Agilysys, Inc. Form 10-Q Summary
Reporting period: The supplied filing covers the three and nine months ended December 31, 2014, Agilysys’ third quarter and first nine months of fiscal 2015. The request metadata identifies “2013 Q3,” but the filing itself is for fiscal 2015 Q3. Amounts are in thousands unless otherwise stated.
Business context
Agilysys provides software-enabled solutions and services to the hospitality industry, including point-of-sale, property management, inventory and procurement, workforce management, analytics, document management, and mobile solutions. Its principal markets include gaming, hotels and resorts, foodservice management, restaurants, universities, stadia, and healthcare. The company operates as a single segment, with significant revenue from support, maintenance, and subscription services.
Prior-period results were reclassified to present the previously sold RSG business and U.K. entity as discontinued operations. Accordingly, the operating comparison below primarily reflects continuing operations.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Total revenue | $24.7 million | $25.0 million | $74.8 million | $73.5 million |
| Gross profit | $14.1 million | $15.2 million | $45.5 million | $47.4 million |
| Gross margin | 57.1% | 60.7% | 60.8% | 64.5% |
| Operating loss | $(2.7) million | $(3.0) million | $(6.8) million | $(3.6) million |
| Loss from continuing operations | $(2.7) million | $(1.7) million | $(6.1) million | $(2.2) million |
| Net loss | $(2.7) million | $(2.7) million | $(6.1) million | $19.1 million net income |
| Basic and diluted loss per share | $(0.12) | $(0.12) | $(0.27) | $0.87 |
Quarterly revenue declined 0.9%, while nine-month revenue increased 1.8%. Support, maintenance, and subscription revenue increased 4.8% in the quarter and 6.3% year to date. Products revenue declined 10.8% in the quarter and 13.5% year to date as management emphasized subscription-based services and new-logo business. Professional services revenue was essentially flat in the quarter and increased 20.4% year to date.
Gross margin contracted because of lower higher-margin proprietary software sales, incremental amortization of software products, and weak professional-services utilization. The quarterly professional-services gross margin fell to 10.7% from 32.2%, primarily due to higher labor costs and subnormal utilization.
Cash flow, liquidity, debt, and balance sheet
- Cash used in operating activities from continuing operations was $7.5 million for the first nine months of fiscal 2015, compared with $7.1 million in the prior-year period.
- Cash used in investing activities was $22.5 million, including $12.5 million of capitalized software development, $3.9 million for the Dining Ventures acquisition and related developed technology, approximately $3.9 million for the ERP replacement project and property and equipment, and net purchases of marketable securities.
- Net cash decreased $30.5 million during the first nine months, to $69.1 million at December 31, 2014, from $99.6 million at March 31, 2014. Marketable securities totaled $5.0 million.
- Total debt was approximately $0.3 million, consisting primarily of capital lease obligations. The filing states that cash, marketable securities, operating cash flow, and access to capital markets are expected to fund requirements for the next 12 months.
- Total assets were $174.6 million and shareholders’ equity was $128.7 million at December 31, 2014.
- Software development costs increased to $28.5 million from $17.2 million at March 31, 2014, reflecting continued investment in proprietary products.
Material changes and unusual items
- Product development expense increased 15.6% in the quarter, and sales and marketing expense increased 18.9%, reflecting engineering investment, sales-force reorganization, and marketing for the rGuest product family.
- Amortization expense declined substantially because the prior ERP system was fully amortized by June 30, 2014. The prior-year quarter included approximately $1.6 million of accelerated ERP amortization.
- No asset impairment charge was recorded in the current quarter, compared with $0.3 million in the prior-year quarter related to discontinued internal-use software.
- The company recorded $0.2 million of legal settlements during the first nine months and restructuring, severance, and other charges of $0.9 million. Remaining restructuring liabilities were approximately $0.1 million, and management did not anticipate significant additional restructuring charges.
- On July 3, 2014, Agilysys acquired certain Dining Ventures assets supporting the rGuest Seat product for approximately $3.8 million in cash.
- The prior-year nine-month results included $21.3 million of income from discontinued operations, including a $23.1 million gain on the RSG sale; this largely explains the comparison from $19.1 million of prior-year net income to a current-period net loss.
Outlook, risks, and contingencies
Management’s strategy focuses on subscription and hosted offerings, next-generation products, hospitality technology, tighter expense management, and investment in higher-margin growth opportunities. The filing does not provide specific quantitative revenue or earnings guidance.
- Caesars Entertainment and certain affiliates filed for Chapter 11 bankruptcy in January 2015. Agilysys had approximately $2.9 million of receivables due from the affected entities at December 31, 2014, including approximately $1.0 million recognized as revenue in the quarter. The balance represented approximately 14% of total accounts receivable, and no specific reserve had been recorded.
- The company has substantial ongoing software-development investment and continued operating losses, which may pressure cash flow if expected product growth or subscription conversion does not materialize.
- Professional-services profitability was adversely affected by customer requirements and labor utilization; continued execution issues could affect margins.
- Substantially all deferred tax assets are offset by a valuation allowance because management considers realization uncertain in light of prior losses.
- Ameranth patent litigation remains pending and stayed while a U.S. Patent and Trademark Office review proceeds. The filing states that the outcome and potential monetary exposure cannot currently be predicted.
- Management stated that known legal matters are not expected to have a material adverse effect, although outcomes and timing remain uncertain.
Important facts for investors to verify
- Whether the Caesars bankruptcy results in collection losses or a required allowance against the approximately $2.9 million receivable.
- Progress and return on the ERP replacement and proprietary software investments, including the $28.5 million software-development asset balance.
- Whether subscription and hosted revenue growth offsets declining product revenue and supports recovery in gross margins.
- Professional-services utilization, project execution, and the sustainability of the sharp decline in professional-services margin.
- Cash burn, liquidity, and the company’s ability to reach profitability without materially increasing external financing.
- Potential exposure from the Ameranth patent litigation, tax examinations, contingent acquisition consideration, and other legal or contractual matters.