Agilysys to Sell Server and Services Biz, Focus on Software

June 7, 2011 Alex Woodie

Agilysys will sell its $474-million Technology Solutions Group (TSG) to OnX Enterprise Solutions for $64 million in cash, the companies announced in late May. The move, which immediately preceded a doubling in Agilysys’ stock value, will let the Cleveland, Ohio, company concentrate on its enterprise software products for the retail and hospitality markets. CEO Martin Ellis also resigned.

Agilysys’ TSG unit sold computer hardware and provided professional IT services to companies primarily in the United States, Canada, and the U.K. As a member of the Arrow Electronics distribution channel, TSG resold servers and IT gear from OEMs such as IBM, HP, and Oracle. Per its contract with Arrow, which absorbed Agilysys’ KeyLink server distribution business for $485 million in 2007, TSG was required to purchase $330 million worth of gear from Arrow. It did the most business with Sun (now Oracle) servers, and the least with IBM.

TSG was by far the company’s biggest segment–and also its biggest money loser. According to unaudited figures provided by Agilysys, TSG accounted for $474 million in revenues for fiscal year 2011, which ended March 31. (The company is expected to announce final figures next week.) That’s 70 percent of the $677 million in annual revenue for 2011.

For 2010, hardware sales in TSG brought in $440 million, while IT services brought in about $120 million and software license deals accounted for about $81 million. However, the TSG unit was often a big money loser for Agilysys, and dragged down the higher margin software businesses. In fiscal 2009, TSG accounted for an operating loss of $88 million. That swung to nearly an $11 million operating profit in fiscal 2010 as spending cuts meshed nicely with the economic recovery. But business has slowed for TSG once again (the company warned of lower-than-expected revenue expectations for TSG in mid May), and it was evidently time to let the big fish go.

“Following a comprehensive strategic review by our board of directors, we determined it was in the best interest of our shareholders to monetize the value of TSG and operate a more focused and higher-margin business,” outgoing CEO and president Martin Ellis said in a statement.

The announcement of the definitive agreement with OnX released the anchor weighing down Agilysys’ shares. The shares, which are traded on NASDAQ, skyrocketed from the $4.75 range to more than $8 per share. That gave Agilysys–now a software company that does some services–a market capitalization of $177 million.

Agilysys’ two units, the Hospitality Solutions Group (HRG) and the Retail Solutions Group (RSG) will bring in more than $200 million and carry gross margins of 38 percent, according to James Dennedy, a member of the board who was appointed as interim president and CEO following the resignation of Ellis.

“Both HSG and RSG have newly released technology,” Dennedy stated. “This new technology, along with our goal to achieve a more tightly focused strategy and improved alignment of operating expenses, gives me confidence in the company’s ability to deliver improved operating and financial results, profitably grow the businesses, and return significant capital to our shareholders.”

Agilysys sells several IBM i-based packages in its HSG unit, including the Lodging Management System (LMS) and Stratton Warren System (formerly MMS400) procurement and inventory software, which were obtained with Agilysys’ acquisition of Inter-American Data (IAD) in 2003. LMS and SWS are very popular among large hotels and casinos, and are used by most of the properties on the Vegas Strip. But the “new technology” that Dennedy referenced is Guest360, a new Windows-based property management system. None of the RSG solutions run on the IBM i server.

The acquisition of TSG bolsters the reseller and services business of OnX Enterprise Solutions, which is based in Toronto, Canada, and sells much the same lineup of servers and storage and networking and virtualization solutions as TSG did. According to OnX cofounder and director Sheldon Pollack, the combined company will have annual revenues in excess of $700 million and will serve customers in the U.S. and Canada.