Agilysys, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended December 31, 2016, representing fiscal third quarter and first nine months of fiscal 2017. The request metadata identifies “2015 Q3,” but the filing itself is for December 31, 2016.
Business context
Agilysys provides hospitality technology, including point-of-sale, property management, inventory and procurement, workforce management, analytics, document management, mobile and wireless solutions, and related services. Its markets include gaming, hotels and resorts, foodservice management, restaurants, universities, stadia, and healthcare. A significant portion of revenue is recurring support, maintenance, and subscription services.
Key financial metrics
| Metric | Q3 FY2017 | Q3 FY2016 | 9M FY2017 | 9M FY2016 |
|---|---|---|---|---|
| Total revenue | $33.4 million | $31.3 million | $97.1 million | $88.4 million |
| Gross profit | $16.2 million | $16.5 million | $48.3 million | $50.5 million |
| Gross margin | 48.6% | 52.7% | 49.8% | 57.1% |
| Operating loss | $1.6 million | $1.7 million | $6.2 million | $2.3 million |
| Net loss | $1.7 million | $1.7 million | $6.4 million | $2.2 million |
| Basic and diluted loss per share | $0.08 | $0.07 | $0.28 | $0.10 |
Revenue mix: Q3 product revenue declined 16.1% to $10.0 million, while support, maintenance, and subscription services increased 9.0% to $16.2 million and professional services increased 60.6% to $7.2 million. For the first nine months, total revenue increased 9.8%; subscription-based service revenue increased approximately 42.3%.
Cash flow and liquidity: Operating activities generated $5.4 million during the first nine months, compared with $8.3 million in the prior-year period. Investing activities used $12.5 million, including $10.3 million for proprietary software development and $2.2 million for capital expenditures. Cash declined $7.9 million to $52.7 million at December 31, 2016. Management believes operating cash flow, cash on hand, and access to capital markets will fund liquidity needs for the next 12 months.
Balance sheet and debt: Total assets were $171.7 million, compared with $185.2 million at March 31, 2016. Total debt was approximately $0.3 million, consisting primarily of capital lease obligations. Current liabilities were $46.6 million, including $27.2 million of deferred revenue. Shareholders’ equity was $117.7 million.
Material changes versus the prior comparable period
- Revenue growth was driven by recurring services and professional services, partially offset by lower product revenue.
- Gross margin declined 417 basis points in Q3 and 730 basis points for the first nine months, primarily because newly commercialized rGuest Stay and rGuest Buy software entered service and generated approximately $2.1 million of Q3 and $5.0 million of nine-month developed-technology amortization.
- Q3 operating loss improved slightly despite lower gross profit, aided by an $1.8 million reduction in general and administrative expense. The reduction included forfeiture credits and reversals associated with the departures of the CEO and CFO.
- Restructuring, severance, and other charges increased by $1.4 million in Q3, including $0.8 million of CEO separation benefits, $0.3 million of CEO search fees, and $0.2 million of restructuring costs.
- First-nine-month net loss increased to $6.4 million from $2.2 million, and operating loss increased to $6.2 million from $2.3 million.
- Capitalized software development costs were $10.3 million in the first nine months, compared with $13.5 million in the prior-year period.
Guidance, outlook, risks, and unusual items
- Management’s strategy emphasizes growth in proprietary products, support and subscription services, professional services, customer diversification, and focused investment in higher-margin opportunities. The filing does not provide specific quantitative revenue or earnings guidance.
- The company expects to continue investing cash in product development, enhancements, marketing, customer expansion, and geographic growth.
- Management identified risks related to execution of its strategy, product development and commercialization, subscription growth, competition, international operations, foreign currency, legal proceedings, tax matters, and the uncertainty inherent in forward-looking statements.
- Management expects no additional costs from the completed fiscal 2016 restructuring activity; the remaining restructuring liability was approximately $0.2 million at December 31, 2016.
- Agilysys has recorded a valuation allowance against substantially all deferred tax assets because realization is not considered more-likely-than-not. The filing estimates potential reductions in unrecognized tax benefits over the next 12 months of up to $0.1 million of tax and $0.1 million of interest, subject to audits and statute expirations.
- The company continues to defend a patent infringement action brought by Ameranth. The filing states that the outcome and potential monetary exposure cannot currently be predicted, although management does not expect the matter to have a material adverse effect.
- Caesars’ bankruptcy restructuring plan provides for payment of approximately $0.7 million of Agilysys pre-petition claims, subject to plan conditions; reorganization was expected later in 2017.
- The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of the quarter end.
Important facts for investors to verify
- Whether recurring subscription growth can offset lower product revenue and sustain overall revenue growth.
- The effect of rGuest Stay and rGuest Buy amortization on future product margins and profitability.
- Progress toward reducing operating losses and converting revenue growth into positive earnings and cash flow.
- Cash consumption from software development and capital expenditures relative to the $52.7 million cash balance.
- Leadership transition costs and the impact of CEO and CFO departures on execution.
- Resolution and potential exposure from the Ameranth patent litigation and other legal contingencies.
- Adoption effects of forthcoming revenue recognition, share-based compensation, cash-flow classification, and lease accounting standards.