Key Takeaways

Transition to modern cloud-native solutions and expanding customer base are key strategies for improved revenue growth.
Growth in recurring and international sales positively impacts long-term earnings and market expansion.
Challenges in POS sales, difficult tech transitions, reliance on large deals, hiring delays, and high subscription licenses impact revenue growth and profitability.

Catalysts

About Agilysys

Operates as a developer and marketer of software-enabled solutions and services to the hospitality industry in North America, Europe, the Asia-Pacific, and India.What are the underlying business or industry changes driving this perspective?

Agilysys is focusing on transitioning from older technologies to modern, cloud-native solutions, especially in the POS systems. This should eventually lead to improved sales and revenue growth as they overcome current sales challenges.
The strong bookings and pipeline growth in Property Management Systems (PMS), with sales up 70% year-over-year, indicate potential revenue growth, particularly as this area seems to be less challenged by the tech transition compared to POS.
The company is actively expanding its sales strategy to focus more on new customer acquisitions, which, combined with a fully modernized product set, may drive future revenue growth.
Agilysys is experiencing significant growth in recurring and subscription revenues, which are critical for long-term earnings growth. Recurring revenue was 63.8% of total revenue in Q3, with a year-over-year growth of 26.4%.
International sales could reach record levels in the near term, due to substantial sales opportunities. If successful, this could positively impact revenue growth and market expansion beyond domestic markets.

Agilysys Earnings and Revenue Growth

Agilysys Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Agilysys's revenue will grow by 17.9% annually over the next 3 years.
Analysts assume that profit margins will increase from 8.4% today to 13.4% in 3 years time.
Analysts expect earnings to reach $57.7 million (and earnings per share of $1.47) by about April 2028, up from $22.3 million today.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 76.6x on those 2028 earnings, down from 93.4x today. This future PE is greater than the current PE for the US Software industry at 31.6x.
Analysts expect the number of shares outstanding to grow by 2.58% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

Agilysys Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Ongoing challenges in the Point-of-Sale (POS) sales, especially in the managed food services vertical, could continue to weigh on revenue as product revenue relies heavily on POS-related sales.
The transition from old technology to new cloud-native technology for POS systems is proving more difficult than anticipated, affecting sales and potentially delaying revenue growth.
There is reliance on large international deals, as opposed to consistent small-to-medium deals, which introduces volatility and risk to revenue growth if expected deals do not materialize.
Recruitment and hiring delays in the implementation services teams could impede the ability to achieve projected service revenue and impact overall profitability and revenue growth.
The high proportion of subscription licenses in lieu of perpetual licenses means less immediate revenue recognition, which could temporarily suppress net margins and impact reported earnings during the transition phase.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $122.0 for Agilysys based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $178.0, and the most bearish reporting a price target of just $90.0.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $431.7 million, earnings will come to $57.7 million, and it would be trading on a PE ratio of 76.6x, assuming you use a discount rate of 7.7%.
Given the current share price of $75.01, the analyst price target of $122.0 is 38.5% higher.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.