Agilysys CEO: With TSG Sold, Focus Now On Retail, Hospitality Markets

On May 31, Agilysys sold its Technology Solutions Group business, a unit that comprised 70 percent of its fiscal 2011 revenue, to OnX Enterprise Solutions for about $64 million in cash. The TSG business represented $474.1 million in revenue out of $675.5 million for fiscal 2011 which ended March 31.

Agilysys, based in Cleveland, Ohio, plans to focus on its Retail Solutions Group and Hospitality Solutions Group going forward. Jim Dennedy, Agilysys interim president and CEO, and Curtis Stout, vice president and treasurer, spoke with CRN's Scott Campbell about the future of the company and why the TSG business was sold. The following are excerpts from the conversation.

Agilysys sold the TSG business. What was the reasoning behind that?

Dennedy: It's a capital allocation question. As a public company, our duty and obligation is to efficiently allocate capital to the benefit of shareholders. We look at return on capital, not just for M&A purposes but also for operating expenses, product development, all the SG&A lines. It's really a capital allocation decision.

So basically you weren't getting the return on the capital for TSG that you felt you can get with RSG or HSG, is that accurate?

Dennedy: We can make any business work. We felt we can run a more efficient business with the next dollar of capital allocated with greater return on capital than we could derive out of TSG. When you evaluate the OnX acquisition of that [TSG] business, they felt they could operate it more efficiently. It was an opportunity for us to sell and have both [companies] satisfied.

It seems like there's been an acceleration of consolidation within the VAR segment, particularly the VAR500 segment. CRN's VAR500 list had more new names than ever before. Why do you think that's happening now? Is it being driven more by vendors looking to get tighter with fewer, larger VARs or VARs seeing more efficiencies of scale than before?

Stout: You probably want to talk to Ed Voss, president and CEO of OnX to that. There's certainly a fair amount of consolidation in that space. In general, scale is something that's important to the acquirers in that space as they look to build out a North American footprint.

Tell me about the two segments that Agilysys still plays in, hospitality and retail. What do you see for those businesses going forward? Is Agilysys just focusing on vertical applications for those markets or will you still sell the entire solution including hardware and services too?

Dennedy: The retail business is still 60 percent the reselling or remarketing of products and services, whether you implement POS or other merchant-type solutions, systems, scanners, everything that goes around that. We see increased use of mobility devices. Not just for checkout but for paying too. We have successfully sold solutions that help merchants better enable [mobility solutions] from a customer perspective. We think that trend continues. In hospitality, proprietary software and services is about 50 to 60 percent of [total HSG revenue]. The other part is remarketed [third-party] hardware, software and services.

Regarding mobility, will Agilysys look to expand to offer more mobility devices or strike relationships with carriers or just focus on the solutions that enable an end user's customers to leverage those solutions with their own mobility devices? Dennedy:

We have technology-enabled solutions today that are compatible with [iPod] Touch or iPhone. A merchant can have a credit card reader attachment. A customer perusing merchandise might want to buy this widget. We could sell them that widget and take their credit card payment wirelessly and have it integrated into customers' POS systems. That we do today. We sell complete solutions to the end user. Our customers are merchants or retailers. Do I sell something to [the consumer?] No.

Next: Will Hardware Go Away?

Overall, what are some of the newer technologies that Agilysys is getting involved in and that customers are interested in?

Stout: Two things. One is mobility, which we touched on and how to deliver service closer to the customer. The second is cloud-enabled technology. Reducing the data center footprint and overall fixed costs and converting IT needs to more variable costs.

Do you envision continuing to sell hardware long term or do you envision transitioning to more of a software and services model?

Dennedy: We will continue to sell hardware, particularly in our RSG business. That's part of the business to sell a complete solution to customers. We're still selling hardware, software and services. In the VAR business itself, you're effectively selling technology, hardware with integration and design services so they can set up their own infrastructure. If you look at our business in that [TSG] sector last year, we grew revenue almost 7 percent. We experienced modest margin compression, just north of 17 percent.

We have seen that gross margin compression in the last few quarters come down from the high 19s, low 20s. Some of that can be managed by the mix of hardware and products we sell. Some vendors offer better margin availability than others.

To the extent you can couple that with service opportunities with those end customers and develop a solutions or services component, you can make some profit opportunity. The challenge is we already have that in our RSG business and our HSG business. So the next dollar of capital to allocate, do you invest in that solutions business in TSG side where you're so predominantly-hardware oriented today? We have to evaluate our own capital and make a ore efficient allocation where we already have greater capture margin by hardware [in RSG and HSG].

As vendors look for more loyal solution providers, partners that will sell only their offerings as opposed to a broad portfolio of vendors, how does that impact Agilysys?

Dennedy: In our retail business, the primary business vendors are Oracle, IBM and Symbol [Technologies]. We are longstanding partners with all those guys. That's a major theme for our business going forward. I don't see the mix of partners changing. If anything, we will deepen those relationships. I don't know that we feel pressure per se to be loyal to them but they're getting it because it's in everybody's best interests to do that. If we're the experts, the go to-team, it benefits us to be as smart and knowledgeable on these vendors as much as it is for them to make sure we're up on new releases and what coming through their platforms, than being pressured to carry just their products.

Finally, anything else going on with Agilysys you'd like to share?

Dennedy: The one thing we did reasonably well with the TSG group is being customer focused on what they need in their next unit of computing utility. What equipment to put in the rack and deliver to them with best services with a business purpose. To the extent you can create the best solution for a unit of computing utility, when I listened to our TSG leadership talk, the biggest customers valued that contribution we made to the sale. We're not just selling the next server, but the next integrated rack to add capacity. That goes back to the comment to adding additional services to a traditional hardware business. Instead of finding the best server or switch, let's find the most efficient collection of devices that are in a rack of a business.