Business Context and Reporting Period
Agilysys, Inc. provides hospitality technology, including point-of-sale, payment, reservation, property-management, inventory, analytics, document-management, guest-offer, mobile and wireless solutions. Its customers operate in gaming, hotels/resorts/cruise, corporate foodservice, restaurants, universities, stadia and healthcare.
The filing is a Form 10-Q for the quarter ended December 31, 2018, representing the third quarter and first nine months of fiscal 2019. The request metadata identifies “2017 Q3,” but the filing text clearly reports fiscal 2019 results compared with fiscal 2018.
Key Financial Metrics
| Metric | Three Months Ended December 31, 2018 | Prior Comparable Period | Nine Months Ended December 31, 2018 | Prior Comparable Period |
|---|---|---|---|---|
| Total revenue | $36.0 million | $31.3 million | $104.2 million | $95.3 million |
| Gross profit | $18.6 million | $15.6 million | $54.3 million | $47.7 million |
| Gross margin | 51.8% | 49.9% | 52.1% | 50.0% |
| Operating loss | $(3.9) million | $(3.6) million | $(9.3) million | $(9.8) million |
| Net loss | $(4.0) million | $(1.9) million | $(9.6) million | $(8.1) million |
| Basic and diluted loss per share | $(0.18) | $(0.08) | $(0.42) | $(0.36) |
| Cash flow from operations | Not separately reported | Not separately reported | $1.7 million | $2.1 million |
Revenue mix for the nine-month period was $28.1 million from products, $56.1 million from support, maintenance and subscription services, and $20.0 million from professional services. Subscription revenue increased approximately 23.6% year over year for the nine-month period.
At December 31, 2018, cash and cash equivalents were $37.0 million, compared with $39.9 million at March 31, 2018. Total debt was approximately $0.1 million, consisting of capital lease obligations. Current assets were $80.8 million versus current liabilities of $59.3 million. Accounts receivable increased to $33.6 million from $16.4 million at March 31, 2018, while contract liabilities increased to $39.9 million from $26.8 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 15.0%, led by 25.5% growth in products, 12.4% growth in support, maintenance and subscription services, and 8.4% growth in professional services.
- Nine-month revenue increased 9.4%; gross profit increased 13.9%, and gross margin expanded by 2.1 percentage points to 52.1%.
- Despite higher revenue and gross margin, third-quarter net loss widened to $4.0 million from $1.9 million. Nine-month net loss widened to $9.6 million from $8.1 million.
- Product development expense increased 38.4% in the quarter and 31.8% year to date, primarily because less software development cost was capitalized after rGuest products reached general availability and the company shifted toward agile development.
- Sales and marketing expense increased 21.9% in the quarter, principally due to higher commissions, incentive compensation and marketing-event costs. General and administrative expense declined 4.1% in the quarter and 7.7% year to date.
- Operating loss improved year to date to $(9.3) million from $(9.8) million, but worsened slightly in the quarter to $(3.9) million from $(3.6) million.
- Operating cash flow declined to $1.7 million from $2.1 million. Investing cash use fell substantially to $3.8 million from $12.6 million, primarily because capitalized software development and property expenditures were lower.
- The company adopted ASC Topic 606 on April 1, 2018 using the modified retrospective method. The adoption increased retained earnings by $2.6 million at adoption and materially changed contract asset, contract liability and receivable presentation, but had no material cash-flow impact.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific quantitative revenue or earnings forecast in the filing. Management’s stated strategy is to invest in product development, expand the customer base and international operations, grow the rGuest platform and improve profitability through tighter expense management and focused investment.
Management believes cash on hand, operating cash flow and access to capital markets will provide adequate liquidity for the next 12 months. The company expects approximately $42 million of remaining performance obligations at December 31, 2018 to be recognized over the following twelve months.
- Substantially all deferred tax assets are offset by a valuation allowance because of the company’s history of losses, limiting the near-term benefit of tax losses.
- The company completed its accounting for the 2017 Tax Act during the quarter and recorded a $0.2 million increase to its deferred tax liability.
- The company is evaluating the new lease standard and expects adoption to materially affect the financial statements because of the significance of its leases.
- Agilysys is defending a patent-infringement lawsuit brought by Ameranth. The filing states that the outcome and potential monetary exposure cannot currently be predicted.
- The company is subject to routine tax audits. A reduction in unrecognized tax benefits during the next 12 months could range from zero to $0.1 million of tax and zero to $0.2 million of interest, although other changes cannot be estimated.
- Remaining restructuring liability was approximately $20,000 at December 31, 2018. Restructuring and legal settlement charges were lower than in the prior-year periods.
- Management reported effective disclosure controls, no changes in internal control over financial reporting, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements with a material expected effect.
Investor Verification Points
- Verify whether revenue growth, particularly subscription growth, continues to offset elevated product-development and sales-investment costs.
- Reconcile the significant increase in accounts receivable and contract liabilities with billings, collections, revenue recognition and remaining performance obligations.
- Monitor cash conversion and liquidity as the company remains loss-making and generated only $1.7 million of operating cash flow during the first nine months.
- Assess the effect of reduced software capitalization on reported operating expenses, operating cash flow and future amortization.
- Review the financial-statement effects of adopting the lease standard and any developments in the Ameranth patent litigation.
- Evaluate the sustainability of gross-margin gains, especially the scalable support, maintenance and subscription-services margin.