AGILYSYS INC Q1 FY2023 earnings

Agilysys opened fiscal 2023 with a record revenue quarter. Total revenue for the three months ended June 30, 2022 was $47.5 million, up 22.7% from $38.7 million in the prior-year quarter. Gross profit rose 14.6% to $28.5 million, but gross margin slipped to 60.0% from 64.2% as the revenue mix shifted. Operating income climbed 48.6% to $3.03 million, and operating margin improved to 6.4% from 5.3%. Net income was $3.04 million, up 54.1% from $1.97 million a year earlier. Diluted EPS came in at $0.10, up from $0.06. Adjusted EBITDA, a non-GAAP measure, was $6.7 million compared with $6.9 million, and adjusted diluted EPS was $0.21 in both periods.

Recurring revenue, made up of subscription and maintenance charges, hit a record $27.7 million, or 58.4% of total net revenue. Subscription revenue grew 29.5% year over year and represented 47.4% of total recurring revenue, up from 43.7% a year earlier. Product revenue rose 24.9% and professional services revenue rose 30.9%, reflecting higher sales and deliveries to new customers and expansion at existing accounts. Management said the combined product and services revenue was about 28% higher than a year earlier. Backlog across product, recurring revenue, and services stood at roughly 85% of peak and about 10% above prior-year first quarter levels. Sales win-loss ratios remained at high levels.

Cash generation was the weak spot. Operating cash flow was $0.10 million, down 98.7% from $8.00 million in the prior-year quarter. Capital expenditures were $0.10 million, down 64.2% from $0.27 million. Free cash flow, a non-GAAP measure, was $0.0 million compared with $7.7 million. Management tied the decline to short-term working capital fluctuations, including additional payments for previously reported higher inventory levels held as a cushion against possible supply chain problems. Deferred revenue rose 20.8% to $41.99 million from $34.76 million, a sign of continued billings activity. The ending cash balance was $94.9 million, compared with $97.0 million at fiscal 2022 year-end.

Margin pressure came mostly from mix. Products gross margin fell to 46.8% from 50.7% as third-party products took a larger share of product revenue. Subscription and maintenance gross margin declined to 77.3% from 79.6% as certain variable costs rose ahead of the related revenue. Professional services gross margin dropped to 21.6% from 28.8% while the company invested in and trained new service team members. Operating expenses, excluding other charges and legal settlements, rose 11.9%, led by a 77.4% increase in sales and marketing on key hires and much higher marketing event and trade show activity. General and administrative spending rose 5.0% on information security and IT infrastructure.

Management reiterated full-year fiscal 2023 guidance. The top-line range is $190 million to $195 million, with approximately 30% subscription revenue growth and Adjusted EBITDA greater than 15% of revenue. The CEO pointed to continued sales progress, a healthy backlog, and an industry investing in technology to ease staffing shortages and improve the guest experience. He also flagged lingering pandemic-related challenges in international regions and managed food services. The CFO said sales, marketing, and professional services investments are being added incrementally to prepare for growth opportunities. Risks include macroeconomic uncertainty, foreign currency swings, and supply chain disruption. The MD&A states that the ultimate impact of COVID-19 on results and liquidity cannot be predicted, and a valuation allowance still offsets substantially all U.S. deferred tax assets.