TSS Inc (TSSI) 2019 Q4 法說會逐字稿

Welcome to the TSS fourth quarter and fiscal 2019 earnings call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. (Operator Instructions) Please note this conference is being recorded.

I'll now turn the call over to John Penver. John, you may begin.

Thank you, Adrienne. Good afternoon, everyone, and thank you for joining us on TSS conference call to discuss our fourth quarter and our fiscal 2019 financial results. I'm John Penver, the Chief Financial Officer of TSS. And joining me on the call today 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 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, March 24, 2020.

TSS expressly disclaims any obligations 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 risk 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. A reconciliation of the differences between those measures with the most directly comparable financial measures calculated in accordance with GAAP is included in the press release.

So I will begin this call with a review of our fourth quarter and our fiscal 2019 results, and then turn the call over to Anthony for his comments on the business and the changes we see coming.

So earlier today, we released a press release announcing our financial results for the fourth quarter and fiscal 2019, and a copy of that release is available on our website at www.tssiusa.com.

Now, our fourth quarter results look a lot different than our previous quarters. We introduced our IT reseller services late in the third quarter, but it did not have much of an impact in that quarter. We recorded $17 million in revenue in the fourth quarter from these services, and that's the main reason you see our revenues increase from $4.2 million in Q3 to $20.4 million in the fourth quarter.

Margins on reselling activities are much lower than our traditional services, and this resulted in our gross margins decreasing so significantly in the fourth quarter. We are procuring third-party hardware, software, and services for our customers, and then using this equipment as we perform integration services and deliver a completed solution to that to the customer.

But the reseller services help drive integration services for our factory. They help us establish new customer relationships and also help us to build an ecosystem of hardware, software, and service providers that we can leverage across all of our customer relationships.

Ultimately, we believe that these services will help fuel growth in our systems integration business, improve the utilization of our integration facility. And although, we will -- will record lower overall gross margins, will contribute to increased operating and net profits for TSS. And with the results of our reseller activities, our fourth quarter revenue, operating profits, and adjusted EBITDA exceeded the result for the first three quarters of 2019 combined.

Now, comparability of our current results to the previous year are unfortunately complicated, not just by the addition of the reseller business in 2019 but because our 2018 numbers include the results of operations and the gain on sale of our power and cooling business that we sold in December 2018.

The results of that business are included in our 2018 numbers but not our 2019 numbers. So I'm going to reference the differences throughout my comments to assist you in understanding how our underlying core business is performing on a comparable basis. And by core business, I mean our systems integration services and our facilities maintenance business.

In 2019, our core business revenues were down 4%, which was $655,000 compared to 2018. And our operating profit on that core business was down $310,000. But the addition of the reseller business drove a year-over-year reported revenue increase of 47% or $10.4 million.

So let me provide some more details on the fourth quarter and our fiscal 2019 results. Our revenue for the fourth quarter of 2019 was $20.4 million as compared to $5.7 million in the fourth quarter of 2018 and is up from $4.2 million in the third quarter of 2019.

Our power and cooling business that we sold in December 2018, contributed $1.2 million of revenues in the fourth quarter of 2018. And our construction management activities, which we have discontinued since 2018, also contributed $1 million of revenue in the fourth quarter of 2018.

Our 2019 revenues included $17.0 million from reseller activities and our facilities business was down $0.4 million or 18% compared to the fourth quarter of 2018 as a number of customer deployments of modular data centers were deferred into 2020.

The systems integration business was up 20% or [$270,000] compared to the fourth quarter of 2018, driven by higher integration services attributable in part to the reseller transactions.

For fiscal 2019, our revenues of $32.8 million were $10.4 million or 47% higher than the $22.3 million we recorded in 2018. Included in our 2018 revenues were $4.6 million from the power and cooling business that we sold in 2018, and $1.4 million from our construction management activities.

Revenues from our core systems integration and facilities maintenance businesses were down 4% in 2019 compared to 2018 with the decrease primarily in our systems integration operation as the level of integration and modular data center integration services were lower than in 2018. And as I noted a moment ago, we added $17.1 million in reseller services revenue in 2019 as we introduced this service line.

Now, increasing the volume and stability of volume in the system integration business is key to our sustaining and increasing operating profits for the company because of the high fixed overhead associated with the facility.

As we witnessed in 2019, volumes can fluctuate significantly on a quarterly basis due to changes in customer demand, including demand for modular data centers, component availability, and other factors. We are actively seeking to add more customers and services to increase the utilization of this system integration facility and to drive growth in our profit. We saw in the fourth quarter that the reseller services are able to bring with them demand for additional integration services.

Now, our gross profit margin of 10% during the fourth quarter is down significantly from the 35% we had in the fourth quarter of 2018. And the impact of the reseller services on our margin is what's caused this year-over-year decrease. Margins on our core business remain in the high 30%, and in fact, was 7% higher in the fourth quarter of 2019 than in the fourth quarter of 2018.

For the year, the gross profit margin was 20% compared to 38% in 2018. And moving forward, we expect the margins from our core business will continue to be in the range of 35% to 40%; however, our overall margin can be expected to fluctuate significantly depending upon the level of reseller services in a given period.

So our reported gross profit for the fourth quarter of 2019 was $2 million. That was 1% lower than what we had recorded in the fourth quarter of 2018. Our full year gross profit of $6.6 million was $1.9 million or 22% lower than the $8.5 million in gross profit we recorded in 2018. But the 2018 gross profit included $2.2 million from our critical power and cooling business and from our construction management activities.

Our selling, general and administrative expenses during the fourth quarter of 2019 were $1.4 million. They were down $185,000 or 11% compared to the $1.6 million we had in the fourth quarter of 2018. This decrease compared to the prior year mainly reflects the absence of operating costs for power and cooling business in our 2019 results that were consistent with the level of operating costs in the third quarter of 2019.

And so for the full year of 2019, our selling, general and administrative expenses of $5.7 million were down $631,000 or 10% compared to the $6.4 million that we recorded in 2018. The 2018 expenses included $520,000 of operating costs from the power and cooling business.

And as I've indicated, in December 2018, we completed the sale of certain identified assets and liabilities that were associated with our Virginia-based power and cooling solutions business. We sold this business for gross proceeds of $2.5 million, and we wrote off goodwill and other identifiable intangible assets of $1.18 million that were directly attributable to the business component we sold. So after direct costs associated with the transaction, we recorded a gain of approximately $1.14 million from the sale of those assets in the fourth quarter of 2018.

After all the above, we recorded an operating profit of $440,000 in the fourth quarter of 2019. Now, this compares to an operating profit of $1,463,000 in the fourth quarter of 2018, and an operating loss of $12,000 in the third quarter of 2019. And that 2018 number included the $1,140,000 gain on the sale of the power and cooling business, and $364,000 in operating profits from that same business.

If you exclude those results of the sold business from our comparable 2018 results, on a pro forma basis, our fourth quarter of 2018 would have shown an operating loss of $180,000.

After interest and tax costs, we had a net income of $346,000 or $0.02 a share in the fourth quarter, compared to a net income of $1,387,000 or $0.08 a share in the fourth quarter of 2018. On a pro forma basis, excluding our power and cooling business from our result, our comparable fourth quarter 2018 would have shown a net loss of $277,000 or $0.02 a share.

For the full year of 2019, we recorded net income of 126,000 or $0.01 per share, which compares to recorded net income in 2018 of $2,437,000 or $0.15 a share. And as I've indicated, the 2018 net income included $1,140,000 million from the gain of the sale of the power and cooling business, and $1,239,000 in operating profits from this power and cooling business.

Our adjusted EBITDA, which excludes interest taxes, depreciation, amortization and stock-based compensation, was a profit of $680,000 for the fourth quarter of 2019. This compares to an adjusted EBITDA loss of $258,000 in the fourth quarter of 2018 on a pro forma basis, and an adjusted EBITDA profit of $157,000 in the third quarter of 2019. And for the full 2019, our adjusted EBITDA was a profit of $1,208,000, which compares to a pro forma adjusted EBITDA profit of $393,000 in 2018. Lot of numbers there.

Now, looking to our balance sheet, as we've commenced activities around new reseller services, there's been some major changes in our balance sheet since we reported our Q3 results. Our receivables increased by $3 million, our inventory by $1.3 million, and our payables by $6.2 million, all directly attributable to the reseller activities.

We do not yet know how much our reseller business will fluctuate on a quarterly business as this is still a nascent activity. And so large balance sheet fluctuations are possible moving forward, we continue to have strong liquidity, working capital, and stockholders' equity at the end of 2019, however.

There's also been a number of large changes in the balance sheet since we reported our fiscal 2018 results, and those changes are really due to the adoption of a new lease accounting standard under our Accounting Standards Codification Topic, ASC 842, that was effective on January 1 of 2019.

And under this new standard, we were required to account for all of our operating leases on our balance sheet rather than off-balance sheet as had been the norm. So upon adoption of ASC 842, we recognized a $2 million right-to-use lease asset and the associated $2 million lease liabilities on our balance sheet effective as of January 1, 2019.

We closed the year with $8.7 million of cash on hand, up from the $5.9 million we reported at the end of Q3 and the $6.2 million we had at the end of 2018. Our net working capital position decreased by $277,000 compared to the end of 2018, which was almost entirely all due to the adoption of the new lease accounting standard, and now recording a portion of our lease liabilities as a current liability per GAAP.

We expected our working capital position will continue to fluctuate due to the timing of billings and our maintenance revenue contracts. I believe we've got adequate liquidity to operate the business and provide flexibility to allow us to exploit these opportunities as they arise.

In the fourth quarter of 2018, we added a $1.5 million bank revolving line of credit agreement to provide some additional liquidity, but we have not drawn against that facility.

So that's a lot of numbers. And with that, I'm going to hand the call over to Anthony for his comments on our 2019 results and the business moving forward into 2020. Thanks, Anthony.

Alright. Thanks, John. As you can see, we got a lot of moving pieces. So we may have to come back and you guys may have some questions on some of those moving pieces. However, our fourth quarter results reflected the changes we've made and been making over 2019 to expand our service offerings to help us grow our range of services and diversify our customer base.

Our revenues were up almost 400% from the third quarter driven -- driven from our new reseller business, and this drove significant increases in operating and net income, and adjusted EBITDA as we predicted. Our fourth quarter results for all of these metrics exceed the results of the first three quarters of 2019 combined and validated our decision to diversify the revenue stream.

Our core integration and facilities maintenance businesses experienced some delays in deployment projects from our channel partner and its customers in the second half of 2019. This impacted both of our operating segments as it delayed integration of the product and subsequent deployment activities. The introduction of our reseller activities helped drive new business into our integration business. So from the reseller business, we're experiencing some growth in our integration business.

At this point, we're trying to more clearly understand what to expect from our reseller activities, and the significant quarterly fluctuations from these activities are likely. We don't believe that there is any significant working capital requirements with this reseller business. In fact, if anything, they're coming down due to recent interest rate declines because some of our financing is pegged off of the one month LIBOR.

We do think that it has the potential to drive additional service revenue and help us establish relationships with new third parties that will drive further revenue opportunities for us and help us diversify the customer base, and we expect this to drive growth in our 2020 revenues, gross profit, and operating profit.

Based on our current picture, we expect to record first quarter revenues in the range of $9 million to $11 million, generating positive EBITDA. Before COVID-19 entered the scene, we were experiencing a large increase in demand for our integration services in part due to our channel partner moving additional business to our facility.

As we have been designated as an essential infrastructure partner by some of our customers, at this time, we are continuing production at our integration facility, but aware that this may change due to factors beyond our control; however, we are open for business.

As it remains open, we have taken steps to ensure the safety and well-being of our employees and their families. We continue to deliver services and to meet deadlines for our clients, which remains our top priority. We've restricted physical access to our facilities in order to keep production operating and have introduced screening procedures for all visitors to our facilities. We do a lot of tours, so restricting some of that access is important in the near term.

We have also established guidelines which help us determine when employees need to stay away from the workplace and self-quarantine, as well as introduced social distancing protocols within the workplace. We have also introduced travel restrictions, by the way, which [effectively] -- and developed contingency planning for alternative working arrangements where suitable.

As a manufacturing facility, however, any shutdown of our facility would have an immediate impact on our operating results. However, as I said earlier, we are open for business and we have documentation to keep us open.

At our remote locations, we will comply with the end user's policies and procedures that they have chosen to implement. If this prevents us from performing services on-site, we will work with our partners and end customers to develop a service plan in response to their site-specific situation.

Our standard with regards to our employee's health and safety have been articulated and won't -- and we will not ask our employees to put themselves in a situation that they feel jeopardizes their individual health or safety. The plans we have in place are designed to ensure our continued service to our customers, subject to federal, state, and local regulatory actions that may prevent this.

We are confident in our ability to work through these uncertain times in a profitable manner and feel our balance sheet is strong enough to work through any short-term issues. As the situation evolves, we will do our best to keep all constituents informed.

With that, we're going to open up for questions.

Thank you. We'll now begin the question-and-answer session. (Operator Instructions) And our first question comes from [Maj Soueidan from Market Search]. Your line is open.

I missed some of the beginning of the call. So maybe if you answered it, I'd just go back to the transcript. But how are your -- I was just curious, I know you hired a new guy for product development, and I'm wondering how that's progressing and is it --

We're getting -- Well -- Yes, I'm sorry. Finish your question. Go ahead.

That's good.

Yes.

Well, I just needed to know how is that going and has the COVID kind of slowed that down at all?

Well, this whole thing slowed everything down, right, everybody's at home all of a sudden. So no, we were making pretty good traction with another -- number of other OEMs. And [Matt] has been working pretty hard on trying to get us some more traction in those. But the problem right now is across the country everybody's at home. So it's -- nobody's making decisions, right, in the short term.

So we feel like as we go through the back half of the year, maybe. I don't know how long this -- I mean, we all probably believe it's maybe June or July, hopefully. But nobody -- no customers are going to make bigger decisions in the next 30, 60 days as far as moving business. However, because we've been determined an essential infrastructure partner, we're going to be open for our key partners, for our key customers right now.

And then on top of it, there was a little bit of another force majeure kind of activity that took place in Nashville that is shifting some business towards us. So that -- so if you look at our partner profile and our customers, one of our customers had a severe customer fall apart basically because of tornado. And so now -- and it's public information and blah-blah-blah. So we're picking up work because of that and we're staying open. But as far as third-party work, it's going to -- it's probably going to take us to the back half of the year. If that helps.

Okay. Great. Yes. Awesome. Thank you, man. Good luck

Alright. Thanks, bud.

And we have no further question.

That's it? Well, guys, we're in strange times. I think we all know that, and I appreciate everybody joining us. We are actually in pretty good shape because we're open for business. We're deemed an essential partner, and so we have the opportunity to, over the next few months, do some better than most, let's call it that way.

John, any comments from you?

No, I think that's it. I just appreciate everybody's time and effort today, and the continued support of the company. And we plan on reporting our first quarter results middle of May in conjunction with the SEC filing deadline. So if there's no other questions, I think we'd say thank you, everybody. I appreciate the time, and we'll talk to you in about six or seven weeks.

Perfect. Okay. Thank you, all.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.