Business Context and Reporting Period
Agilysys, Inc. is a single-segment hospitality technology provider offering point-of-sale, property management, inventory and procurement, payments, subscription, support and professional services to gaming, lodging, resorts, cruise lines, foodservice, restaurants, universities, stadiums and healthcare customers. The supplied filing is a Form 10-K for the fiscal year ended March 31, 2022, filed May 23, 2022. This does not correspond to the requested “2020 Q4” period.
Agilysys operated with approximately 1,400 employees as of March 31, 2022, including approximately 63% in India and 30% in the United States. The company reported continued recovery in hospitality markets as customer locations reopened following COVID-19 disruptions.
Financial Results and Key Metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Total revenue | $162.6 million | $137.2 million | Up 18.6% |
| Products revenue | $36.0 million | $26.7 million | Up 34.6% |
| Support, maintenance and subscription revenue | $99.0 million | $88.6 million | Up 11.7% |
| Professional services revenue | $27.7 million | $21.9 million | Up 26.6% |
| Gross profit | $101.5 million | $89.4 million | Up 13.6% |
| Gross margin | 62.4% | 65.2% | Down 280 basis points |
| Operating income (loss) | $6.3 million | $(21.0) million | Improved by $27.3 million |
| Net income (loss) | $6.5 million | $(21.0) million | Returned to profitability |
| Net income (loss) attributable to common shareholders | $4.6 million | $(23.6) million | Improved materially |
| Diluted earnings (loss) per share | $0.18 | $(1.01) | Improved |
| Cash flow from operating activities | $28.5 million | $28.4 million | Essentially flat |
Subscription revenue increased 28.0% year over year. International revenue represented approximately 7% of total revenue in fiscal 2022, compared with 8% in fiscal 2021.
Operating expenses declined to $95.2 million from $110.3 million. Product development expense declined 16.3% to $46.3 million, and general and administrative expense declined 16.6% to $27.7 million. The decreases were substantially influenced by lower share-based compensation following significant accelerated vesting charges in fiscal 2021.
Cash and cash equivalents were $97.0 million at March 31, 2022, compared with $99.2 million at March 31, 2021. Total current assets were $136.2 million and total current liabilities were $71.5 million. The filing states that the company believes operating cash flow, cash on hand and access to capital markets are adequate to meet liquidity requirements.
Agilysys had limited traditional debt. Finance lease obligations totaled approximately $6,000, while operating lease liabilities totaled $10.7 million. The company also had $35.5 million of Series A convertible preferred stock outstanding, carrying a 5.25% cumulative dividend and convertible at $20.1676 per common share.
Material Changes Versus Prior Comparable Period
- Revenue recovered as hospitality customers reopened properties and resumed technology purchases, reversing much of the COVID-19-related weakness in products and professional services.
- Products revenue increased due to higher sales and deliveries; professional services revenue increased as customers resumed implementation and integration projects.
- Gross margin declined because of a greater proportion of third-party products, higher variable costs in support and subscription services, and hiring and training costs in professional services.
- Operating results improved from a $21.0 million loss to $6.3 million of operating income. Fiscal 2021 included substantial share-based compensation charges; fiscal 2022 share-based compensation expense was $14.5 million versus $40.1 million.
- Fiscal 2022 included $24.5 million of net cash paid for the acquisition of ResortSuite, a Canada-based property management software provider. The acquisition contributed $1.3 million of revenue and was not material to net income for the post-acquisition period.
- Cash flow remained strong at $28.5 million, but investing cash use increased substantially because of the ResortSuite acquisition.
- Fiscal 2020 included $23.7 million of impairment charges, including $22.0 million related to software development costs; no impairment charges were recorded in fiscal 2021 or 2022.
Outlook, Commentary, Risks and Unusual Items
Management described the hospitality market as recovering and stated that the long-term opportunity remained strong, with a total addressable market previously estimated at approximately $4.8 billion of annual recurring revenue. The company plans to invest in product development, cloud and subscription offerings, sales and marketing, international expansion and organizational efficiency. No formal quantitative revenue or earnings guidance was provided in the filing.
- COVID-19 and hospitality exposure: Renewed outbreaks, travel restrictions, customer closures or reduced hospitality spending could delay implementations, reduce demand and impair liquidity.
- Competition: Agilysys competes with larger providers including Oracle, Shiji, Amadeus and Infor, as well as smaller providers and internally developed systems.
- Execution and investment risk: Continued research and development, acquisitions and expansion may increase costs and may not produce expected revenue or profitability.
- Supply chain and labor risk: The company relies on concentrated third-party hardware and technology suppliers and faces rising labor costs and a competitive market for technical personnel.
- Cybersecurity and privacy: Breaches, service disruptions or failures by cloud and other third-party providers could result in liability, regulatory action, reputational damage and customer losses.
- Tax assets: The company had $196.3 million of federal net operating loss carryforwards with expiration dates, $42.8 million of federal carryforwards that may be carried forward indefinitely, and $166.8 million of state carryforwards. A $69.5 million valuation allowance substantially offset deferred tax assets.
- Convertible preferred stock: The preferred stock ranks senior to common stock, requires cumulative dividends and may create dilution upon conversion or cash obligations upon redemption or specified change-of-control events.
- Legal contingency: Agilysys prevailed in the Ameranth patent litigation at the district court level, but appeals remained pending as of the filing; the company could not predict the outcome or potential monetary exposure.
- Lease commitment: An additional operating lease with approximately $11.7 million of commitments was expected to commence in fiscal 2023 with an approximately eleven-year term.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The auditor reported no critical audit matters.
Important Facts for Investors to Verify
- Confirm that the relevant period is fiscal 2022 rather than the requested 2020 fourth quarter.
- Reconcile the reported return to profitability with the underlying reduction in share-based compensation and the absence of fiscal 2020 impairment charges.
- Assess the sustainability of subscription growth and the effect of the declining gross margin.
- Review ResortSuite’s integration, subsequent contribution and final purchase price allocation.
- Evaluate liquidity after preferred dividends, acquisition spending, lease obligations and potential preferred-stock redemption or conversion.
- Monitor hospitality demand, COVID-19 developments, customer implementation backlogs and supplier constraints.
- Review dilution, voting, dividend and redemption terms of the Series A convertible preferred stock.
- Monitor the Ameranth appeal and any other litigation, tax contingencies or changes in the deferred tax valuation allowance.