you're seeing people buying a whole solution, where they're buying InfoGenesis and rGuest Pay, right? So that we're getting both components as a combined deal on that multiple sale deal.

Perfect. And, let's see. So that's enough from the topline. When it comes to a little bit about cash flow, how do you expect to see -- so you mentioned that it should be positive by fiscal year-end '16. How do you expect to see software expenditures going forward, CapEx?

Sure. So from a CapEx prospective, we've obviously said we're still in an investment cycle this year. And I think, on previous calls, we've indicated, obviously, similar levels to last year, which is in that $50 million to $20 million range, which is driving our cash. We're expecting that that's going to go down more towards normalized rates in fiscal '17. So that 5% type of -- 5% to 7% type of revenue, to be able to kind of bring that back to normalized levels. And then, obviously, offsetting that will be the EBITDA or cash flow generation we're expecting from the business, with the continued growth in top line and continued management of our operating expenses to help us get to free cash flow positive.

Okay, got it. Got it. And then a general product question. You guys are continually updating the software, which is normal. Do your customers pay for those version updates or is that something that they just plug-in and click update and they get the newest version?

If they are current on their maintenance or they are current as a subscriber, they have entitlements to the next release or the next version update. What will typically happen when that occurs is some level of professional services alongside that order for implementation, training, configuration services and maybe some modest hardware upgrades that are also attendant to that upgrade cycle of that version upgrade. As we've noted on the call, when they have upgraded to the latest release, whether it's Visual One, InfoGenesis or LMS, the latest releases also contain key components of integration that attach to the rGuest platform. And it's at that time we have the opportunity to introduce to that customer, the rGuest platform, advantages whether it's Pay, Seat, Analyze or in some cases we tried to introduce them to the Stay product in an effort to at least trial it at a property or 2 where they might be a traditional CMS customer of ours. So that's usually what happens in the upgrade cycle.

Got it. Got it. A bit more than just an iOS update for your iPhone, if you will?

Exactly. We try to sell you some more apps.

We do have a follow-up from Mr. Stan Berenshteyn of Sidoti & Company.

Just 2 follow-up questions. The first is, now it appears that services gross margin has still not recovered compared to the prior year's quarter. Are there still project overruns that you guys are working through? How do we think about this?

Sure. So, Stan, the margins in this quarter are actually back to more normalized rates. The projects that we discussed in Q4 are on track so we're not seeing any more overruns. Q1 of last year was slightly higher than normal run rates due to some custom dev projects that were included. So it is back to where we anticipated it to be.

Right. Right. And I guess, last question is now how should we look about -- or how should we consider product sales for the remainder of the year? Is there are any guidance you can give in that regard?

We don't guide on components of revenue. We have been trying to guide on the composite revenue picture that Janine provided earlier. I think that the way we're emphasizing the selling motion in the business is to prefer subscription to license-based sales, which will drive higher on the recurring revenue line than it would on a product line. And that's the way I think to think about and model the business.

At this time, I'd like to turn the call back to Mr. Jim Dennedy for any closing remarks.

Thank you, Vince. Thank you for your interest and for your investment in our company. We would -- 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 longer-term to deliver sustainable value to our customers and shareholders. 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. I look forward to updating you on our progress on our fiscal 2016 second quarter call. Thank you.

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