New Acquisitions for Agilysys, Earnings Boost on the Horizon?

by: Dayanand Menashi

Agilysys (NASDAQ:AGYS) has been undergoing great transformation for few years. The sale of KSG to Arrow Electronics for $485mn marked a major milestone. With this hoard of cash under its belt, the company has been in a buying spree to acquire domain-rich companies that would contemplate their goal of being a major computer solutions provider to enterprises.

What are the company’s new goals?

With the sale of KSG, the company has established the following long-term goals:

  • Grow sales from approximately $500 million to $1 billion in two years and to $1.5 billion in three years. Much of this growth will come from acquisitions.
  • Target gross margins in excess of 20% and earnings before interest, taxes, depreciation and amortization of 6% within three years.
  • While in the near term return on invested capital will be diluted due to acquisitions and legacy costs, the company continues to target long-term return on capital of 15%.
  • Great increase in Goodwill:
    With recent acquisitions of InfoGenesis, Stack and Visual one. The company’s goodwill has jumped from $93mn on Apr-1/2007 to around $191mn on June-30/2007. The following have been major acquisitions in the recent past. Its book value though remains around $600mn. It is very important to analyze in detail how these new acquisitions justify their high prices.

    Recent acquisitions:
    1. The acquisition of Visual One provides Agilysys expertise around the development, marketing and sale of Microsoft® Windows®-based software for the hospitality industry, including additional applications in property management, condominium, golf course, spa, point-of-sale, and sales and catering management. The acquisition cost was $14.3mn (approximately $11.9 mn was assigned as goodwill).The company announced three additional acquisitions shortly after year-end, Stack Computer (“Stack”), Innovative Systems Design, Inc. (“Innovative”), and InfoGenesis, Inc. (“InfoGenesis”).

    2. Stack is a premier technology integrator with a strong focus in high availability storage infrastructure solutions. Stack’s customers, primarily concentrated on the West Coast, include leading corporations in the financial services, healthcare and manufacturing industries. The total cost of acquisition was $26.8mn. Out of which $24.8mn has been allocated to goodwill.

    3. Innovative is the largest U.S. commercial reseller of Sun Microsystems servers and storage products. The acquisition cost of the company has been around $100mn

    4. InfoGenesis is an independent software vendor and solution provider to the hospitality market, offering enterprise-class point-of-sale solutions that provide end-users a highly intuitive, secure and easy way to process customer transactions. The total acquisition cost has been $90mn, out of which $73.4mn was attributed towards goodwill.

    5. The September 2003 acquisition of Kyrus Corporation, a leading provider of retail store solutions and services with a focus on the supermarket, chain drug and general retail segments of the retail industry.

    6. The February 2004 acquisition of Inter-American Data, Inc., a leading developer and provider of software and service solutions to the hotel casino and destination resort segments of the hospitality industry.

    7. The May 2005 acquisition of The CTS Corporations, a leading services organization specializing in IT storage solutions for large and medium-sized corporate and public-sector customers. The aggregate acquisition cost was $27.8mn of which $17.6mn was for goodwill.

    These acquisitions complement the company’s growth strategy to acquire businesses that enhance and differentiate its product and services offerings, broaden its customer base, and expand its markets.

    So what is the outlook for the company?
    Looking at the company’s estimates of achieving sales of $1bn in 2 years and $1.5bn in 3 years. Discounting these figures to around 70% and assuming a net profit margin of around 3.5% (this based on the 40% tax rate on 6% margin of Income before taxes).

    The earnings schedule comes to:
    Mar-31/2008.…………..0
    Mar-31/2009.…………..$10mn
    Mar-31/2010.…………..$15mn
    Mar-31/2011.…………..$20mn

    Competition

    The reselling of innovative computer technology solutions is competitive primarily with respect to price, but also with respect to service levels. The company faces competition with respect to developing and maintaining relationships with customers. Agilysys competes for customers with other solution providers and occasionally with some of its suppliers.

    There are very few large, public enterprise product reseller companies in the IT solution provider market. As such, Agilysys' competition is typically small or regional, privately held technology solution providers with $50-$200 million in revenues. The company does occasionally compete with large companies such as Berbee Information Networks Corporation (a division of CDW Corporation), Forsythe Solutions Group, Inc., Logicalis Group and Micros Systems, Inc.


    I would pay close attention to the company’s earnings next few quarters to see how they are leveraging the new acquisitions and resume my analysis then.

    AGYS 1 year chart

    click to enlarge