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Summary
We think that Agilysys (AGYS) is a good buy due to its coronavirus resilient business model and strong financial footing.
Overview
Agilysys Incorporated is a Software-as-a-Service platform that focuses on customer relationship management, data analytics, and point-of-sale solutions in the hospitality, travel, and gaming (casino) industries. The company has operations in North America, Europe, and Asia, and has a wide range of both software and hardware products that offer contactless solutions for the entire gamut of hospitality and customer service needs: property management systems for hotel rooms, guest self-service check-in, inventory and procurement management, table and booking management for restaurants, and scheduling for leisure activities such as for golf resorts and spas. In addition, Agilysys provides business intelligence and maintenance services for the industries that it supports to ensure a strong working relationship with their clients.
Product & Market Fit
We believe that Agilysys is poised to benefit from the overarching trend in better hygiene and social distancing that will continue to linger long after this immediate first phase of pandemic induced lockdown and reopening. Agilysys makes products and provides services that are perfectly suited for this “new normal.” For example, in their hospitality segment, branded as rGuest, self directed check-in kiosks will soon be popping up at a variety of hotel chains and locations all over the world as a method of reducing the overall total human to human interaction that occurred before the world shut down. This same product will also be available on mobile devices, allowing a hotel guest to check-in, communicate with the concierge / room service, get room keys, verify ID cards, and check out, all from a phone. From the point of view of the hotel, this will alleviate overhead costs that would have existed from legacy systems, and help to lower staffing costs in the long run.
Another industry where Agilysys has penetrated successfully is cruises. Of course, cruise lines have been some of the hardest hit as a result of this pandemic, and rightfully so. However, in late 2020 and 2021, cruises will come back and people will eventually begin to sail again. Agilysys’ comprehensive platforms that include self-service kiosks, point of sale solutions, activity scheduling and management, and data analytics tools will be incredibly helpful for cruises to automate manual tasks, lessen the amount of face to face interaction, and allow customers to have more peace of mind while traveling. In fact, Royal Caribbean (NYSE:RCL), the second largest cruise company in the world, has already been a customer. Since 2010, they have used the products and services offered by Agilysys to better understand customer data, evaluate successful and unsuccessful activities and trends on their ships, and provide a more personalized experience for travelers. Employees of the ships are also benefiting as the technology used in the point-of-sale kiosks allows them to sign into shifts quickly and effectively, as well as get information on food temperatures, wait times, and other maintenance / quality assurance data that is vitally important on these massive floating cities.
In these customer centric industries, big data and greater efficiency is incredibly important, and Agilysys has years of experience capitalizing on them. A cherry on top for Agilysys is that this pandemic and the themes that are associated with coronavirus will accelerate growth and adoption of their contactless, cashless, cost saving solutions in the hospitality, travel, and leisure industries.
Financial Analysis
Agilysys stands on very strong financial footing. On the company’s balance sheet, you see a current ratio of 1.36 (79M current assets vs. 58.1M current liabilities) and a debt to equity ratio of 0.63 (62.9M in liabilities vs. 163.6M shareholders equity). The company has an almost negligible amount of long-term debt at $35,000. 96.7% of AGYS’s current liabilities are under a line item called “customer advances”, AKA deferred revenues. This is very favorable for the company because 1) They are receiving payments for their products in advance and 2) customer advances convert from a liability on the balance sheet to revenue on the income statement as products are shipped.
On the cash flow statement, we see a positive cash flow from operations since 2015, increasing at a whopping CAGR of 45.2% compared to revenues growing in the same period at a CAGR of 8%. In addition, we calculate the company’s cash conversion cycle to be -135 days. This means that on average, they are getting paid for their services 135 days before they have to pay for any expenses related to those aforementioned goods and services (COGS). This is huge for a company because it essentially equates to an interest free loan; in this case, for more than a third of a year.
Agilysys’s strong financial footing is a huge reason why we believe that the stock is severely undervalued at its current price of around $20. The company has a very low amount of debt and guaranteed future incomes with customer advances of almost $40 million. This in addition to the company’s growing cash flows and revenues puts Agilysys in a very good position to weather the coronavirus storm and come out on the other side stronger than ever.
Growth and Client Base
As mentioned earlier, Agilysys has a strong following and customer base in the hospitality, dining, and travel industries. Some of their largest and most well known clients include: Caesars Entertainment (NASDAQ:CZR), UC Berkeley, Carnival Cruises (NYSE:CCL), Cosmopolitan of Las Vegas, Hilton Worldwide (NYSE:HLT), Royal Caribbean, The Venetian Resort & Casino, Vail Resorts (NYSE:MTN), and Yale University. They currently are the leaders in market share on point of sale systems on the Las Vegas strip, and they are poised to benefit from an increased “migration toward cashless operations.” They currently estimate their total room share of the hotel, casino, and gaming sectors to be 271,000 rooms out of a possible total market of 17.5 million rooms, or 1.55%. There is room for growth and the company views the continued rise of Macau and other popular sites around the world to be a positive catalyst for greater adoption of their products.
According to their most recent 10-K filing, the average IT budget for the hospitality industry has grown more than 15% year over year from 2018-2019, and the growth for 2019-2020 is forecasted to be the same. Although coronavirus will impact these forecasts, our belief is that over time, more will be allocated towards the IT and SaaS budgets of hotels in order to compensate for the increased need of virtual solutions and products. The same holds true for the other segments the company operates in; namely: food service management (the universities listed above) and sports and entertainment (food and beverage management at large venues).
Recent Earnings
Agilysys recently reported earnings for the quarter ending March 31st on May 21st. They reported earnings of -$1.16 per share compared to a consensus estimate of -$0.12 a share. While the quarterly loss was about 9.5x wider than expected, the earnings call gave us even more confidence that AGYS is a great value (considering that the stock barely dropped 3% on the news over a full trading day, the market seems to agree that it has strong future value).
The CEO reported that about ⅓ of the revenue earned in the quarter was earned in March, even though the hospitality industry was “virtually shutting down completely.” In addition, the company saw customer retention of greater than 95% over the last 4 quarters, indicating that the company’s offerings remain valuable to customers even during an extended period of reduced demand in the hospitality industry. The CEO goes on to mention that the company conducted 2 times the number of product demos in April and May (i.e. during coronavirus shutdowns) as compared to January and February (i.e. before coronavirus shutdowns).
One potential concern is that the company is giving 90 day concessions on some of its products to its customers. This equates to 3 months of $0 in revenue on those products for the company for every customer who is taking advantage of the offering. However, while this may result in a temporary reduction in top line numbers, we think that the concessions are overall a good thing for the company and will help to increase customer retention and increase the business that current customers give to the company. We think the concessions will help more customers realize the value of Agilysys’ products and this free trial period should be a great way to add new, hesitant customers into the mix while improving relations with existing customers.
For a full transcript of the earnings call see here.
Risks
With any investment, there are risks. The top 3 most relevant risks that we view as dangers to our investment are:
Risk 1: Coronavirus continuing to derail the travel, hospitality, entertainment, and food service segments.
Mitigation: Coronavirus will be a temporary blip on the radar for most companies. Social distancing has been effective, and as of this writing, states and countries around the world are starting to open up again. Casinos in Macau and the southern USA are beginning to reopen and are already seeing lines out the door. In addition, airlines are starting to see increased bookings and travel planning, further signifying a recovery.
Risk 2: There is a lot of competition in the industries Agilysys serves, including larger companies as well as in-house solutions built by various hotel chains themselves.
Mitigation: Of course in this hardware & SaaS space, there will be plenty of upstarts and players wanting a piece of this important and growing market. However, building in-house is expensive at the start and costly to maintain and run. The larger players, such as Oracle (NYSE:ORCL) and NCR (NYSE:NCR), sell comprehensive solutions at a costly price. Agilysys, on the other hand, sells modular solutions that range from a single point of sale kiosk to an entire property management system, that all can be linked together and synced. Their capability of seamless integration with third party systems in all their products also helps to keep their product ranked highly as compared to competitors.
Risk 3: Greater consolidation in the hotel space could potentially drive customers together and limit the potential market.
Mitigation: Most hotel chains are not looking to buy another chain right now as cash is most importantly being saved and used for reopening and all of the necessary preparations needed to restart operations after a global pandemic. Agilysys’ products should remain a top portion of their customers’ IT and software budgets moving forward.
Conclusion
In conclusion, we are bullish, on a medium to long-term time horizon, on Agilysys. The company has a product mix that we believe will be successful in the future after coronavirus, and there is a definite market for their core offerings. On the conference call after earnings, the leadership of the company bolstered our belief in confirming that more demos are being requested for their products as a direct result of the pandemic. Financially speaking, they have a solid cash burn rate, minimal amounts of debt, and growing revenues. The company faces risks like any other would in this crisis, but due to the factors listed above, Agilysys is poised to thrive in the years after.
Disclosure: I am/we are long AGYS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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