Agilysys, Inc. (NASDAQ:AGYS) Q4 2019 Earnings Conference Call May 16, 2019 4:30 PM ET

Company Participants

Dave Wood - Vice President, Finance
Ramesh Srinivasan - President and Chief Executive Officer
Tony Pritchett - Chief Financial Officer

Conference Call Participants

Allen Klee - Maxim Group
Tim Klasell - Northland Securities

Operator

Good day, ladies and gentlemen and welcome to Agilysys Fiscal 2019 Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference maybe recorded. I would now turn the conference over to Dave Wood, VP of Finance at Agilysys. You may begin.

Dave Wood

Thank you, Liz and good afternoon everybody. Thank you for joining the Agilysys fiscal 2019 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 EBITDA and free cash flow and statements we make regarding continued sales and business momentum. Forward-looking statements are neither historical facts nor assurances 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 these indicated in the forward-looking statements today include, among others, our ability to achieve operational efficiencies and meet customer demand for products and services and the risks described in today’s news announcement and in the company’s filings within the Securities and Exchange Commission, including the company’s reports on Form 10-K and Form 10-Q. Any 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 was made. We undertake no obligation to publicly update any forward-looking statements that may have been 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 measures calculated and then presented in accordance with GAAP can be found in today’s press release as well as on 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.

Ramesh Srinivasan

Thank you, Dave. Good afternoon, everyone. Thank you for joining our fiscal year 2019 fourth quarter earnings call. Joining me on the call today will be Tony Pritchett, our Chief Financial Officer.

Fourth quarter revenue increased 14.2%, that’s 14.2, increased 14.2% over the comparable quarter last year to a record $36.6 million. Q4 fiscal 2019 was our third consecutive double-digit year-over-year growth quarter, the fourth consecutive record revenue quarter and the sixth consecutive sequential revenue growth quarter. Our sales momentum continues to be strong. The third and fourth quarters of fiscal 2019 were two of our strongest ever with respect to overall global sales. That sales momentum trend has continued into the first half of our current Q1 fiscal 2020 quarter as well. And we seem well set to make this current Q1 FY ‘20 our fifth consecutive record revenue quarter.

Our full year fiscal 2019 revenue was $140.8 million, that is 1-4-0, $140.8 million, slightly exceeding our expectations and just above our full year revenue guidance of 10% growth over fiscal 2018 revenue. For the full year, our overall recurring revenue base grew by $6.4 million over the prior year. The largest single year increase since we became a pure play hospitality software solutions provider during fiscal 2014 and included a 24% increase in full year subscription revenue compared to fiscal 2018. Adjusted earnings from operations or AOE was positive during each quarter in fiscal 2019, adding up to $4.8 million for the year, approximately $10.7 million better than fiscal 2018 and well ahead of our original expectations and guidance provided. Adjusted EBITDA grew approximately 13%, 1-3, 13% year-over-year to $10.3 million. Free cash flow was $1.7 million for the year, our first such positive free cash flow year since before fiscal 2014.

Fiscal 2019 was an important milestone year for us, where in we made the transition from a turnaround company to a growth company. We executed on a number of transformational positive initiatives across almost every aspect of our business that have set us up well for continued and sustainable profitable growth. Fiscal 2019 was by far our best year with respect to international sales. One of our key strategic initiatives continues to be to make Agilysys an engineering driven company, consistently innovating, creating and enhancing great products, and we made substantial progress with that objective. Our overall R&D and technical services personnel grew from approximately 450 at the beginning of fiscal 2019 to 510 by the end of the year, helping us drive our products forward at a pace far higher than at any time in our history and I suspect quite possibly faster than most of our competition.

During fiscal 2019, we made substantial improvements with all our core product sets, including point-of-sale, property management systems, inventory and procurement, document management and data analysis. Our increased pace of innovation significantly improved our core products, and in addition, helped us create and implement high value ancillary software modules around the core POS and PMS products. Most of these additional modules have been sold and implemented in at least a couple of customer sites each during fiscal 2019.

Along with a couple of crucial mobile-enabled software modules, which add value to our POS products, the majority of the additional software modules have been valuable additions to our core PMS product sales. Such additional software modules command good pricing, comparable to the pricing of the core products, and will play an increasingly crucial role in driving our revenue growth, and increased profitability. Our customers today cater to guests with high expectations regarding technology efficacy. The additional modules we’ve brought to the market in the recent past cater to that exact mean. Each of these additional software modules integrate seamlessly across all our core PMS products, allowing for less integration work and good value for our customers and in turn for us as well.

During fiscal 2019, we developed and implemented the following additional software modules, all well integrated with our core PMS products. One, rGuest Book, a web booking system that is arguably the only booking engine in the market today that integrates with major loyalty and revenue management systems, allowing for truly personalized and differentiated booking experiences for each loyalty tier level of guests. Two, rGuest Express Mobile, a mobile check-in, check-out module that enables guests to check in by room upgrades, make dining reservations, do digital ID verification, check-out and receive room ready SMS notifications, all from the convenience of their own mobile device. This module is the industry’s first fully integrated check-in, check-out solution with digital ID verification and digital key delivery. Three, rGuest Express Kiosk, a self-service kiosk that allows guests to check in and out of their rooms, while balancing ease of guest use with security considerations of the hotel operators and includes innovative features like soft check in and the ability to purchase upgrades at the time of check in. rGuest Service four, this software module facilitates resort-wide staff communication and integrated customer service and is designed to mobilize all internal workflows by using wearable technology, thereby enabling all staff to receive instant housekeeping, in-room dining, concierge and other alerts.

Additionally, we are a few months away from implementing new modules for golf and spa facilities that will help our customers operate more efficiently and leverage customer data from across the guest journey. As we continue to improve our PMS products to drive the level of revenue growth that exceeds the current POS revenue growth rate, we are simultaneously strengthening the ecosystem around PMS to further leverage the PMS competitive advantage we are working toward. While POS is carrying the bulk of our revenue growth currently, we expect PMS to begin contributing significantly to our growth during the upcoming years. Regarding our POS food and beverage business, we continue to add solutions that bring the point-of-sale to the guest in dynamic ways that improve guest experience and provide operational efficiency to our customers.

We will soon be implementing the InfoGenesis mobile order application, which enables restaurant staff to carry out most of their order taking functions using consumer grade iOS or Android devices or even cellphones. This is in addition to the InfoGenesis Flex application that we have implemented at many customer sites over the past several years, which is essentially a full featured InfoGenesis terminal application optimized for mobile devices. We round out our POS offerings with the guests facing rGuest Buy Kiosk and our recently implemented rGuest Buy on demand module, which enables restaurant guests to order directly from their mobile phone or PC before going to the F&B location for pickup. What makes this value proposition even more attractive for our customers is that, we are able to provide all this functionality through a single integrated menu, price and order management functionality set driven by the core point-of-sale application InfoGenesis, instead of the multiple disparate systems many properties are currently having to deal with.

During this quarter, we also implemented a new rGuest Pay and Go module, which is a new payment app that gives the guests control to tender their checks from their mobile device, including the ability to add tips and split checks. It further enhances the guest experience and helps our customers turn over their tables faster. The vastly improved engineering strength along with a sharp culture shift to become obsessively customer-centric has helped us significantly improve how we serve our customers. This is reflected in the fact, fiscal 2019 saw the lowest customer churn in the past four years in spite of operating with a far higher recurring revenue base. Increasing recurring revenue and decreasing customer churn together led to our lowest customer churn year in percentage terms. Customer retention as a percentage of recurring revenue during fiscal 2019 improved 10% over fiscal 2018 and 25% over fiscal 2017. Our customer retention rate was significantly higher than 95% during fiscal 2019.

During Q4, 22 new customers joined the Agilysys family, bringing the total to 89 new customers for the year. Fiscal 2019 was our best year ever with respect to competitor replacements, especially during the second half of the year. Continuing to grow our market share in a steadily expanding overall market is a great position to be in. Being entirely focused as we are on the hospitality industry and serving it well by balancing day-to-day execution and future innovation simultaneously is not an easy task. And we are happy to be handling the challenge seemingly better than most of the competition.

With respect to the various market verticals we serve, we continue to thrive and grow in the gaming sector as that industry continues its shift toward non-gaming amenities and focuses on non-gaming revenue growth. During Q4 fiscal 2019, about five different casino operators switched from a competitor system to Agilysys products. With respect to the hotels, resorts and cruises market vertical, Q4 was one of our biggest ever sales quarters in this segment. Apart from many new customer, competitive replacements, and other wins across various hotels and resorts, the highlight of the quarter was a successful pilot go-live on a major new cruise customer ship where we replaced a competitor’s system with InfoGenesis and InfoGenesis Flex and helped automate many processes within the ship, making the handling of food and beverage orders and fulfillment across multiple restaurants and bars a lot more efficient.

The other major highlight of the quarter was the expansion of our foodservice management, FSM business. We continue to expand our partnership with a major FSM customer, who we have had a longstanding relationship with and we recently completed a successful pilot install at one of their major clients, again replacing a competitor system. We expect to expand our implementation with that important client during the next few quarters. Apart from that, we are also in the early stages of expanding our business with a couple of other major FSM providers, who are relatively new customers for us. In addition, we made significant breakthroughs into the healthcare, senior living and higher education, FSM market segments and are getting close to a breakthrough in the sports and entertainment area. These are all market segments, which have not been areas of strengths for us in the past. With our increased product development strength, we are now able to provide the required product functionality these new customers require.

During fiscal 2019, our marketing efforts were a lot more focused on our key messages and played a big part in Q3 and Q4 being two of our strongest sales quarters ever. The overall stability and increasing constructive teamwork among the management team was another highlight of fiscal 2019. Apart from the addition of Jeba Kingsley to head US professional services teams about six months ago, all the members of the current management team were with us at the start of the fiscal year and continue to drive our progress now. All things considered, the biggest highlight of fiscal 2019 is the major improvement in sales processes and sales results across our three major geographical regions US, Asia and Europe. Fiscal 2019 was our best global sales year since we became entirely focused on hospitality software solutions in fiscal 2014. Along with having more and improving products, together with improving customer service levels, our sales processes have become a lot more disciplined with a far higher level of accountability for forecasts and for results.

Now looking forward to fiscal 2020, we expect to grow revenue at a similar rate as last year. We expect our revenue levels to grow approximately 11% in fiscal 2020 from the approximately $141 million revenue level in fiscal 2019. We continue to enjoy good operating leverage and expect to grow profitability faster than our revenue growth rate. In spite of no longer having the benefit of capitalized software development costs unlike previous years, we still expect to grow adjusted EBITDA by around 25% in fiscal 2020 to approximately $13 million. As a result, free cash flow generated during fiscal 2020 should be well ahead of the $1.7 million generated during fiscal 2019.

In summary, we are pleased to get past the turnaround phase and enter a growth phase across all our business areas. We worked hard for it, but we are also lucky to be in a marketplace largely insulated from the short-term economic vagaries and market fluctuations created by the daily news cycle. We will continue to work hard and smart to translate our successful efforts to growing shareholder value.

Our annual revenue level is still a small fraction of the total addressable market we operate in, and even more so, when we look at the vast opportunities before us in Asia and Europe. A long growth runway is ahead of us. It is great we are in a growing industry with an increasing need for a world-class technology vendor, who is focused on serving the industry with a broad range of products backed up by world-class services and support. Even if that industry growth rate were to slow down a bit due to external reasons, our growth path will continue as we keep expanding our competitive edge. Our future is clearly in our own hands and not too dependent on anything else. As we continue to get better, we will also perform better.

Our top line growth will continue to be driven forward by many factors, but none more important and impactful as subscription recurring revenue, which grew by 24% during the full fiscal year 2019. The top line growth will continue to outpace required cost investment increases, thereby driving profitability at an even faster clip. We look forward to catching up with all of you again in our next earnings call a couple of months from now when we will report on what should be our fifth consecutive record revenue quarter. We expect Q1 of fiscal 2020 to be the first quarter in which we exceed the $38 million quarterly revenue milestone.

With that, I will now turn the call over to Tony Pritchett for further color on our financial results and future outlook. Tony?

Tony Pritchett

Thanks, Ramesh. To echo Ramesh’s comments, we are pleased with the results for both the fiscal fourth quarter and for the full year. We are very encouraged by the growth trajectory we see in our business as we are more confident than ever in our ability to grow top line and leverage our momentum down to the bottom line to create shareholder value. Throughout the fiscal year, we made significant progress on our key financial priorities, including lowering overall costs, total OpEx and CapEx as a percentage of revenue and positioning the Company for growth through the result of success of the strategic initiatives we put in place over the past two years. We are pleased with the success we are having with sales and the positive impact that it’s having on our overall business momentum.

Taking a look at our financial results, beginning with our income statement, fourth quarter fiscal 2019 revenue was $36.6 million, a 14.2% increase from total net revenue of $32.1 million in the comparable prior year period. This marks our fourth consecutive record revenue quarter and our sixth consecutive quarter of sequential revenue growth. The increase in top line largely reflects the 37.5% increase in product revenue to $10.9 million and a 7.1% increase in recurring revenue to $19.4 million.

On an annual basis, we are pleased to see growth across all three of our revenue line items, including a $6.4 million increase in recurring revenue, our largest annual increase in recurring revenue to-date. Total recurring revenue represented 52.9% of total net revenues for the fiscal fourth quarter and 53.6% for the full year. That compares to 56.4% and 54.2% of total net revenues in the fourth quarter and full year fiscal 2018. We are also pleased with our robust subscription revenue growth, which grew at 23% for the fourth quarter of fiscal 2019 and 24% for the full fiscal year. Subscription revenues comprised approximately 34% of total recurring revenues, compared to 30% of total recurring revenues in the fourth quarter of fiscal 2018. We expect total recurring revenue to continue to grow and for subscription revenue growth to continue to outpace the rate of total recurring revenue growth and remain in the 20% growth rate range for fiscal 2020. Both of which are important measures of progress and a good reference point regarding the health of the business.

With regard to endpoints, we currently serve approximately 271,000 rooms and have approximately 54,000 terminal endpoints or up 5% and 16%, respectively compared to how we exited Q4 of last year. Total revenue related to our rGuest platform comprised approximately 9% of total fiscal 2019 fourth quarter revenue, which is up 200 basis points year-over-year.

Moving down the income statement, cost of goods sold increased by 11.2% or $1.7 million in the fourth quarter versus the prior year period, mainly as a result of the increase in product sales, including third-party costs associated with more hardware revenue and to a lesser extent, higher amortization of software development costs. Cost of goods sold decreased 3.5% for support, maintenance, and subscription services, and 5% for professional services in spite of the revenue growth we saw in both, reflecting the success we are having with our cost initiatives. This led to a total gross profit of $19.6 million, a 17% or $2.8 million improvement from the fourth quarter of fiscal 2018.

Gross profit margin improved 126 basis points to 53.5% compared to 52.2% in the fourth quarter of fiscal 2018. Taking a closer look, products gross margin improved to 21.2% in Q4 of fiscal 2019 from 17.8% in the prior year period primarily as a result of higher software revenue related to licensing our software to customers. Recurring revenue gross margin for Q4 fiscal of 2019 improved to 79.7% from 77.4% in the prior year period 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 margin also improved from 21.9% in Q4 of fiscal 2018 to 29.2% in Q4 of fiscal 2019. We are pleased with our ability to improve on our gross margin, a measure we continue to be very much focused on as we feel it reflects the improved quality of our revenue and ability to control costs. Going forward for fiscal 2020, we expect total gross profit margins to continue with modest improvement, similar to what we have seen in the last couple of years.

Looking at operating expenses, excluding charges for legal settlements and restructuring, severance and other charges, the fourth quarter saw a 25% increase in operating expenses to $23.1 million compared to $18.4 million in the prior year period. Half of this increase is attributable to the fact that we no longer capitalize software development costs. As a reminder and as discussed on prior calls, we adopted agile development and deployment practices across all of our products earlier this fiscal year that preclude the ability for us to capitalize internal labor costs onto the balance sheet. The second quarter of this fiscal year was the first quarter we saw the effect of these practices on our income statement. The same effect has carried into the third and fourth quarters.

As a result, our product development expense line item on the income statement is significantly higher than in prior years. Since the cost that was previously removed from the P&L as capitalized software development costs and capitalized onto the balance sheet is now being reflected as an expense. In the back of our press release, you will find a reconciliation of product development expense to include these amounts. As an effect of this change, our operating loss and net loss are higher this quarter than they would have been, if we had capitalized labor. This also affects operating cash flows as wages and contract labor payments that were previously capitalized now reflect as an operating cash outflow.

Now looking at our operating expense line items in more detail, product development expense increased by $3.3 million or 46% compared to fiscal Q4 of last year, about two-thirds of which was due to the change we implemented beginning in the fiscal 2019 second quarter to no longer capitalize software development costs and the remainder was due to the extra costs for higher bonus eligibility due to better financial performance in fiscal year ‘19 versus fiscal year ‘18. Sales and marketing expenses increased $0.8 million or 18.5% compared to fiscal Q4 of last year, while general and administrative expenses increased $0.5 million or 9.1% compared to fiscal Q4 of last year both mainly attributable to higher incentive compensation associated with our financial performance.

Our operating loss of $3.8 million for the fourth quarter compares to an operating loss of $2.2 million for the fourth quarter of fiscal 2018. Net loss for the fourth quarter was $3.6 million or $0.16 per diluted share, which did not include the $1.8 million non-cash income tax benefit or approximately $1.6 million in software development costs capitalization, both of which were a benefit to net income during the fourth quarter of fiscal 2018.

Moving to the balance sheet and cash flow statement, cash and marketable securities as of March 31, 2019 was $40.8 million compared to $39.9 million at March 31,2018. This is in line with our prior guidance to end this fiscal year with a cash balance at or slightly above $38.5 million and it’s notable because it marks the first time, we have generated cash during a full fiscal year since fiscal 2014.

We are pleased with our ability to manage our liquidity as we continue to invest in the business, including in the development of our solutions and execute on our initiatives. As it relates to our free cash flow, I am pleased to see an increase in net cash provided by operating activities, which rose from $6.9 million to $7.2 million for the 12 months ended March 31, 2019 even with the headwind of previously capitalized engineering costs not reflected in operating cash flows. As has been historically the case, we do expect the first half of the coming year to be a drag on cash, especially during the first quarter, which will be more than made up in the second half of the year resulting in significantly improved free cash flows for fiscal 2020 compared to fiscal 2019.

Looking at adjusted earnings from operations, we posted a set of $0.7 million gain for the fourth quarter of fiscal 2019 compared to $0.6 million in the prior year period. A slight improvement even while incurring $0.9 million more of CapEx during the current quarter for the expansion of our India Development Center and investment in our SaaS development and operations IT infrastructure. And on an annual basis, AOE improved to a $4.8 million gain compared to a $6 million loss in fiscal 2018. Since we are no longer incurring the capital expense of capitalized software development costs, starting this fiscal year, we will focus more on adjusted EBITDA as a profitability metric, rather than adjusted earnings from operations.

For the fiscal 2019 fourth quarter, adjusted EBITDA was $2.4 million compared to $3.1 million in the year ago quarter. However, assuming no software development costs were capitalized in the fiscal 2018 fourth quarter, adjusted EBITDA for the fiscal 2018 fourth quarter would have been around $1.4 million or $1 million less than the current year. In terms of our NOLs, we continue to carry approximately $210 million of NOL carry-forwards with a full valuation allowance on our books that will help us remain liable for taxes only in certain foreign jurisdictions, along with minimal state taxes for the foreseeable future. Our current NOLs expire between fiscal years 2031 and 2038.

Finally, taking a look at our guidance, revenue growth is expected to continue in the double-digit range in fiscal 2020 as we expect revenue growth of approximately 11% and for subscription revenue to continue to grow in the 20% range. In addition, we expect adjusted EBITDA to improve to nearly $13 million, a 25% improvement over fiscal 2019. And as we mentioned, we expect to generate meaningful increase in free cash flows over the fiscal 2019 full year $1.7 million mark.

In closing, we are pleased with our 2019 financial results and with our improving revenue mix becoming more predictable everyday. With our continued focus on prudent management of our cost structure, we are confident in our ability to achieve ongoing profitable growth as our guidance for fiscal 2020 reflects. We have both the resources and the capital flexibility we need to continue to support and invest in our products and in our people, and to diligently and effectively pursue new opportunities. We are confident that fiscal 2020 will mark another year of growth and overall improvement for Agilysys.

With that, I’ll now turn the call back over to the operator. Liz?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Allen Klee with Maxim Group. Your line is now open.

Allen Klee

Yes, hi. I missed you said something about what you expected your next fiscal quarter revenues to exceed I thought you said $38 million, but could you clarify that. And then can you just remind us of how we should think about any seasonality throughout the year?

Ramesh Srinivasan

Hi, Allen. Thanks for joining the call. Yes, I did say that based on our sales momentum was very good in Q3, Q4 of last year and so far, we have almost done with half the quarter now of this quarter and that momentum continues. So, based on all of that, I did say that there’s a high probability we’ll cross – we will exceed the $38 million mark for the first time in our history. So that is one. As far as cyclicality in our business, there is really not much cyclicality in our business at all. Like you see with our consecutive sequential growth, we are just getting better quarter-after-quarter like six consecutive sequential quarter growth. Our business is getting better, our market share is getting better. We have more products to offer to our customers. So, it’s getting better. So, there’s no cyclicality in our business at all, with the exception of one aspect, which is cash balance. Our cash tends to be bit of a challenge in Q1 and Q2 where there are certain expenses that happen and also a lot of our maintenance invoices tend to go in the second half of the year. So, the cash balance alone will tend to go down in Q1 and Q2 and then more than make up for it in Q3 and Q4. That is about the only part of our business I would call cyclical, Allen.

Allen Klee

Okay, thank you. And can you tell us where you had set a goal of doubling the amount of people, I believe, in your India Development Center. Can you give us an idea of where that stands and then of the spend expenses that you’re planning to spend in fiscal ‘20, is there a way we can think of like how much extra spending there is to get to that higher level. What I’m trying to figure out is, if it might be the expense run rate at least the incremental increases maybe at a little higher rate than a normalized rate would be there after. Thank you.

Ramesh Srinivasan

Yes. Hi, Allen. Yes. Just to clarify, Allen, what we set about what we said about the India Development Center is that, we have created the space and the infrastructure to double the people. Like we initially had a capacity of 330 and we said we will double it to 660 and get the infrastructure ready. But how much of the 660 we hire is going to be carefully balanced against how our sales grows and how our revenue grows. So, our objective does remain that we will grow revenue at a faster pace than costs, and that applies to R&D as much as it applies to any of our other OpEx headlines OpEx heads. So, we will be growing R&D revenue fast. We will be growing revenue faster than we grow R&D costs. And how much we hire in India will depend on how our sales and revenue grows. At the moment, our India Development Center is about, it’s crossed the 400 mark, it’s a little higher than 400. But there is no specific plan we are committed to as to how quickly we will grow that to 660. It will we’ll just grow it along with our business. Currently, when you look at our product development expense in our GAAP P&L, it looks like those costs have gone up, while actually it is more because we are not capitalizing software cost now and we were before, and you just have to work through that. But in general, we do expect revenue to grow faster than our R&D expense. Tony, you have something to add to that?

Tony Pritchett

Yes. And just, for a little bit more clarity and precision, Allen, if you look at our P&L, our operating expense line items are product development, sales and marketing, and general and administrative expenses. As we’ve said over the last couple quarters, since we announced the expansion of the IDC, we do expect product development expense to probably tick up a couple of percentage points next year. That’s on an annual basis. If you look at our current product development as a percentage of revenue on an annual basis, you can apply that to next year and add a couple of percentage points likely. And then sales and marketing and G&A combined, they stay about flat, they might come down a little bit to offset that increase of product development expense. So overall, you’re looking at as a percentage of revenue, our OpEx should stay fairly consistent.

Allen Klee

Thank you. And any thoughts on what CapEx would be for the year?

Ramesh Srinivasan

Yes. So, we’re looking at CapEx next year that’s a little bit higher than what we saw in fiscal ‘19, not substantially, but probably increases a little bit from where we were in fiscal ‘19.

Allen Klee

Okay, alright. Thank you so much. Appreciate it.

Ramesh Srinivasan

Thanks, Allen.

Operator

[Operator Instructions] Our next question comes from line of Tim Klasell with Northland Securities. Your line is now open.

Tim Klasell

Hi, guys. Congratulations on a nice quarter. My first question has to do with this is sort of the, obviously the time of the year where you have set your sales quotas and territories and goals, what have you, I’m sure. Can you sort of maybe, even just qualitatively tell us where you are directing maybe additional sales efforts and resources this year? Are there particular geography or product set that is getting extra attention for this fiscal year? Thank you.

Ramesh Srinivasan

Yes. Sure, Tim. Great to have you on board, Tim. To answer your question, yes. The quotas, the goals and all our budgets everything has been set. The anomaly happened during the first month of the fiscal year. So those are all set. In general, the good news about our business is, we see growth in all our major verticals. The gaming sector continues to focus more and more on non-gaming and they require more and more products that are well integrated with the rest of the systems they have and they’ve always done well in that sector and we see more and more opportunities there. Like I said in my prepared remarks, just in the last quarter alone, there are like five major operators, who switch from a computing system to us. So, we continue to see growth there. Hotel, resorts and cruises, what we call HRC, there are massive opportunities for us there. So, we do have extra focus in those areas now, especially in the cruise segment of that, there are multiple big cruise companies that are currently talking to us based on the recent successes we’ve had. And foodservice management also remains a major focus area because with what we have done there, with one major customer now we have opportunities with a couple of other major foodservice management providers and also, we are branching into market segments where we have typically not done well. So that’s a big focus area for us, getting into senior living, healthcare, higher education, sports and entertainment. So, we do have additional sales staff, who are focused on those areas and of course Asia and Europe remain huge opportunities for us. So, we have improved bulked up our sales support and sales staff there. In Europe, we are just in the process of expanding our sales team there and the same with Asia as well. So, you think of Asia, Europe and our three major verticals in the U.S., we see opportunities in all of those and we are continuing to expand our sales efforts in each of them. Now you switch to products. POS continues to be a scent area for us now. That’s where a bulk of our growth is happening and we are beginning to increase our focus in the PMS area as well. As the products are improving, as we have created more and more ancillary products that our customers have always wanted, where they would have, they like to get the core products and the ancillary products from one vendor, if they can help it, so PMS is a major product focus area for us.

Tim Klasell

Okay, good. And then in your guidance, you mentioned some new products or areas, I believe golf and spas. Is there anything in the guidance that is coming from new products or the guidance predicated all on existing products? Thank you.

Ramesh Srinivasan

It’s a combination of the two, Tim. Our growth, our, the guidance we have provided is based on both. We do have a lot of strength with our core products now that have been established over many, number of years. And of course, the rGuest platform is continuing to gain strength with every passing month. So that is a big growth driver for us. And then a lot of these new additional modules that I mentioned they achieve two objectives they help us achieve two objectives. One, the revenue and book sales bookings we gain from those additional products increases, they also help us increase the sales of our core products, because a customer will prefer to buy the core product when you have these ancillary modules that also add value. So, I mean fortunately or unfortunately, the answer is all of the above. Our guidance is based on continued growth in all our core products and from our newer set of products.

Tim Klasell

Okay, good. Thank you very much, guys. Appreciate the help.

Ramesh Srinivasan

Thank you, Tim.

Tony Pritchett

Thanks, Tim.

Operator

I’m showing no further questions in queue at this time. I’d like to turn the call back to Ramesh Srinivasan for closing remarks.

Ramesh Srinivasan

Thank you, Liz. And does Allen have another question? No?

Tony Pritchett

I think Allen has.

Operator

We do have a follow-up question from the line of Allen Klee. Your line is now open.

Ramesh Srinivasan

Yes, sure, Liz. Yes.

Allen Klee

Hi. It’s not that meaningful, but it’s something that stood out that I was just trying to understand. I noticed that your gross margins in the professional services segment improved pretty significantly in the quarter compared to where they’ve kind of averaged around and I was just wondering what was behind that and is that anything that to think about going forward?

Ramesh Srinivasan

Allen, we’ve talked about this a bit in the past. Professional services margins vary a decent amount depending on the mix of projects that we have going on in any given quarter. We continue to expect that our margins for professional services will be in the 20% range, sometimes it’s low-20s and sometimes it’s high-20s. It will fluctuate from quarter-to-quarter. Likely next year that trend will continue to be comparable to what we saw in fiscal ‘19. So not great predictability there, but in the 20s, that’s what we expect to see.

Allen Klee

Okay. Thank you very much.

Ramesh Srinivasan

Thank you, Allen.

Tony Pritchett

Thanks, Allen.

Operator

I’m showing no further questions in queue at this time.

Ramesh Srinivasan

Thank you, Liz and thanks to everyone for joining the call today. Look forward to speaking with all of you again in a couple of months when we report our Q1 FY ‘20. Enjoy the summer and good luck with everything. Thank you.

Operator

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