Agilysys CEO Discusses F2Q2011 Results – Earnings Call Transcript

Agilysys, Inc. (AGYS)

F2Q2011 Earnings Call Transcript

November 4, 2010 11:00 am ET

Executives

Martin Ellis – President and CEO

Henry Bond – SVP and CFO

Analysts

Brian Kinstlinger – Sidoti & Company

Zachary Prensky – Koyote Capital

Presentation

Operator

Compare to:
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» Agilysys, Inc. F1Q11 (Qtr End 06/30/10) Earnings Call Transcript
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» Agilysys, Inc. F3Q 2010 (Quarter ending 12/31/2009) Earnings Call Transcript

Welcome to the Agilysys fiscal second quarter 2011 conference call. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially.

Important factors that could cause actual results to differ materially are those in the forward-looking statements that are set forth in the company's reports on Form 10-K and 10-Q and news releases filed with the Securities and Exchange Commission.

Today's live broadcast will be archived and available on Agilysys' Website. At this time, I would like to introduce your host for today’s call, Agilysys’ President and CEO, Martin Ellis. Thank you, sir. You may begin.

Martin Ellis

Thank you Donna. Good morning everyone and thank you for joining us today to review our unaudited second quarter and first half results. With me today is Henry Bond, who recently joined our company as Senior Vice President and Chief Financial Officer. We will be using a slide presentation as the basis for today’s review. If you have not already done so, we encourage you to access the slide deck from the Investor Relations section of our Website.

Please not that additional information and risk factors can be found in our SEC filings, all of which are available on our Website. Also during today’s discussion, we will be discussing non-GAAP financial data, namely adjusted EBITDA. Reconciliations to GAAP are provided at the end of the presentation as well as in the press release issued this morning.

Turning to the quarter, we were very pleased with the strong year-over-year and sequential improvements in revenue generated during the second quarter. In fact, this is the first quarter since 2007 that we have reported revenue growth for the consolidated company, reinforcing that we continue to gain traction with our focus on bundling more software and services in the solutions we sell.

Historically, our second quarter revenues are comfortable with the first quarter of the fiscal year. However, we reported strong sequential growth with sales up 39% sequentially, which made up for some of the softness we experienced in our TSG segment in the first quarter. Year-over-year, sales were up 18%, however gross margin contracted during the quarter to 22.2% of sales compared to 28.1% in the prior year. This was largely the result of significantly lower vendor rebates in the quarter, ongoing competitive pricing in the market as well as a mix shift with the higher proportion of hardware sales compared to the prior quarter, given the strong growth in TSG this year.

Selling, general and administrative expenses decreased as a percentage of sales, but total SG&A was up slightly over $3 million, primarily due to $1 million of expense development costs related to Guest360. In the same quarter last year, investments and development costs related to Guest360 were capitalized. We also incurred roughly $1.1 million of non-capitalized expenses associated with our new Oracle ERP implementation. These costs are expensed – are expected not to continue beyond our third quarter. And we also incurred approximately $500,000 related to severance and transition costs. Notwithstanding the strong sales growth we reported, the reduced gross margin and loss of rebates pressured our bottom line, resulting in a second quarter loss from continuing operations of $0.10 per share compared with last year’s earnings of $0.12 per diluted share.

On a consolidated basis, revenues were higher in each of our broad product lines culminating in the 18% increase over the second quarter last year. Hardware sales were up 21% year-over-year and software and services increased 9% and 11% respectively. Gross margins were disappointing and were down 590 basis points, reflecting the lower rebates, competitive pricing, and a shift in product mix with higher hardware sales during the quarter.

As mentioned, SG&A excluding depreciation and amortization was up $3.5 million, primarily due to expensing of software development costs and severance costs. Despite strong sales volume this quarter, pricing pressure and lower vendor rebates impacted margins and profitability. The $2.8 million operating loss posted during the quarter compared with last year’s operating income of $3.8 million.

Before I turn the floor over to Henry who is making his debut on our call today, I would like o take this opportunity to thank Ken Kossin for his service to the company and his role in our transformation over the last number of years. Last month, we welcomed Henry on board as the company’s new CFO, and on behalf of the entire Agilysys’ management team, we look forward to work with him as we continue to execute our strategy.

With that, I will turn the call over to Henry to discuss segments and balance sheet information.

Henry Bond

Thanks Martin. I would like to start off by saying that in the little more than two weeks I have been on the ground here, my enthusiasm about where the company is heading have increased beyond my early observations, which were already positive. I believe there are strong prospects for sustained profitable growth, and I look forward to playing a role in realizing these opportunities. I have spent the past few weeks coming up the learning curve, which is still pretty steep, and thus far, everyone I have met is clearly dedicated to contributing to the company’s success. That said, I am excited to be part of the management team here at Agilysys, and I look forward to meeting those of you on the call today.

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