Snowball research notes
Agilysys: Significant achievements by the new management team + signs of moat + long term shareholder representation
What is interesting?
1. Sign of moat: Recurring revenue, recent shift to SaaS business model
- Generally speaking, SaaS customers face huge switching costs – (a) risk of data loss from migration from one platform to another platform; and (b) learning curve involved in learning a new platform. Since Agilysys enjoys huge recurring revenue (~ roughly 55% of total revenue) and its 2017 investor presentation notes that the average customer relationship is ~10 years and renewal rate is 95%+, it gives a solid impression that the company enjoys a huge competitive advantage.
- As per the Investor presentation filed in September 2018, recurring revenue accounts for 55% of total revenue; Out of the total recurring revenue, 30% is generated from SaaS revenue model. Moreover, SaaS revenue grew 26% in TTM ended June 2018. This information is not available in 10-K.
- In the investor presentation filed in 2007, the company highlighted its shift from the legacy business model to Saas model.
“Transforms Agilysys into a SaaS business: Shifts primary focus to a subscription services revenue model from legacy license and maintenance revenue model”
2. New management’s achievements
a. Significant management shakeup in 2017
- 7 out of 9 top executives were appointed after January 2017.
- CEO – January 2017
- CFO (June 2017)
- Corporate controller (June 2017)
- CTO ( April 2018)
- SVP, Sales, Americas: (January 2018)
- VP, Marketing (March 2018)
- VP, Customer support (September 2017)
- VP, India (March 2017)
b) Achievements of the new management team highlighted by the company
- Three consecutive quarters of sequential revenue growth
- Achievement of record revenue
- 13 quarters of double-digit SaaS revenue growth.
3. Notable performance linked compensation discussion
Even though the Board used its discretionary power to lower the target to help the CEO earn the bonus, the arguments presented by the Board is compelling.
The argument highlights the achievements of the new CEO in the one year period – a significant reduction in operational expenses, decrease in (capitalized) software development costs from $11.9 million to 8.9 million and the increase in cash from operations from $3.4 million to $6.9 million.
- MAK Capital
- MAK Capital currently holds approximately 23%.
- MAK runs an ultra-concentrated portfolio with just 4 stocks.
- Agilysys accounts for roughly 26% of its portfolio (2nd largest position).
- Owns Agilysys since 2007 ~ more than 11 years.
- Secured a Board seat in 2008.