Agilysys, Inc. (AGYS) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2018 Fourth Quarter Conference Call. [Operator Instructions]. As a reminder, today's conference may be recorded. I would now like to turn the call over to Norberto Aja, Investor Relations. Sir, you may begin.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on the Agilysys Fiscal 2018 Fourth Quarter Conference Call. We will get started in just a minute with management's comments. But before doing so, let me read the safe harbor language. Today's conference call contains forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as anticipate, intend, plan, goal, believe, estimate, expect, future, likely, may, should, will and other similar references to future periods. Examples of forward-looking statements include, among others, our guidance relating to revenue, adjusted earnings from operations and cash and cash equivalent balance and statements we make regarding continuing sales momentum, our ability to achieve revenue and profitability growth, greater innovation, product development velocity and improvements in the financial results and shareholder value. Forward-looking statements are neither historical facts nor assurance of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial conditions to differ materially from those indicated in the forward-looking statements today include, among others, our ability to achieve operational efficiencies and meet customer demand for products and solutions and the risks described in today's news announcement and in the company's filings with the SEC, including the company's reports on Form 10-K and Form 10-Q. Forward-looking statement made by us in today's conference call is based solely on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements that may be made from time-to-time, whether as a result of new information, future developments or otherwise. Today's call and webcast will include non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure, calculated and presented in accordance with GAAP, can be found in today's press release as well as in the company's website. With that, I would now like to turn the call over to Mr. Ramesh Srinivasan, President and Chief Executive Officer of Agilysys. Ramesh, please go ahead.

Thank you, Norberto. Good afternoon and good evening, everyone. Thank you for joining us on the call today to review our fiscal 2018 fourth quarter results, our future outlook, and expectation. Joining me on the call today is Tony Pritchett, our Chief Financial Officer. Taking a quick look at our financial results. Revenue as compared to last fiscal year's fourth quarter increased 4.8% to $32.1 million, leading to a GAAP net loss of $0.2 million or a loss of $0.01 per share compared to a loss of $5.3 million or $0.23 per share in Q4 of fiscal 2017. This improvement in GAAP loss included a onetime noncash gain of approximately $2 million related to changes in our tax provision as a result of the recently passed Tax Act. This brought our full year fiscal 2018 revenue to $127.4 million, in line with full year fiscal 2017 revenue, and led to a GAAP net loss of $8.4 million or $0.37 per share compared to a GAAP net loss of $11.7 million or $0.52 per share for full year fiscal 2017. The total annual onetime noncash gain included in our GAAP net loss related to adjustments from the Tax Act was $3.3 million revenue. Revenue for the fourth quarter was driven by a marked increase in our SaaS subscription and annual maintenance recurring revenue, which rose to a quarterly record of $18.1 million, 11% increase over the comparable quarter last fiscal year. This year-over-year quarterly increase in recurring revenue included a 32% increase in SaaS subscription revenue. Our overall recurring revenue base grew by $5.8 million in fiscal 2018 compared to fiscal 2017, our largest single year increase since fiscal 2014 when we transformed our business into a pure-play hospitality industry software provider that we are today. This recurring revenue increase during fiscal 2018 included a 35% increase in full year SaaS subscription revenue compared to fiscal 2017. While the overall fiscal 2018 revenue level was flat compared to fiscal 2017, we achieved a much better revenue mix and higher margins, with higher-margin SaaS and other recurring revenue contributions offsetting the decline in low-margin hardware revenue. With our recurring revenue currently at an all-time high approximately 56% of overall revenue and highly predictable services revenue accounting for approximately 19% of overall revenue, our revenue base continues to become increasingly more predictable. In addition, without the impact of reselling low-margin hardware servers, which is mostly out of our revenue, our revenue mix now is significantly more favorable for achieving profitable growth moving forward. As we have continued to work through our revenue mix changes, our increased business momentum in the marketplace is not yet evident in our top line results. Our various business improvements are more evident in our EBITDA and other profitability metrics. Fourth quarter adjusted EBITDA gain was $3.1 million compared to an adjusted EBITDA loss of $0.2 million in the prior fiscal year period. Our overall expense levels as a percentage of revenue were lower in Q4 fiscal 2018 compared to the same period last year. We are pleased that we achieved positive $0.6 million adjusted earnings from operations, or AOE as we also refer to this metric. We are pleased that we achieved positive $0.6 million AOE in the fiscal fourth quarter, our first such positive AOE quarter since we transformed the company in fiscal 2014. The $4.3 million year-over-year quarterly improvement in AOE from negative $3.8 million in Q4 fiscal '17 to a positive $0.6 million in Q4 of fiscal 2018 as well as the $5.6 million or approximately 48% full year AOE improvement on a flat revenue year are good proof points that the various strategic initiatives we've been working on for the past year or so are positioning Agilysys well for sustainable and consistent medium- and long-term profitable growth. As we mentioned before, adjusted earnings from operations is essentially adjusted EBITDA minus capital spend, or stated differently, a measure of our overall revenue minus overall expenses, whether they are capitalized or not, minus capital expenditure and is a comprehensive measure of our business operations performance. Aside from certain exceptional onetime cash expenditure items, AOE is also a good proxy for free cash flow over a full fiscal year period. Our free cash flow tends to be cyclical on a quarterly basis, better in the latter half of the fiscal year compared to quarters one and two due to the invoicing timing of a significant portion of our annual maintenance billing happening during the second half of the fiscal year. The adjusted earnings from operations measure normalizes free cash flow uniformly across the year. Fiscal 2018 was a pivotal year for Agilysys. It was a time of enormous transformation that has positioned the company for medium- and long-term sustainable profitable growth. It was a year in which significant changes were made across just about every aspect of our business. As we have expressed before, our intent and conviction is driven by our belief that we can achieve significant value creation by leveraging our world-class point-of-sale and lodging management software solutions already well established in the marketplace by growing our product development, enhancement, and innovation scale and improving our customer service levels in various global markets. Along those lines, we made consistent good progress on several key priorities throughout fiscal 2018. Let's start with leadership. We've now established and accomplished cohesive management team, all passionately focused on executing our growth plans. We've been fortunate to attract a group of talented leaders during the past few months to help us drive future success. This is a testament to the significant opportunity that these leaders see in our business and the positive impact they feel they can make. Regarding R&D, Prabuddha Biswas joined us recently as our CTO based in our Bellevue, Seattle office. He joined us from Alert Logic, one of the nation's leading cloud security providers, where he led the transformation of their core security incident detection engine to leverage machine learning and heuristics and led the effort to revamp their tools used to analyze security incidents. Prabuddha, or PB as he is known, has already made his mark at our Bellevue R&D centers and across the organization, having taken control of the rGuest technology team and leading the oversight of our technology initiatives and strategy. Prabuddha came to us with a lot of positive prior experience, working with offshore development centers as well. In just a few weeks, he has already started to make a noticeable impact in increasing our product development velocity. During the past 12 months, we have more than doubled our R&D resources to enable far greater innovation and product development velocity without any increase in R&D spend as a percentage of revenue. In fact, our R&D spend as a percentage of revenue and sales bookings, even including capitalized software development cost, has declined during the past couple of quarters, proving that we can do more, grow and do so profitably. With more than 450 employees in R&D now, well more than half our employee base, we are now a lot more cost effective and quicker with our product deliverables. And that is clearly helping us serve the various markets we operate in a lot better. We've made good progress on a number of long-pending product enhancements, which were required to tap the enormous growth potential we have in APAC and EMEA. We started, completed and brought more new software added-value modules to the marketplace during the past six months than we did in over three years before. The India Development Center has grown to more than 300 personnel and should be close to the current capacity level of 3-3-0, 330, during the next few weeks. As expected, they're gaining knowledge and command of our products with every passing week and represent a significant competitive advantage for us. Regarding sales, our sales momentum has picked up during the past few months, and it is only a matter of time before that increased momentum starts reflecting in top line growth. Don DeMarinis joined Agilysys earlier this calendar year as Head of Sales Americas. Don brings with him extensive experience in hospitality technology sales, having previously led sales at MICROS, both before and after the Oracle acquisition. During the past few months, we've implemented a lot more discipline, granular and process-oriented sales structure, a well-organized sales forecasting process, reinforced with a significantly higher level of accountability across all departments. All Agilysys departments are now pulling towards the customers and working in lockstep with our sales and services teams. Regarding marketing, Heather Foster, our Head of Marketing, joined us more than a month ago. This is a new position at Agilysys based in our Alpharetta, Atlanta office, that's already become a vital part of our overall business as we become more data-driven, analytical and strategic in our marketing initiatives and in how we leverage the value proposition of our solutions. Heather brings to Agilysys more than 20 years of marketing vision and execution experience across product marketing, go-to-market, content marketing, public relations, demand generation and use of social media at fast-growing technology companies. We've made good recent progress in enhancing our marketing efforts with the new analytical approach that we expect will lead to increased effectiveness and better lead generation. We are also heavily engaged in crafting our marketing messaging to better position Agilysys with customers and to ramp up our lead-generation activities. Last and definitely not the least, we are making good positive strides in transforming our culture into an obsessively customer-focused organization that is engineering- and innovation-driven and dedicated to supporting all our products across all the markets we serve with world-class zeal, excellence in quality standards, with complete commitment and relentless focus. I'm truly pleased to have such a talented, passionate and focused management team in place to enact change and better align our resources with the opportunities we have in front of us to transform Agilysys into a growth-oriented, SaaS-driven, innovative technology solutions company. The opportunities are obviously there for us to act on. Based on my and all our frequent interactions with many of our customers, we know the growing hospitality marketplace is eager for Agilysys to do well. Now looking forward. With respect to fiscal 2019, we expect to build our increasing current momentum and have a successful year with growing top line and improving adjusted earnings from operations, driven by multiple opportunities from certain large strategic accounts, of growing SaaS subscriptions and annual maintenance recurring revenue base, international expansion, increased selling to our large customer base and expanded availability of additional software modules. In accordance with the guidance we provided earlier this afternoon in our earnings press release, we expect to achieve approximately 10% full year top line revenue growth in fiscal 2019 compared to the fiscal 2018 revenue level of $127 million. In addition, we expect our improving operational efficiency will help us improve our full year adjusted earnings from operations by approximately $4 million to $6 million in fiscal 2019 compared to fiscal 2018 where our AOE loss was approximately $6 million. That is at the higher end of our AOE guidance range, we expect to be at or close to breakeven AOE for full year fiscal 2019. One note of caution, though. While we do expect Q1 fiscal 2019, our current quarter, to be our third consecutive sequential top line revenue growth quarter, it'll be a tough comparison to Q1 fiscal 2018 where we had the benefit of some nonrecurring onetime product revenue. In addition, we expect Q1 to be quite possibly our only quarter in fiscal 2019 with a negative AOE. Q1 just happens to be expense-heavy for us, with a number of cost events happening during the quarter. While being negative, AOE in Q1 fiscal 2019 will still be a significant improvement over the comparable Q1 period in fiscal 2018. We are starting fiscal 2019 with a strong backlog and increased confidence in our ability to improve sales levels. We therefore expect positive AOE results during the remaining three quarters of fiscal 2019, Q2, Q3 and Q4. We will continue to be prudent and disciplined stewards of our balance sheet. From the fiscal 2018 year-end balance of $39.9 million, our cash and cash equivalents are expected to decline by approximately $3 million to $5 million during fiscal 2019, marking a significant improvement from the $9 million decrease in fiscal 2018 and the double-digit millions of cash loss each year since our balance sheet peak in fiscal 2014. Our working capital cash cycles are typically not favorable to us in Q1 and Q2 every fiscal year. We expect our cash balance to drop to around 30, 3-0, $30 million at the end of the first half of the fiscal year, that is after Q1 and Q2, before improving and ending in the mid- to high 30s at the end of the fiscal year. All things considered, we are pleased with our current improving position in the marketplace. We are happy with what we accomplished in fiscal 2018. A number of transformative improvements and tangible progress are taking place. We especially like our momentum in sales bookings closed during the past few months. We are now well poised to be a sought-out employer of world-class talent, a responsive, fast-moving reliable partner for our customers and vendors and a growing profitable hospitality software solutions provider that unlocks considerable value for our shareholders. With that, I will now turn the call over to Tony Pritchett to review our financial results and future outlook. Tony?

Thank you, Ramesh. To echo Ramesh's comments, we are pleased with the direction we're headed and more confident than ever in our ability to grow top line, drive back growth down to the bottom line and create shareholder value. In the fourth quarter of fiscal 2018 and throughout the fiscal year, we made significant progress on our key financial priorities, including lowering our overall cost as a percentage of revenue and positioning the company for growth through all of the strategic initiatives Ramesh just explained. Taking a look at our financial results, beginning with our income statement. Fourth quarter fiscal 2018 revenue was $32.1 million, a 4.8% increase from total net revenue of $30.6 million in the comparable prior year period. The increase in top line revenue largely reflects an 11.4% increase in recurring revenue to $18.1 million, offsetting a slight decline in product and professional services revenues. On an annual basis, we are happy with our $5.8 million increase in recurring revenue. The decline in our product revenue was mostly due to lower volume with third-party products. This shift in the revenue mix is important to keep in mind. Total recurring revenue represented 56.4% of total net revenues compared to 53% of total net revenues in the fourth quarter of fiscal 2017. We are pleased with the all-time high quarterly recurring revenue this quarter and the fact that total revenue rose sequentially for the second consecutive quarter. We are also pleased with our robust SaaS-based revenue growth, which grew at 32% for the fourth quarter of fiscal 2018 and 35% for the full fiscal year. SaaS revenues comprised around 30% of total recurring revenues compared to 25% of total recurring revenues in the fourth quarter of fiscal 2017. Product revenue and professional services revenue were both down slightly compared to fiscal 2017's fourth quarter, due mainly to a lower backlog of hardware refreshes in fiscal 2018. Ramesh touched on our recent success with bookings and we expect sales momentum will continue in fiscal 2019, leading to the top line revenue growth. We also expect total recurring revenue to continue to grow and our SaaS revenue growth will continue to outpace the rate of total recurring revenue growth, both of which are important measures or progress for us. With regard to endpoints, we currently service about 260,000 rooms and have approximately 46,000 terminal endpoints or 5% and 17% increase, respectively, compared to Q4 of last year. Total revenue related to our rGuest platform comprised approximately 7% of total fiscal 2018 fourth quarter revenue. Moving down the income statement. Cost of goods sold increased by 1.2% or $0.2 million in the fourth quarter versus the prior year period, mainly as a result of increased amortization of our developed technology, with certain versions going into service during the fiscal year and beginning their amortization period. I would like to point out that cost of goods sold decreased 4.1% for support, maintenance and subscription services in spite of the revenue growth, reflecting the success we are having with our cost initiatives. This led to a total gross profit increase of $1.3 million or 8.2% from the fourth quarter of fiscal 2017. Gross profit margin improved 160 basis points to 52.2% compared to 50.6% in the fourth quarter of fiscal 2017. Going forward, for fiscal year 2019, we expect growth in the high-margin recurring revenue stream to offset the impact of increasing amortization related to developed technology. And we expect gross profit margins to continue in this range. Excluding the impact of software amortization from cost of goods sold, gross margin would have been 60.5% compared to 58.1%, a measure we're internally focused on, as we feel it reflects the improved quality of our revenue and ability to control cost. Taking a closer look. Products gross profit decreased $0.6 million, with gross profit margin decreasing 17.9%, primarily as a result of higher amortization of developed technology. Support, maintenance and subscription services gross profit increased $2 million, leading to a total gross margin of 77.4% on the back of the scalable nature of our infrastructure, supporting and hosting customers and the positive impact of the changes mentioned earlier. Professional services gross profit decreased by $0.1 million on the back of the lower professional services revenue, with gross profit margin decreasing to 21.9%, both compared to Q4 of fiscal 2017. However, consistent with the trend pointed out during our Q3 call, we are now realizing the benefits of restructuring our professional services workforce and the teams responsible for named customer accounts, as evidenced by our gross profit increase of nearly $100,000 sequentially compared to Q3 of this fiscal year. Looking at operating expenses. Excluding the charges for legal settlements and restructuring, severance and other charges, the fourth quarter saw a 10.7% decrease in operating expenses to $18.4 million compared to $20.6 million in the prior year period when we began executing on our operational plan. Product development expenses decreased by $1.2 million or 14% compared to fiscal Q4 of last year, despite the doubling of our engineering development capacity. Sales and marketing expenses decreased $0.6 million or 12.2% compared to fiscal Q4 of last year, while general and administrative expenses decreased $0.6 million or 10.2% compared to fiscal Q4 of last year. To reiterate what Ramesh said, our overall expense levels as a percentage of revenue were lower in Q4 fiscal 2018 compared to the same period last year. Our expectation in the future is that we will grow revenue at a faster rate than cost increases. We are pleased with our ability to leverage the powerful operating structure of the company and to increase the utilization of our resources and expect to be able to continue leveraging our cost and operating structure, while we look to meaningfully grow top line revenue. Our operating loss of $2.2 million for the fourth quarter favorably compares to an operating loss of $5.2 million for the fourth quarter of fiscal 2017. Net loss for the fourth quarter was $0.2 million or $0.01 per diluted share, which included a noncash income tax benefit related to the new Tax Act. This compared to a net loss of $5.3 million or $0.23 per diluted share in the fourth quarter of fiscal 2017. Moving to the balance sheet and cash flow statement. Cash and marketable securities as of March 31, 2018, was $39.9 million compared to $49.3 million at March 31, 2017. And as we mentioned on our last call, we expect it to end this fiscal year with a cash balance at or slightly above $38.5 million. So we are pleased with our ability to manage our liquidity as we continue to invest in the business, including in the development of proprietary software and execute on our initiatives. We expect fiscal 2019 year-end cash and cash equivalents to reflect a decline of approximately $3 million to $5 million from the fiscal 2018 year-end balance of $39.9 million, a significant improvement from the -- over $9 million decline from fiscal 2018. In terms of our NOLs, we continue to carry approximately $200 million of NOL carryforwards, with a full valuation allowance on our books that will help us remain liable for taxes paid only in certain foreign jurisdictions along with minimal state taxes for the foreseeable future. Our current NOLs expire between fiscal years 2031 and 2038. It is important to note that the tax law in place stipulates that all preexisting NOLs prior to our fiscal 2019 can be utilized at 100% and are not subject to the 80% limit that any future created NOLs will be subject to. As it relates to our free cash flow, we expect the free cash flow and adjusted earnings from operations to closely mirror each other on an annual basis, with the exception of any onetime cash payments like restructuring. And as a reminder, free cash flow tends to lag adjusted earnings from operations during the first half of most fiscal years and then gets ahead of it during the second half, reflecting the timing of our annual recurring revenue, billing and collection cycles. Looking at adjusted earnings from operations. We posted a $0.6 million gain for the fourth quarter of fiscal 2018 compared to a loss of $3.8 million in the prior year period. And on an annual basis, AOE improved to a $6 million loss compared to an $11.6 million loss in fiscal 2017. I'm pleased with our performance, given that even on flat revenue, our AOE improved markedly compared to fiscal 2017. We essentially cut our AOE loss in half, reflecting the positive impact that our operational initiatives are having on the cost structure of our company. Finally, taking a look at our guidance. Our initial revenue forecast for fiscal 2019 full year calls for revenue growth of approximately 10% from fiscal 2018 revenue of $127.4 million. As noted, we are starting fiscal 2019 with a strong backlog and increased confidence in our ability to improve sales levels, especially with the new management team in place. In addition, we continue to forecast strong quarterly SaaS growth, even as that base of revenue continues to get larger. Regarding adjusted earnings from operations, our guidance is for $4 million to $6 million of improvement in fiscal 2019 from the loss of approximately $6 million in fiscal 2018. The higher end of that range would put us right around breakeven AOE. With that, I'll turn the call back over to the operator. Chelsey?

[Operator Instructions]. And our first question will come from Allen Klee with Maxim Group.

I had three questions. The first one is, can you talk a little about the timeline for rolling out new pieces of the rGuest offerings and plans to add any new services or features that you believe can improve your competitive position? The second question is, if you could expand on opportunities to grow with larger hotels internationally and how to think about the impact that, that can have on the overall revenue growth and potential upside to your guidance? And then finally, just some comments on the overall competitive environment and if it's changed in any way.

Allen, thank you. Let me just take those questions one-by-one. As far as the rGuest timeline is concerned, rGuest Buy -- the bookings for rGuest Buy is really beginning to pick up and that product is doing well right now, and we're continuing to add more features and more enhancements to that product. In terms of rGuest Stay hitting the stride, I think, like we told you before, we are a few quarters away from that before rGuest Stay really starts contributing to our revenue growth. In terms of new services and new modules and features, we are just about gone live now with a new Web booking engine that's gone actually live with the customer and we are beginning -- that's an additional software module that we're beginning to sell now. We will also be bringing in a matter of weeks a new kiosk product that's an rGuest Express Kiosk that enables customers to help themselves more and more customer guest-facing functionality. So that new module is coming to the marketplace. We are working on a whole lot of mobile applications that can be attached to our InfoGenesis product. And we're also working on a new golf and spa module that will be additions to all our property management systems, LMS, V One and Stay. So the pace at which we are now doing software modules, the newer ones that are higher margin by nature has really picked up, and they are all beginning to hit the marketplace now one-by-one. So in terms of time line, rGuest Buy is hitting its stride right now. rGuest Stay is a few quarters away. But a few more new rGuest modules are beginning to hit the marketplace now in a matter of weeks. Number two, in terms of opportunities of larger hotels, the upside that we expect from the larger hotels, we accounted for that when we said that our revenue will grow up by 10% or so. We are being conservative with how we estimate the larger hotel will expand the business with us. There was a significant pickup in the last couple of months in terms of competitive replacements. We had our best competitive replacement month in March and our best ever quarter in Q4, and a lot of that came from the larger hotels. So we are assuming that the pace at which the larger hotels are expanding their business with us will continue. The upside will come in adding a couple of more of the larger hotels to that list, and the upside will also come from how well we expand internationally with the larger hotels. So with respect to larger hotels, we expect the expansion to come from Asia and EMEA, and that will contribute to the upside. Now a couple of comments on -- competitive environment hasn't changed much, Allen, right? Our competitive environment still remains very favorable to us. We are perfectly positioned. We are the right-size company, not too big, not too small. We are big enough to provide the kind of stability that customers require and small enough to have that customer service focus that is generally lacking in this industry. So I still consider our competitive positioning quite an advantage to us. And I will tell you, it definitely feels like the rate at which our product development velocity is moving along, especially in the last three, four months, is much better than what our competition is doing in terms of improving their product set. So I would say our products and customer service are getting faster -- are getting better, faster than what our competitors are doing.

[Operator Instructions]. Our next question will come from Phil Bernard with Eilers & Krejcik.

Congrats on a decent period and the significant margin improvement. And just one question today. You mentioned one opportunity to grow the top line and the increasing sales within your customer base. Just wonder if you could maybe provide a little more detail there on maybe what percentage of your current customers have a single product and maybe how that has changed over the last year and maybe your goal going forward over the next year.

Yes. Phil, this is Tony. Thanks for listening in. So with respect to our current customers, we did feel like there's a significant opportunity there to help grow our revenue and help grow our top line. We still have just over 50% of our customers with one of our products. So that provides a great opportunity for us to go after. There's lot of opportunity to sell rGuest Pay into those customers as well as just all of our other complementary products. So Don, when he came onboard, he's been here for about, what, four months now. That's one of his big initiatives, and we've also got several of our product teams working on initiatives to kind of drive sales into our existing customers with some of our new products that Ramesh mentioned earlier.

Our next question comes from John Dumont with Archon Capital.

Congrats on the strong SaaS revenue growth. It's great to see the continued growth there and as well as just the increased profitability. A couple of questions here. On the sales strategy, we're curious, as part of your strategy there, are you going back to your current customers and trying to move them over to your SaaS offerings from your on-premise customers? And then as a follow-up to that, we're also curious just have you seen a change in just how new customers are consuming the software? Is there a shift between SaaS and on-premise? Or just curious if you could give some color there.

Yes, sure. Thanks, John. In terms of going to our current customers, I would say the chief highlight, the main highlight there is that we are going to them with a lot more software offerings, right? Following up on Phil's question, our position with our current customers, where about half our customers use only one of our products, hasn't changed much, because a lot of the innovation, a lot of the speeding up of our product development is beginning to hit the marketplace now in the last few months or so. So we just have a lot more software modules to offer to our current customers now, and that's what we're focused on. And most of the demand is for SaaS, right? Compared to on-premise versus SaaS, SaaS is where the general marketplace is. So that is going to continue to drive our SaaS revenue forward. And wherever possible, we do offer customers the option of switching from annual maintenance model to a SaaS model. When it is good for them and it is good for us, it really works out well. But in terms of selling more to our current customer base, the major driver is coming from the fact that there is just a lot more increased pace of innovation and we have a lot more new software modules to offer to them. And also, the product that they're already licensed have improved a lot in the last few months. So that is also beginning to drive our services revenue and customers wanting to upgrade to our newer versions.

Okay. And a couple of follow-ups if you don't mind. On the development side, I know you guys have spent the whole last year really focusing on upgrading the development and the speed of innovation there. And you kind of touched on this a little bit earlier. But curious, do you think you're where you need to be as far as just your development speed, or is there more working to do there? And just curious if you could also provide just a little bit of color in terms of just to have a difference that the -- all the increased capacities in India has put on?

Yes, the increased capacity in India has made a big difference during the last few months. We're just getting a lot more done not only in terms of new requirements that customers have, but also we're acting quicker to all kinds of customer requirements. So that's definitely making a difference, and they're especially making a difference in India and Asia. We're beginning to support those markets a lot better. Now in terms of your first part of your question, it's a matter of continuous improvement, John. I mean, there's never a period where we're going to say we are completely satisfied. We are in a far better position now than we were 12 months ago. We are multiple times more productive now than we were 12 months ago. But it's a continuous improvement process. India can still get better. Our U.S. R&D teams can still get better. We're continuing to attract more talent into our R&D offices. And it's a continuous improvement process. But what I can tell you is we are far better off today than we were six months ago, 12 months ago, and we will continue to improve in the next 3 to 6 months as well. It's a continuous improvement, John.

Great. And then are you planning on adding significant headcount on the R&D side or -- as far as headcount, or are you close to where you want to be there?

We're close to where we want to be now, but that will be driven by revenue growth. Like Tony said in his comments, our plan is to grow revenue at a faster pace than we grow cost. And that applies to R&D as much as it applies to sales and marketing and G&A. So we will carefully continue to expand R&D as our revenue continues to grow as well. And at current level of revenue, we are almost there where we need to be.

And our next question comes from Tucker Golden with Solas.

Ramesh, Tony, Norberto, congratulations on continued progress and look forward to more. I was curious on the India Development Center. What's the current headcount and how far are you towards being fully staffed up there?

Yes, the current headcount is just about at 300 or less, and our capacity there is 330. So we should be building up to 330 in a matter of weeks. We've made a bunch of offers and they are about to join. So they are about to join us. So I would say the current headcount is 300. We should be at our capacity of 330 in a matter of a few weeks.

That's great. I know that's a big piece of the puzzle. And I know you've talked about one -- in addition to hotels, one other big growth opportunity is being international, specifically Asia. Just any update there, any more granularity into where you see opportunity and when you think you might be able to begin to address it?

We are beginning to address it already, Tucker. International growth, we saw that happening in Q4, where EMEA had an excellent quarter as far as sales booking goes. And our product sets are beginning to deliver the enhancements that those markets require. So I expect, in the subsequent quarters, international to become an increasing contributor. But that's not the only growth factor we're relying on. Like we said, 50% of our customers have only one product. Our selling to our current customers has also increased, because we have more to offer them. The gaming vertical is doing quite well. So we expect considerable growth there, because generally gaming, which currently constitutes about 50% of our revenue, that industry is doing very well. So there's increased customer demand there. So we expect that to drive our revenue as well. And rGuest Buy as a product is a second offering now we have to the broad-based food services management market. So there, we were a very little dependent on one big customer. Now there are more customers there, who are talking to us with respect to InfoGenesis and Buy. And so there are a lot of areas of growth that we are currently addressing. And all of them, I think, will constitute our growth in this coming next two, three quarters. International is just one piece of the puzzle.

That's great. I know you're not guiding out this far today, but as you look into fiscal 2020, do you hope to accelerate on beyond 10% sales growth?

Yes. Most definitely, yes. Yes. Because we like our momentum now and as we continue to improve our products, we continue to improve our people strength and talent level, we are seeing -- we are being -- we're very encouraged with the improvements we are seeing now. And I think that momentum will only continue to increase. I do expect 2020 to be a high double-digit growth year, between 10% and 20%. That's what I...

Not the 90s. That's great. It's clear you're laying all the groundwork and making a lot of progress. Just switching gears a little bit, in terms of next year's guidance, Tony, can you give us some color on CapEx and capitalized software development costs?

Yes. So if you look at our cash flow statement and you look at those two numbers for capitalized PP&E and capitalized software development costs, looking into next year, those numbers will probably come down a bit. We ramped up the India Center this year. That required a descent amount of capitalized PP&E. So that number will come down a bit, not a whole lot, though, because we do have other initiatives to invest in. And then the capitalized software development costs will probably tick down a little bit just as we continue to realize the benefits of our transition from the contractors that we used to have even into early fiscal '18 that are now pretty much gone and everything has kind of completely transitioned to our own internal resources.

Okay. And so I'm guessing adjusted EBITDA might be just up very modestly if we're looking at adjusted operating earnings being kind of $4 million or $6 million better with lower CapEx, lower capitalized software development cost. Any line items you can highlight on the income statement where there will be kind of incremental investment or are gross margin still going to be kind of in that 50%, 51% range?

We think gross margin will probably stay pretty close to where it is now, kind of as we ended the fiscal year. As you look down the P&L, all of our costs, we expect to stay about the same range as a percentage of revenue. There is still some ramping to go with respect to the engineering teams from where we are today. But overall, as a percentage of revenue on an annual basis, we're pretty close to where we're expecting it to be. Keep in mind, there's fluctuations in the quarter. Q1, we've got some additional expenses that come in for certain trade shows and professional fees for things like our annual audit, stuff like that. So it's cyclical to some extent. Some quarters are heavier than others. But on an annual basis, the percentage of revenue should be pretty consistent with where we are now.

Okay. Makes sense. And then hopefully, we'd expect to see some operating leverage in 2020?

Yes, absolutely. And we do feel like we're pretty well set-up at this point with descent operating leverage. As we both mentioned, I think we expect revenue to grow faster than cost.

Even in the FY '19.

Even in FY '19, absolutely.

And I'm showing no further questions at this time. I would now like to turn the call back to Ramesh for closing remarks.

Thank you, Chelsey. In closing, we enter fiscal 2019 with growing momentum, driven by increasing SaaS and recurring revenue, improving operating margins, a world-class leadership team, expanded R&D capacity and a new work ethic and attitude across the organization, focused on being customer-centric, engineering-driven and devoted to all the markets we serve. Please enjoy a terrific and safe long weekend coming up. We look forward to reporting further progress when we report our first quarter results a couple of months from now. Thank you.

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