Agilysys, Inc. Form 10-Q Summary
Reporting period: The supplied filing covers the three and nine months ended December 31, 2019, Agilysys’s fiscal third quarter and first nine months of fiscal 2020. The request metadata identifies “2018 Q3,” but the filing itself is clearly a December 31, 2019 Form 10-Q. Amounts are in thousands, except per-share data.
Business Context
Agilysys provides hospitality software and related products and services to gaming, hotels and resorts, cruise, managed foodservice, and sports and entertainment customers. Offerings include point-of-sale, property management, inventory and procurement, payment, subscription, support, maintenance, and professional services. The company operates across multiple international regions and is headquartered in Alpharetta, Georgia.
Financial Results and Key Metrics
| Metric | Three Months Ended Dec. 31, 2019 | Three Months Ended Dec. 31, 2018 | Nine Months Ended Dec. 31, 2019 | Nine Months Ended Dec. 31, 2018 |
|---|---|---|---|---|
| Total revenue | $42.0 million | $36.0 million | $121.1 million | $104.2 million |
| Gross profit | $21.1 million | $18.6 million | $61.3 million | $54.3 million |
| Gross margin | 50.2% | 51.8% | 50.6% | 52.1% |
| Operating loss | $(2.7) million | $(3.9) million | $(7.1) million | $(9.3) million |
| Net loss | $(2.6) million | $(4.0) million | $(7.1) million | $(9.6) million |
| Basic and diluted loss per share | $(0.11) | $(0.18) | $(0.30) | $(0.42) |
- Third-quarter revenue increased 16.6%, led by products revenue up 18.5%, professional services up 38.2%, and support, maintenance and subscription services up 8.4%. Subscription revenue increased 24.8% year over year.
- Nine-month revenue increased 16.2%. Products and professional services each increased 24.2%, while support, maintenance and subscription services increased 9.3%; subscription revenue increased 22.2%.
- Operating losses narrowed due to revenue growth and operating leverage, despite higher product development and administrative spending.
- Product development expense increased 17.7% for the nine-month period, partly because the company capitalized no external-use software development costs in fiscal 2020 compared with approximately $2.0 million in the prior-year period.
- Cash flow from operations was $5.3 million for the first nine months, compared with $1.7 million in the prior-year period. Investing cash flow was $(3.0) million, primarily for property and equipment, and financing cash flow was $(1.1) million, primarily for employee tax-withholding share repurchases.
- Cash and cash equivalents were $41.9 million at December 31, 2019, compared with $40.8 million at March 31, 2019. The company reported approximately $0.1 million of total debt, consisting of finance lease obligations.
- Total assets were $171.8 million and shareholders’ equity was $96.9 million at December 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue growth exceeded cost growth, but consolidated gross margin declined 160 basis points in the quarter and 150 basis points for the nine-month period.
- Support, maintenance and subscription services margin declined to 76.9% in the quarter and 77.7% for the nine-month period because of expanded support teams and hosting infrastructure.
- Professional services margin improved to 27.6% in the quarter and 27.3% for the nine-month period as implementation efficiencies improved following hiring and training.
- Product development spending increased due to expanded development teams, higher compensation and reduced capitalization of development costs.
- The company adopted the new lease accounting standard, Topic 842, on April 1, 2019. This resulted in recognition of operating lease right-of-use assets of $13.8 million and operating lease liabilities of $16.3 million at adoption. At December 31, 2019, operating lease liabilities totaled $14.0 million.
- Restructuring, severance and other charges declined to $0.4 million for the first nine months from $0.9 million. A $0.1 million net legal settlement benefit was recorded in fiscal 2020.
Outlook, Risks, Contingencies and Unusual Items
- Management’s strategy is to grow through product development, expansion of the rGuest platform, international growth, broader customer penetration, and tighter operating expense management. The filing does not provide quantitative revenue or earnings guidance.
- Management expects operating cash flow, cash on hand, and access to capital markets to fund short- and long-term liquidity requirements.
- Substantially all U.S. and certain foreign deferred tax assets are offset by valuation allowances because management believes realization is not more likely than not. The effective tax rates were negative because the company remains in a loss position.
- The company is subject to various legal matters. The Ameranth patent litigation remains unresolved, although key patents were invalidated and an appellate ruling against Ameranth was upheld in November 2019. The filing states that the ultimate outcome and potential impact remain unclear.
- Management reported no material changes to previously disclosed risk factors, no material market-risk changes, and no off-balance-sheet arrangements.
- An additional India development-center operating lease was expected to commence in January 2020, with approximately $2.5 million of related right-of-use assets and lease liabilities.
- Forward-looking statements remain subject to competitive, operational, technology, customer adoption, international, legal, tax, and other risks described in the filing and prior Form 10-K.
Important Facts for Investors to Verify
- Confirm the reporting-period discrepancy: the supplied filing is for December 31, 2019, not 2018 Q3.
- Assess whether strong revenue growth can continue while subscription and consolidated gross margins remain under pressure.
- Monitor the path from operating losses to profitability, particularly the effect of product development hiring and ongoing software investment.
- Evaluate recurring subscription and support revenue growth, customer retention, and the scalability of hosting and support infrastructure.
- Review cash conversion, working-capital movements, capital expenditures, lease obligations, and the company’s limited debt position.
- Follow developments in the Ameranth litigation and any potential effect on financial statements, liquidity, or product offerings.
- Review deferred tax asset valuation allowances and the implications of continued losses for future tax benefits.