Agilysys, Inc. Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2019, representing the second quarter and first half of fiscal 2020. The request metadata identifies “2018 Q2,” but the filing itself is for September 30, 2019 and compares against September 30, 2018. Amounts are in thousands except per-share data.
Business Context
Agilysys provides hospitality software and related solutions, including point-of-sale, property management, inventory and procurement, payments, support, subscription and professional services. Its customers include gaming, hotels, resorts, cruise operators, restaurants, universities, healthcare organizations, and sports and entertainment venues. The company operates across the Americas, Europe, the Middle East, Africa, Asia-Pacific and India.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Six Months Ended September 30 |
|---|---|---|
| Total revenue | $40.7 million, up 19.1% | $79.1 million, up 16.0% |
| Gross profit | $20.2 million | $40.2 million |
| Gross margin | 49.6%, versus 51.9% | 50.9%, versus 52.2% |
| Operating loss | $2.9 million, versus $3.8 million | $4.4 million, versus $5.4 million |
| Net loss | $2.9 million, versus $3.8 million | $4.5 million, versus $5.5 million |
| Basic and diluted loss per share | $(0.13), versus $(0.16) | $(0.19), versus $(0.24) |
| Operating cash flow | Not separately provided | $1.2 million, versus $(2.7) million |
- Revenue mix: Second-quarter products revenue increased 35.4% to $11.9 million; support, maintenance and subscription services increased 7.8% to $20.3 million; and professional services increased 29.5% to $8.5 million.
- Subscription growth: Subscription service revenue increased 15.7% in the quarter and 19.4% in the first half, according to management.
- Operating expenses: Product development was $10.8 million in the quarter and $20.8 million year to date. First-half product development expense increased 20.9%, primarily because of lower software-cost capitalization and continued development-team expansion.
- Cash and liquidity: Cash and cash equivalents were $38.9 million at September 30, 2019, compared with $40.8 million at March 31, 2019. Total current assets were $72.4 million and current liabilities were $52.6 million.
- Debt: Total debt was approximately $0.1 million, consisting primarily of finance lease obligations. Operating lease liabilities of $14.8 million were recognized under the new lease standard but are not described by management as debt.
- Investing and financing: Investing cash outflow was $1.9 million, primarily for property and equipment. Financing cash outflow was $1.1 million, primarily for shares withheld to satisfy employee tax obligations.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by increased third-party hardware sales, new and expanded customer relationships, higher subscription activity and increased implementation work.
- Gross profit increased, but gross margin declined 230 basis points in the quarter and 130 basis points for the first half. Management attributed quarterly pressure primarily to the revenue mix and higher support and hosting infrastructure costs.
- Product gross margin improved to 17.5% in the quarter and 19.0% for the first half because higher revenue was earned against a partially fixed cost base that includes software-development amortization.
- Professional-services margin improved in the quarter but declined for the first half because of hiring and training costs incurred to support demand.
- Operating losses narrowed as revenue growth and lower restructuring and severance charges more than offset higher product-development, sales and marketing, and general and administrative expenses.
- Operating cash flow improved from a use of $2.7 million to generation of $1.2 million, while the cash balance declined by $1.9 million after investing, financing and foreign-exchange effects.
- The company adopted ASC Topic 842 on April 1, 2019, recording $13.8 million of operating lease right-of-use assets and $16.3 million of operating lease liabilities at adoption. Prior periods were not restated.
- No external-use software development costs were capitalized in the first half of fiscal 2020, compared with approximately $2.0 million in the first half of fiscal 2019.
Outlook, Commentary, Risks and Unusual Items
Management’s strategy is to prioritize customer focus, product development, organizational efficiency, employee development, expansion of the rGuest platform, and international growth. The company expects to use cash on hand to enhance existing products, develop and market new products, and expand customer and geographic reach. The filing does not provide a quantitative revenue, margin or earnings forecast.
- Management believes operating cash flow, $38.9 million of cash on hand and access to capital markets will provide adequate liquidity for short- and long-term requirements.
- Management expects continued investment in product development, infrastructure, sales and marketing, and customer-support capacity, which may pressure margins and profitability.
- Substantially all U.S. and certain foreign deferred tax assets are subject to valuation allowances because management does not currently believe realization is more likely than not.
- The company is subject to various legal matters. The Ameranth patent litigation remains unresolved, and the filing states that the outcome cannot currently be predicted, although management does not believe the ultimate resolution of pending matters will materially affect the company’s financial position, results or cash flows.
- A favorable net legal-settlement benefit of $119,000 was recorded in the first half, including approximately $100,000 received in connection with a former-employee matter. No further activity is expected for that matter.
- Restructuring, severance and other charges declined to $421,000 in the first half from $889,000 in the prior-year period.
- Management reported no material changes to previously disclosed risk factors, market-risk exposures, contractual obligations or off-balance-sheet arrangements. Disclosure controls were deemed effective.
Important Facts for Investors to Verify
- Confirm the applicable period: the filing is fiscal second-quarter 2020, ended September 30, 2019, not 2018 Q2.
- Assess whether revenue growth, particularly hardware and professional services, can continue without further gross-margin deterioration.
- Monitor subscription growth, recurring-revenue mix and the cost of expanding support, hosting and development infrastructure.
- Evaluate the path from sustained operating losses to profitability, including the effect of product-development spending and reduced software capitalization.
- Review cash conversion, working-capital movements and the adequacy of the $38.9 million cash balance relative to planned investments and lease commitments.
- Track the Ameranth litigation, tax examinations, deferred-tax-asset valuation allowances and other contingencies.
- Consider the effect of ASC Topic 842 on reported assets, liabilities, expenses and comparability with prior periods.