Business Context and Reporting Period
Agilysys, Inc. is a hospitality software and services provider serving casinos, hotels, resorts, cruise lines, foodservice operators, sports and entertainment venues, and healthcare customers. Its offerings include point-of-sale, property management, inventory and procurement, payment, cloud, subscription, support, and professional services solutions. The company operates as one reportable segment globally.
The supplied filing is a Form 10-K for the fiscal year ended March 31, 2020, filed May 22, 2020. It does not cover “2018 Q4.” The filing separately reports fourth-quarter fiscal 2020 results for the quarter ended March 31, 2020.
Financial Metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $160.8 million | $140.8 million | 14.1% increase |
| Gross profit | $81.0 million | $73.9 million | 9.6% increase |
| Gross margin | 50.4% | 52.5% | Down 210 basis points |
| Operating loss | $34.1 million | $13.1 million | Loss increased $21.0 million |
| Operating margin | (21.2%) | (9.3%) | Down 11.9 percentage points |
| Net loss | $34.1 million | $13.2 million | Loss increased $20.9 million |
| Basic and diluted loss per share | $(1.47) | $(0.57) | More unfavorable |
| Cash flow from operations | $10.6 million | $7.2 million | Increase of $3.3 million |
| Capital expenditures and other investing outflows | $3.4 million | $5.5 million | Lower outflow |
| Cash and cash equivalents | $46.7 million | $40.8 million | Increase of $5.9 million |
| Total debt | $49 thousand | $57 thousand | Minimal debt |
| Working capital | $24.0 million | $21.2 million | Increase of $2.8 million |
Revenue growth was broad-based: products revenue increased 13.4% to $44.2 million, support, maintenance and subscription revenue increased 10.8% to $83.7 million, and professional services revenue increased 24.7% to $32.8 million. Subscription-based revenue increased 24.3% year over year.
Cash flow from operations exceeded the reported net loss because of $46.2 million of non-cash expenses, including impairment, depreciation, amortization, and share-based compensation. Operating lease liabilities totaled $15.3 million after adoption of the new lease standard; contractual obligations totaled $20.9 million, primarily operating leases.
Fourth-Quarter Fiscal 2020 Results
| Metric | Q4 FY2020 | Q4 FY2019 |
|---|---|---|
| Revenue | $39.7 million | $36.6 million |
| Gross profit | $19.7 million | $19.6 million |
| Net loss | $27.0 million | $3.6 million |
| Loss per share | $(1.16) | $(0.15) |
Fourth-quarter results were materially affected by COVID-19-related customer closures, project delays, revenue allowances, credit-risk provisions, and impairment charges.
Material Changes Versus the Prior Comparable Period
- Revenue increased 14.1%, led by higher hardware sales, subscription growth, and professional services activity.
- Gross margin declined to 50.4% from 52.5%, partly because of higher hosting costs and allowances related to products and services affected by COVID-19.
- Operating expenses increased primarily because of $23.7 million of impairment charges. The company recorded approximately $22.0 million of impairment against capitalized software development costs for certain rGuest solutions and $1.7 million against internal-use software related to rGuest Seat.
- Capitalized software development costs declined from $34.6 million at March 31, 2019 to zero at March 31, 2020. No software development costs were capitalized in FY2020.
- Accounts receivable increased to $35.9 million from $27.0 million, while the allowance for doubtful accounts increased to $1.6 million from $0.8 million, reflecting heightened customer collection risk.
- Operating lease assets and liabilities were recognized upon adoption of ASC 842 on April 1, 2019, adding approximately $13.8 million of right-of-use assets and $16.3 million of operating lease liabilities at adoption.
- Shareholders’ equity declined to $71.8 million from $100.6 million, primarily because of the $34.1 million net loss.
Outlook, Commentary, Risks, and Unusual Items
Management stated that COVID-19 created significant uncertainty for customer demand, implementations, collections, liquidity, and future results. Hospitality-sector closures, travel restrictions, canceled events, and reduced customer capital spending delayed projects and reduced sales activity. Management expects the long-term hospitality technology opportunity to remain significant but provided no specific financial guidance.
In response to the pandemic, the company reduced discretionary spending, halted or limited certain marketing and capital expenditures, implemented a hiring freeze, reduced salaries and retirement benefits, and furloughed approximately 24% of employees across the United States, Asia-Pacific, and Europe. Management warned that prolonged furloughs or workforce reductions could impair customer service and growth.
In May 2020, after the fiscal year-end, Agilysys announced an agreement for MAK Capital to invest $35 million in convertible preferred stock with a 5.25% cumulative dividend and a $20.1676 conversion price. The transaction was expected to provide approximately $34 million of net cash proceeds after estimated closing costs, subject to customary closing conditions. The filing does not present this financing as completed at March 31, 2020.
- Principal risks include continued COVID-19 effects, customer insolvencies and delayed payments, reduced hospitality spending, competition, cybersecurity and privacy exposure, technology development risk, international operations, supplier concentration, litigation, and future impairment charges.
- The Ameranth patent litigation remained pending. The company stated that the outcome and potential monetary exposure could not be predicted, although management was vigorously defending the matter.
- The company has incurred operating losses for several years and recorded a $66.8 million valuation allowance against substantially all deferred tax assets at March 31, 2020.
- No dividends were paid in FY2020 or FY2019, and management indicated that dividends are unlikely in the foreseeable future.
- Grant Thornton issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the reporting-period mismatch: this is a FY2020 10-K, not a 2018 fourth-quarter filing.
- Assess the duration and financial consequences of COVID-19 on hospitality customers, implementations, recurring revenue, collections, and liquidity.
- Verify the status and final terms of the $35 million convertible preferred-stock financing announced after year-end.
- Review whether the impairment of rGuest-related software represents a broader change in product strategy or future revenue potential.
- Monitor recurring subscription revenue growth, gross-margin recovery, and the company’s path toward profitability.
- Evaluate customer credit exposure, the increased allowance for doubtful accounts, and potential hospitality-industry bankruptcies.
- Review the Ameranth litigation, other contingencies, lease commitments, and the substantial deferred-tax valuation allowance.