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Overall, what are some of the newer technologies that Agilysys is getting involved in and that customers are interested in?
Stout:Two things. One is mobility, which we touched on and how to deliver service closer to the customer. The second is cloud-enabled technology. Reducing the data center footprint and overall fixed costs and converting IT needs to more variable costs.
Do you envision continuing to sell hardware long term or do you envision transitioning to more of a software and services model?
Dennedy:We will continue to sell hardware, particularly in our RSG business. That's part of the business to sell a complete solution to customers. We're still selling hardware, software and services. In the VAR business itself, you're effectively selling technology, hardware with integration and design services so they can set up their own infrastructure. If you look at our business in that [TSG] sector last year, we grew revenue almost 7 percent. We experienced modest margin compression, just north of 17 percent.
We have seen that gross margin compression in the last few quarters come down from the high 19s, low 20s. Some of that can be managed by the mix of hardware and products we sell. Some vendors offer better margin availability than others.
To the extent you can couple that with service opportunities with those end customers and develop a solutions or services component, you can make some profit opportunity. The challenge is we already have that in our RSG business and our HSG business. So the next dollar of capital to allocate, do you invest in that solutions business in TSG side where you're so predominantly-hardware oriented today? We have to evaluate our own capital and make a ore efficient allocation where we already have greater capture margin by hardware [in RSG and HSG].
As vendors look for more loyal solution providers, partners that will sell only their offerings as opposed to a broad portfolio of vendors, how does that impact Agilysys?
Dennedy:In our retail business, the primary business vendors are Oracle, IBM and Symbol [Technologies]. We are longstanding partners with all those guys. That's a major theme for our business going forward. I don't see the mix of partners changing. If anything, we will deepen those relationships. I don't know that we feel pressure per se to be loyal to them but they're getting it because it's in everybody's best interests to do that. If we're the experts, the go to-team, it benefits us to be as smart and knowledgeable on these vendors as much as it is for them to make sure we're up on new releases and what coming through their platforms, than being pressured to carry just their products.
Finally, anything else going on with Agilysys you'd like to share?
Dennedy:The one thing we did reasonably well with the TSG group is being customer focused on what they need in their next unit of computing utility. What equipment to put in the rack and deliver to them with best services with a business purpose. To the extent you can create the best solution for a unit of computing utility, when I listened to our TSG leadership talk, the biggest customers valued that contribution we made to the sale. We're not just selling the next server, but the next integrated rack to add capacity. That goes back to the comment to adding additional services to a traditional hardware business. Instead of finding the best server or switch, let's find the most efficient collection of devices that are in a rack of a business.