Agilysys, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2019, representing Agilysys’s first fiscal quarter of fiscal 2020. The request metadata identifies “2018 Q1,” but the filing itself is dated for the June 30, 2019 quarter and compares results with June 30, 2018.
Business Context
Agilysys provides hospitality software and technology solutions, including point-of-sale, property management, inventory and procurement, payments, support, subscription, and professional services. Its customers operate in gaming, hotels and resorts, cruise, corporate foodservice, restaurants, universities, stadia, and healthcare. The company operates across North America, Europe, Asia-Pacific, and India.
Management’s strategy emphasizes customer-focused products, accelerated product development, organizational efficiency, expansion of the rGuest platform, and international growth.
Financial Results and Key Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $38.4 million | $34.0 million | Up 12.9% |
| Products revenue | $10.9 million | $9.1 million | Up 19.7% |
| Support, maintenance and subscription revenue | $20.1 million | $17.9 million | Up 12.0% |
| Professional services revenue | $7.4 million | $7.0 million | Up 6.3% |
| Gross profit | $20.0 million | $17.9 million | Up 11.9% |
| Gross margin | 52.1% | 52.6% | Down 50 basis points |
| Operating loss | $1.5 million | $1.6 million | Improved by $0.1 million |
| Net loss | $1.6 million | $1.7 million | Improved by $0.2 million |
| Basic and diluted loss per share | $0.07 loss | $0.08 loss | Improved |
| Operating cash flow | $1.9 million use | $1.4 million use | Higher cash use |
Subscription revenue increased 23.5% year over year. Support, maintenance, and subscription gross margin improved to 79.2% from 77.3%, while professional services gross margin declined to 25.1% from 29.8%. Product gross margin declined approximately 80 basis points, primarily due to higher developed-technology amortization.
Product development expense increased 42.0% to $10.1 million, mainly because the company stopped capitalizing certain software development costs and continued expanding its development teams. No external-use software development costs were capitalized in the current quarter, compared with approximately $2.0 million in the prior-year quarter.
Cash and cash equivalents were $37.2 million at June 30, 2019, compared with $40.8 million at March 31, 2019. Total debt was approximately $0.1 million, consisting primarily of finance lease obligations. The company reported no material off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based, led by products and subscription-related services.
- Gross profit increased, but gross margin narrowed modestly because cost of goods sold grew faster than revenue.
- Operating loss improved slightly despite significantly higher product development spending.
- Sales and marketing expense decreased 5.4%, general and administrative expense decreased 2.2%, and restructuring and severance charges declined 47.5%.
- There were no legal settlement charges in the current quarter compared with $91,000 in the prior-year quarter.
- Operating cash flow deteriorated to a $1.9 million use from a $1.4 million use, primarily due to working-capital changes.
- Investing cash use declined to $0.6 million from $2.9 million because the company did not capitalize software development costs in the current quarter.
- Financing cash use increased to $1.0 million, primarily from repurchases of shares to satisfy employee tax-withholding obligations.
- The company adopted the new lease accounting standard, recognizing $13.8 million of operating lease right-of-use assets and $16.3 million of operating lease liabilities at April 1, 2019. Prior periods were not restated.
Outlook, Commentary, Risks and Unusual Items
Management expects to use cash to enhance existing products, develop and market new products, and expand customer and geographic reach. It believes operating cash flow, $37.2 million of cash on hand, and access to capital markets will provide adequate liquidity for short- and long-term requirements. The filing does not provide specific numerical revenue or earnings guidance.
Management identified continued investment in product development and growth of the rGuest platform as strategic priorities, while also emphasizing tighter expense management and investment discipline. The company’s ability to achieve profitability remains dependent on revenue growth, operating leverage, and control of development and other operating costs.
Substantially all deferred tax assets are offset by a valuation allowance because management concluded that realization is not more likely than not. The company also reported an effective tax rate of negative 1.6%, reflecting tax expense despite a pretax loss.
Agilysys is subject to various legal matters, including litigation brought by Ameranth concerning alleged patent infringement. The company is not party to a related appeal and cannot predict the outcome of its case, although management does not currently expect the ultimate resolution of legal matters to have a material adverse effect.
Other risks include foreign-currency exposure, execution of product-development initiatives, realization of deferred tax assets, customer and contract-related risks, and the uncertainties described in the company’s annual report. The company stated that there were no material changes to previously disclosed risk factors or market-risk exposures.
Important Facts for Investors to Verify
- Confirm the applicable period: the filing covers June 30, 2019, or Q1 fiscal 2020, rather than Q1 2018.
- Assess whether subscription growth and the 79.2% service gross margin can offset continued investment in product development.
- Monitor operating cash flow, working-capital requirements, and the decline in cash from $40.8 million to $37.2 million.
- Evaluate the effect of lease capitalization on reported assets, liabilities, and future cash commitments.
- Review the Ameranth litigation and any developments that could create financial or operational exposure.
- Consider the company’s history of losses and the valuation allowance against substantially all deferred tax assets.
- Verify whether management’s planned product and international expansion generates sufficient revenue growth to support eventual profitability.