TSS Inc (TSSI) 2016 Q4 法說會逐字稿

Welcome to the TSS fourth-quarter and fiscal 2016 earnings call.

My name is Victoria and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the call over to John Penver.

John, you may begin.

Thank you, Victoria.

Good afternoon everyone.

Thank you for joining us on TSS' conference call to discuss our fourth-quarter and our fiscal 2016 financial results.

I'm John Penver, the Chief Financial Officer of TSS.

And joining me today on this call is Anthony Angelini, the President and Chief Executive Officer of TSS.

As we begin the call I would like to remind everyone to take note of the cautionary language regarding forward-looking statements contained in the press release that we issued today.

That same language applies to comments and statements made on today's conference call.

This call will contain time sensitive information as well as forward-looking statements which are only accurate as of today April 3, 2017.

TSS expressly disclaims any obligation to update, amend, supplement or otherwise review any information or forward-looking statements made on this conference call or replay to reflect events or circumstances that may arise after the date indicated except as otherwise required by applicable law.

For a list of the risks and uncertainties which may affect future performance please refer to the Company's periodic filings with the Securities and Exchange Commission.

In addition, we will be referring to non-GAAP financial measures.

Reconciliation of the differences between these measures with the most directly comparable financial measures calculated in accordance with GAAP is included in today's press release.

I will begin with a review of the results and then turn the call of Anthony for his comments on the business.

Earlier today we released a press release announcing our financial results for the fourth quarter and fiscal 2016.

And a copy of that release is available on our website at www.totalsitesolutions.com.

Our revenue for the fourth quarter was $7.3 million.

This compares to $10.1 million in the fourth quarter of 2015 and $5.4 million in the third quarter of 2016.

The decrease compared to the previous year was due to the fact that we had a large data center upgrade project in process in 2015 which included $3.5 million of equipment sales.

This project concluded in early 2016.

The increase from the prior quarter is due to a $1.3 million or 160% increase in our systems integration business on higher volumes from our channel partner and also from a $0.5 million increase in our facility services business driven by increased modular deployments in this period compared to the third quarter.

On an annual basis our 2016 revenue of $27.4 million is $2.1 million, or 7% lower than our 2015 revenues of $29.5 million.

This decrease was due to lower sales in our facility services business unit reflecting the absence of a large one-time project.

The increase in systems integration work during the fourth quarter resulted in a more favorable revenue mix for our business and drove improvement in our profitability.

We were able to generate higher margins from these activities and from the deployment of modular data centers.

As Anthony will discuss shortly, we have taken steps to ensure we have more of our higher-margin revenues moving forward.

As a result of this change in revenue mix, our gross profit margin for the fourth quarter was 31% compared to 27% in the third quarter and 25% in the fourth quarter of 2015.

This resulted in our gross profit of $2.3 million being $0.8 million more than the third quarter of 2016, almost a 50% increase.

Our selling, general and administrative expenses this quarter of $1.85 million were $389,000, or 17% lower than the $2.2 million we had in the fourth quarter of 2015.

This decrease was mainly in lower professional and headcount cost.

For the full-year 2016, we have reduced our selling general and administrative costs by $1.5 million or 16% to $8.1 million compared to $9.7 million in 2015, in part due to our ongoing cost control activities and the sale of a portion of our facilities business based in Maryland.

We have continued to work on reducing our operating costs including reducing our public Company costs.

In September 2016 we sold assets and liabilities associated with the Maryland-based portion of our facilities maintenance operation, resulting in a gain of $910,000 recorded during 2016 from this sale.

As a result of all the above, during the fourth quarter we recorded an operating profit of $281,000.

This compares to an operating profit of $240,000 in the third quarter that included a $910,000 gain from the sale of part of the business and an operating profit of $139,000 in the fourth quarter of 2015.

After interest and tax costs we had a net income of $148,000 or $0.01 per share in the fourth quarter of 2016 compared to a net income of $16,000, or $0.00 per share in the fourth quarter of 2015.

For the fiscal year we had an operating loss of $633,000.

This is a $1.2 million or 66% decrease compared to the operating loss of $1.8 million that we incurred in 2015.

After interest and tax cost our net loss for 2016 was $1 million or $0.07 share compared to a net loss of $2.2 million or $0.15 a share in 2015, a 54% decrease.

Our adjusted EBITDA, which excludes interest, taxes, depreciation, amortization and stock-based compensation, was a profit of $431,000 for the fourth quarter of 2016.

This compares to an adjusted EBITDA profit of $439,000 in the third quarter of 2016 and an adjusted EBITDA profit of $416,000 in the fourth quarter of 2015.

For the full year, our 2016 adjusted EBITDA was a profit of $226,000 which does include the $910,000 gain on a portion of the facilities maintenance business compared to an adjusted EBITDA loss of $750,000 in 2015.

Turning to our balance sheet, we closed the quarter with $2.2 million on hand which was up $1 million from our balance the end of Q3 and up from the $1.1 million we had at the end of December 2015.

Most of this increase was attributable to timing of renewals for annual maintenance contracts on modular data centers.

We also repaid $2.15 million against our bank credit facility in 2016 as this lending facility terminated in May.

We have partially replaced this bank lending facility with a receivables-based facility and drew down $0.7 million against this at year-end.

Along with the proceeds received from the sale of a portion of our facilities maintenance operations, these sources of funds have allowed us to fund ongoing operations.

Managing our liquidity continues to be an important priority for management.

As I have mentioned, in September we sold a portion of our facilities maintenance operation that allowed us to generate $0.6 million in net cash and remove liabilities from our balance sheet.

In January of 2017 we sold another (technical difficulty) contract that was part of our construction management activities and generated another $350,000 in proceeds.

We have also made the decision during the fourth quarter of 2016 to discontinue the direct staffing of certain services including consulting, engineering and project management to help reduce the fixed overhead we were carrying in the business.

While we will continue to offer these services to customers, we will engage third-party subcontractors to deliver these services.

These decisions allowed us to close our facility in Maryland to the end of 2016 and will reduce our level of overhead, improving our efforts of attaining and sustaining profitability in the future.

We continue to look at new sources of capital in both debt or equity form so that we can provide the Company with as efficient sources of capital as we can.

We are planning for additional capital to assist our growth and continue to work with potential investors and lenders to see if we can come to a transaction on terms reasonably acceptable to us.

The availability of additional capital coupled with our ability to adjust operating costs in responses to changes in our business will enable us to ensure we have sufficient liquidity.

With that, I will now hand the call over to Anthony for his perspectives on the business going forward and the market opportunities that we have in front of us.

Thanks, Anthony.

Thank you, John, and thank you to those attending the call today.

Our fourth-quarter results were strongly in line with our guidance of adjusted EBITDA profitability.

There were also some important developments and steps taken during this quarter that should significantly enhance our business moving forward.

As John indicated and we discussed in our last call at the end of the third quarter we sold the Maryland-based portion of our facilities maintenance business.

This generated cash for our business and we recorded a gain of $910,000 from this transaction.

In the fourth quarter, we executed on our decision to outsource a number of the services that we had historically staffed directly.

These included our consulting, engineering and our construction management activities.

These operations have had high, relatively high fixed cost, predominantly headcount-related, high working capital requirements and generally nonrecurring revenue.

The lack of predictability of revenue streams in these business areas and significantly fluctuating quarterly revenue levels caused major fluctuations and profitability from these operations.

Outsourcing allows us to better align our cost with these variable revenue streams and the reduction in headcount and other cost allows us to significantly reduce our fixed overhead cost.

We believe this will improve the overall profitability of the business, albeit at lower revenue levels.

In January we also completed the sale of a specific customer contract that was part of our Maryland business.

This resulted in a further $350,000 in proceeds and we will record a gain of approximately $320,000 during our first quarter of 2017 from this transaction.

This change combined with the sale of our Maryland-based facility business that I previously mentioned have allowed us to exit our facility in Maryland, simplify our business and reduce our fixed operating cost.

This will significantly lower our breakeven level of the business and focus our efforts on growing our integration and modular businesses.

Moving forward, our business will be concentrated on our modular data center maintenance and system integration services.

These have been our highest margin services and represent the greatest opportunity for profitable growth.

While the changes we have made through the sales mentioned or our outsourcing of parts of our business will result in lower annual revenue initially, we believe it allows us to focus our resources in growing the portions of our business that we see with the most upside.

Simply, we are leaner or more narrowly focused on the large markets we service.

This coupled with lower overhead and less strain on the working capital required for the construction projects will make us stronger, more flexible and better positioned to invest and grow our business.

As we look at 2017, we expect to begin the year with first-quarter revenue in the $4 million to $5 million range and be profitable.

We are optimistic that we can drive growth throughout the year and grow the business at a greater than 20% compound annual growth rate.

At these levels we should generate consistent and increase profitability.

There are a number of positive discussions with existing and prospective customers that led us to believe that we could see significant growth in our integration services throughout 2017 beyond.

We continue to look at our capital structure and overhead cost and look for ways to further reduce these costs and increase our ability to invest in the areas of our business that we believe we can grow significantly.

I'm very proud of the efforts of our team over the past six months to effect the changes in the business to get us to this point.

It has been an incredible effort to divest our businesses while continuing to run the day-to-day business profitably with lower overhead cost.

We have done this all while servicing our customers transparently and more positively positioning our services for accelerating growth.

I'm confident in the team we have and our ability to grow the business from here.

With that I will open the call for questions.

(Operator Instructions) I am showing that we have no questions at this time.

Okay, thank you very much.

I want to thank those who attended the call and we expect to have our first-quarter call in just under six weeks.

So thank you all for attending.

Thank you, ladies and gentlemen.

This concludes today's call.

Thank you for participating.

You may now disconnect.