AGILYSYS, INC.
In "Management's Discussion and Analysis of Financial Condition and Results of
Operations" ("MD&A"), management explains the general financial condition and
results of operations for Agilysys and subsidiaries including:
- what factors affect our business;
- what our earnings and costs were;
- why those earnings and costs were different from the year before;
- where the earnings came from;
- how our financial condition was affected; and
- where the cash will come from to fund future operations.
The MD&A analyzes changes in specific line items in the Condensed Consolidated
Statements of Operations and Condensed Consolidated Statements of Cash Flows and
provides information that management believes is important to assessing and
understanding our consolidated financial condition and results of operations.
This Quarterly Report on Form 10-Q updates information included in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2021 , filed with the
Securities and Exchange Commission (SEC). This discussion should be read in
conjunction with the Condensed Consolidated Financial Statements and related
Notes that appear in Item 1 of this Quarterly Report as well as our Annual
Report for the year ended March 31, 2021 . Information provided in the MD&A may
include forward-looking statements that involve risks and uncertainties. Many
factors could cause actual results to be materially different from those
contained in the forward-looking statements. See "Forward-Looking Information"
on page 24 of this Quarterly Report, Item 1A "Risk Factors" in Part II of this
Quarterly Report, and Item 1A "Risk Factors" in Part I of our Annual Report for
the fiscal year ended March 31, 2021 for additional information concerning these
items. Management believes that this information, discussion, and disclosure is
important in making decisions about investing in Agilysys .
Overview
Recent Developments
COVID-19 Pandemic
The World Health Organization declared COVID-19 a pandemic on March 11, 2020 .
COVID-19 has had a significant impact on our business since that time. The
extent to which COVID-19 will continue impacting our financial condition and
results of operations remains uncertain and depends on various factors,
including the ongoing or recurring impact on our customers, partners, and
vendors and on the operation of the global markets in general. Because an
increasing portion of our business is based on a subscription model, the effect
of COVID-19 on our results of operations may also not be fully reflected for
some time.
We have taken actions to mitigate the impact on our business. We continue to
conduct business with substantial modifications to employee travel, employee
work locations, virtualization of customer and employee events, and partially
remote sales, implementation, and support activities, among other modifications.
These modifications may continue to delay or reduce sales and harm productivity
and collaboration. The pandemic could have an ongoing adverse impact on demand
for our customers' products and services, which in turn could negatively impact
the willingness of our customers to enter into or renew contracts with us. The
pandemic has impacted our ability to complete certain implementations timely,
which negatively impacts our ability to recognize revenue.
While we have previously taken certain cost reduction measures, we may take
further actions that alter our business operations in response to changes in the
global environment. As a result, the ultimate impact of the COVID-19 pandemic
and the effects of the operational alterations we have made in response on our
business, financial condition, liquidity, and financial results cannot be
predicted at this time.
Our Business
Agilysys has been a leader in hospitality software for more than 40 years, delivering innovative modern cloud native SaaS and on-premise guest-centric technology solutions for gaming, hotels, resorts and cruise, corporate foodservice management, restaurants, universities, stadia and healthcare.Agilysys offers the most comprehensive software solutions in the hospitality industry, including point-of-sale (POS), property management (PMS), inventory and procurement, payments, and related applications, to manage the entire guest journey.Agilysys is also known for its world class customer-centric service. During recent years,Agilysys has made major R&D investments and has successfully modernized virtually all its longstanding trusted software solutions. Some of the largest hospitality companies around the world useAgilysys solutions to help improve guest loyalty, drive revenue growth and increase operational efficiencies. 16
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The Company has just one reportable segment serving the global hospitality
industry.
Our top priority is increasing shareholder value by improving operating and financial performance and profitably growing the business through superior products and services. To that end, we expect to invest a certain portion of our cash on hand to fund enhancements to existing software products, to develop and market new software products, and to expand our customer breadth, both vertically and geographically.
Our strategic plan specifically focuses on:
• Putting the customer first • Focusing on product innovation and development
• Growing revenue through increased investments in sales and marketing
initiatives
• Increasing organizational efficiency and teamwork
• Developing our employees and leaders
• Growing revenue by improving the breadth and depth of our product set across
both point-of-sale and property management applications
• Growing revenue through international expansion
The primary objective of our ongoing strategic planning process is to create
shareholder value by capitalizing on growth opportunities, remaining profitable
and strengthening our competitive position within the specific technology
solutions and end markets we serve. Profitability and industry leading growth
will be achieved through effective management of operating expenses and
sharpening the focus of our investments to concentrate on growth opportunities.
Revenue - Defined
As required by theSEC , we separately present revenue earned as products revenue, support, maintenance and subscription services revenue or professional services revenue in our condensed consolidated statements of operations. In addition to theSEC requirements, we may, at times, also refer to revenue as defined below. The terminology, definitions, and applications of terms we use to describe our revenue may be different from those used by other companies and caution should be used when comparing these financial measures to those of other companies. We use the following terms to describe revenue:
• Revenue - We present revenue net of sales returns and allowances.
• Products revenue - Revenue earned from the sales of software licenses, third
party hardware and operating systems.
• Support, maintenance and subscription services revenue - Revenue earned from
the sale of proprietary and remarketed ongoing support, maintenance and
subscription services.
• Professional services revenue - Revenue earned from the delivery of
implementation, integration and installation services for proprietary and
remarketed products.
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Results of Operations
Third Fiscal Quarter 2022 Compared to Third Fiscal Quarter 2021
Net Revenue and Operating Income
The following table presents our consolidated revenue and operating results for
the three months ended
Three months ended
December 31, Increase (decrease)
(Dollars in thousands) 2021 2020 $ %
Net revenue:
Products $ 8,101 $ 7,599 $ 502 6.6 %
Support, maintenance and subscription
services 25,136 22,846 2,290 10.0
Professional services 6,223 6,230 (7 ) nm
Total net revenue 39,460 36,675 2,785 7.6
Cost of goods sold:
Products 4,400 3,660 740 20.2
Support, maintenance and subscription
services 5,421 4,655 766 16.5
Professional services 4,923 4,164 759 18.2
Total cost of goods sold 14,744 12,479 2,265 18.2
Gross profit $ 24,716 $ 24,196 $ 520 2.1 %
Gross profit margin 62.6 % 66.0 %
Operating expenses:
Product development $ 11,210 $ 12,376 $ (1,166 ) (9.4 )%
Sales and marketing 3,943 3,327 616 18.5
General and administrative 6,804 7,509 (705 ) (9.4 )
Depreciation of fixed assets 495 722 (227 ) (31.4 )
Amortization of internal-use software 267 521 (254 ) (48.8 )
Severance and other charges 381 1,552 (1,171 ) (75.5 )
Legal settlements, net 4 - 4 nm
Operating income (loss) $ 1,612 $ (1,811 ) $ 3,423 189.0 %
Operating income (loss) percentage 4.1 % (4.9 )%
nm - not meaningful
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The following table presents the percentage relationship of our condensed
consolidated statement of operations line items to our consolidated net revenues
for the periods presented:
Three months ended
December 31,
2021 2020
Net revenue:
Products 20.5 % 20.7 %Support, maintenance and subscription services 63.7 62.3 Professional services
15.8 17.0
Total net revenue 100.0 % 100.0 %
Cost of goods sold:
Products 11.2 % 10.0 %
Support, maintenance and subscription services 13.7 12.7
Professional services 12.5 11.3
Total cost of goods sold 37.4 % 34.0 %
Gross profit 62.6 % 66.0 %
Operating expenses:
Product development 28.4 % 33.7 %
Sales and marketing 10.0 9.1
General and administrative 17.2 20.5
Depreciation of fixed assets 1.2 2.0
Amortization of internal-use software 0.7 1.4
Severance and other charges 1.0 4.2
Legal settlements, net 0.0 -
Operating income (loss) 4.1 % (4.9 )%
nm - not meaningful
Net revenue. Total net revenue increased $2.8 million , or 7.6%, during the third
quarter of fiscal 2022 compared to the third quarter of fiscal 2021. Products
revenue increased $0.5 million , or 6.6%, due to higher sales and deliveries as
our customers re-open their locations for business. Support, maintenance and
subscription services revenue increased $2.3 million , or 10.0%, compared to the
third quarter of fiscal 2021 driven by continued growth in subscription-based
service revenue, which increased 24.9% during the third quarter of fiscal 2022
compared to the third quarter of fiscal 2021. The increase in subscription
revenue is due to increased sales and implementations of our newer cloud native
add-on modules. Professional services revenue was consistent with the third
quarter of fiscal 2021 as customers continue to struggle with labor availability
causing delay in certain projects during the quarter while complex
implementations require additional time for completion.
Gross profit and gross profit margin. Our total gross profit increased $0.5
million , or 2.1%, for the third quarter of fiscal 2022 and total gross profit
margin decreased from 66.0% to 62.6% driven by changes in the composition of
revenue by category. Products gross profit decreased $0.2 million , or 6.0%, and
products gross profit margin decreased from 51.8% to 45.7% due to a higher
proportion of third-party products over proprietary software revenue. Support,
maintenance and subscription services gross profit increased $1.5 million , or
8.4%, and gross profit margin decreased from 79.6% to 78.4% as certain variable
costs increased ahead of related revenue. Professional services gross profit
decreased $0.8 million due to delays in certain professional service projects
with a decrease in gross profit margin from 33.2% to 20.9% due to an increase in
costs as our implementation teams continue to hire and train new staff while
project backlogs increase from ongoing sales activity and certain project
delays.
Operating expenses
Operating expenses, excluding legal settlements, severance and other charges,
decreased
Product development. Product development decreased$1.2 million , or 9.4%, in the third quarter of fiscal 2022 compared with the third quarter of fiscal 2021 due to higher than usual share-based and other incentive compensation in the prior year which did not reoccur in the current fiscal year. 19
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Sales and marketing. Sales and marketing increased$0.6 million , or 18.5%, in the third quarter of fiscal 2022 compared with the third quarter of fiscal 2021 due to the return of some travel costs due to increased in-person selling activity, and higher advertising and promotions costs due to increased marketing event and trade show activity. General and administrative. General and administrative decreased$0.7 million , or 9.4%, in the third quarter of fiscal 2022 compared with the third quarter of fiscal 2021 due to higher than usual share-based compensation in the prior year which did not reoccur in the current fiscal year. Severance and other charges. Severance, and other charges decreased$1.2 million , or 75.5%, in the third quarter of fiscal 2022 compared with the third quarter of fiscal 2021 due to the absence of layoffs and significantly reduced employee terminations in fiscal 2022.
Other (Income) Expenses
Three Months Ended
December 31, (Unfavorable) favorable
(Dollars in thousands) 2021 2020 $ %
Other expense:
Interest income $ (10 ) $ (27 ) $ (17 ) (63.0 )%
Interest expense 4 9 5 nm
Other expense, net 52 95 43 (45.3 )
Total other expense, net $ 46 $ 77 $ 31 (40.3 )%
nm - not meaningful
Interest income. Interest income consists of interest earned through interest-bearing bank accounts and on cash equivalents including short-term investments in commercial paper, treasury bills and money market funds.
Interest expense. Interest expense consists of costs associated with finance leases.
Other expense, net. Other expense, net consists mainly of the impact of foreign
currency due to movement of European and Asian currencies against the US dollar.
Income Taxes
Three Months Ended
December 31, (Unfavorable) favorable
(Dollars in thousands) 2021 2020 $ %
Income tax expense $ 24 $ 182 $ 158 nm
Effective tax rate 1.5 % (9.6 )%
nm - not meaningful
For the three months ended December 31, 2021 , the effective tax rate was
different than the statutory rate due primarily to the recognition of net
operating losses as deferred tax assets in the U.S. and certain foreign
jurisdictions, which were offset by increases in the valuation allowance,
certain foreign and state tax effects and other U.S. permanent book to tax
differences. For the three months ended December 31, 2020 , the effective tax
rate was different than the statutory tax rate due primarily to the recognition
of net operating losses that were offset by increased valuation allowance in the
U.S , certain foreign and state tax effects and other U.S. permanent book to tax
differences.
Although the timing and outcome of tax settlements are uncertain, it is
reasonably possible that during the next 12 months an immaterial reduction in
unrecognized tax benefits may occur based on the outcome of tax examinations and
as a result of the expiration of various statutes of limitations. We are
consistently subject to tax audits; due to the nature of examinations in
multiple jurisdictions, changes could occur in the amount of gross unrecognized
tax benefits during the next 12 months which cannot be estimated at this time.
Because of our losses in prior periods, we have recorded a valuation allowance
offsetting substantially all of our deferred tax assets in the U.S. and certain
foreign jurisdictions, as management believes that it is more likely than not
that we will not realize the benefits of
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these deductible differences. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible.
Results of Operations
First Nine Months of Fiscal 2022 Compared to First Nine Months of Fiscal 2021
Net Revenue and Operating Income
The following table presents our consolidated revenue and operating results for
the three months ended
Nine months ended
December 31, Increase (decrease)
(Dollars in thousands) 2021 2020 $ %
Net revenue:
Products $ 24,244 $ 19,396 $ 4,848 25.0 %
Support, maintenance and subscription
services 72,371 65,647 6,724 10.2
Professional services 19,463 15,797 3,666 23.2
Total net revenue 116,078 100,840 15,238 15.1
Cost of goods sold:
Products 12,420 9,625 2,795 29.0
Support, maintenance and subscription
services 15,184 13,515 1,669 12.3
Professional services 14,634 11,802 2,832 24.0
Total cost of goods sold 42,238 34,942 7,296 20.9
Gross profit $ 73,840 $ 65,898 $ 7,942 12.1 %
Gross profit margin 63.6 % 65.3 %
Operating expenses:
Product development $ 34,074 $ 28,900 $ 5,174 17.9 %
Sales and marketing 10,418 8,278 2,140 25.9
General and administrative 20,330 18,446 1,884 10.2
Depreciation of fixed assets 1,609 2,160 (551 ) (25.5 )
Amortization of intangibles 1,077 1,490 (413 ) (27.7 )
Severance and other charges 1,187 2,762 (1,575 ) (57.0 )
Legal settlements, net 371 50 321 nm
Operating income $ 4,774 $ 3,812 $ 962 (25.2 )%
Operating income percentage 4.1 % 3.8 %
nm - not meaningful
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The following table presents the percentage relationship of our condensed
consolidated statement of operations line items to our consolidated net revenues
for the periods presented:
Nine months ended
December 31,
Net revenue: 2021 2020
Products 20.9 % 19.2 %Support, maintenance and subscription services 62.3 65.1 Professional services
16.8 15.7
Total net revenue 100.0 % 100.0 %
Cost of goods sold:
Products 10.7 % 9.5 %
Support, maintenance and subscription services 13.1 13.5
Professional services 12.6 11.7
Total cost of goods sold 36.4 % 34.7 %
Gross profit 63.6 % 65.3 %
Operating expenses:
Product development 29.4 % 28.7 %
Sales and marketing 9.0 8.2
General and administrative 17.5 18.3
Depreciation of fixed assets 1.4 2.1
Amortization of intangibles 0.9 1.5
Severance and other charges 1.0 2.7
Legal settlements, net 0.3 0.0
Operating income 4.1 % 3.8 %
Net revenue. Total net revenue increased $15.2 million , or 15.1%, during the
first nine months of fiscal 2022 compared to the first nine months of fiscal
2021. Products revenue increased $4.8 million , or 25.0%, due to higher sales and
deliveries as our customers re-open their locations for business. Support,
maintenance and subscription services revenue increased $6.7 million , or 10.2%,
compared to the first nine months of fiscal 2021 driven by continued growth in
subscription-based service revenue, which increased 26.2% during the first nine
months of fiscal 2022 compared to the first nine months of fiscal 2021.
Professional services revenue increased $3.7 million , or 23.2%, due to higher
sales and service activity as our customers re-open their locations for
business.
Gross profit and gross profit margin. Our total gross profit increased $7.9
million , or 12.1%, for the first nine months of fiscal 2022 and total gross
profit margin decreased from 65.3% to 63.6% driven by changes in the composition
of revenue by category. Products gross profit increased $2.1 million , or 21.0%,
compared to the first nine months of fiscal 2021 and products gross profit
margin decreased from 50.4% to 48.8% due to a higher proportion of third-party
products over proprietary software revenue. Support, maintenance and
subscription services gross profit increased $5.1 million , or 9.7%, and gross
profit margin decreased from 79.4% to 79.0% as certain variable costs increased
ahead of related revenue. Professional services gross profit increased $0.8
million , or 20.9%, due to the increase in professional service projects as
customers continue to re-open their locations. Professional services gross
profit margin decreased from 25.3% to 24.8% due to continued hiring and training
of new staff to meet increasing project backlogs from ongoing sales activity and
certain project delays.
Operating expenses
Operating expenses, excluding legal settlements, severance and other charges,
increased $8.2 million , or 13.9%, during the first nine months of fiscal 2022
compared with the first nine months of fiscal 2021.
Product development. Product development increased
Sales and marketing. Sales and marketing increased$2.1 million , or 25.9%, in the first nine months of fiscal 2022 compared with the first nine months of fiscal 2021 due to restored base pay and employee benefits, increased share-based compensation, a return of some travel costs due to increased in-person selling activity, and higher advertising and promotions costs due to increased marketing event and trade show activity. General and administrative. General and administrative increased by$1.9 million , or 10.2%, in the first nine months of fiscal 2022 compared with the first nine months of fiscal 2021 due to restored base pay and employee benefits, and higher internal system subscription costs. 22
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Severance and other charges. Severance, and other charges decreased$1.6 million in the first nine months of fiscal 2022 due to layoffs and other employee terminations during the first nine months of fiscal 2021 that did not re-occur during the first nine months of fiscal 2022. Legal settlements, net. Legal settlements, net increased$0.3 million in the first nine months of fiscal 2022 compared with the first nine months of fiscal 2021 due to settlement of a lawsuit involving a former employee; no further activity is expected on this matter. Other (Income) Expenses Nine Months Ended December 31, (Unfavorable) favorable (Dollars in thousands) 2021 2020 $ % Other expense: Interest income$ (45 ) $ (76 ) $ (31 ) (40.8 )% Interest expense 5 13 8 nm Other expense, net 53 284 231 nm Total other expense, net$ 13 $ 221 $ 208 nm nm - not meaningful Interest income. Interest income consists of interest earned on cash equivalents including short-term investments in certificates of deposit, commercial paper, treasury bills and money market funds.
Interest expense. Interest expense consists of costs associated with finance leases.
Other expense. Other expense consists mainly of the impact of foreign currency due to movement of European and Asian currencies against the US dollar.
Income Taxes
Nine Months Ended
December 31, (Unfavorable) favorable
(Dollars in thousands) 2021 2020 $ %
Income tax expense $ 265 $ 311 $ 46 nm
Effective tax rate 5.6 % 8.7 %
nm - not meaningful
For the nine months ended December 31, 2021 , the effective tax rate was
different than the statutory tax rate due primarily to the recognition of net
operating losses as deferred tax assets in the U.S. and certain foreign
jurisdictions, which were offset by increases in the valuation allowance,
certain foreign and state tax effects and other U.S. permanent book to tax
differences. For the nine months ended December 31, 2020 , the effective tax rate
was different than the statutory tax rate due primarily to the utilization of
net operating losses that were offset by decreases in the valuation allowances
in the U.S , certain foreign and state tax effects and other U.S. permanent book
to tax differences.
Although the timing and outcome of tax settlements are uncertain, it is
reasonably possible that during the next 12 months an immaterial reduction in
unrecognized tax benefits may occur based on the outcome of tax examinations and
as a result of the expiration of various statutes of limitations. We are
consistently subject to tax audits; due to the nature of examinations in
multiple jurisdictions, changes could occur in the amount of gross unrecognized
tax benefits during the next 12 months which cannot be estimated at this time.
Liquidity and Capital Resources
Overview
Our operating cash requirements consist primarily of working capital needs, operating expenses, capital expenditures and payments on indebtedness outstanding, which primarily consists of lease obligations and preferred stock dividends.
AtDecember 31, 2021 , 100% of our cash and cash equivalents, of which 95% were located inthe United States , were deposited in bank accounts or invested in highly liquid investments including money market funds and commercial paper with original maturity 23
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from the date of acquisition of three months or less. We believe credit risk is limited with respect to our cash and cash equivalents balances.
As of
We believe that cash flow from operating activities, cash on hand of$115.1 million as ofDecember 31, 2021 and access to capital markets will provide adequate funds to meet our short- and long-term liquidity requirements including the acquisition of ResortSuite, which is expected to total approximately$25 million of whichAgilysys paid$22.7 million inJanuary 2022 . Cash Flow Nine Months Ended December 31, (In thousands) 2021 2020 Net cash provided by (used in): Operating activities$ 21,815 $ 15,084 Investing activities (1,081 ) (1,078 ) Financing activities (4,754 ) 31,765 Effect of exchange rate changes on cash (38 ) 184
Net increase in cash and cash equivalents
Cash flow provided by operating activities. Cash flow provided by operating
activities was
Cash flow used in investing activities. Consists primarily of property and equipment purchases.
Cash flow (used in) provided by financing activities. During the first nine months of fiscal 2022, the$4.8 million used in financing activities consisted primarily of$2.9 million related to the repurchase of shares to satisfy employee tax withholding on share-based compensation and$1.8 million in preferred stock dividends. During the first nine months of fiscal 2021, the$31.8 million provided by financing activities consisted primarily of$34.0 million in preferred stock issuance proceeds from theMAK Capital investment, net of issuance costs, offset by$1.1 million related to the repurchase of shares to satisfy employee tax withholding on share-based compensation and$1.1 million in preferred stock dividends.
Contractual Obligations
As of
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies
A detailed description of our significant accounting policies is included in our Annual Report for the year endedMarch 31, 2021 . Other than as described in Note 2 to the condensed consolidated financial statements, there have been no material changes in our significant accounting policies and estimates sinceMarch 31, 2021 .
Forward-Looking Information
This Quarterly Report and other publicly available documents, including the documents incorporated herein and therein by reference, contain, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of theU.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," 24
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"may," "should," "will" and similar references to future periods. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. These statements are based on management's current expectations, intentions, or beliefs and are subject to a number of factors, assumptions, and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the risk factors set forth in Item 1A in Part II of this Quarterly Report and Item IA of our Annual Report for the fiscal year endedMarch 31, 2021 . We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events, or otherwise.
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