AGILYSYS INC Q2 FY2024 earnings

Agilysys grew revenue 22.8% in the fiscal 2024 second quarter, to $58.6 million. Gross profit rose 19.5% to $35.1 million, and operating income climbed 21.7% to $3.56 million. Net income came in at $4.54 million, up 27.1%, while diluted earnings per share of $0.16 rose $0.04 year over year. Operating margin held flat at 6.1%. Gross margin did not keep pace, sliding to 59.9%, down 1.6 percentage points.

The revenue mix explains most of the margin give. Subscription-based service revenue, the recurring core of the business, rose 29.1%. Subscription and maintenance revenue as a whole was up 18.0%. Professional services grew fastest at 43.8%, and products revenue rose 19.8%. Every one of those lines carried a thinner gross margin than a year ago except services. Subscription and maintenance gross margin eased to 77.2% from 78.8% because certain variable costs increased ahead of the related revenue. Products gross margin fell to 46.6% from 48.5% on the composition of hardware delivered. Professional services margin improved to 23.6% from 17.0% as utilization rates firmed on multi-solution implementations.

Cost growth tracked revenue growth closely. Operating expenses excluding other charges rose 18.8% in the quarter. Product development was up 15.9% on hiring, higher salary and employee benefit rates, and rent. Sales and marketing increased 20.3% on hiring, heavier marketing event and trade show activity, and higher commissions on a larger sales base. General and administrative rose 16.1% on hiring and higher compensation. Depreciation of fixed assets and amortization of internal-use software both moved, and the build-out of the company's expanded footprint is showing up in the expense base.

The quarter looks better than the first half as a whole. Through six months, revenue of $114.7 million rose 20.4%, but operating income fell 24.1% to $4.52 million and operating margin slipped to 3.9%. Net income of $6.09 million was down 7.9%, and diluted earnings per share of $0.20 was down 9.1%. First-half operating expenses excluding other charges rose 21.4%, with sales and marketing up 27.7% and general and administrative up 21.6%. Expense growth running ahead of revenue is the main reason the two periods diverge.

Cash generation improved. Operating cash flow was $5.45 million in the quarter, up 80.6%, and $5.47 million for the first half, up 75.5%. Capital expenditures, a separate use of cash, reached $2.94 million in the quarter and $6.00 million year to date, up 320.2% and 653.1% respectively, driven by leasehold improvements and equipment for the new development center in Chennai, India. Deferred revenue, a rough proxy for billings momentum, ended the quarter at $43.3 million, up 15.4% from a year earlier. Management reported cash of $107.4 million at September 30, 2023, with 93% of it held in the United States.

Non-operating items flattered the bottom line. Interest income of $1.23 million lifted total other income, net to $1.28 million, which is why net income grew faster than operating income. The income tax provision was $295 thousand, a 6.1% effective rate. Management said it is reasonably possible that a significant portion of the valuation allowance against deferred tax assets will no longer be needed during the fiscal year ending March 31, 2024, and releasing it would trigger significant income tax benefits.

Risks sit in both the macro backdrop and the tax line. The company pointed to the Israel-Hamas and Russia-Ukraine wars, labor shortages, supply chain inconsistencies, inflation, and foreign currency volatility against the U.S. dollar as conditions that weigh on customer spending, raise costs, and reduce margins, particularly outside the United States. Tax audits across multiple jurisdictions add uncertainty to the unrecognized tax benefits balance. The heavy spending on the Chennai site, and the depreciation that comes with it, will keep pressure on operating margin in the near term.