Agilysys, Inc., a global provider of next-generation hospitality software solutions and services, reported operating results for its fiscal 2019 second quarter ended September 30, 2018.

Summary of Fiscal 2019 Second Quarter Financial Results

• Total net revenue was a record $34.2 million, compared to total net revenue of $30.1 million in the comparable prior-year period.

• Recurring revenues (which are comprised of support, maintenance and subscription services) were a record $18.9 million, or 55% of total net revenue, compared to $17.1 million, or 57% of total net revenue, for the same period in fiscal 2018. SaaS revenues increased 27% year over year and comprised 34% of total recurring revenues, compared to 29% of total recurring revenues in the second quarter of fiscal 2018.

• Gross margin was 51.9% in the fiscal 2019 second quarter, compared to 51.0% in the prior-year period.

• Net loss in the fiscal 2019 second quarter was $(3.8) million, or $(0.16) per diluted share, compared to a net loss of $(3.2) million, or $(0.14) per diluted share, in the prior-year period.

• Adjusted EBITDA (non-GAAP) was $2.6 million, compared to Adjusted EBITDA of $2.3 million in the same period last year. As described below, due to a change in software development and deployment methodologies during the quarter, capitalized software development costs were significantly lower compared to the same period last year. If all software development costs were not capitalized in both periods (non-GAAP), then Adjusted EBITDA would have been $2.6 million in the fiscal 2019 second quarter and Adjusted EBITDA in the fiscal 2018 second quarter would have been $(0.2) million (see reconciliation below).

• Adjusted earnings from operations (“AOE”) (non-GAAP) in the fiscal 2019 second quarter was $2.0 million, compared to a loss in the fiscal 2018 second quarter of $(1.2) million (see reconciliation below).

As previously reported, the fiscal 2019 second quarter is the first quarter in which the Company adopted agile development and deployment methodologies across all of its products, allowing for significantly reduced time between the design of new products and their distribution in the market. The result of this change increased the amount of product development costs included in operating expenses and significantly decreased the amount of product development costs capitalized in the quarter. A reconciliation table on the last page of this release provides a comparison of the previously reported fiscal 2018 second quarter Adjusted EBITDA to a presentation that incorporates all software development costs as if they were not capitalized in both periods.

Ramesh Srinivasan, President and CEO of Agilysys, commented, “The fiscal 2019 second quarter results continue to demonstrate our ability to generate record revenue and improve our overall financial health while also continuing to elevate our talent levels. The fiscal 2019 second quarter was the second consecutive quarter we generated record revenue and the fourth consecutive quarter of sequential revenue growth. The 14% year over year quarterly revenue growth was driven by SaaS revenue growth of 27%, among other factors. Overall recurring revenue increased to a quarterly record $18.9 million. With recurring revenue, including SaaS revenue, accounting for approximately 55% of overall revenue in the fiscal 2019 second quarter and our highly predictable services revenue accounting for approximately 19% of overall revenue, we continue to have good revenue visibility.

“Our current strong focus on customer service excellence and increasing pace of product development and innovation velocity are driving our business growth. Given how successful our U.S. based R&D centers have been in leading and collaborating with our currently 320-person strong India Development Center, as reflected in our dramatically increased R&D capacity without any significant impact on overall R&D costs as a percentage of revenue, we have decided to increase our U.S. engineering resource strength and double our capacity in the India Development Center over the next 12 to 15 months. We expect this significantly increased R&D capacity will help us further improve on our current business growth momentum. Notwithstanding the additional investments we will be making for this planned R&D expansion, we expect our Adjusted Earnings from Operations (AOE) for fiscal 2019 will be at or slightly better than our prior guidance of approximately break-even AOE.

“We remain focused on disciplined profitable revenue growth. AOE in the fiscal 2019 second quarter was a record $2.0 million and was the third consecutive positive AOE quarter – the only three such quarters since our transition in fiscal 2014 into a pure play software technology solutions provider focused on the hospitality sector. AOE for the first half of fiscal 2019 rose $6.9 million, on an approximately $4.0 million revenue improvement. Our current sales and overall business momentum continues to be positive and over the second half of fiscal 2019 and beyond, we expect to continue to build on our quarterly sequential revenue growth trend. While we believe there are still considerable improvements we can achieve in our business, we are pleased our operating results are beginning to reflect some of the benefits of our execution against our strategic initiatives.”

Fiscal 2019 Outlook

Agilysys reiterated its previously provided forecast for fiscal 2019 full year revenue growth of approximately 10%, compared to fiscal 2018 revenue of approximately $127 million. In addition, despite the additional planned near-term R&D investments not previously contemplated, the Company now expects that it will record approximately break-even or modestly higher Adjusted Earnings from Operations (non-GAAP measure) in fiscal 2019, compared to the loss of approximately $6.0 million for this metric in fiscal 2018. Agilysys also expects fiscal 2019 year-end cash and cash equivalents to reflect a decline of approximately $3 million to $5 million, from the fiscal 2018 year-end balance of $39.9 million, a significant improvement from the over $9 million decline in fiscal 2018.

The Company defines adjusted earnings from operations as adjusted EBITDA, less capital expenditures and capitalized software development costs, which management believes is a meaningful measure of earnings and provides insight to investors on the Company’s overall profitability and cash generation from core operations. Adjusted earnings from operations include costs for capitalized efforts while minimizing the seasonality of the Company’s cash flows due to the timing of billing.

Tony Pritchett, Chief Financial Officer, commented, “We continue to achieve momentum in our business with fiscal 2019 second quarter revenue and AOE both reflecting record quarterly performance. Our financial results through the first half of the year have positioned the Company well to achieve our financial goals for fiscal 2019. Importantly, as we invest in our initiative to increase our U.S. engineering and India Development Center resources, our fiscal discipline and expected continued revenue growth allows us to undertake this significant expansion without any significant increase in overall research and development expenses as a percentage of revenue as well as to be on track to achieve break-even to slightly positive AOE this year.

“Our cash balance declined approximately $7.0 million in the first half of fiscal 2019 compared to approximately $10.7 million in the first half of fiscal 2018. Due to the timing of billing our annual maintenance agreements, our cash flow typically improves in the second half of the fiscal year. We expect our cash balance will grow over the second half of the fiscal year and we will end the year with cash on hand of $35 million to $37 million. We continue to have a healthy balance sheet that enables us to invest in initiatives that will deliver profitable revenue growth. In addition, the revenue momentum we are achieving now and which we expect will continue in fiscal 2020 and beyond, positions the Company to achieve our near and long-term goals of growing profitably and creating shareholder value.”

New Revenue Recognition Standard

On April 1, 2018, Agilysys adopted accounting standard update No. 2014-09 (“ASC 606”), the Financial Accounting Standards Board’s new revenue recognition standard. Financial results for the three month and six month periods ended September 30, 2018 reflect this accounting standard. Financial results for the three month and six month periods ended September 30, 2017 have not been restated and are reported under the accounting standards in effect during that period. The impact on revenue, net loss, Adjusted EBITDA, and Adjusted Earnings from Operations (“AOE”) from the adoption of ASC 606 was immaterial.