Agilysys

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Agilysys is a software and services provider specializing in the hospitality industry, offering a range of solutions to hotels, resorts, cruise lines, casinos, corporate foodservice management, restaurants, universities, stadiums, and healthcare facilities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Agilysys has been a leader in hospitality software for over 45 years, delivering innovative solutions for the hospitality industry including software, automation and financial solutions, and related professional services which help clients manage and enhance their operations. The company’s software solutions address all aspects of property management, food and beverage management, and revenue generation.

Business Overview

Agilysys serves a variety of clients globally with a focus in the hospitality sector. Here’s a detailed overview:

  • Revenue Distribution: Agilysys’ revenue streams are primarily from two segments:
    • Products: This includes software solutions, hardware products, software licenses, and subscriptions. Software solutions form a big part of their revenue and their customers rely on this product for core functions.
    • Professional Services: Revenue from consulting, implementation, integration, development and installation services for their software. A great deal of the company’s revenue is tied to the successful implementation of their software with customers.
  • Industry Trends:
    • The hospitality industry is seeing a major shift to cloud-based software. Agilysys is also transitioning to a Software-as-a-Service (SaaS) model.

The company expects to see strong subscription revenue growth in coming years. * The industry is demanding more data-driven, efficient operating systems. * Companies in this sector are looking for solutions that improve guest experience and streamline operations.

  • Margins: Gross profit margins are typically strong in the software sector but they are somewhat lower compared to software only companies due to the company selling hardware and other services.

Competitive Landscape

  • The hospitality industry is highly competitive with several players.
  • Competitors include a mix of large, established software vendors and smaller, more specialized players
  • Agilysys faces competition on product features, pricing, and innovation.
  • They compete on different aspects of the market, ranging from specific software to hardware to integrated software solutions with services.

What Makes Agilysys Different

  • Specific Focus on Hospitality: The company is specifically targeting hospitality and is a major differentiator. Because of this they have experience in understanding customers needs which helps them maintain market share and allows them to build features that are well suited to their target market.
  • End-to-End Solutions: The company offers everything from software to services making them a one-stop-shop which can be appealing to some customers.
  • Global Reach: They have a presence across the world, which is helping them capture revenue from multiple geographical regions.

Financial Analysis

Agilysys’ financials reveal a company in a state of transition with growing revenues but still with some areas of concern.

  • Revenue Growth: The company has shown good growth in revenue, primarily fueled by a push toward cloud and recurring revenue models.

Total revenue has gone up from $190 million in fiscal 2021 to $260 million in 2023. The company expects to accelerate this further with a good year in 2024.

  • Gross Profit Margins: Gross profits are healthy and average around 60%.
  • Profitability: The company is barely profitable with razor-thin margins and its profits can easily fall into the negative with a minor decline in revenue or increase in cost.
  • Cash Flow: The company has a decent cash flow but it is not as robust as its operating profitability because the company is spending capital on sales and marketing activities.

Cash from operations was $15 million in 2022 and -$17 million in 2023. The company’s cash flow can fluctuate widely due to the cyclical nature of sales.

  • Balance Sheet: The company has a healthy balance sheet.
    • They have around $150 million in cash with a current ratio of 2.15 in the quarter ending on December 31, 2023.
    • However, debt has been increasing with acquisitions over time. The debt currently stands at $46.9 million. While they have a good portion of cash to deal with the debt load, investors should closely monitor this because more acquisitions could drive their debt higher and further impact profitability.

Moat Analysis: 2 / 5

Agilysys has some strengths, but their moat is not very strong. They have:

  • Some intangible assets, like brand recognition.
  • Some switching costs from customers who have already adopted the company’s software.

  • Economies of scale from having a global market presence and customers base. However, all these are not strong enough to make a strong moat. Other players could always get into these markets and steal market share because they do not have a proprietary product. Therefore, their moat is narrow or weak.

    Justification: The primary challenge is the lack of a proprietary product that allows them to be completely unique in the hospitality software market. They also have to rely on their implementation and professional services, which can be replicated or done better by competitors. Although they have made some successful moves into cloud, they still face tough competition and low barriers to entry. Given the lack of strong defensible competitive advantages, their moat is relatively weak.

The concept of economic moat is the sustainable advantages that protect a company against competitors. These advantages allow companies to earn excess profits.

Risks to the Moat

  • Increased Competition: As the hospitality software market grows, more and more vendors will want to get into this market, making it tough for Agilysys to hold on to market share and pricing power.
  • Rapid Technological Changes: Software technology is rapidly changing and new innovative companies can come up with better solutions quickly. Companies need to keep reinventing themselves. Otherwise, their competitive advantages will disappear.
  • Dependence on Large Clients: Having several large clients make the company vulnerable to a decline in revenues from a few large customers if any of these large clients opt for different solutions.

Business Resilience

  • Shift to Recurring Revenue: Shift from onetime licenses to a recurring subscription model has given some resilience to Agilysys, as these subscriptions are recurring in nature.

Justification: Their ability to recover from some temporary troubles might be limited as they don’t have strong moats to fallback on. This also mean that they may not be able to pass price increases to their customers. Their reliance on professional services and the lack of proprietary products make them even more susceptible to revenue and profit fluctuations.

Understandability: 3 / 5

The company’s business model is somewhat complicated and requires a good understanding of the SaaS sector and the hospitality space.

Justification: While the overall business of selling software is easy to understand, the details of Agilysys’ operations, its target market, the intricacies of its software and services, and all the moving pieces such as accounting adjustments, pricing changes, and different revenue streams make the company’s business relatively difficult to analyze and predict.

Balance Sheet Health: 4 / 5

Agilysys has a good balance sheet and solid liquidity, giving a safety net for the company. Their only concern is growing debt to service acquisitions.

Justification: They have ample cash and a good current ratio, showing the ability to meet short term obligations. However, long term debt has been creeping up in recent years, mainly due to acquisitions which are a concern.

Recent Concerns and Problems

  • Acquisition Integration: The company has mentioned that it has been focusing on integrating recently acquired companies, such as Agilysys International. The results are yet to be seen. Successful integration of these companies will be paramount to future success.
  • Profitability: The company has had issues maintaining or increasing profitability, especially with large competitors and new entrants putting price pressure on the business.

While revenues have been increasing, profitability has not followed suit. This means the company could have good revenues but not be able to translate that to cash flows and profits. This puts a great deal of stress on the company’s operations.

  • Rising Interest Rates: With interest rates going higher, borrowing money becomes more expensive and increases their operational cost as well as the likelihood of more earnings dilution from issuing more shares.

Management has expressed confidence that their shift towards cloud-based recurring revenues is helping their profitability, they have been seeing rising sales, and they are focused on acquiring high-growth companies. However, in recent earnings calls, management has been very guarded and did not project very high results, which indicates management may want to take a wait-and-see approach and reduce investor expectations.