TSS Inc (TSSI) 2020 Q1 法說會逐字稿

Welcome to the TSS first quarter 2020 earnings call. My name is [Darryl] 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, Darryl. Good afternoon, everyone, and thank you for joining us on TSS's conference call to discuss our first quarter 2020 financial results. I'm John Penver, the Chief Financial Officer for TSS. And joining me today on the 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 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, May 18, 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 the replay to reflect events and 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. A reconciliation of the difference between these measures with the most directly comparable financial measures calculated in accordance with GAAP is included in today's press release.

I'll begin the call with a review of our first quarter 2020 results and then turn the call over to Anthony for his comments on the business and changes we see coming. So earlier today, we released a press release containing [for] announcing our financial results for the first quarter of 2020. And a copy of that release is available on our website at www.tssiusa.com.

Our first quarter was mixed performance for TSS. Compared to the first quarter of 2019, you'll see that our revenues have increased by $5.9 million or 127%. This reflects $6.8 million of IT reseller services revenue from the reseller services business we commenced in the third quarter of 2019. Our margins on reselling activities are much lower than our traditional services, and this resulted in our gross margins decreasing so significantly compared to the first quarter of 2019.

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 complete solution to our customer. So the reseller services help drive integration services for our factory, 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 record lower overall gross margins, will contribute to increased operating and net profits for TSS. Absent this, the first quarter results reflect the impacts of the COVID-19 pandemic on our business. Our facilities segment in particular, saw revenues decreased by $0.8 million or 27% compared to the first quarter of 2019, has travel and customer site access restrictions resulted in the deferral of modular data center deployment.

We were deemed a critical systems infrastructure provider and our integration facilities continued to operate throughout the pandemic and its related shutdowns. Supply chain issues and customer uncertainty have, however, had an impact on this business. Now our first calendar quarter of each year is also where we traditionally have our highest level of operating expenses as we incur professional fees around the audit and our annual SEC reporting.

We also invested in additional headcount in 2019 to drive business development and customer diversity. So our headcount related expenditures have increased from last year. So this higher combined expenditure with less than expected revenues resulted in us incurring an operating loss this quarter for only the second time in the last three years.

We anticipate operating expenses decreasing in the second quarter. And although we do not know the duration and extent of the COVID-19 pandemic on our business, we do expect revenues to grow and to return to profitability in the second quarter.

So with that, let me provide some more detail on our first quarter 2020 results. Our revenue for the first quarter of 2020 was $10.7 million. This compared to $20.4 million in the fourth quarter of 2019, that included $17 million of reseller revenues. And it's up from $4.7 million that we had in the first quarter of 2019. As I said before, our 2020 revenue included $6.8 million from our reseller activities.

Our facilities business was down$ 0.8 million or 27% compared to the first quarter of 2019 as travel and site restrictions imposed due to the COVID-19 pandemic caused a number of customer deployments of modular data centers to be delayed. The systems integration business was up 380% or $6.7 million compared to the first quarter of 2019. As our 2020 number included the $6.8 million from an IT reseller services, which we were not offering in the first quarter of 2019.

Absent this reseller business, our system integration business was down $45,000 or 3% compared to the first quarter of 2019, mainly due to supply constraints and other negative impacts from the COVID-19 pandemic. Now, increasing the volume and the stability of volume in our systems integration business is the key to sustaining and increasing operating profits for the company, because of the high fixed overhead associated with this 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. So we are actively seeking to add more customers and services to increase the utilization of the system integration facility and to drive growth in our profits. And our reseller services are one of the ways in which we have to accomplish this.

Our gross profit margin of 15% during the first quarter was down significantly from 35% in the first quarter of 2019. And the impact of our reseller services on our margin is what caused this year-over-year decrease. Margins on our core business remain in the mid to high 30s and [over] 1% lower in the first quarter of 2020 than in the first quarter of 2019. As a result, our reported gross profit for the quarter was $1.6 million, which was 2% lower than what we recorded in the first quarter of 2019.

Our selling, general and administrative expenses during the first quarter of 2020 were $1.75 million, [up] $254,000 or 17%, compared to the $1.5 million we had in the first quarter of 2019. Our headcount and related expenses were higher than the prior year as we invested in additional personnel to drive customer diversity and new business development that will benefit our future periods.

And after the above, we recorded an operating loss of $277,000 in the first quarter of 2020. This compared to an operating profit of $50,000 in the first quarter of 2019, and operating profit of $440,000 in the fourth quarter of 2019. After interest and tax costs, we had a net loss of $368,000 or $0.2 a share in the first quarter of 2020, compared to a net loss of $31,000 or $0 per share in the first quarter of 2019.

Our adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and stock-based compensation, was a loss of $49,000 in the first quarter of 2020. Our first EBITDA loss in four years. This compares to an adjusted EBITDA profit of $203,000 for the first quarter of 2019.

Now looking to the balance sheet, the reseller business has had a large impact on the balance sheet during the first quarter of 2020. In the fourth quarter of 2019, we generated approximately $3 million in positive cash flows from operating activities, including our reseller business, where we were able to collect greater funds than what we had paid to our vendors for our reseller business.

As we completed one large reseller contract in the first quarter of 2020, this cash flow situation reversed. As a result of fluctuations in receivables down $2.9 million, inventories down $1.2 million, and payables down $7 million during the first quarter were all primarily connected to the reseller activities and contributed to us using $3 million in cash in operations during the quarter.

We have been able to structure our reseller activities in such a way as to minimize their overall impact on our liquidity by using trade credit as the primary way to finance these activities. However, due to timing, it's possible to see fluctuations on a quarterly basis for reseller contracts in progress at the end of the particular reporting period.

We had no reseller contracts in progress at the end of Q1, but we will be doing more of these projects beginning in the second quarter. And we do believe we'll have adequate trade credit to continue financing our reseller activities as we grow this business during 2020.

We closed the quarter with $5.3 million of cash on hand down from the $8.7 million we had on hand at the end of 2019. Our net working capital position decreased by $467,000 compared to the end of 2019, primarily due to a net loss, and from investments we made in the integration facility during Q1. Now subsequent to the end of the quarter through our subsidiary, VTC, LLC, we applied to our bank under the Small Business Administration Payroll Protection program of the Corona Aid, Relief, and Economic Security Act of 2020 for a loan of approximately $890,000.

We may apply to the lender for forgiveness of some or all of this loan amount with the amount which may be forgiven equal to the sum of eligible payroll costs, covered rent, and utility payments incurred by us during the eight week period following the effective date of the loan calculated in accordance with the terms of the CARES Act. And there is no guarantee that we will receive forgiveness for any fixed amount of the loan proceeds received.

With that, I'll just hand the call over to Anthony for his comments.

Okay. Thank you, John. As John explained, our first quarter included the increased costs traditional in our first quarter, including our audit and other costs for our filings. In addition to the increase in staff related costs as we ramp up for additional reseller and other third party business, and furthermore, because of the COVID-19 impacted field deployments at the end of the quarter as well as in the supply chain of our systems integration business.

So we basically had three areas that impacted the quarter which were normal incremental cost as well as some increased staff costs, as John mentioned, and then the impact of COVID-19. Our second quarter, however, will benefit from these delays, and looks to be strong despite our additional cost to manage social distancing in our production facility, along with additional cost for PPE to maintain a safe facility for our employees.

As we look at the back half of the year, we are hesitant to provide guidance until we better understand the effects of the pandemic and the reopening of the country, and the net effect on the IT industry in regards to that. However, we feel confident we can maintain profitability in the back half of the year as we get better visibility later in June.

I believe John's covered the rest, and we'll now open the call for questions.

(Operator Instructions) Yaron Naymark, 1 Main Capital.

Hey, guys. Thanks for all the color. Thanks for all the color. I think you said that we should expect profitability for Q2 as well as the back half. Just curious what the underlying assumption on that is for the reseller business, as well as the core legacy business? Thanks.

Sure. I'll take a shot at it and then, John, you can chime. The reseller business is, as we have explained previously, new and it's kind of choppy. So we don't have a lot of visibility in advance two particular programs. Generally they're 30 days to 45 days out that we know we're going to be looped into a reseller program. So we've taken a cut of things we know, and some of which we do know through the end of the year, but there's also -- we expect to have additional ones in our program.

So we're being a little conservative on the back half of the year, and second quarter we've got good visibility to everything that's going to happen between now and the end of June. And our core business will -- some of the negative effects that we saw at the end of the first quarter in regard to deployments and supply chain issues have been basically been resolved. So we'll pick up some of that shortfall from the first quarter in the second quarter.

Beyond that, we're just cautious as kind of the rest of the world is as to what things are going to look like as we go through the summer months and into the fourth quarter. We're monitoring the situation and I think we'll have a better picture as we get towards the end of June, as to how July and August will look. And then hopefully as we get to September, October, November, countries opened up, things pick back up, et cetera. But we're all in that situation of trying to estimate what that's going to look like.

And John, I don't know if you want to --

(inaudible) I think the comment I'd add to that is that short term visibility is fairly solid. But as I said, we have certain reseller programs [that do] take place in the second quarter that will help the results. And I think just with the overall uncertainty around the pandemic, understanding the longer-term demand picture is a little unclear. So in the short term, we've been busy with work for public clients that over the long term just -- how long [they're] going to take for things to return to something resembling normal. So that visibility's a little more impaired to further (inaudible).

Got it. Thanks.

(Operator Instructions) And we have no more questions at this time.

Okay. Well, thank you all very much for attending today. We'll keep things posted. We are still open for business and pushing everything through that we can. So everybody stay safe, and hopefully the pandemic -- the COVID situation winds itself down as we exit through the summer.

And thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.