Agilysys, Inc. Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2015, representing the second quarter and first half of fiscal 2016. The request metadata identifies “2014 Q2,” but the filing itself is a fiscal 2016 second-quarter report comparing results with the corresponding 2014 periods.
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 principal markets include gaming, hotels and resorts, foodservice management, restaurants, universities, stadia, and healthcare. The company operates as a single operating segment across North America, Europe, and Asia.
Financial Performance and Liquidity
| Metric | Three months ended September 30, 2015 | Three months ended September 30, 2014 | Six months ended September 30, 2015 | Six months ended September 30, 2014 |
|---|---|---|---|---|
| Net revenue | $29.6 million | $26.3 million | $57.1 million | $50.1 million |
| Gross profit | $17.6 million | $16.7 million | $34.0 million | $31.3 million |
| Gross margin | 59.3% | 63.3% | 59.5% | 62.6% |
| Operating loss | $(0.4) million | $(1.1) million | $(0.7) million | $(4.2) million |
| Net loss | $(0.4) million | $(1.1) million | $(0.6) million | $(3.4) million |
| Loss per diluted share | $(0.02) | $(0.05) | $(0.02) | $(0.15) |
- Revenue mix: Second-quarter products revenue increased 30.0% to $9.9 million; support, maintenance, and subscription services increased 6.5% to $14.7 million; and professional services increased 2.9% to $5.0 million. For the first half, total revenue increased 14.1% to $57.1 million.
- Profitability: Gross profit increased, but gross margin declined 400 basis points in the quarter and 310 basis points in the first half, primarily because of a greater mix of lower-margin hardware and continued investment in the subscription platform.
- Operating expenses: Second-quarter product development expense increased 9.6% and sales and marketing expense increased 39.0%, while general and administrative expense declined 14.4%. First-half operating expenses excluding unusual charges increased modestly overall.
- Cash flow: Six-month operating cash use was $0.2 million, compared with $9.5 million in the prior-year period. Investing cash use was $12.2 million, including $9.9 million of capitalized software development costs and $2.3 million of capital expenditures. Financing cash use was $0.5 million.
- Cash and debt: Cash and cash equivalents were $62.1 million at September 30, 2015, down from $75.1 million at March 31, 2015. Total debt was approximately $0.2 million, consisting primarily of capital lease obligations. Management stated that cash on hand, operating cash flow, and access to capital markets should provide adequate liquidity for the next 12 months.
- Balance sheet: Total assets were $169.2 million and shareholders’ equity was $125.0 million at September 30, 2015. Accounts receivable declined to $17.0 million from $25.5 million at fiscal year-end, while software development costs increased to $38.5 million from $31.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by proprietary and remarketed products, including offerings associated with the rGuest platform, and by subscription-based hosting revenue.
- Subscription-based hosting revenue increased 34.8% in the quarter and 28.9% in the first half, according to management.
- Gross margin contracted because product revenue included more lower-margin hardware and because the company continued investing in its subscription platform.
- Operating losses narrowed substantially, aided by revenue growth, lower general and administrative expense, lower amortization, and reduced restructuring and legal charges.
- Sales and marketing expense rose substantially due to additional quota-carrying sales personnel and higher commissions.
- Amortization expense declined $1.8 million in the first half, partly because the legacy ERP system was fully amortized by June 30, 2014 and other assets became fully amortized, replaced, or impaired.
- Operating cash use improved by $9.3 million year over year, primarily because of increased collections of accounts receivable and lower legal settlement and working-capital cash outflows.
Guidance, Outlook, Risks, and Unusual Items
- Management’s strategy emphasizes growth in proprietary products, support and subscription services, customer diversification, intellectual property, and emerging technology. The company expects to invest cash in product development, sales and marketing, geographic and vertical expansion, and selected acquisitions.
- No specific quantitative revenue or earnings guidance is provided in the filing.
- The company corrected nonmaterial errors involving contract-support revenue allocation and capitalization of internal software-development labor. Management concluded that the errors were not material to previously issued statements or the current periods.
- The company recorded a $0.2 million gain in the second quarter from writing off residual product-transition costs associated with a prior Guest 360 impairment reserve after the related customer became insolvent.
- Restructuring activity generated a $0.1 million benefit in the first half, and approximately $6,000 of restructuring liability remained at September 30, 2015.
- Agilysys has a patent-infringement lawsuit brought by Ameranth, Inc. The litigation was stayed pending covered-business-method reviews by the U.S. Patent and Trademark Office. The company disputes the allegations and cannot predict the outcome or potential monetary exposure.
- Caesars Entertainment and affiliates in bankruptcy owed Agilysys approximately $3.2 million at March 31, 2015. Approximately $0.4 million of pre-petition claims remained outstanding at September 30, 2015, with an amended proof of claim anticipated.
- Substantially all deferred tax assets are offset by a valuation allowance. Management expects a full release of the Hong Kong valuation allowance, which would increase reported income tax benefit but would not affect cash taxes.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes to previously reported risk factors were identified.
Investor Verification Checklist
- Verify whether revenue growth, particularly products and subscription-based hosting revenue, continues without further erosion in gross margin.
- Monitor the conversion of capitalized software-development costs into revenue and the associated amortization and impairment risks.
- Assess whether higher sales and marketing investment produces sustained growth and eventual operating profitability.
- Track cash usage, collections, deferred revenue, and the company’s ability to fund product development from operations.
- Review developments in the Ameranth litigation and the collectability and ultimate recovery of Caesars-related receivables.
- Confirm the timing and accounting impact of any Hong Kong deferred-tax valuation allowance release.
- Consider the effect of the pending revenue-recognition standard, ASU 2014-09, which the company was evaluating and had not early adopted.