Agilysys, Inc. Form 10-Q Summary
Reporting period: The provided filing covers the three and six months ended September 30, 2016, Agilysys’ second quarter and first half of fiscal 2017. The request metadata identifies “2015 Q2,” but the filing itself is a 2016 Form 10-Q and compares against September 30, 2015.
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, cruise, foodservice management, restaurants, universities, stadia and healthcare. A significant portion of revenue comes from support, maintenance and subscription services.
Management’s strategy emphasizes proprietary products, subscription-based offerings, customer diversification, intellectual property, and investment in products including rGuest Stay and rGuest Buy.
Financial Performance
| Metric | Three Months Ended September 30, 2016 | Three Months Ended September 30, 2015 | Six Months Ended September 30, 2016 | Six Months Ended September 30, 2015 |
|---|---|---|---|---|
| Total revenue | $32.7 million | $29.6 million | $63.6 million | $57.1 million |
| Gross profit | $15.9 million | $17.6 million | $32.1 million | $34.0 million |
| Gross margin | 48.6% | 59.3% | 50.4% | 59.5% |
| Operating loss | $(2.3) million | $(0.4) million | $(4.5) million | $(0.7) million |
| Net loss | $(2.4) million | $(0.4) million | $(4.7) million | $(0.6) million |
| Loss per share | $(0.11) | $(0.02) | $(0.21) | $(0.02) |
Revenue mix: Second-quarter products revenue increased 7.9% to $10.7 million, support, maintenance and subscription services increased 8.5% to $15.9 million, and professional services increased 19.9% to $6.0 million. For the first half, these categories increased 8.0%, 4.4% and 42.0%, respectively.
Cash flow and liquidity: First-half cash used in operating activities was $0.2 million, compared with $0.2 million in the prior-year period. Cash used in investing activities was $8.1 million, including $6.6 million of capitalized software development costs and $1.5 million of capital expenditures. Cash used in financing activities was $0.7 million. Cash declined from $60.6 million at March 31, 2016 to $51.6 million at September 30, 2016.
Debt: Total debt was approximately $0.3 million at September 30, 2016, consisting primarily of capital lease obligations. Management stated that operating cash flow, cash on hand and access to capital markets should fund liquidity requirements for the next 12 months.
Balance sheet: Total assets were $171.4 million and shareholders’ equity was $119.5 million at September 30, 2016. Current assets were $79.1 million versus current liabilities of $44.3 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 10.2% in the quarter and 11.4% in the first half.
- Gross margin declined by approximately 1,075 basis points in the quarter and 910 basis points in the first half.
- Product gross margin was pressured by increased amortization of developed technology after rGuest Stay and rGuest Buy entered general availability. Developed technology amortization increased by $1.9 million in the quarter and $2.9 million in the first half.
- Operating and net losses increased substantially despite revenue growth, primarily because of lower gross profit and higher technology amortization.
- Subscription-based service revenue increased approximately 46.3% in the quarter and 39.3% in the first half. Subscription-based booking total contract value increased 135% year over year in the first half.
- Professional services revenue grew rapidly, but margins declined because of upfront investment in the professional services organization.
- Operating cash use remained broadly unchanged year over year, while investing cash use decreased from $12.2 million to $8.1 million.
Outlook, Risks, Contingencies and Unusual Items
- Management expects to continue investing cash in new products, existing product enhancements, customer expansion and geographic growth, with an emphasis on higher-margin revenue opportunities and operating expense discipline.
- The filing does not provide a quantitative revenue, earnings or margin forecast.
- Remaining restructuring liability was approximately $17,000 at September 30, 2016; additional fiscal 2017 charges were expected but not to exceed $0.2 million.
- The company recorded $85,000 of legal settlement expense in the quarter and first half. It also faces an Ameranth patent infringement lawsuit; management disputes the allegations and cannot predict the outcome or potential monetary exposure.
- Approximately $0.7 million of Caesars-related pre-petition receivables remained outstanding at September 30, 2016.
- Substantially all deferred tax assets are offset by a valuation allowance. Management expects a future release of the Hong Kong valuation allowance, which would increase reported net income but would not affect cash taxes.
- The company is evaluating the future effects of new accounting standards, including revenue recognition, leases, share-based payments and cash-flow presentation.
- Management reported effective disclosure controls and no changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Confirm the applicable period: the filing is for fiscal 2017 second quarter, ended September 30, 2016, rather than 2015 Q2.
- Assess whether subscription growth and new product adoption can offset the near-term impact of developed technology amortization and lower gross margins.
- Review the sustainability of cash funding given operating cash flow near breakeven and continued software development investment.
- Monitor the Ameranth litigation, Caesars receivable recovery and other legal or tax contingencies.
- Evaluate the impact of future accounting adoption, particularly ASC 606 revenue recognition and lease accounting.