Agilysys, Inc. Form 10-Q Summary
Reporting period: The supplied filing covers the three and nine months ended December 31, 2017, Agilysys’ fiscal third quarter and first nine months of fiscal 2018. The request metadata identifies “2016 Q3,” but the filing itself is for fiscal 2018. Financial statements are unaudited and presented under U.S. GAAP.
Business Context
Agilysys provides hospitality technology, including point-of-sale, property management, reservation and table management, inventory and procurement, workforce management, analytics, document management, and mobile solutions. Its customers include gaming, hotels and resorts, cruise operators, corporate foodservice providers, restaurants, universities, stadia, and healthcare organizations. A significant portion of revenue comes from support, maintenance, and subscription services.
Financial Performance and Position
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Total revenue | $31.3 million | $33.4 million | $95.3 million | $97.1 million |
| Gross profit | $15.6 million | $16.2 million | $47.7 million | $48.3 million |
| Gross margin | 49.9% | 48.6% | 50.0% | 49.8% |
| Operating loss | $(3.6) million | $(1.6) million | $(9.8) million | $(6.2) million |
| Net loss | $(1.9) million | $(1.7) million | $(8.1) million | $(6.4) million |
| Loss per share | $(0.08) | $(0.08) | $(0.36) | $(0.28) |
- Q3 revenue declined 6.4%, driven by an 18.5% decline in products revenue and a 17.6% decline in professional services revenue. Support, maintenance, and subscription revenue increased 6.0%.
- For the nine-month period, revenue declined 1.8%. Products revenue decreased 14.9%, while support, maintenance, and subscription revenue increased 8.3%; subscription-based service revenue increased 36.0%.
- Q3 gross margin improved 1.3 percentage points to 49.9%; nine-month gross margin improved 0.2 percentage points to 50.0%.
- Operating losses widened due primarily to higher general and administrative costs, product development spending, amortization, and legal settlements. General and administrative expense increased 66.2% in Q3 and 34.9% for the nine-month period, partly due to executive stock compensation and professional fees.
- Cash flow from operations was $2.1 million for the first nine months, down from $5.4 million in the comparable period.
- Investing cash outflows were $12.6 million, including $7.3 million for proprietary software development and $5.3 million for property, equipment, and internal-use software.
- Cash and cash equivalents were $37.6 million at December 31, 2017, compared with $49.3 million at March 31, 2017. Total debt was approximately $0.2 million, consisting of capital lease obligations.
- Total assets were $155.9 million and shareholders’ equity was $108.2 million at December 31, 2017. Deferred revenue declined to $23.4 million from $29.2 million at March 31, 2017.
Material Changes Versus the Prior Comparable Period
- The revenue mix continued shifting from products and professional services toward recurring support, maintenance, and subscription services.
- Products gross margin declined in Q3 to 16.4%, primarily because of lower product revenue and increased amortization related to the rGuest Buy point-of-sale solution. Approximately $6.8 million of related software development costs entered service in September 2017.
- Support, maintenance, and subscription gross margin increased to 76.0% in Q3 and 75.3% for the nine-month period, reflecting operating leverage in the hosting and support infrastructure.
- Professional services margins weakened because of lower revenue and the cost structure associated with reorganizing the workforce into customer-account teams.
- Sales and marketing costs declined 14.4% in Q3 and 13.5% year to date, including lower payroll, advertising, and incentive commissions.
- The company recorded $1.2 million of restructuring and severance charges in the first nine months, compared with $1.5 million in the prior period. Management expects the restructuring initiative to generate approximately $2.7 million of annual savings.
- The company adopted ASU 2016-09 for stock-based compensation, recording an approximately $0.7 million reduction to opening retained earnings and changing forfeiture accounting. Nine-month share-based compensation expense increased to $3.8 million from $0.8 million.
Guidance, Outlook, Risks, and Unusual Items
- Management’s strategy is to improve profitability and growth through product development, expansion of the rGuest platform, international expansion, tighter operating expense management, and improved organizational efficiency.
- No quantitative revenue or earnings guidance is provided in the filing.
- Management believes operating cash flow, $37.6 million of cash on hand, and access to capital markets will provide adequate liquidity for the next 12 months.
- The Tax Cuts and Jobs Act generated a one-time tax benefit of approximately $1.3 million from remeasurement of deferred tax balances. A further $0.4 million tax benefit resulted from a California Franchise Tax Board settlement. Substantially all deferred tax assets remain offset by a valuation allowance.
- The company recorded $0.2 million of legal settlements in Q3 and $0.2 million for the nine-month period. A patent infringement lawsuit brought by Ameranth remains pending; the company disputes the allegations and cannot predict the outcome or potential monetary exposure.
- The company anticipates that adoption of the new lease standard will materially affect its financial statements because of the significance of its leases. Revenue recognition standard adoption was planned for April 1, 2018, with the implementation approach and financial impact still under evaluation.
- New lease commitments totaled approximately $1.2 million, comprising a Singapore office lease of approximately $1.0 million over 36 months and a Roswell, Georgia warehouse lease of approximately $0.2 million over 62 months.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Investor Verification Checklist
- Verify whether the shift toward subscription revenue can offset continued declines in hardware and professional services revenue.
- Assess the sustainability of the reported subscription growth and support-service margins.
- Monitor operating expense discipline, restructuring savings, and the effect of elevated stock-based compensation.
- Evaluate cash consumption, software development investment, and liquidity if operating losses continue.
- Review the impact of the new revenue recognition and lease accounting standards on reported revenue, deferred revenue, assets, and liabilities.
- Track developments in the Ameranth patent litigation and other legal or tax contingencies.
- Consider the effect of the one-time tax benefits when evaluating underlying profitability.