Agilysys, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2014, representing the first quarter of fiscal 2015. The filing compares results with the three months ended June 30, 2013. The supplied request metadata identifies “2013 Q1,” but the filing itself clearly reports June 30, 2014 results.
Business Context
Agilysys develops and markets enterprise software, services and solutions for the hospitality industry, including point-of-sale, property management, inventory and procurement, workforce management, analytics, mobile and wireless solutions. It operates as a single segment across North America, Europe and Asia. Revenue is primarily generated from products, support, maintenance and subscription services, and professional services.
Results are affected by the sale of the RSG business in July 2013 and the UK entity in March 2014. These businesses are presented as discontinued operations in the prior-year comparison; continuing-operations results are therefore the more relevant comparison.
Financial Performance and Position
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total net revenue | $23.7 million | $23.7 million | Up 0.2% |
| Gross profit | $14.7 million | $15.6 million | Down 6.2% |
| Gross margin | 61.8% | 66.0% | Down 420 basis points |
| Operating income (loss) | $(3.1) million | $0.5 million | Down $3.6 million |
| Loss from continuing operations | $(2.2) million | $0.8 million income | Unfavorable change |
| Net income (loss) | $(2.2) million | $1.3 million income | Unfavorable change |
| Diluted loss or earnings per share | $(0.10) | $0.06 | Unfavorable change |
Products revenue declined 19.4% to $6.1 million, while support, maintenance and subscription revenue increased 7.3% to $13.8 million and professional services revenue increased 16.7% to $3.9 million.
At June 30, 2014, cash and cash equivalents were $77.9 million, marketable securities were $10.1 million, and total current assets were $114.9 million. Total assets were $178.7 million and shareholders’ equity was $131.0 million. Total debt was approximately $0.3 million, consisting primarily of capital lease obligations. Current liabilities were $39.0 million, including $22.0 million of deferred revenue.
Net cash used in operating activities from continuing operations was $8.2 million, compared with $5.6 million in the prior-year quarter. Investing activities used $13.2 million, primarily for marketable securities, property and equipment, and software development. Financing activities used $0.4 million. Cash and cash equivalents decreased by $21.7 million during the quarter to $77.9 million.
Material Changes Versus the Prior Comparable Period
- Total revenue was essentially flat because growth in recurring services and professional services offset lower product revenue.
- Gross margin deteriorated because of lower sales of higher-margin proprietary software, additional software amortization, and a less favorable labor mix in support services.
- Operating expenses increased by approximately $2.2 million, excluding restructuring and legal settlement charges. Sales and marketing expense rose 31.0% due largely to activities supporting the rGuest product launch, while general and administrative expense rose 10.5% due to back-office rationalization and an ERP replacement project.
- Amortization expense increased by approximately $1.0 million. Approximately $0.9 million related to accelerated amortization of the existing ERP system, which was fully amortized as of June 30, 2014.
- The company recorded $0.4 million of restructuring charges and $0.1 million of legal settlements. It paid $0.7 million of restructuring costs and $1.6 million related to legal settlements during the quarter.
- Prior-year net income included $0.5 million from discontinued operations. The prior-year discontinued operations also included $25.1 million of revenue, so reported consolidated comparisons are not fully comparable without excluding those operations.
- Capitalized software development costs increased to $4.0 million from $1.9 million in the prior-year quarter, while total software development costs on the balance sheet rose to $20.8 million from $17.2 million at March 31, 2014.
Guidance, Outlook, Risks and Unusual Items
Management stated that its strategy is to pursue growth in differentiated hospitality technology solutions, emphasize customer-driven development and innovation, improve operating-expense discipline, and focus investment on higher-margin growth opportunities. The filing does not provide quantitative revenue, earnings or margin guidance.
Management believes that operating cash flow, cash on hand, marketable securities and access to capital markets will provide adequate liquidity for short- and long-term requirements over the next 12 months. The company reported no material changes to contractual obligations, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
Key risks include execution of the sales-force transition and rGuest product launch, product demand and mix, recurring-service cost pressures, continued software-development investment, ERP replacement execution, customer installation timing, and the company’s ability to return to profitability while cash is being used in operations.
Agilysys is defending a patent-infringement lawsuit filed by Ameranth, Inc. The filing states that the outcome and potential monetary exposure cannot currently be predicted. Management believes the resolution of the company’s legal matters is not expected to have a material adverse effect, although the Ameranth matter remains uncertain.
The company has recorded a valuation allowance against substantially all deferred tax assets because management believes realization is not more likely than not given prior losses. Potential reductions in unrecognized tax benefits over the next 12 months were estimated at zero to $0.1 million, plus zero to $0.1 million of interest, subject to audits and statute expirations.
Important Facts for Investors to Verify
- Whether recurring support, maintenance and subscription growth can offset continued weakness in product revenue.
- Whether gross margin can recover from the 61.8% level and whether product and support-service mix improves.
- The pace of cash consumption, including the effect of capitalized software development and ERP-related spending.
- Progress and commercial traction for the rGuest next-generation product launch.
- Future restructuring, severance, legal settlement and ERP-related costs.
- The ultimate outcome and potential exposure from the Ameranth patent litigation.
- The recoverability of deferred tax assets and changes in unrecognized tax benefits.
- Whether management’s stated liquidity position remains adequate if operating losses and negative operating cash flow continue.