Agilysys, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2015. The filing represents Agilysys’s first fiscal quarter of fiscal 2016, despite the request metadata identifying “2014 Q1.” Comparative results are for the three months ended June 30, 2014. The financial statements are unaudited.
Business Context
Agilysys provides software, hardware, and services for the hospitality industry, including point-of-sale, property management, inventory and procurement, workforce management, analytics, document management, and mobile solutions. Its primary markets include gaming, hotels and resorts, cruise, foodservice management, restaurants, universities, stadia, and healthcare. The company operates in North America, Europe, and Asia and reports as a single operating segment.
Key Financial Metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 |
|---|---|---|
| Total revenue | $27.5 million | $23.7 million |
| Gross profit | $16.4 million | $14.7 million |
| Gross margin | 59.7% | 61.8% |
| Operating loss | $0.3 million | $3.1 million |
| Operating margin | (1.0)% | (13.1)% |
| Net loss | $0.2 million | $2.2 million |
| Basic and diluted loss per share | $0.01 | $0.10 |
| Cash used in operating activities | $1.9 million | $8.2 million |
| Cash used in investing activities | $6.8 million | $13.2 million |
| Net decrease in cash | $9.0 million | $21.7 million |
Revenue consisted of products of $8.8 million, support, maintenance and subscription services of $14.9 million, and professional services of $3.8 million. Products revenue increased 45.6%, support, maintenance and subscription services increased 7.8%, and professional services declined 2.4%.
At June 30, 2015, cash and cash equivalents were $66.0 million, compared with $75.1 million at March 31, 2015. Total assets were $170.6 million and shareholders’ equity was $124.4 million. Total debt was approximately $0.2 million, consisting primarily of capital lease obligations. Current liabilities were $39.5 million, including $22.5 million of deferred revenue.
Material Changes Versus the Prior Comparable Period
- Revenue increased $3.7 million, or 15.8%, primarily from higher sales of on-premise proprietary solutions, particularly InfoGenesis, and increased hosted perpetual and subscription revenue.
- Gross profit increased $1.7 million, but gross margin declined approximately 210 basis points because of a less favorable revenue mix and continued investment in the subscription platform.
- Operating loss improved by $2.8 million. The improvement primarily reflected lower amortization, reduced restructuring charges, and the absence of prior-year legal settlement expense.
- Operating expenses excluding restructuring, severance, and other charges declined 3.1%. Product development and sales and marketing expense increased as Agilysys invested in its product roadmap and reorganized its sales force.
- Net loss improved by $2.0 million, although the company remained unprofitable.
- Cash used in operating activities improved by $6.3 million, largely because of stronger collections and the absence of the prior-year legal settlement and annual bonus cash payments.
- Investing cash usage declined primarily because the prior-year period included $10.2 million of marketable-securities purchases. Capitalized software development costs increased to $5.6 million from $4.0 million.
Liquidity, Outlook, Risks, and Unusual Items
Management stated that cash flow from operations, cash on hand, and access to capital markets should provide adequate funds for short- and long-term liquidity requirements over the next 12 months. The company expects to invest cash in product development, product enhancements, marketing, geographic and vertical expansion, and selected acquisitions. No formal quantitative revenue or earnings guidance was provided in the filing.
- Approximately $4.7 million of software development costs were capitalized during the quarter, and total software development costs on the balance sheet were $36.1 million. Future impairment or commercialization risk should be monitored.
- Agilysys held $66.0 million of cash and had minimal debt, but cash declined $9.0 million during the quarter while the company continued to report a net loss.
- Caesars Entertainment and affiliates were in Chapter 11 bankruptcy. Approximately $0.5 million of pre-petition claims remained outstanding at June 30, 2015, creating collection and customer-continuity risk.
- The company is defending patent-infringement litigation brought by Ameranth. The case was stayed pending a covered business method review, and Agilysys stated that the outcome and potential monetary exposure could not be predicted.
- Management recorded a valuation allowance against substantially all deferred tax assets because realization is not considered more likely than not. Potential 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.
- Restructuring liabilities totaled approximately $0.1 million at June 30, 2015, expected to be paid during fiscal 2016. The quarter included a restructuring benefit of $46,000.
- The company completed a prior-year acquisition of Dining Ventures assets for approximately $3.8 million, including the technology underlying the rGuest Seat product. Management determined the acquisition was not material.
- No material changes to previously disclosed risk factors, contractual obligations, market-risk exposures, or off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective and reported no changes in internal control over financial reporting.
Investor Verification Points
- Verify whether revenue growth, particularly products and subscription revenue, is sustained while subscription-platform investment moderates gross-margin pressure.
- Track progress toward consistent operating profitability and whether the improvement is recurring or primarily attributable to lower amortization, restructuring, and legal costs.
- Evaluate cash burn, capitalized software development spending, and the recoverability of the $36.1 million software-development asset balance.
- Monitor collection of Caesars-related receivables and any developments in the Ameranth patent litigation.
- Review future filings for the impact of the new revenue-recognition standard and for changes in the valuation allowance on deferred tax assets.