Agilysys, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, representing the first quarter of fiscal 2019. The filing’s comparable period is the three months ended June 30, 2017. The financial statements are unaudited. Agilysys provides hospitality-industry software and services, including point-of-sale, property management, reservations, payment, inventory, analytics, and subscription solutions.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total revenue | $34.0 million | $33.9 million | Up 0.4% |
| Gross profit | $17.9 million | $16.7 million | Up 7.3% |
| Gross margin | 52.6% | 49.2% | Up 3.4 percentage points |
| Operating loss | $1.6 million | $3.0 million | Improved $1.4 million |
| Net loss | $1.7 million | $3.0 million | Improved $1.2 million |
| Basic and diluted loss per share | $0.08 | $0.13 | Improved |
| Cash flow from operations | $(1.4) million | $(0.5) million | Greater use of cash |
| Cash and equivalents at period end | $35.1 million | $43.4 million | Down from June 2017; $39.9 million at March 31, 2018 |
Revenue mix: Products revenue was $9.1 million, down 11.7%; support, maintenance and subscription services revenue was $17.9 million, up 7.6%; and professional services revenue was $7.0 million, up 1.2%. Subscription revenue increased approximately 18.7% year over year.
Cash flow and investment: Investing cash use was $2.9 million, including $2.1 million of capitalized software development and approximately $0.7 million for property and equipment and internal-use software. Financing cash use was $0.5 million, primarily for share repurchases to satisfy employee tax withholding. Total cash decreased $4.9 million during the quarter.
Liquidity and debt: Management reported that cash on hand, operating cash flow, and access to capital markets should fund short- and long-term requirements for the next 12 months. Total debt was approximately $0.1 million, consisting of capital lease obligations. Approximately 90% of cash was held in the United States.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly flat as growth in recurring support, maintenance, and subscription services offset lower third-party hardware sales.
- Gross margin improved primarily because of the scalable nature of hosted infrastructure and improved professional-services utilization following workforce restructuring.
- Operating expenses excluding legal settlements, restructuring, severance, and other charges declined 3.3%. Sales and marketing and general and administrative expenses decreased, while product development expense increased 7.0% due primarily to expansion of the India Development Center.
- Restructuring, severance, and other charges increased to $0.4 million from $0.04 million, and the company recorded $0.09 million of legal settlements.
- Operating loss and net loss improved despite higher operating cash use, reflecting working-capital changes and continued investment in software development.
Accounting and Unusual Items
- Agilysys adopted ASC 606, Revenue from Contracts with Customers, on April 1, 2018 using the modified retrospective method. The adoption increased opening retained earnings by $2.6 million and created contract assets and contract liabilities.
- ASC 606 increased reported Q1 revenue by a net $0.05 million versus the amount that would have been reported under the prior standard and reduced reported net loss by approximately $0.08 million. It did not affect cash flows.
- At June 30, 2018, contract assets were $5.3 million and contract liabilities were $30.8 million. Approximately $34 million of remaining performance obligations were expected to be recognized over the next 12 months.
- The company capitalized approximately $1.9 million of sales incentive costs in connection with ASC 606 and expensed $0.9 million of sales commissions during the quarter.
- The company had a full valuation allowance against substantially all deferred tax assets, reflecting uncertainty about future taxable income.
Outlook, Commentary, and Risks
Management’s strategy emphasizes customer-focused product development, organizational efficiency, expansion of the rGuest platform, international growth, and disciplined investment in products and markets offering attractive returns. The filing does not provide quantitative revenue or earnings guidance.
- Management expects to continue investing cash in software enhancements, new products, customer expansion, and international growth.
- Material risks include continued operating losses, negative operating cash flow, dependence on recurring service growth, execution of software-development investments, foreign-currency exposure, and reliance on future taxable income to realize deferred tax assets.
- Agilysys is defending a long-running patent-infringement lawsuit brought by Ameranth. The company cannot predict the outcome or potential monetary exposure, although management believes current legal matters are not expected to have a material adverse effect.
- The company expects the adoption of the new lease standard to materially affect its financial statements because of the significance of its leases; the filing does not quantify the impact.
- Management stated that there were no material changes to previously disclosed risk factors, contractual obligations, market-risk exposures, or off-balance-sheet arrangements.
Investor Verification Points
- Verify that recurring support, maintenance, and subscription growth continues to offset declining product and hardware revenue.
- Track progress toward profitability and positive operating cash flow, including the effect of product-development spending and restructuring costs.
- Reconcile ASC 606 contract assets, contract liabilities, remaining performance obligations, and future revenue recognition.
- Assess liquidity runway in light of the $35.1 million cash balance, quarterly cash burn, and ongoing software investment.
- Monitor the Ameranth litigation, tax examinations, uncertain tax positions, and the eventual accounting impact of the new lease standard.