Agilysys, Inc. Form 10-Q Summary
Reporting period: The provided filing covers the three and nine months ended December 31, 2020, corresponding to fiscal third quarter and first nine months of fiscal 2021. The request metadata identifies “2019 Q3,” but the filing itself is a December 31, 2020 Form 10-Q.
Business context and reporting period
Agilysys provides hospitality software and related services, including point-of-sale, property management, inventory and procurement, payments, subscription, support and professional services. It reports one operating segment serving the global hospitality industry. Results were materially affected by COVID-19, including customer site closures, delayed purchasing and implementations, reduced travel, and lower in-person sales activity.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Total revenue | $36.7 million | $42.0 million | $100.8 million | $121.1 million |
| Gross profit | $24.2 million | $21.1 million | $65.9 million | $61.3 million |
| Gross margin | 66.0% | 50.2% | 65.3% | 50.6% |
| Operating income (loss) | $(1.8) million | $(2.7) million | $3.8 million | $(7.1) million |
| Net income (loss) | $(2.1) million | $(2.6) million | $3.3 million | $(7.1) million |
| Net income (loss) attributable to common shareholders | $(2.5) million | $(2.6) million | $1.1 million | $(7.1) million |
| Basic earnings (loss) per share | $(0.11) | $(0.11) | $0.05 | $(0.30) |
Revenue mix: First-nine-month products revenue declined 44.4% to $19.4 million, professional services revenue declined 36.4% to $15.8 million, and support, maintenance and subscription services revenue increased 7.0% to $65.6 million. Subscription revenue increased 17.0% for the nine-month period and 18.1% in the quarter.
Cash flow and liquidity: Operating cash flow was $15.1 million for the first nine months, compared with $5.3 million in the prior-year period. Capital expenditures were $1.1 million, and investing cash flow was $(1.1) million. Cash increased by $46.0 million to $92.6 million at December 31, 2020, substantially aided by the preferred-stock financing.
Debt and obligations: Reported debt was approximately $0.1 million, consisting primarily of finance lease obligations. Operating lease liabilities totaled $14.1 million. Current liabilities were $58.4 million against current assets of $132.0 million.
Material changes versus the prior comparable period
- Total revenue declined 12.7% in the quarter and 16.7% for the first nine months, primarily because of COVID-19-related delays in customer purchases, installations and professional services.
- Recurring support, maintenance and subscription revenue continued to grow, partially offsetting declines in products and professional services. Management reported high recurring-revenue renewal rates.
- Gross margin expanded substantially, primarily because of revenue mix and the absence of software-development-cost amortization recorded in the prior-year period. Prior-year amortization was $9.4 million for the first nine months.
- Operating results improved to $3.8 million of income for the first nine months, compared with a $7.1 million loss in the prior-year period, despite lower revenue.
- Operating expenses excluding legal settlements, severance and other charges declined $8.8 million, or 13.0%, for the first nine months due to cost controls, reduced travel, furloughs, layoffs, compensation changes and lower discretionary spending.
- Severance and other charges increased to $2.8 million for the first nine months, including $1.6 million in the third quarter.
- Share-based compensation increased to $9.3 million for the first nine months from $3.2 million in the prior-year period.
Guidance, outlook, risks and unusual items
- The filing does not provide specific quantitative revenue, earnings or margin guidance.
- Management stated that the duration and ultimate effects of COVID-19 remain uncertain. Risks include delayed or reduced orders, missed payments, lower renewals, continued site-access restrictions, implementation delays and lasting effects on the hospitality industry.
- Agilysys reduced discretionary costs, froze non-essential hiring, and used layoffs, furloughs, temporary salary reductions and benefit limitations. These measures may adversely affect productivity, collaboration and future growth if maintained for an extended period.
- In May 2020, the company issued 1,735,457 Series A convertible preferred shares to MAK Capital for $35.0 million, receiving $34.0 million net of issuance costs. The preferred stock carries a 5.25% annual dividend, has a $20.1676 conversion price, and includes holder redemption and change-of-control rights.
- Preferred-stock dividends reduced nine-month income attributable to common shareholders by $1.1 million; issuance costs reduced it by an additional $1.0 million.
- The company deferred $1.8 million of employer payroll taxes under the CARES Act as of December 31, 2020.
- Agilysys is defending an Ameranth patent lawsuit. Management cannot predict the outcome, although it believes the ultimate resolution of legal matters will not materially affect consolidated financial position, results or cash flows.
- The company reported no material changes in contractual obligations or market-risk exposures and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the applicable period: this filing is for fiscal Q3 2021, not calendar or fiscal Q3 2019.
- Assess whether recurring-revenue growth and renewal rates can continue to offset weaker products and professional-services demand.
- Separate the underlying margin improvement from the benefit of no longer recording software-development-cost amortization.
- Evaluate the sustainability of operating cash flow after excluding financing proceeds and considering preferred dividends and deferred payroll taxes.
- Review the conversion, dividend, redemption and change-of-control terms of the Series A preferred stock and their potential dilution or cash requirements.
- Monitor COVID-19 effects on hospitality customers, implementation timing, collections, renewals and future demand.
- Review the Ameranth litigation and any changes to the company’s assessment of potential exposure.