Agilysys, Inc. Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2020, representing fiscal second quarter and first half of fiscal 2021. The request metadata identifies “2019 Q2,” but the filing itself is the September 30, 2020 Form 10-Q; comparable periods are September 30, 2019. Dollar amounts are in thousands unless otherwise stated.
Business Context
Agilysys provides hospitality software and related services, including point-of-sale, property-management, inventory and procurement, payments, support, maintenance, subscriptions and professional services. It operates globally in one reportable segment. Results were materially affected by COVID-19-related customer site closures, travel restrictions, delayed implementations, lower spending and customer concessions.
Key Financial Metrics
| Metric | Three months ended September 30, 2020 | Three months ended September 30, 2019 | Six months ended September 30, 2020 | Six months ended September 30, 2019 |
|---|---|---|---|---|
| Revenue | $34,360 | $40,722 | $64,166 | $79,111 |
| Gross profit | $23,154 | $20,217 | $41,703 | $40,232 |
| Gross margin | 67.4% | 49.6% | 65.0% | 50.9% |
| Operating income (loss) | $6,050 | $(2,881) | $5,626 | $(4,424) |
| Net income (loss) | $5,867 | $(2,918) | $5,350 | $(4,493) |
| Net income attributable to common shareholders | $5,314 | $(2,918) | $3,661 | $(4,493) |
| Diluted EPS | $0.22 | $(0.13) | $0.15 | $(0.19) |
Revenue mix: Second-quarter products revenue declined 44.8% to $6,559; support, maintenance and subscription revenue increased 9.7% to $22,304; and professional services revenue declined 35.5% to $5,497. For the six-month period, products revenue declined 48.1%, support, maintenance and subscription revenue increased 5.9%, and professional services revenue declined 40.0%.
Cash flow and liquidity: Six-month operating cash flow was $6,642 versus $1,234 in the prior-year period. Investing cash usage was $473, primarily for capital expenditures. Financing cash flow was $32,799, principally reflecting net proceeds from the preferred-stock issuance. Cash and cash equivalents increased to $85,706 at September 30, 2020 from $46,653 at March 31, 2020.
Balance sheet and debt: Total assets were $173,714 and shareholders’ equity was $77,924 at September 30, 2020. Total debt was approximately $0.1 million, consisting primarily of finance lease obligations. Operating lease liabilities totaled $14,561. Contract liabilities were $30,755.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 15.6% in the second quarter and 18.9% for the first six months, primarily because COVID-19 delayed product deliveries, implementations and professional services.
- Recurring support, maintenance and subscription revenue grew despite customer concessions and temporary site closures. Subscription revenue increased 23.9% in the quarter and 16.4% for the six-month period.
- Gross margin expanded substantially because of the shift toward higher-margin recurring and proprietary software revenue and the absence of developed-technology amortization following the $22.0 million software-development impairment recorded in fiscal 2020.
- Operating expenses declined through furloughs, layoffs, salary reductions, lower incentive compensation, reduced travel and fewer conferences. Six-month restructuring, severance and other charges increased to $1,210 from $421.
- The company completed a $35 million Series A convertible preferred-stock investment from MAK Capital in May 2020, receiving approximately $34.0 million net of issuance costs. The preferred stock carries a 5.25% annual dividend and is convertible at $20.1676 per common share, subject to adjustments.
- Common-shareholder earnings were reduced by $1,031 of preferred-stock issuance costs and $658 of preferred dividends during the six-month period.
Outlook, Risks and Unusual Items
- Management did not provide quantitative financial guidance in the filing. It stated that the duration and full effect of COVID-19 remain uncertain.
- Potential continuing effects include delayed or reduced orders, subscription or maintenance renewals, customer payment issues, site-access restrictions, implementation delays and reduced sales productivity from remote operations.
- The company reduced discretionary spending and deferred $1,287 of employer payroll taxes under the CARES Act as of September 30, 2020.
- Management stated that cash from operations, $85.7 million of cash on hand and access to capital markets should fund short- and long-term liquidity needs, but liquidity could weaken if demand declines materially.
- Ameranth patent litigation remains unresolved. The company disputes the allegations and is defending the matter; the potential outcome and financial effect cannot currently be predicted.
- Substantially all U.S. and certain foreign deferred tax assets remain offset by valuation allowances because realization is not considered more likely than not.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the reporting-period discrepancy: the supplied metadata says 2019 Q2, while the filing covers September 30, 2020 and fiscal Q2 2021.
- Assess whether recurring-revenue growth can continue after COVID-19-related customer concessions and whether products and professional-services demand recover.
- Review the terms, conversion potential, dividend accumulation and change-of-control provisions of the Series A preferred stock.
- Distinguish operating cash generation of $6.6 million from the $34.0 million of preferred-stock financing proceeds that drove most of the cash increase.
- Monitor the sustainability of cost reductions, including furloughs, layoffs, salary reductions and reduced sales and marketing activity.
- Evaluate the unresolved Ameranth litigation, tax valuation allowances, deferred payroll-tax obligations and the continuing impact of the pandemic on customers and implementations.