Agilysys, Inc. 10-K Summary
Reporting period: The provided filing is Agilysys’s Form 10-K for the fiscal year ended March 31, 2019, filed May 24, 2019. This does not correspond to the request metadata identifying “2017 Q4.” Fiscal 2018 and fiscal 2017 comparisons are included.
Business Context
Agilysys provides hospitality software and related services across gaming, hotels, resorts, cruise, restaurants, foodservice, universities, stadia and healthcare. Its portfolio includes point-of-sale, property-management, inventory and procurement, payments, analytics, reservations, guest self-service and cloud applications. The company is pursuing a higher mix of support, maintenance, subscription, cloud and professional-services revenue.
Financial Performance and Position
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Total revenue | $140.8 million | $127.4 million | 10.6% increase |
| Products revenue | $39.0 million | $33.7 million | 15.7% increase |
| Support, maintenance and subscription revenue | $75.5 million | $69.1 million | 9.3% increase |
| Professional-services revenue | $26.3 million | $24.6 million | 7.1% increase |
| Gross profit | $73.9 million | $64.4 million | 14.7% increase |
| Gross margin | 52.5% | 50.6% | 190 basis-point expansion |
| Operating loss | $13.1 million | $12.1 million | Loss increased $1.0 million |
| Net loss | $13.2 million | $8.4 million | Loss increased $4.8 million |
| Net loss per share | $0.57 | $0.37 | Loss per share increased |
| Operating cash flow | $7.2 million | $6.9 million | 5.3% increase |
- Subscription-based revenue increased 23.5% and represented 17.7% of total revenue, compared with 15.8% in fiscal 2018.
- Support, maintenance and subscription services generated a 78.9% gross margin, while products generated an 18.4% gross margin and professional services generated a 26.9% gross margin.
- Product-development expense increased 35.4% to $37.8 million, primarily because less development cost was capitalized as rGuest products reached general availability.
- Capitalized software-development costs declined to approximately $2.0 million from $8.2 million, while amortization of developed technology increased to $12.6 million from $10.0 million.
- Cash and cash equivalents were $40.8 million at March 31, 2019, compared with $39.9 million one year earlier. Working capital was $20.7 million.
- Total debt was approximately $57,000, consisting primarily of capital-lease obligations.
- Total assets were $163.6 million and shareholders’ equity was $100.6 million at March 31, 2019.
- Fiscal 2019 investing cash outflows were $5.5 million, including $2.2 million of software development and $3.3 million of property and equipment purchases.
Material Changes Versus Prior Comparable Period
- Revenue growth accelerated across all three reported revenue categories, led by products and subscription services.
- Gross margin improved because of the scalable infrastructure supporting hosted customers and lower professional-services costs following workforce restructuring.
- Despite higher gross profit, the operating loss widened because operating expenses increased, particularly product development, sales incentives and amortization of newly deployed technology.
- Net loss increased partly because fiscal 2018 benefited from a $3.3 million tax benefit related primarily to the Tax Cuts and Jobs Act; fiscal 2019 recorded $0.2 million of income-tax expense.
- Operating cash flow remained positive, while total cash increased modestly after investing and financing activities.
- Agilysys adopted ASC Topic 606 on April 1, 2018 using the modified retrospective method. The adoption increased fiscal 2019 reported net loss by approximately $0.5 million compared with amounts that would have been reported without the new standard and increased retained earnings by $2.6 million at adoption.
Outlook, Risks and Unusual Items
Management’s strategy is to grow revenue, improve organizational efficiency, expand the rGuest platform and international operations, and invest in product development. The filing does not provide specific fiscal 2020 revenue, earnings or margin guidance.
- Management expects cash on hand, operating cash flow and access to capital markets to fund foreseeable operating, capital and working-capital requirements.
- Operating lease obligations totaled $19.4 million and total contractual obligations were $19.9 million at March 31, 2019. The company expected adoption of ASC Topic 842 on April 1, 2019 to add approximately $15 million of right-of-use assets and $17 million of lease liabilities, with no material income-statement or cash-flow impact expected.
- Agilysys reported $19.6 million of goodwill, $8.4 million of net intangible assets and $34.6 million of net software-development costs. Future impairment charges could materially affect results.
- The company had $210.6 million of federal net operating-loss carryforwards and recorded a $57.9 million valuation allowance against substantially all deferred tax assets.
- The Ameranth patent litigation remained unresolved. A related patent was invalidated in September 2018, but Agilysys was not a party to the subsequent appeal and stated that the outcome and potential monetary exposure could not be predicted.
- Key business risks include intense competition, rapid technology changes, execution of cloud products, cybersecurity and data-security exposure, dependence on strategic hardware and software suppliers, customer concentration or consolidation, employee retention, foreign-exchange movements and hospitality-industry weakness.
- The company did not pay dividends in fiscal 2019 or fiscal 2018 and stated that dividends were unlikely in the foreseeable future.
- Grant Thornton issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of March 31, 2019.
Facts Investors Should Verify
- Confirm the intended period, because the supplied filing is fiscal 2019 rather than 2017 fourth quarter.
- Assess whether subscription and recurring-revenue growth can offset continuing operating losses and elevated product-development spending.
- Reconcile cash generation with the company’s significant non-cash amortization, capitalization of software costs and working-capital movements.
- Evaluate the carrying values and future recoverability of capitalized software, goodwill and other intangible assets.
- Review the financial and legal implications of the Ameranth litigation and the company’s tax-loss valuation allowance.
- Monitor the effect of ASC Topic 842 lease capitalization and the continuing transition toward cloud-based offerings.