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, 2022 , 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, 2022 . 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 25 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, 2022 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
pandemic has created significant economic challenges as organizations and
governmental authorities around the world have implemented numerous measures
attempting to contain the spread of COVID-19, including travel restrictions,
border closings, shelter-in-place orders, and social distancing requirements.
Our customers and suppliers have closed or have otherwise applied restrictions
at certain sites in response to the pandemic. Similarly, we have provided remote
working arrangements for our employees, limited business travel, and canceled or
shifted various events to virtual attendance. We have localized our pandemic
response to the countries and specific locations in which we, our customers and
our suppliers operate.
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 business and on the operation
of the global markets in general. We continue to monitor and evaluate the
operational impact and may take further actions that alter our business
operations that we believe are in the best interests of our employees,
customers, partners, suppliers, shareholders, and other stakeholders.
Our Business
Agilysys is well known for its long heritage of hospitality-focused technology innovation. The Company delivers modular and integrated software solutions and expertise to businesses seeking to maximize Return on Experience (ROE) through hospitality encounters that are both personal and profitable. Over time, customers achieve High Return Hospitality by consistently delighting guests, retaining staff and growing margins. Customers around the world include: branded and independent hotels; multi-amenity resort properties; casinos; property, hotel and resort management companies; cruise lines; corporate dining providers; higher education campus dining providers; food service management companies; hospitals; lifestyle communities; senior living facilities; stadiums; and theme parks. The Agilysys Hospitality Cloud™ combines core operational systems for property management (PMS), point-of-sale (POS) and Inventory and Procurement (I&P) with Experience Enhancers™ that meaningfully improve interactions for guests and for employees across dimensions such as digital access, mobile convenience, self-service control, personal choice, payment options, service coverage and real-time insights to improve decisions. Core solutions and Experience Enhancers are selectively combined in Hospitality Solution Studios™ tailored to specific hospitality settings and business needs.
The Company has just one reportable segment serving the global hospitality
industry.
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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 • Improving our liquidity • 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, increasing profitability and strengthening our competitive position within the specific technology solutions and end markets we serve. Profitability and industry-leading growth will be achieved through tighter management of operating expenses and sharpening the focus of our investments to concentrate on growth opportunities that offer the highest returns.
Revenue - Defined
As required by theSEC , we separately present revenue earned as products revenue, subscription and maintenance 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 delivery of software licenses, third
party hardware and operating systems.
•
Subscription and maintenance revenue - Revenue earned from the ongoing delivery
of software updates, upgrades, bug fixes and technical support over the period
covered by subscription or maintenance agreements with our customers for both
proprietary and remarketed solutions.
•
Professional services revenue - Revenue earned from the delivery of
implementation, integration and installation services for proprietary and
remarketed solutions.
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--------------------------------------------------------------------------------Results of Operations
Third Fiscal Quarter 2023 Compared to Third Fiscal Quarter 2022
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) 2022 2021 $ %
Net revenue:
Products $ 10,697 $ 8,101 $ 2,596 32.0 %
Subscription and maintenance 30,154 25,136 5,018 20.0 %
Professional services 9,069 6,223 2,846 45.7 %
Total net revenue 49,920 39,460 10,460 26.5 %
Cost of goods sold:
Products 5,368 4,400 968 22.0 %
Subscription and maintenance 6,767 5,421 1,346 24.8 %
Professional services 7,009 4,923 2,086 42.4 %
Total cost of goods sold 19,144 14,744 4,400 29.8 %
Gross profit $ 30,776 $ 24,716 $ 6,060 24.5 %
Gross profit margin 61.7 % 62.6 %
Operating expenses:
Product development $ 12,416 $ 11,210 $ 1,206 10.8 %
Sales and marketing 5,886 3,943 1,943 49.3 %
General and administrative 7,928 6,804 1,124 16.5 %
Depreciation of fixed assets 437 495 (58 ) (11.7 )%
Amortization of internal-use
software and intangibles 430 267 163 61.0 %
Other charges 93 381 (288 ) nm
Legal settlements 104 4 100 nm
Operating income $ 3,482 $ 1,612 $ 1,870 116.0 %
Operating income percentage 7.0 % 4.1 %
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,
2022 2021
Net revenue:
Products 21.4 % 20.5 %
Subscription and maintenance 60.4 63.7
Professional services 18.2 15.8
Total net revenue 100.0 % 100.0 %
Cost of goods sold:
Products 10.7 % 11.2 %
Subscription and maintenance 13.6 13.7
Professional services 14.0 12.5
Total net cost of goods sold 38.3 % 37.4 %
Gross profit 61.7 % 62.6 %
Operating expenses:
Product development 24.8 % 28.4 %
Sales and marketing 11.8 10.0
General and administrative 15.9 17.2
Depreciation of fixed assets 0.9 1.2
Amortization of internal-use software and intangibles 0.9 0.7
Other charges 0.2 1.0
Legal settlements 0.2 0.0
Operating income 7.0 % 4.1 %
Net revenue. Total net revenue increased $10.5 million , or 26.5%, during the
third quarter of fiscal 2023 compared to the third quarter of fiscal 2022.
Products revenue increased $2.6 million , or 32.0%, due to higher sales and
deliveries to new customers and expansion with existing customers. Subscription
and maintenance revenue increased $5.0 million , or 20.0%, compared to the third
quarter of fiscal 2022 driven by continued growth in subscription-based service
revenue, which increased 28.8% during the third quarter of fiscal 2023 compared
to the third quarter of fiscal 2022. Professional services revenue increased
$2.8 million , or 45.7%, due to higher sales and service activity as our new and
existing customers continue implementing technology to improve their operations.
Gross profit and gross profit margin. Our total gross profit increased $6.1
million , or 24.5%, during the third quarter of fiscal 2023 and total gross
profit margin decreased from 62.6% to 61.7% compared to the third quarter of
fiscal 2022 driven by changes in the composition of revenue by category.
Products gross profit increased $1.6 million , or 44.0%, and products gross
profit margin increased from 45.7% to 49.8% due to a higher proportion of
proprietary software deliveries. Subscription and maintenance gross profit
increased $3.7 million , or 18.6%, and gross profit margin decreased from 78.4%
to 77.6% as certain variable costs increased ahead of related revenue.
Professional services gross profit margin increased from 20.9% to 22.7%
reflecting improved utilization rates from efficiency gains on multi-solution
implementations.
Operating expenses
Operating expenses, excluding other charges and legal settlements, increased
$4.4 million , or 19.3%, during the third quarter of fiscal 2023 compared with
the third quarter of fiscal 2022.
Product development. Product development increased $1.2 million , or 10.8%, in
the third quarter of fiscal 2023 compared with the third quarter of fiscal 2022
due to hiring and increased salary and incentive rates across our development
teams.
Sales and marketing. Sales and marketing increased $1.9 million , or 49.3%, in
the third quarter of fiscal 2023 compared with the third quarter of fiscal 2022
due to various sales and marketing investments including several key hires,
higher levels of marketing event and trade show activity and increased
commission expense on higher sales activity.
General and administrative. General and administrative increased $1.1 million ,
or 16.5%, in the third quarter of fiscal 2023 compared with the third quarter of
fiscal 2022 due to hiring and increased salary and incentive rates across our
administrative teams, higher rent, and higher subscription charges for cloud
computing arrangements.
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--------------------------------------------------------------------------------Other charges. Other charges consist of severance costs, infrequent settlements of customer disputes and acquisition costs related to business combinations.
Legal settlements. Legal settlements consist of settlements of employment and other business-related matters.
Other (Income) Expenses
Three Months Ended December 31, (Unfavorable) favorable
(Dollars in thousands) 2022 2021 $ %
Other (income) expense:
Interest income $ (704 ) $ (10 ) $ 694 nm
Interest expense - 4 4 nm
Other (income) expense, net (384 ) 52 436 nm
Total other (income) expense, net
$ 1,134 nm nm - not meaningful Interest income. Interest income consists of interest earned 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 (income) expense, net. Other (income) expense, net mainly consists of movement of foreign currencies against the US dollar.
Income Taxes
Three Months Ended December 31, (Unfavorable) favorable
(Dollars in thousands) 2022 2021 $ %
Income tax expense $ 678 $ 24 $ (654 ) nm
Effective tax rate 14.8 % 1.5 %
nm - not meaningful
For the three months ended
Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a 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. 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. Because of our losses in prior periods, we have recorded a valuation allowance offsetting substantially all of our deferred tax assets in theU.S. and certain foreign jurisdictions, as management believes that it is more likely than not that we will not realize the benefits of these deductible differences. 21 --------------------------------------------------------------------------------
Results of Operations
First Nine Months of Fiscal 2023 Compared to First Nine Months of Fiscal 2022
Net Revenue and Operating Income
The following table presents our consolidated revenue and operating results for
the nine months ended
Nine Months Ended December 31, Increase (decrease)
(Dollars in thousands) 2022 2021 $ %
Net revenue:
Products $ 32,291 $ 24,244 $ 8,047 33.2 %
Subscription and maintenance 86,917 72,371 14,546 20.1 %
Professional services 25,960 19,463 6,497 33.4 %
Total net revenue 145,168 116,078 29,090 25.1 %
Cost of goods sold:
Products 16,682 12,420 4,262 34.3 %
Subscription and maintenance 19,223 15,184 4,039 26.6 %
Professional services 20,627 14,634 5,993 41.0 %
Total cost of goods sold 56,532 42,238 14,294 33.8 %
Gross profit $ 88,636 $ 73,840 $ 14,796 20.0 %
Gross profit margin 61.1 % 63.6 %
Operating expenses:
Product development $ 36,550 $ 34,074 $ 2,476 7.3 %
Sales and marketing 16,619 10,418 6,201 59.5 %
General and administrative 22,850 20,330 2,520 12.4 %
Depreciation of fixed assets 1,371 1,609 (238 ) (14.8 )%
Amortization of internal-use
software and intangibles 1,326 1,077 249 23.1 %
Other charges 374 1,187 (813 ) (68.5 )%
Legal settlements 104 371 (267 ) nm
Operating income $ 9,442 $ 4,774 $ 4,668 97.8 %
Operating income percentage 6.5 % 4.1 %
nm - not meaningful
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:
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Nine Months Ended December 31,
2022 2021
Net revenue:
Products 22.2 % 20.9 %
Subscription and maintenance 59.9 62.3
Professional services 17.9 16.8
Total net revenue 100.0 % 100.0 %
Cost of goods sold:
Products 11.5 % 10.7 %
Subscription and maintenance 13.2 13.1
Professional services 14.2 12.6
Total net cost of goods sold 38.9 % 36.4 %
Gross profit 61.1 % 63.6 %
Operating expenses:
Product development 25.2 % 29.4 %
Sales and marketing 11.5 9.0
General and administrative 15.7 17.5
Depreciation of fixed assets 0.9 1.4
Amortization of internal-use software and intangibles 0.9 0.9
Other charges 0.3 1.0
Legal settlements 0.1 0.3
Operating income 6.5 % 4.1 %
Net revenue. Total net revenue increased $29.1 million , or 25.1%, during the
first nine months of fiscal 2023 compared to the first nine months of fiscal
2022. Products revenue increased $8.0 million , or 33.2%, due to higher sales and
deliveries to new customers and expansion with existing customers. Subscription
and maintenance revenue increased $14.5 million , or 20.1%, compared to the first
nine months of fiscal 2022 driven by continued growth in subscription-based
service revenue, which increased 28.9% during the first nine months of fiscal
2023 compared to the first nine months of fiscal 2022. Professional services
revenue increased $6.5 million , or 33.4%, due to higher sales and service
activity as our new and existing customers continue implementing technology to
improve their operations.
Gross profit and gross profit margin. Our total gross profit increased $14.8
million , or 20.0%, during the first nine months of fiscal 2023 and total gross
profit margin decreased from 63.6% to 61.1% compared to the first nine months of
fiscal 2022 driven by changes in the composition of revenue by category.
Products gross profit increased $3.8 million , or 32.0%, and products gross
profit margin decreased from 48.8% to 48.3% due to the composition of hardware
products delivered. Subscription and maintenance gross profit increased $10.5
million , or 18.4%, and gross profit margin decreased from 79.0% to 77.9% as
certain variable costs increased ahead of related revenue. Professional services
gross profit margin decreased from 24.8% to 20.5% reflecting lower utilization
rates due to higher non-billable hours on new, more complex solution
implementations over the comparable nine-month periods.
Operating expenses
Operating expenses, excluding other charges and legal settlements, increased$11.2 million , or 16.6%, during the first nine months of fiscal 2023 compared with the first nine months of fiscal 2022. Product development. Product development increased$2.5 million , or 7.3%, in the first nine months of fiscal 2023 compared with the first nine months of fiscal 2022 due to hiring and increased salary and incentive rates across our development teams. Sales and marketing. Sales and marketing increased$6.2 million , or 59.5%, in the first nine months of fiscal 2023 compared with the first nine months of fiscal 2022 due to various sales and marketing investments including several key hires, significantly higher levels of marketing event and trade show activity and increased commission expense on higher sales activity. General and administrative. General and administrative increased$2.5 million , or 12.4%, in the first nine months of fiscal 2023 compared with the first nine months of fiscal 2022 due to investments in our information security and information technology infrastructure along with hiring and increased salary and incentive rates across our administrative teams, higher rent, and higher subscription charges for cloud computing arrangements.
Other charges. Other charges consist of severance costs, infrequent settlements of customer disputes and acquisition costs related to business combinations.
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--------------------------------------------------------------------------------Other (Income) Expenses
Nine Months Ended December 31, (Unfavorable) favorable
(Dollars in thousands) 2022 2021 $ %
Other (income) expense:
Interest income $ (1,186 ) $ (45 ) $ 1,141 nm
Interest expense 0 5 5 nm
Other (income) expense, net (799 ) 53 852 nm
Total other (income) expense, net $ (1,985 ) $ 13 $ 1,998 nm
nm - not meaningful
Interest income. Interest income consists of interest earned 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 (income) expense, net. Other (income) expense, net mainly consists of movement of foreign currencies against the US dollar.
Income Taxes
Nine Months Ended December 31 , (Unfavorable) favorable(Dollars in thousands) 2022 2021 $ % Income tax expense $ 920 $ 265 $ (655 ) nm Effective tax rate 8.1 % 5.6 % nm - not meaningful
For the nine months ended
Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a 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 cash requirements consist primarily of working capital needs, capital expenditures and payments of contractual obligations. Our contractual obligations consist primarily of operating leases for office space and preferred stock dividends.
AtDecember 31, 2022 , 100% of our cash and cash equivalents, of which 92% were located inthe United States , were deposited in bank accounts or invested in highly liquid investments including commercial paper and treasury bills with original maturity from the date of acquisition of three months or less and money market funds. We determine the fair value of commercial paper using significant other observable inputs based on pricing from independent sources that use quoted prices in active markets for identical assets or other observable inputs including benchmark yields and interest rates. We believe credit risk is limited with respect to our cash and cash equivalents. We believe that cash flow from operating activities, cash and cash equivalents of$105.8 million as ofDecember 31, 2022 , and access to capital markets will provide adequate funds to meet our short- and long-term liquidity requirements. 24
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