Agilysys (AGYS)

Hospitality industry software provider Agilysys (NASDAQ:AGYS) fell short of the market’s revenue expectations in Q4 CY2024, but sales rose 14.9% year on year to $69.56 million. The company’s full-year revenue guidance of $273 million at the midpoint came in 3.2% below analysts’ estimates. Its non-GAAP profit of $0.38 per share was 10.9% above analysts’ consensus estimates.

Company Overview

Originally a subsidiary of Pioneer-Standard Electronics that distributed electronic components, Agilysys (NASDAQ:AGYS) offers a software-as-service platform that helps hotels, resorts, restaurants, and other hospitality businesses manage their operations and workflows.

Enterprise resource planning (ERP) and customer relationship management (CRM) are two of the largest software categories dominated by the likes of Microsoft, Oracle, and Salesforce.com. Today, the secular trend of mass customization is driving vertical software that customizes ERP and CRM functions for specific industry requirements. Restaurants are a prime example where a set of customized software providers have sprung up in recent years to create unique operating systems that blend tax and accounting software, order management and delivery, along with supply chain management. Hotels and other hospitality providers are another example.

Competitors offering hospitality software solutions include Oracle (NYSE:ORCL) Hospitality OPERA Property Management System and private companies SkyTouch Technology and Maestro PMS.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Agilysys grew its sales at a decent 20% compounded annual growth rate. Its growth was slightly above the average software company and shows its offerings resonate with customers.

This quarter, Agilysys’s revenue grew by 14.9% year on year to $69.56 million but fell short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 23.4% over the next 12 months, an acceleration versus the last three years. This projection is noteworthy and indicates its newer products and services will fuel better top-line performance.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Agilysys is very efficient at acquiring new customers, and its CAC payback period checked in at 22.4 months this quarter. The company’s rapid sales cycles indicate it has a highly differentiated product offering and a strong brand reputation. These dynamics give Agilysys more resources to pursue new product initiatives while maintaining optionality.

For software companies like Agilysys, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Agilysys’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 62.7% gross margin over the last year. Said differently, Agilysys had to pay a chunky $37.32 to its service providers for every $100 in revenue.

Agilysys produced a 63% gross profit margin in Q4, in line with the same quarter last year. Zooming out, Agilysys’s full-year margin has been trending up over the past 12 months, increasing by 2.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Agilysys has been an optimally-run company over the last year. It was one of the more profitable businesses in the software sector, boasting an average operating margin of 7.9%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Agilysys’s operating margin might have seen some fluctuations but has generally stayed the same over the last year, highlighting the consistency of its business.

This quarter, Agilysys generated an operating profit margin of 10.7%, down 2.1 percentage points year on year. Since Agilysys’s operating margin decreased more than its gross margin, we can assume it was recently less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Agilysys has shown robust cash profitability, driven by its cost-effective customer acquisition strategy that enables it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 21% over the last year, quite impressive for a software business.

Agilysys’s free cash flow clocked in at $19.73 million in Q4, equivalent to a 28.4% margin. This result was good as its margin was 9.8 percentage points higher than in the same quarter last year. Its cash profitability was also above its one-year level, and we hope the company can build on this trend.

Over the next year, analysts predict Agilysys’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 21% for the last 12 months will decrease to 15.3%.

Agilysys reported $60.76 million of cash and $60.9 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $50.01 million of EBITDA over the last 12 months, we view Agilysys’s net-debt-to-EBITDA ratio as safe as the company has roughly no net debt. We also see its $4.16 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

Revenue in the quarter missed and its full-year revenue guidance missed significantly after being dropped from previous levels. The company said "revenue levels, especially one-time product revenue, continue to be impacted by recent sales challenges with point-of-sale products, mainly in the managed food services vertical, caused by our final modernization transition phase." Overall, this was a weaker quarter. The stock traded down 13.4% to $109 immediately following the results.

Updated: May 4, 2025 at 10:20 PM EDT

Before investing in or passing on Agilysys, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Agilysys isn’t a bad business, but we’re not clamoring to buy it here and now. To kick things off, its revenue growth was solid over the last three years. And while Agilysys’s gross margins show its business model is much less lucrative than other companies, its efficient sales strategy allows it to target and onboard new users at scale.

Agilysys’s price-to-sales ratio based on the next 12 months is 7x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $122 on the company (compared to the current share price of $75.69).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.