Agilysys, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2016, representing the first quarter of fiscal 2017. The request metadata identifies “2015 Q1,” but the filing itself covers June 30, 2016 and compares results with June 30, 2015.
Business Context
Agilysys provides hospitality technology, including point-of-sale, property management, inventory and procurement, workforce management, analytics, document management, mobile and wireless solutions, and related services. Its markets include gaming, hotels and resorts, cruise, foodservice management, restaurants, universities, stadia, and healthcare. A significant portion of revenue is recurring support, maintenance, and subscription services.
Financial Performance and Liquidity
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total net revenue | $31.0 million | $27.5 million | Up 12.6% |
| Gross profit | $16.2 million | $16.4 million | Down 1.3% |
| Gross margin | 52.3% | 59.7% | Down 740 basis points |
| Operating loss | $2.2 million | $0.3 million | Unfavorable change |
| Net loss | $2.3 million | $0.2 million | Unfavorable change |
| Loss per share | $0.10 | $0.01 | Unfavorable change |
| Cash used in operating activities | $1.0 million | $1.9 million | Improved |
| Cash used in investing activities | $3.7 million | $6.8 million | Improved |
Revenue consisted of products of $9.5 million, support, maintenance and subscription services of $14.9 million, and professional services of $6.5 million. Subscription-based service revenue increased approximately 31.3%, while subscription booking contract value increased 250% year over year.
As of June 30, 2016, cash and cash equivalents were $55.3 million, down from $60.6 million at March 31, 2016. Total debt was approximately $0.3 million, consisting primarily of capital lease obligations. Total assets were $175.1 million and shareholders’ equity was $121.5 million. Management stated that operating cash flow, cash on hand, and access to capital markets should provide adequate liquidity for the next 12 months.
Capitalized software development costs were $3.3 million during the quarter, and net software development costs increased to $46.3 million. The company ended the quarter with $28.8 million of deferred revenue.
Material Changes Versus the Prior Comparable Period
- Total revenue increased $3.5 million, driven by a $2.7 million increase in professional services and a $0.7 million increase in products revenue. Support, maintenance, and subscription services revenue was essentially flat.
- Gross profit declined $0.2 million despite higher revenue. Product gross margin fell to 31.4%, primarily because approximately $1.0 million of additional amortization began following the release of the rGuest Stay property management solution.
- Professional services gross margin improved to 32.6%, while support, maintenance, and subscription services margin declined to 74.2% as the company continued investing in its subscription platform.
- Product development expense increased 9.4% to $6.9 million, and sales and marketing expense increased 26.3% to $5.6 million. General and administrative expense declined 5.9% to $4.9 million.
- Operating loss increased to $2.2 million from $0.3 million, reflecting lower gross profit and higher operating expenses.
- Cash usage improved year over year, primarily because of lower software development spending and improved working-capital collections, although deferred revenue and accrued liabilities declined.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management did not provide specific quantitative revenue or earnings guidance in the filing. The stated strategy is to grow proprietary products, support and subscription services, and professional services; diversify customers and geographies; invest in intellectual property and emerging technologies; and focus spending on higher-margin growth opportunities.
- The rGuest Stay solution became generally available during the quarter, placing $31.2 million of related development costs into service. Its estimated useful life is five years.
- On July 28, 2016, the company announced general availability of rGuest Buy. Approximately $10.4 million of related development costs remained classified as projects not yet in use at June 30, 2016. Expected annual amortization after deployment is approximately $2.1 million.
- The company recorded $89,000 of restructuring, severance, and other charges in the quarter and expected additional fiscal 2017 restructuring charges not exceeding $0.2 million.
- The company corrected previously identified, non-material errors involving contract support revenue allocation and capitalization of internal software-development labor. The filing states that the corrections were not material to previously issued financial statements or the reported comparative quarter.
- Substantially all deferred tax assets are offset by a valuation allowance. Management expects a future release of the Hong Kong valuation allowance, which would increase reported net income but would not affect cash taxes.
- Legal matters include a patent-infringement lawsuit brought by Ameranth. The company disputes the allegations and states that the potential outcome and monetary exposure cannot presently be predicted.
- Approximately $0.7 million of Caesars-related pre-petition accounts receivable claims remained outstanding at June 30, 2016.
- Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls.
Key Facts Investors Should Verify
- Whether the strong growth in subscription bookings converts into recurring revenue and improved margins.
- The pace at which rGuest Stay and rGuest Buy deployments generate revenue relative to the related capitalized software balances and future amortization.
- Whether gross-margin pressure from developed-technology amortization and subscription-platform investment persists.
- The company’s ability to return to positive operating cash flow while continuing substantial software-development investment.
- The recoverability of capitalized software development costs and deferred tax assets, including the timing and effect of any valuation allowance release.
- The resolution and potential financial exposure from the Ameranth litigation and remaining Caesars bankruptcy claims.
- Actual results relative to management’s stated strategy, since the filing provides no specific quantitative earnings or revenue guidance.