Agilysys, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2014, representing fiscal 2015 second quarter and first half. The request metadata identifies “2013 Q2,” but the filing itself is for September 30, 2014. Comparisons are primarily with the periods ended September 30, 2013. The company is a hospitality software, services and solutions provider operating as one segment across gaming, hotels and resorts, foodservice, restaurants, universities, stadia and healthcare.
Financial Performance and Position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenue | $26.3 million, up 5.9% | $50.1 million, up 3.1% |
| Gross profit | $16.7 million, up 0.5% | $31.3 million, down 2.7% |
| Gross margin | 63.3%, down from 66.8% | 62.6%, down from 66.4% |
| Operating loss | $1.1 million, versus $1.1 million | $4.2 million, versus $0.7 million |
| Loss from continuing operations | $1.1 million, or $0.05 per diluted share | $3.4 million, or $0.15 per diluted share |
| Net loss | $1.1 million, or $0.05 per diluted share | $3.4 million, or $0.15 per diluted share |
Prior-year net income benefited from discontinued operations, including a $23.1 million gain on the sale of the RSG business. The prior-year three- and six-month periods therefore reported net income of $20.5 million and $21.8 million, respectively, which is not directly comparable with the current continuing-operations results.
- Revenue mix: Second-quarter products revenue declined 10.9% to $7.6 million; support, maintenance and subscription revenue increased 6.9% to $13.8 million; and professional services revenue increased 44.8% to $4.9 million. For the first half, the corresponding changes were products down 14.9%, recurring services up 7.1%, and professional services up 30.9%.
- Cash flow: Operating cash flow from continuing operations was negative $9.5 million in the first half, compared with negative $7.7 million in the prior-year period. Investing cash flow was negative $22.6 million, including $10.2 million invested in marketable securities, $8.0 million of capitalized software development, $3.8 million for the Dining Ventures assets and $3.0 million for capital expenditures and the ERP project.
- Liquidity: Cash and cash equivalents were $67.2 million and marketable securities were $10.1 million at September 30, 2014, compared with $99.6 million of cash and no marketable securities at March 31, 2014. Management stated that available liquidity and access to capital markets should fund requirements for the next 12 months.
- Debt: Total debt was approximately $0.3 million, consisting primarily of capital lease obligations. Current and non-current capital lease obligations totaled $0.3 million.
- Balance sheet: Total assets were $176.6 million and shareholders’ equity was $130.7 million at September 30, 2014. Goodwill increased to $19.6 million, primarily reflecting the Dining Ventures acquisition.
Material Changes Versus the Prior Comparable Period
- The company continued shifting its mix toward recurring support, maintenance and subscription revenue, while products revenue declined because of sales-force transition and related strategic initiatives.
- Gross margin declined 350 basis points in the quarter and 380 basis points in the first half, primarily because of lower higher-margin proprietary software sales, incremental amortization of recently completed software and changes in service labor mix.
- First-half operating loss worsened by $3.5 million to $4.2 million. Excluding restructuring and legal settlement charges, operating expenses increased $2.2 million, or 6.8%.
- General and administrative expense increased 20.0% in the quarter and 15.5% in the first half, driven partly by back-office rationalization and the ERP replacement project.
- First-half amortization expense increased 49.7%, including approximately $0.9 million of accelerated amortization related to the legacy ERP system, which was fully amortized by June 30, 2014.
- Capitalized software development increased to $8.0 million in the first half from $4.9 million in the prior-year period. Management stated that more product-development resources were devoted to future-generation products and capitalized.
- Cash declined by $32.4 million during the first half, compared with a $17.5 million increase in the prior-year period, when cash benefited from approximately $36.0 million of net proceeds from the RSG sale.
Guidance, Outlook, Risks and Unusual Items
- Management emphasized a strategy focused on hospitality technology, recurring revenue, new-generation products, customer and guest connectivity, and tighter control of operating expenses. The filing does not provide quantitative revenue or earnings guidance.
- Agilysys acquired Dining Ventures assets for approximately $3.8 million in cash, including the technology underlying its rGuest Seat dining reservations and table-management product. The acquisition was deemed immaterial for accounting purposes.
- Second-quarter restructuring charges were approximately $0.2 million. Remaining restructuring liabilities were approximately $0.2 million for the fiscal 2015 plan and $0.1 million for the fiscal 2014 plan; management did not expect significant additional charges.
- The company recorded $0.2 million of legal settlement expense in the first half and paid $1.7 million in related settlements. An Ameranth patent litigation matter remains stayed pending a U.S. Patent and Trademark Office covered business method review. The potential exposure cannot currently be predicted.
- Substantially all deferred tax assets are offset by a valuation allowance because management believes realization is not more likely than not. Possible 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, although other changes cannot be estimated.
- The company stated that no material changes occurred in its previously disclosed risk factors, market-risk exposures, contractual obligations or off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no changes in internal control over financial reporting.
Investor Verification Points
- Verify whether the transition toward recurring subscription and support revenue can offset declining products revenue and sustain or improve gross margins.
- Track operating cash burn, particularly the impact of deferred revenue reductions, legal payments, bonus payments and continued software capitalization.
- Assess the commercial traction and return on investment of rGuest, rGuest Seat, the ERP replacement and other capitalized software projects.
- Review the sustainability of liquidity after the $32.4 million first-half cash decline and the extent to which marketable securities may be needed to fund operations.
- Monitor the Ameranth patent litigation, tax examinations and any additional restructuring or legal settlement obligations.
- Reconcile current-period continuing operations with prior-year reported net income, which was materially affected by discontinued operations and the RSG sale gain.