Business Context and Reporting Period
Agilysys, Inc. provides hospitality-industry software and services, including point-of-sale, property management, reservations, inventory, workforce management, analytics, and related support and subscription services. This Form 10-Q covers the three months ended June 30, 2017, the first quarter of fiscal 2018, compared with the three months ended June 30, 2016. The filing is unaudited.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net revenue | $33.9 million | $31.0 million |
| Gross profit | $16.7 million | $16.2 million |
| Gross margin | 49.2% | 52.3% |
| Operating loss | $3.0 million | $2.2 million |
| Operating margin | (8.9%) | (7.1%) |
| Net loss | $3.0 million | $2.3 million |
| Basic and diluted loss per share | $0.13 | $0.10 |
| Cash flow from operating activities | $(0.5) million | $(1.0) million |
| Capital expenditures and capitalized software development | $5.1 million | $3.7 million |
Revenue consisted of products of $10.3 million, support, maintenance and subscription services of $16.7 million, and professional services of $6.9 million. Support, maintenance and subscription services represented approximately 49% of revenue.
At June 30, 2017, cash and cash equivalents were $43.4 million, total assets were $164.2 million, and total shareholders’ equity was $111.9 million. Total debt was approximately $0.2 million, consisting of capital lease obligations. Current liabilities were $45.0 million, including $26.9 million of deferred revenue.
Material Changes Versus the Prior Comparable Period
- Total revenue increased $2.9 million, or 9.4%, led by an 11.5% increase in support, maintenance and subscription services revenue. Subscription-based service revenue increased approximately 57.8%.
- Gross profit increased only 3.0%, while gross margin declined 3.1 percentage points to 49.2%. Product margin declined primarily because developed-technology amortization increased by approximately $1.0 million following the placement of rGuest Stay and Buy development costs into service.
- Professional services margin declined to 19.9% from 32.5%, reflecting the redeployment of previously non-billable internal resources into billable functions during a professional-services workforce restructuring.
- Operating loss increased by $0.8 million. General and administrative expense increased 39.5%, or $1.9 million, due mainly to higher stock compensation, additional headcount, non-recurring professional fees and contract labor, and executive turnover costs.
- Product development expense decreased 3.3% and sales and marketing expense decreased 8.9%, partly offsetting higher general and administrative costs.
- Cash used in operating activities improved by $0.5 million, but investing cash use increased to $5.1 million, primarily for proprietary software development and property and equipment. Cash declined $5.8 million during the quarter.
- Share-based compensation expense increased to $1.2 million from $0.3 million, including effects from higher-value executive grants and adoption of ASU 2016-09.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide specific quantitative revenue or earnings guidance. Its stated strategy is to grow revenue through the breadth and depth of its software portfolio, including the rGuest platform, international expansion, improved product delivery, customer focus, and tighter expense management. Management expects cash on hand, operating cash flow, and access to capital markets to fund short- and long-term liquidity needs for at least the next 12 months.
- Management has recorded a valuation allowance against substantially all deferred tax assets because realization is not considered more likely than not given prior-period losses.
- The company adopted ASU 2016-09 in the quarter and recorded an approximately $0.7 million cumulative reduction to opening retained earnings related to forfeiture accounting. It also did not recognize a $4.4 million excess tax deduction benefit because of its full U.S. federal net operating loss valuation allowance.
- Agilysys expects the future lease standard, ASU 2016-02, to materially affect its financial statements because of the significance of its leases.
- The company plans to adopt the revenue standard, ASU 2014-09, beginning April 1, 2018. It expects possible increases in accounts receivable and deferred revenue or contract liabilities, but the ultimate effect remains under evaluation.
- Approximately $0.7 million of pre-petition claims against Caesars Entertainment remained outstanding at June 30, 2017.
- Agilysys is defending a patent-infringement lawsuit brought by Ameranth involving hospitality technology products. The filing states that the outcome and potential monetary exposure cannot currently be predicted.
- Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls.
Important Facts for Investors to Verify
- Confirm the period designation: the filing covers June 30, 2017 and fiscal Q1 2018, despite the request metadata identifying “2016 Q1.”
- Assess whether revenue growth, particularly subscription revenue, can offset declining product and professional-services margins.
- Monitor the effect of increased general and administrative expense and stock-based compensation on the path to profitability.
- Evaluate cash consumption against software-development investment and the company’s stated liquidity expectations.
- Review the impact and implementation timing of ASC 606 revenue recognition and ASC 842 lease accounting.
- Track developments in the Ameranth litigation, Caesars claim, tax examinations, and deferred-tax-asset valuation allowance.