AGILYSYS INC quarterly report, Q2 FY2017

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Agilysys, Inc. Form 10-Q Summary

Reporting period: Quarter and six months ended September 30, 2017, representing fiscal 2018 second quarter and first half. The request metadata identifies “2016 Q2,” but the filing is for September 30, 2017 and compares against September 30, 2016.

Business Context

Agilysys provides hospitality technology, including point-of-sale, property management, reservations, inventory and procurement, workforce management, analytics, document management, mobile and wireless solutions, and related support, maintenance, subscription, and professional services. Its principal markets include gaming; hotels, resorts and cruise; corporate foodservice; and restaurants, universities, stadia, and healthcare.

Financial Performance and Position

  • Second-quarter revenue: $30.1 million, down 7.8% from $32.7 million. Products revenue fell 31.8% to $7.3 million; support, maintenance and subscription revenue rose 7.6% to $17.1 million; professional services revenue fell 5.6% to $5.7 million.
  • First-half revenue: $64.0 million, up 0.6% from $63.6 million. Products revenue declined 13.1%, while support, maintenance and subscription revenue increased 9.5% and professional services revenue increased 0.8%.
  • Gross profit and margin: Second-quarter gross profit was $15.4 million, with a 51.0% margin versus 48.6% in the prior-year quarter. First-half gross profit was $32.0 million, with a 50.1% margin versus 50.4%.
  • Operating loss: Second-quarter operating loss was $3.2 million versus $2.3 million; first-half operating loss was $6.2 million versus $4.5 million.
  • Net loss: Second-quarter net loss was $3.2 million, or $0.14 per diluted share, versus $2.4 million, or $0.11 per share. First-half net loss was $6.2 million, or $0.27 per share, versus $4.7 million, or $0.21 per share.
  • Cash flow: First-half operating cash flow was negative $1.6 million versus negative $0.2 million. Investing cash flow was negative $8.6 million, including $5.5 million of capitalized software development and $3.1 million of capital expenditures. Financing cash flow was negative $0.6 million.
  • Liquidity: Cash and cash equivalents were $38.5 million at September 30, 2017, down from $49.3 million at March 31, 2017. Management stated that cash on hand, operating cash flow, and access to capital markets should fund expected liquidity needs for the next 12 months.
  • Debt: Total debt was approximately $0.2 million, consisting of capital lease obligations.
  • Balance sheet: Total assets were $155.7 million and shareholders’ equity was $109.4 million at September 30, 2017. Deferred revenue declined to $22.2 million from $29.2 million at March 31, 2017.

Material Changes Versus the Prior Comparable Period

  • Revenue mix shifted toward recurring support, maintenance, and subscription services, which represented 56.8% of second-quarter revenue versus 48.7% in the prior-year quarter.
  • Subscription-based service revenue increased approximately 28.8% in the quarter and 41.5% in the first half.
  • Products revenue weakened primarily because of lower hardware sales. Product gross margin improved in the quarter because of a greater proportion of proprietary software revenue, but first-half product margin declined because of higher amortization related to rGuest solutions.
  • Professional services gross margin deteriorated because of lower quarterly revenue and a higher cost structure following workforce realignment.
  • Second-quarter restructuring charges were $0.8 million; management expects the restructuring initiative to generate annual savings of approximately $2.7 million. The remaining restructuring liability was approximately $31,000 at September 30, 2017.
  • General and administrative expense increased 23.4% in the first half, primarily due to higher executive stock compensation, additional headcount, professional and legal fees, and executive turnover costs.
  • Share-based compensation expense increased to $2.3 million in the first half from $0.8 million, partly reflecting adoption of ASU 2016-09 and the elimination of estimated forfeiture rates.
  • The company announced general availability of its rGuest Buy point-of-sale solution and placed approximately $6.8 million of related software development costs into service during the quarter.

Outlook, Risks, Contingencies, and Unusual Items

  • Management’s strategy emphasizes customer focus, product development, organizational efficiency, expansion of the rGuest platform, broader product coverage, and international growth. The filing does not provide quantitative revenue or earnings guidance.
  • Management expects to continue investing cash in software enhancements, new products, marketing, and customer and geographic expansion while pursuing profitability through expense controls and focused investment.
  • The company expects to adopt the new revenue recognition standard, ASC 606, beginning April 1, 2018. The assessment is ongoing; management expects similar performance obligations and generally similar revenue timing but anticipates possible increases in reported accounts receivable and deferred revenue.
  • Lease accounting guidance is expected to materially affect the financial statements because of the significance of the company’s leases; implementation timing and impact were still under evaluation.
  • Substantially all deferred tax assets are offset by a valuation allowance because management believes realization is not more likely than not. The effective tax rate was negative 3.3% for the quarter and negative 3.0% for the first half.
  • Agilysys is defending a patent infringement lawsuit filed by Ameranth, Inc. The company cannot predict the outcome or potential monetary exposure, although management believes the resolution of legal matters is not expected to have a material adverse effect.
  • The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2017.

Investor Verification Items

  1. Verify whether recurring subscription and support revenue continues to offset weakness in hardware and product sales.
  2. Monitor operating cash burn, software capitalization, and the decline in cash balances.
  3. Assess whether the restructuring produces the stated approximately $2.7 million of annual savings without impairing customer implementation capacity.
  4. Evaluate the effect of increased software amortization on product margins and future earnings.
  5. Review the ultimate accounting impact of ASC 606 and the new lease standard.
  6. Track the Ameranth patent litigation and any changes in potential exposure.
  7. Reconcile the increased share-based compensation and executive-related costs with operating performance and dilution.