Business Context and Reporting Period
Agilysys, Inc. provides hospitality technology, including point-of-sale, payment, reservation, property-management, inventory, analytics, document-management, and subscription solutions. The filing is an unaudited Form 10-Q for the quarter ended September 30, 2018, representing the second quarter and first six months of fiscal 2019. The request metadata identifies “2017 Q2,” but the filing text clearly reports September 30, 2018 results compared with September 30, 2017.
As of October 24, 2018, 23.5 million common shares were outstanding.
Key Financial Metrics
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenue | $34.2 million, up 13.5% | $68.2 million, up 6.6% |
| Gross profit | $17.7 million | $35.6 million |
| Gross margin | 51.9%, versus 51.0% | 52.2%, versus 50.1% |
| Operating loss | $3.8 million, versus $3.2 million | $5.4 million, versus $6.2 million |
| Net loss | $3.8 million, or $0.16 per share | $5.5 million, or $0.24 per share |
| Operating cash flow | Not separately provided | $(2.7) million, versus $(1.6) million |
- Quarterly revenue growth was led by products revenue, up 19.8% to $8.8 million; support, maintenance and subscription services, up 10.2% to $18.9 million; and professional services, up 15.3% to $6.6 million.
- Subscription service revenue increased approximately 26.8% in the quarter and 22.8% in the first half.
- Six-month operating expenses were $41.1 million, including $17.2 million of product development expense, $1.2 million of intangible amortization, $0.9 million of restructuring and other charges, and $0.1 million of legal settlements.
- Cash and cash equivalents were $32.9 million at September 30, 2018, compared with $39.9 million at March 31, 2018.
- Total debt was approximately $0.1 million, consisting of capital lease obligations. Current and non-current capital lease obligations totaled $0.1 million.
- Total assets were $153.6 million and shareholders’ equity was $107.0 million at September 30, 2018.
- Investing cash use was $3.5 million for the first six months, including $2.2 million of capitalized software development and $1.3 million of capital expenditures.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased $4.1 million, while six-month revenue increased $4.2 million.
- Gross margin improved by 0.9 percentage points in the quarter and 2.1 percentage points for the first half, primarily due to improved margins in support, maintenance, subscription, and professional services.
- Quarterly operating loss increased by $0.6 million because higher product development expense and amortization more than offset gross-profit growth. For the first half, the operating loss improved by $0.8 million.
- Product development expense increased 49.0% in the quarter and 28.3% in the first half. Management attributed the increase primarily to the absence of capitalization for certain rGuest development costs after those products reached general availability, as well as expansion of the India Development Center.
- Products gross margin declined to 12.2% in the quarter and 16.9% for the first half, primarily because of increased developed-technology amortization.
- General and administrative expense declined $0.4 million in the quarter and $1.2 million in the first half, reflecting lower salaries, contract labor, executive stock compensation, and outside-service costs.
- Operating cash flow deteriorated by $1.1 million year over year despite the lower net loss, primarily because of changes in operating assets and liabilities.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects to invest cash in software enhancements, new products, marketing, customer expansion, international growth, and the rGuest platform. The stated objective is to grow revenue, improve operating efficiency, achieve profitability, and strengthen competitiveness; the filing does not provide numerical revenue or earnings guidance.
- Management believes operating cash flow, cash on hand, and access to capital markets will provide adequate liquidity for the next 12 months.
- Approximately $28 million of remaining performance obligations at September 30, 2018 were expected to be recognized over the following 12 months.
- Agilysys adopted ASC Topic 606 on April 1, 2018 using the modified retrospective method. The adoption increased retained earnings by $2.6 million at adoption and had no impact on cash flows. Reported 2018 revenue and net loss differed modestly from amounts that would have been reported under the prior standard.
- The company anticipates that adoption of the new lease standard will materially affect its financial statements because of the significance of its leases, although the filing does not quantify the effect.
- Substantially all deferred tax assets are offset by a valuation allowance because management believes realization is not more likely than not. The company also reported uncertain tax positions and ongoing tax examinations.
- The company is defending a patent-infringement lawsuit brought by Ameranth, Inc. Management cannot predict the outcome or potential monetary exposure, although it believes the ultimate resolution of legal matters will not materially adversely affect consolidated financial position, results, or cash flows.
- Restructuring, severance, and other charges totaled $0.9 million in the first half; the remaining fiscal 2018 restructuring liability was approximately $20,000 at September 30, 2018.
- The filing reports no material changes to previously disclosed risk factors, no material changes in contractual obligations, and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm the filing period: this is fiscal second-quarter 2019, ended September 30, 2018, rather than second-quarter 2017.
- Assess whether subscription growth and improved recurring-service margins can offset higher product development costs and developed-technology amortization.
- Monitor cash consumption, including the $2.7 million first-half operating cash outflow and $32.9 million cash balance.
- Evaluate the effect of ASC Topic 606 on revenue timing, contract assets, contract liabilities, retained earnings, and comparability with prior periods.
- Review the anticipated material balance-sheet effect of the forthcoming lease-accounting adoption.
- Follow the Ameranth patent litigation, tax examinations, uncertain tax positions, and the realization prospects for deferred tax assets.
- Verify progress toward management’s stated objective of achieving profitability, since the company remained loss-making and provided no quantitative guidance.