Exiting Hardware Business, Agilysys Positions For Future Profits

June 11, 2012 Timothy Prickett Morgan

This time last year, Agilysys, known mostly for its application suites for managing hotels and casinos, sold off its Technology Solutions Group hardware reseller business for $64 million in cash to OnX Enterprise Solutions, bidding good riddance to the low-margin iron services business and allowing it to focus on its software business. Agilysys has just closed out its fourth fiscal fourth quarter and is still writing down intangibles and taking restructuring charges from its hardware and services exit, but the company says it is positioning itself to be profitable in the future.

Agilysys ends its fiscal year in the March of the following year, so it has just closed out its fourth quarter of fiscal 2011 in March 2012. And the gain on the sale of the Technology Solutions Group (TSG) business that it sold to OnX as well as its assets and liabilities are reported as discontinued operations. But still, the TSG resale and the writedown of intangible assets still hit the books in the fiscal fourth quarter, causing the company to report a proportionately large loss compared to the size of its software business. That said, losses were a lot lower than what Agilysys reported this time last year.

In the quarter ended March 31, Agilysys reported software product sales of $24.8 million, up 7.1 percent, with support, maintenance, and subscription services accounted for another $19.5 million, up 3.7 percent. The company’s professional services biz saw very good growth in the final quarter of the fiscal 2012 year, rising 53.9 percent to $7.8 million. Gross profits hit $20.8 million, up 5.3 percent, but $9.7 million in asset impairment charges and $5.3 million in restructuring charges in the wake of the TSG sale combined with rising sales, marketing, and administration costs to push the company to a $19.9 million operating loss and a $17 million net loss. That is a far cry better than the core software business at Agilysys was doing a year ago, when software and related sales were just a smidgen under $47 million and had a net loss of $45 million.

For the full fiscal 2012 year, Agilysys had $208.9 million in sales, up 3.1 percent, with a net loss of $22.8 million, down but more than half compared to fiscal 2011.

During the latest quarter, the Hospitality Solutions Group posted $6.8 million in software license sales, down 36.9 percent from a year ago, while overall sales were $22.9 million, down 8.8 percent. Even with that sharp decline, Agilysys increased gross profits by 3.3 points to 66.3 percent of revenues. The Retail Solutions Group posted larger revenues, but the profits are lower–and also on the rise. The RSG unit had $18 million in software license sales, up 45.1 percent, with total sales for this group up 33.4 percent to $29.1 million. However, gross profits on this side of the house were only 19.4 percent of revenues–a third of what Agilysys takes in from the HSG side of the house. The good news is that RSG gross profits are also on the rise, up 1.3 points compared to the year-ago period. RSG posted a $308,000 operating profit, while HSG posted an $8.6 million operating loss. So you can see where the writedowns and restructurings hit hardest.

“We have essentially completed the restructuring and have better aligned cost structure with continuing operations, implemented procedures to increase accountability, and enhanced the corporate services team,” said Agilysys CEO James Dennedy in a statement accompanying the financial results. “At the same time, we returned capital to shareholders with the repurchase of 1.6 million shares during the year. Entering the new fiscal year, Agilysys is a leaner company with a flatter organizational structure and two solid growth platforms on which to build.”

The company generated $16.2 million in cash from operations for the full fiscal 2012 year, has no debts, and $97.6 million in cash. Looking ahead to fiscal 2013, Agilysys is expected for relatively flat sales of between $208 million and $211 million, with an adjusted operating income of between $3.5 million and $3.5 million compared to an adjusted operating loss of $7.9 million in fiscal 2012.

Anyone with a crystal ball has to be able to see that now that Agilysys is out of the hardware biz and on the way to profitability, and some company flush with venture capital–Infor, perhaps, since it is just up the road, but maybe even Oracle–will swoop in and eat Agilysys.