Agilysys, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2020, representing the first quarter of fiscal 2021. The filing compares results with the three months ended June 30, 2019. The request metadata identifies “2019 Q1,” but the filing itself is for the June 30, 2020 quarter.
Business Context
Agilysys provides hospitality software and related solutions, including point-of-sale, property management, inventory and procurement, payments, support, subscription, and professional services. It operates globally and reports one segment serving the hospitality industry.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $29.8 million | $38.4 million | Down 22.4% |
| Gross profit | $18.6 million | $20.0 million | Down 7.3% |
| Gross margin | 62.2% | 52.1% | Up 10.1 percentage points |
| Operating loss | $0.4 million | $1.5 million | Improved by $1.1 million |
| Net loss | $0.5 million | $1.6 million | Improved by $1.1 million |
| Net loss available to common shareholders | $1.7 million | $1.6 million | Worsened by preferred-stock items |
| Basic and diluted loss per share | $0.07 loss | $0.07 loss | Unchanged |
| Operating cash flow | $4.9 million use | $1.9 million use | Greater use of $3.0 million |
Revenue from products declined 51.8% to $5.2 million, professional services declined 45.3% to $4.1 million, and support, maintenance and subscription services increased 2.1% to $20.5 million. Subscription revenue increased 8.6%, but growth was partly offset by COVID-19-related customer concessions.
Gross margin improved primarily because the prior-year period included $3.2 million of developed-technology amortization. The related capitalized software development costs had been fully impaired in fiscal 2020. Professional services gross margin fell to 3.3% from 25.1% due to reduced demand and implementation restrictions.
Operating expenses declined 12.0% overall to $19.0 million. Product development and sales and marketing expenses decreased with furloughs, layoffs, salary reductions, hiring restrictions, and lower travel and event costs. Severance and other charges increased to $1.2 million from $0.2 million. Share-based compensation increased to $1.4 million from $0.5 million.
Financial Position, Liquidity and Debt
- Cash and cash equivalents were $74.6 million at June 30, 2020, compared with $46.7 million at March 31, 2020.
- Total assets were $176.1 million, compared with $154.6 million at March 31, 2020.
- Total current assets were $116.9 million versus current liabilities of $56.1 million.
- Finance lease obligations were approximately $0.1 million. The company reported no material traditional debt.
- Operating cash flow was negative $4.9 million; capital expenditures were $0.2 million.
- Financing cash flow was $33.1 million, principally from the preferred-stock issuance, net of issuance costs, partially offset by $0.9 million of share repurchases for employee tax withholding.
- Management stated that cash on hand, operating cash flow, and access to capital markets should provide adequate liquidity for short- and long-term requirements, while warning that reduced customer demand could negatively affect liquidity.
Material Changes Versus the Prior Comparable Period
- Total revenue decreased $8.6 million, primarily because COVID-19 delayed customer projects, installations, deliveries, and professional services.
- Recurring support, maintenance, and subscription revenue remained relatively stable, supported by high renewal rates, but was affected by customer financial relief and concessions.
- Gross margin expanded materially due to the absence of developed-technology amortization and the increased mix of recurring revenue.
- Operating loss narrowed despite the revenue decline because of lower operating expenses, although severance charges increased.
- Operating cash use increased because of working-capital movements and lower operating results.
- On May 22, 2020, Agilysys issued 1,735,457 Series A convertible preferred shares to MAK Capital for $35.0 million, incurring $0.9 million of issuance costs.
- Preferred stock increased to $35.2 million and resulted in $0.9 million of issuance costs and $0.2 million of preferred dividends being deducted in calculating loss available to common shareholders.
Outlook, Risks and Unusual Items
The COVID-19 pandemic materially affected customer operations, demand, site access, travel, sales activity, implementations, and collections. Management could not predict the duration or full financial impact. Risks include further customer delays, reduced orders, missed payments, lower renewals, continuing travel and site restrictions, and reduced employee productivity from modified work arrangements.
The company implemented cost reductions, including hiring restrictions, furloughs, layoffs, salary reductions, benefit limitations, and reduced discretionary spending. Management may take additional actions as conditions evolve, but stated that prolonged measures could adversely affect productivity, collaboration, and growth.
The Series A preferred stock carries a 5.25% annual dividend, has senior liquidation and dividend rights, is convertible at an initial conversion price of $20.1676 per common share, and includes holder redemption and change-of-control rights. These terms may create future cash obligations or dilution.
The company recorded no current-quarter goodwill or software-development impairment. It continues to face an Ameranth patent lawsuit; management cannot predict the outcome, although it believes the ultimate resolution of other legal matters will not materially affect the company. The filing text does not provide a clear potential loss amount for the Ameranth matter.
The company adopted new accounting standards concerning cloud-computing implementation costs, fair-value disclosures, goodwill impairment testing, and expected credit losses. The adoption had no material impact on the financial statements.
Investor Verification Checklist
- Verify the durability of recurring revenue growth and renewal rates after COVID-19-related concessions expire.
- Assess whether product and professional-services demand, installations, and customer payments recover or remain delayed.
- Review the terms, dividend accruals, conversion mechanics, redemption rights, and potential dilution from the Series A preferred stock.
- Monitor operating cash burn and whether the $74.6 million cash balance remains adequate under prolonged pandemic disruption.
- Determine whether cost reductions and lower spending impair product development, sales capacity, customer support, or long-term growth.
- Review the Ameranth litigation and any developments that could create a material liability.
- Reconcile the filing’s fiscal-period designation with the requested “2019 Q1” metadata; the filing reports June 30, 2020 results for fiscal Q1 2021.