Agilysys, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2021, representing Agilysys’ second fiscal quarter and first half of fiscal 2022. The filing is unaudited and compares results with the periods ended September 30, 2020. Agilysys provides hospitality software and related services, including point-of-sale, property management, inventory, procurement, payments and subscription solutions.
Key Financial Metrics
| Metric | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Six months ended September 30, 2021 | Six months ended September 30, 2020 |
|---|---|---|---|---|
| Revenue | $37.9 million | $34.4 million | $76.6 million | $64.2 million |
| Gross profit | $24.3 million | $23.2 million | $49.1 million | $41.7 million |
| Gross margin | 64.0% | 67.4% | 64.1% | 65.0% |
| Operating income | $1.1 million | $6.1 million | $3.2 million | $5.6 million |
| Operating margin | 3.0% | 17.6% | 4.1% | 8.8% |
| Net income | $1.0 million | $5.9 million | $3.0 million | $5.4 million |
| Net income attributable to common shareholders | $0.5 million | $5.3 million | $2.0 million | $3.7 million |
| Diluted earnings per share | $0.02 | $0.22 | $0.08 | $0.15 |
- Revenue mix: Second-quarter products revenue increased 11.3% to $7.3 million; support, maintenance and subscription services increased 7.7% to $24.0 million; and professional services increased 19.4% to $6.6 million. Subscription revenue increased 21.7% in the quarter and 26.9% for the six-month period.
- Cash flow: Operating cash flow was $11.7 million for the six months, compared with $6.6 million in the prior-year period. Capital expenditures were $0.8 million.
- Liquidity: Cash and cash equivalents were $106.4 million at September 30, 2021, compared with $99.2 million at March 31, 2021. Management stated that operating cash flow, cash on hand and access to capital markets are expected to meet liquidity needs.
- Debt and obligations: Total debt was approximately $0.1 million, consisting primarily of finance lease obligations. The company had current and non-current operating lease liabilities totaling approximately $11.7 million and approximately $11.8 million of additional operating leases not yet commenced.
- Preferred stock: Series A convertible preferred stock had a carrying amount of $35.5 million. It carries a 5.25% annual dividend, payable semi-annually under specified cash or in-kind alternatives. Preferred dividends reduced earnings attributable to common shareholders by $0.9 million for the six months.
Material Changes Versus the Prior Comparable Period
- Revenue grew 10.3% in the quarter and 19.4% for the first six months, reflecting customer site reopenings, increased product deliveries, higher implementation activity and continued subscription growth.
- Gross profit increased, but gross margin declined by 3.4 percentage points in the quarter and 0.9 percentage points for the six months. Quarterly pressure reflected a greater proportion of third-party products and delays in professional-services projects.
- Operating income declined 81.5% in the quarter and 43.8% for the six months. Operating expenses excluding legal settlements, severance and other charges increased 30.3% in the quarter and 28.6% for the six months.
- Product development expense increased substantially due to restored base pay and benefits and higher share-based compensation. Sales and marketing expense also rose as travel, trade shows, advertising and promotional activity resumed.
- Share-based compensation expense increased to $7.0 million for the six months from $2.7 million in the prior-year period, contributing materially to higher operating expenses.
- Operating cash flow improved by $5.0 million. Financing cash flow changed from $32.8 million of inflow in the prior-year period, primarily from preferred-stock issuance, to $3.6 million of outflow, primarily employee-tax withholding share repurchases and preferred dividends.
Outlook, Risks and Unusual Items
- The filing does not provide specific quantitative revenue, earnings or margin guidance.
- COVID-19 continued to create uncertainty. Potential effects include weaker customer demand, delayed implementations, reduced renewals, collection risk, operating disruptions and lower productivity from modified work arrangements. Management stated that the ultimate impact cannot be predicted.
- Professional-services projects were delayed in the quarter while implementation teams remained fully staffed, reducing utilization and margins.
- Severance and other charges were $0.6 million in the quarter and $0.8 million for the six months. Legal settlements were $0.3 million in the quarter and $0.4 million for the six months, primarily related to a former-employee lawsuit for which no further activity is expected.
- Agilysys remains involved in the Ameranth patent litigation. Management disputes the allegations and is defending the matter; the outcome and potential impact cannot currently be predicted.
- Substantially all deferred tax assets in the United States and certain foreign jurisdictions remain offset by valuation allowances because realization is not considered more likely than not.
- The company reported no material changes in market-risk exposure, no off-balance-sheet arrangements and no material changes to previously disclosed contractual obligations.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify the filing period: the supplied filing is for September 30, 2021, or fiscal second quarter 2022, rather than calendar 2020 second quarter.
- Assess whether subscription growth and customer reopenings can offset implementation delays and continued hospitality-sector COVID-19 exposure.
- Monitor gross-margin trends, particularly product mix, third-party hardware contribution and professional-services utilization.
- Evaluate the sustainability of elevated product-development, sales-and-marketing and share-based compensation expenses.
- Review the terms, dividend burden and potential dilution associated with the Series A convertible preferred stock.
- Track the Ameranth litigation, tax audits, deferred-tax-asset valuation allowances and approximately $11.8 million of future operating lease commitments.