Agilysys Restates 3Q Results; Biggest Shareholder to Get Bigger

Published: February 22, 2010

by Alex Woodie

Agilysys has restated its financial results for the third quarter of fiscal 2009 ended December 31. The IBM hardware reseller and i/OS software developer shifted revenue down $1.4 million, or 0.6 percent, and shifted net income down $1.3 million, or 9.5 percent. Shareholders for the Cleveland, Ohio, company also approved a request by its largest shareholder, MAK Capital One, to increase its stake in the company.

Following the markdown of results originally announced on February 3, Agilysys' revenue for the third quarter of fiscal year 2009 came in at $219 million, down about $5 million, or 2.2 percent, from its 3Q08 numbers, while its net income was reported as $13.6 million, a big turn around from the $3.7 million loss the company reported for 3Q08.

Shareholders didn't seem to mind the markdown, as profitability returned to the company, which has been hit hard by the recession. Following its restatement, its share price surged from its late January low of about $8.50 to close to $10 at the end of last week, setting a new 52-week high.

Agilysys didn't elaborate on the source of the markdown, except to say it was "due to remarketed services in the Technology Solutions Group business," which sells equipment and software from IBM and other major IT vendors.

ITG accounted for about $161 million in revenue for Agilysys, which was flat year over year. By comparison, its Retail Solutions Group (RSG), which caters to retailers with point of sale (POS) and kiosk offerings, saw an 11 percent jump in revenue to $37.7 million, while its Hospitality Solutions Group (HSG), which sells the i/OS-based lodging management systems (LMS) and related technologies, saw its revenues plummeted nearly 20 percent to $23.3 million. Agilysys attributed this drop to continued weakness in the casino market, although performance in the cruise ship segment was "solid."

Agilysys president and CEO Martin Ellis painted a rosy picture during a conference call held the day of the original earnings release, February 3. "We were encouraged by the improving demand environment we've seen in the past two quarters. While a number of sectors continue to be challenged, project funding and CapEx budgets are starting to loosen," he said according to a transcript of the call.

Also according to the transcript, Agilysys is in the process of implementing an Oracle ERP system. "The majority of capital expenditures are related to the implementation of our Oracle ERP software, which is scheduled to go live in April 2010 and capitalized cost associated with Guest 360 [a new LMS that runs on Windows], which is scheduled for general release in the first half of fiscal 2011," said Ken Kossin, senior vice president and chief financial officer.

In a separate development, shareholders voting in a special election approved a motion to allow a group of investors known as the MAK Group to boost its ownership in the company from its current 19.2 percent to up to 33.3 percent. As part of its bid for the higher stake, Michael Kaufman, the managing member of MAK Capital One, and MAK Group relinquished any right to additional seats on the board of directors (it currently has one) that would result from its greater stake.

Giving up the seat eliminated MAK's "ability to single-handedly block a transaction and effectively [gives] up most of the increase in voting control," stated Proxy Governance, a privately held company that provides research and voting advice on companies around the world. (Keep in mind that Agilysys hired JPMorganChase to advise it for a possible sale of the company in the summer of 2008.)

Added RiskMetrics, a publicly traded provider of risk management and corporate governance products: "It does not appear that MAK is attempting to exert undue influence on the board."

It's unclear exactly why MAK Group sought a greater stake in the company, aside from the possibility that it viewed the company as undervalued, a view that was validated somewhat by the positive 3Q09 results (even with the markdowns).

Agilysys' share price increased by $1.50 since November 20, the day MAK Group announced its intention to increase its holdings. If the company had been allowed to increase its ownership at that time, MAK would have realized a $4.8-million gain. Overall, the stock AGYS (traded on the NASDAQ) is up almost 200 percent from its 52-week low in the $3.30s in February 2009, reflecting growing optimism.

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