Agilysys, Inc. Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2018. The request metadata references “2016 Q4,” but the supplied filing is Agilysys’s fiscal 2018 Annual Report, filed May 25, 2018.
Business Context
Agilysys provides hospitality technology, including point-of-sale, payment gateway, property management, reservation and table management, inventory and procurement, analytics, document management, mobile, cloud, support, subscription and professional services. Its primary markets are gaming, hotels/resorts/cruise, corporate foodservice, and restaurants, universities, stadia and healthcare.
- The company is shifting toward its rGuest platform, cloud applications, hosted perpetual licenses and subscription services.
- Fiscal 2018 included the opening of a development center in Chennai, India.
- International revenue represented approximately 8% of total revenue, compared with 6% in fiscal 2017 and 4% in fiscal 2016.
- Retail Solutions Group and the United Kingdom entity remain classified as discontinued operations for applicable historical periods.
Financial Performance and Liquidity
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $127.4 million | $127.7 million | Down 0.2% |
| Gross profit | $64.4 million | $63.8 million | Up 1.0% |
| Gross margin | 50.6% | 50.0% | Up 0.6 percentage points |
| Operating loss | $12.1 million | $11.4 million | Loss increased $0.7 million |
| Net loss | $8.4 million | $11.7 million | Loss improved $3.4 million |
| Net loss per share | $0.37 | $0.52 | Improved |
| Operating cash flow | $6.9 million | $3.4 million | Improved $3.4 million |
- Products revenue declined 12.1% to $33.7 million, while support, maintenance and subscription revenue increased 9.1% to $69.1 million. Professional services revenue declined 5.5% to $24.6 million.
- Hosted perpetual and subscription revenue grew 35.0% and represented 16% of consolidated revenue, compared with 12% in fiscal 2017.
- Support, maintenance and subscription services generated a 75.8% gross margin, compared with 21.7% for products and 19.2% for professional services.
- Operating expenses were $76.5 million. General and administrative expense increased 20.9%, primarily because of executive stock compensation and higher headcount, partly offset by lower product development and sales and marketing costs.
- Fiscal 2018 included $1.8 million of restructuring, severance and other charges and $0.2 million of legal settlements. No impairment or fair-value adjustment was recorded.
- The effective tax rate was negative 28.0%, including an approximately $3.3 million tax benefit related primarily to the Tax Cuts and Jobs Act. Substantially all deferred tax assets remained subject to a valuation allowance.
- Cash and cash equivalents were $39.9 million at March 31, 2018, down from $49.3 million. Working capital was $19.3 million, down from $27.2 million.
- Total debt was approximately $0.2 million, consisting primarily of capital lease obligations. Contractual obligations totaled $15.5 million, including $14.9 million of operating leases.
- Investing cash outflows were $15.1 million, including $8.9 million of capitalized software development and $6.1 million of capital expenditures.
- Total assets were $157.2 million and shareholders’ equity was $108.4 million at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat, but the mix continued to move away from products toward recurring support, maintenance, hosted and subscription revenue.
- Gross margin improved modestly because of higher-margin support and subscription revenue and scalable hosting infrastructure.
- Operating loss widened despite the higher gross profit, reflecting increased general and administrative costs, amortization, restructuring and other expenses.
- Net loss improved due primarily to the tax benefit and favorable other income, rather than a corresponding improvement in operating profitability.
- Operating cash flow approximately doubled, but remained insufficient to fund investing and financing outflows; cash declined by $9.3 million during the year.
- Capitalized software development declined from $11.9 million to $8.9 million, while capital expenditures increased from $4.2 million to $6.1 million.
Outlook, Commentary, Risks and Unusual Items
Management’s strategy is to improve profitability and shareholder value through customer-focused product development, organizational efficiency, recurring revenue growth, expansion of the rGuest platform, and international expansion. Management expects to use a portion of cash on hand to enhance existing products, develop and market new products, and broaden the customer base.
- Management stated that cash on hand, operating cash flow and access to capital markets should provide adequate liquidity for foreseeable operating, capital spending and working capital needs.
- The company adopted the new revenue recognition standard using the modified retrospective method effective April 1, 2018. Management did not expect a material impact on most revenue timing, but expected changes to sales commission deferral and balance-sheet presentation of receivables and contract liabilities.
- The new lease standard was expected to materially affect the consolidated financial statements because of the company’s operating leases.
- Key risks include rapid technological change, failure of new products or cloud offerings to gain market acceptance, cybersecurity and payment-data breaches, intense competition, dependence on strategic suppliers, customer concentration and hospitality-industry weakness.
- The company carries significant software development costs, goodwill and intangible assets that could be impaired if expected product performance or market conditions deteriorate.
- The Ameranth patent litigation remained pending. Agilysys disputed the allegations and stated that the outcome and potential monetary exposure could not be predicted.
- Agilysys paid no dividends in fiscal 2018 or 2017 and stated that dividends were unlikely in the foreseeable future.
- Management and Grant Thornton both concluded that internal control over financial reporting was effective. The auditor issued unqualified opinions on the financial statements and internal controls.
Important Facts for Investors to Verify
- Whether recurring hosted and subscription revenue continues to grow fast enough to offset declining products and professional services revenue.
- Whether the company can convert improved gross margin and operating cash flow into sustained operating profitability.
- The cash-burn rate, remaining cash resources, capitalized software investment requirements and future lease obligations.
- The recoverability of $45.2 million of net software development costs, $19.6 million of goodwill and $8.5 million of net intangible assets.
- The ultimate impact of ASC 606 revenue recognition, including deferred commissions, contract liabilities and the approximately $10.2 million offset between accounts receivable and deferred revenue noted at March 31, 2018.
- The status and potential exposure from the Ameranth patent litigation and other legal or tax contingencies.
- The realizability of tax assets, including $198.7 million of federal net operating loss carryforwards and the $54.3 million deferred-tax valuation allowance.
- The company’s ability to compete effectively in cloud hospitality software while maintaining data security and service reliability.