Business Context and Reporting Period
Agilysys, Inc. filed this Form 10-K for the fiscal year ended March 31, 2015. The request metadata references “2013 Q4,” but the supplied filing is an annual fiscal 2015 report, not a quarterly 2013 filing.
The company operates as a single hospitality-technology segment, providing point-of-sale, property-management, inventory and procurement, workforce-management, analytics, document-management, mobile, wireless and payment solutions. Its principal markets include gaming, hotels, resorts and cruise, foodservice, restaurants, universities, stadia and healthcare. The company is emphasizing proprietary software, hosted and subscription offerings, recurring support revenue and its rGuest platform.
Prior-period results have been recast to present the former Technology Solutions Group, Retail Solutions Group and U.K. entity as discontinued operations. The company completed the RSG sale in July 2013 and the U.K. sale in March 2014.
Key Financial Metrics
| Fiscal year ended March 31 | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenue | $103.5 million | $101.3 million | 2.2% increase |
| Gross profit | $60.1 million | $64.0 million | 6.2% decrease |
| Gross margin | 58.0% | 63.2% | Down 520 basis points |
| Operating loss | $12.5 million | $6.2 million | Loss increased $6.3 million |
| Loss from continuing operations | $11.5 million | $2.9 million | Loss increased $8.6 million |
| Net loss | $11.5 million | $17.1 million net income | Prior year included discontinued-operations gain |
| Basic and diluted loss per share | $0.51 | $0.13 loss from continuing operations | Continuing-operations loss increased |
- Products revenue declined 8.0% to $31.8 million, reflecting the strategic shift toward subscription-based services and new-logo business.
- Support, maintenance and subscription revenue increased 5.3% to $56.0 million. Hosted perpetual and subscription revenue increased 11.3% and represented 8% of recurring revenue, versus 7% in fiscal 2014.
- Professional services revenue increased 16.3% to $15.7 million, including approximately $1.9 million from two large projects.
- Operating expenses were affected by higher sales and marketing costs, $1.8 million of asset write-offs and fair-value adjustments, $1.5 million of restructuring and related charges, and $0.2 million of legal settlements.
- The company recorded a $1.1 million income-tax benefit and had an 8.4% effective tax rate. A $76.4 million valuation allowance covered substantially all deferred tax assets.
Cash Flow, Liquidity and Capital Structure
| Fiscal year ended March 31 | 2015 | 2014 |
|---|---|---|
| Cash flow from continuing operating activities | $(2.2) million | $1.4 million |
| Cash flow from continuing investing activities | $(21.6) million | $17.7 million |
| Cash flow from continuing financing activities | $(0.4) million | $(0.9) million |
| Net change in cash | $(24.5) million | $16.6 million increase |
| Cash and cash equivalents at year-end | $75.1 million | $99.6 million |
| Total debt | $0.2 million | $0.3 million |
Fiscal 2015 investing cash outflows included $15.8 million of capitalized software development, $4.7 million of fixed-asset purchases and $3.8 million for the Dining Ventures technology acquisition supporting rGuest Seat. Working capital was $54.4 million at March 31, 2015, compared with $81.7 million a year earlier. Management stated that cash on hand, operating cash flow and access to capital markets should fund foreseeable liquidity needs.
Contractual obligations totaled $13.2 million, including $12.0 million of operating leases, $0.1 million of contingent consideration, $0.5 million of restructuring liabilities, $0.2 million of capital leases and $0.4 million of asset-retirement obligations. The filing also disclosed $1.8 million of unrecognized tax positions not included in the contractual-obligations table.
Material Changes Versus the Prior Comparable Period
- Revenue grew modestly, but gross margin declined materially because of lower-margin product mix, approximately $1.0 million of incremental software amortization, labor costs in support activities and higher professional-services delivery costs.
- Sales and marketing expense increased 16.3% as the company reorganized and expanded its sales force and marketed rGuest.
- Capitalized software development increased to approximately $17.2 million from $13.7 million, increasing the company’s investment in its next-generation platform.
- The company recorded fiscal 2015 impairment and write-off charges for Elevate hosted POS assets, InfoGenesis Mobile software and the Eatec trade name. It also recognized a $1.6 million gain from reducing the fair value of TimeManagement contingent consideration.
- Cash declined by $24.5 million, primarily because of operating cash use, software development investment, fixed-asset purchases and the Dining Ventures acquisition.
- Fiscal 2014 net income was materially affected by approximately $20.0 million of income from discontinued operations, including the gain on the RSG and U.K. divestitures; fiscal 2015 had no discontinued-operations income.
Guidance, Outlook, Commentary and Risks
No specific quantitative revenue, earnings or margin guidance is provided in the supplied filing. Management’s strategy is to grow proprietary products, support and subscription services and professional services; expand recurring revenue; invest in rGuest and other software; diversify customers and geographies; and improve expense discipline and profitability.
- Execution risk remains significant because the company is transitioning toward the rGuest platform and cloud-based offerings while maintaining migration paths from legacy products.
- The hospitality industry is sensitive to economic conditions, consumer travel and discretionary spending, customer financing and industry consolidation.
- Competition includes larger providers such as MICROS, NCR, PAR Technology and Infor, as well as specialized software vendors and customers’ internally developed systems.
- Cloud and payment solutions create security, data-protection, service-disruption, third-party dependency and potential liability risks.
- At March 31, 2015, Caesars Entertainment and affiliates in bankruptcy owed approximately $3.2 million, or 13% of outstanding accounts receivable. The company filed a proof of claim for approximately $0.7 million of pre-petition claims still outstanding as of May 26, 2015.
- Ameranth patent litigation remained unresolved, and the company stated that its outcome and potential monetary exposure could not be predicted.
- The company recorded $0.5 million of fourth-quarter fiscal 2015 restructuring charges and had approximately $0.5 million of related liability remaining at year-end.
- The board did not declare dividends in fiscal 2015 or 2014 and stated that dividends are unlikely in the foreseeable future.
- The filing identifies MAK Capital as holding approximately 31% of the common shares, creating potential influence over corporate policy and strategic transactions.
PricewaterhouseCoopers LLP issued an unqualified audit opinion and concluded that internal control over financial reporting was effective as of March 31, 2015. The company reported no unresolved SEC staff comments and no material subsequent event.
Most Important Facts to Verify
- Confirm that the intended period is fiscal 2015, because the supplied document does not correspond to “2013 Q4.”
- Assess whether recurring support, maintenance and subscription growth can offset declining products revenue and restore gross margin.
- Review the sustainability and expected returns of the substantial capitalized software-development investment.
- Monitor cash consumption, operating cash-flow conversion and the company’s ability to fund development without materially reducing liquidity.
- Evaluate collectability of Caesars-related receivables and the ultimate outcome of the Ameranth patent litigation.
- Review impairment assumptions for goodwill, trade names, developed technology and capitalized software, particularly given the fiscal 2015 write-offs.
- Track adoption of the new revenue-recognition standard and any effect on revenue timing, deferred revenue and disclosures.