Agilysys Back To Profitability; Sells Retail Division, Buys New Product Line

June 17, 2013 Dan Burger

A two-week flurry of activity, including a financial report that showed a return to profitability, the sale of one business unit and the acquisition of another, has Agilysys popping up on the BusinessWire like thunderstorms on a Florida summer afternoon. Agilysys is best known in the IBM midrange community for its hospitality and gaming software that is dominant in those markets. However, the company has more than that on its plate.

Two weeks ago, Agilysys announced it was selling its Retail Solutions Group to an affiliate of Clearlake Capital Group for $34.55 million in cash. An estimated 200 customers buy Agilysys software in the Retail Solutions Group. None of those customers run their business on the IBM i platform.

If the deal closes as expected later this summer, Agilysys’ business will be focused exclusively on software for the hospitality industry, which includes casinos, resorts, hotels, and food service venues. There are more than 3,000 Agilysys customers in this segment. The company is mum on the number of IBM i-based shops that are in that installed base. What it has said is that a little less than two-thirds of those customers use only a single Agilysys product, which presents a cross-selling growth potential Agilysys hopes to capitalize on without the time and expense incurred by expanding the customer count or venturing into new segments of the hospitality market.

The overall hospitality industry is estimated to spend more than $4 billion on software, services, and software maintenance. Agilysys officials forecast overall market growth in the middle single digits looking ahead to 2014. However, it also recognizes individual segments of the hospitality market may outperform or underperform the overall market forecast. Gaming is one example of a segment that has struggled in recent years. It is now improving modestly. Half of Agilysys’ revenue is generated by the gaming segment of the hospitality business.

Agilysys’ hospitality-based revenue is approximately $100 million, and 90 percent is generated in the United States, with about 5 percent coming from Europe and 5 percent from Asia.

According to a statement released by the company, Agilysys plans for continued investments in new product development as well as potential acquisitions. Product development, however, is decidedly for Windows platforms. Agilysys’ InfoGenesis point of sale and Eatek inventory and procurement software are Windows-based products, as is the Guest360 property management system.

Statements made by Agilysys officials indicate the product roadmap has enhancements aimed at adding more than transactional efficiency, which alone is not sufficient to cause a company to switch from one software provider to another. The battleground, as they describe it, is in the guest recruitment arena, where return on investment has much greater potential.

Agilysys is also expecting increased business resulting from its mobile solutions investments, its software as a service business–that is growing at roughly 6 percent year over year–as well as from expanding its product reach outside the United States.

On the topic of future acquisitions, executives of the company say future M&A activity will not focus on buying market through the acquisition of companies that duplicate products Agilysys already has in its arsenal and then forcing customers off those products and onto the Agilysys products. Yet, if an acquisition accelerates the Agilysys new product roadmap, the company would consider that a strategic purchase.

Within a week of the retail business divestiture, Agilysys backed up its stated direction by announcing the purchase of TimeManagement Corporation, a privately-owned, Minneapolis-based software company specializing in workforce management for hospitality operators. Financial terms of the acquisition were not disclosed.

TMx software runs on Windows machines and integrates with point of sale, property management, inventory and procurement, and payroll systems, including Agilysys’ InfoGenesis point of sale and Eatek inventory and procurement software. It is expected that TMx will find a wider install base within the existing Agilysys installed base and that Agilysys products will find their way into the existing TMx installed base. Its traditional focus has been on the hospitality segment, which was one of the reasons it looked attractive to Agilysys.

Financial reports for Agilysys’ fourth quarter 2013 and fiscal year 2013 were released last week and overall it shows the company has escaped the red ink stained previous year.

In the quarter ended March 31, Agilysys reported software product sales of $33.9 million, up 34.3 percent, with support, maintenance, and subscription services accounted for another $20.5 million, up 7.7 percent. The company’s professional services biz saw growth in the final quarter of the fiscal 2013 year, rising 11.4 percent to $8.7 million. Gross profits hit $24.3 million, up 16.5 percent, and adjusted operating income showed a reversal from a year ago when it recorded a loss of $3.6 million to the current quarter’s $3.3 million on the plus side. Adjusted net income showed similar gains going from at $3.6 million loss one year ago to a $3.2 million gain.

For the full fiscal 2013 year, Agilysys had $236.1 million in sales, up 13 percent, with an operating loss of $1.1 million. The operating loss in 2012 was $41.2 million.

During the latest quarter, the Hospitality Solutions Group posted $6.8 million in software license sales, down 6.2 percent from a year ago, while overall sales were $23.5 million, an increase of 2.8 percent. The biggest gain came from professional services (software implementation), which stepped up 10.4 percent. The support, maintenance, and subscription services category was the largest money maker, producing $13.1 million in revenue. That’s a 6 percent increase from a year earlier.

Agilysys increased gross profits in this segment by 9.3 points to $16.6 million.

The Retail Solutions Group posted larger revenues, but smaller profits. The RSG unit had $27.1 million in software license sales, up 50.6 percent in the Q4 report. A year earlier, product revenue was $18 million, which was a 45.1 percent increase compared to the year before that. Total sales for this group grew 35.6 percent to $39.5 million.

However, gross profits were only 19.5 percent of revenues–compared to gross profits of 70.4 percent for the Hospitality Solutions Group.

Product development expenses increased $1.4 million during the past fiscal year, to a total of $8.4 million. Sales and marketing expenses declined from $$7.1 million to 5.6 million. General operating expenses decreased from $9.4 million to $7 million.

Customer wins in the just completed quarter include Kirkwood Mountain Resort, owned and managed by Vail Resorts, a long-time Agilysys customer; Vanderbilt Campus Dining at Vanderbilt University; Indigo Sky Casino and Hotel; and Clearwater River Casino and Hotel.