Agilysys (AGYS)

Hospitality industry software provider Agilysys (NASDAQ:AGYS) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 19.4% year on year to $74.27 million. On the other hand, the company’s full-year revenue guidance of $310 million at the midpoint came in 2.8% below analysts’ estimates. Its non-GAAP profit of $0.54 per share was 88.8% 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.

Reviewing a company’s long-term sales performance reveals insights into its 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 19.2% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, Agilysys reported year-on-year revenue growth of 19.4%, and its $74.27 million of revenue exceeded Wall Street’s estimates by 3.7%.

Looking ahead, sell-side analysts expect revenue to grow 15.6% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is commendable and indicates the market sees success for its products and services.

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 extremely efficient at acquiring new customers, and its CAC payback period checked in at 20.2 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

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 62.4% gross margin over the last year. That means Agilysys paid its providers a lot of money ($37.60 for every $100 in revenue) to run its business.

Agilysys produced a 60.7% gross profit margin in Q1, in line with the same quarter last year. On a wider time horizon, Agilysys’s full-year margin has been trending up over the past 12 months, increasing by 1.7 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).

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Agilysys has been an efficient company over the last year. It was one of the more profitable businesses in the software sector, boasting an average operating margin of 8.2%. 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 rose by 1.6 percentage points over the last year, as its sales growth gave it operating leverage.

In Q1, Agilysys generated an operating profit margin of 7.1%, up 1.6 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

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 19% over the last year, quite impressive for a software business.

Agilysys’s free cash flow clocked in at $26.45 million in Q1, equivalent to a 35.6% margin. The company’s cash profitability regressed as it was 11.5 percentage points lower than in the same quarter last year, but it’s still above its one-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Agilysys’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 19% for the last 12 months will decrease to 25.4%.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Agilysys is a profitable, well-capitalized company with $73.04 million of cash and $46.96 million of debt on its balance sheet. This $26.08 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Agilysys blew past analysts’ EBITDA expectations this quarter. We were also happy its revenue outperformed Wall Street’s estimates. On the other hand, its full-year revenue guidance missed and its revenue guidance for next year suggests growth will stall. Overall, this print was mixed but still had some key positives. The stock traded up 2.2% to $84.74 immediately after reporting.

Updated: July 10, 2025 at 10:35 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Agilysys.

Agilysys’s business quality ultimately falls short of our standards. First off, its revenue growth was mediocre over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while Agilysys’s efficient sales strategy allows it to target and onboard new users at scale, its gross margins show its business model is much less lucrative than other companies.

Agilysys’s price-to-sales ratio based on the next 12 months is 10.5x. This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $123.40 on the company (compared to the current share price of $112.99).