TSS Inc (TSSI) 2020 Q2 法說會逐字稿

Welcome to the TSS second-quarter 2020 earnings call. My name is Darrell, and I'll 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, Darrell, good afternoon, everybody, and thank you for joining us on TSS's conference call to discuss our second-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 everybody 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 this conference call. And this call will contain time sensitive information as well as forward-looking statements, which are only accurate as of today, August 17, 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 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. A reconciliation of the differences between those measures with the most directly comparable financial measures calculated in accordance with GAAP is also included in today's press release.

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

Our second quarter was a continuation of the mixed performance for TSS that we've experienced so far in 2020. Compared to the second quarter of 2019, you'll see our revenues have increased by $2.9 million or 82%. And for the first half of 2020, our revenues of $17.1 million have increased by $8.9 million or 108% compared to the first half of 2019.

These increases in revenue reflect $3 million and $9.8 million of revenues from our reseller business that we commenced in the third quarter of 2019. With our reseller activities, we're procuring third-party hardware, software, and services for our customers and then using this equipment and services as we perform integration services to deliver a completed solution to our customer.

Providing reseller services helps us drive additional integration business into our facility to improve utilization helps us diversify our customer base and has broadened the number of business relationships that we have. We do generate lower margins on reseller services than we do for core integration and maintenance services. So growth in reseller revenues will result in lower gross profit margins.

However, this revenue drives large incremental gross profit and increased operating profits. Despite this growth in our reseller business, revenue in our traditional integration and facilities business units decreased by $102,000 in the second quarter and by $918,000 on a year-to-date basis, compared to the same periods of 2019.

This was due to the inability for some customers to accept delivery of the product and delayed us performing the corresponding services. We continue to see a negative impact on our business from the COVID-19 pandemic in different ways.

Our facilities business revenues were down 24% compared to the second quarter of 2019 and down 26% on a year-to-date basis compared to 2019 as travel and customer site access restrictions resulted in deferral deployments of modular data centers. Our deployment revenues are down 41% from 2019 as a direct result of these delays, due to restrictions that prevented us from providing deployment services.

Revenues in our traditional systems integration business increased by $380,000 or 25%, compared to the second quarter of 2019. Although this business has been impacted, in particular, by supply chain challenges, where our customers have been unable to deliver equipment to us to perform our integration and reseller services, and approximately $8 million of reseller services were deferred into the third quarter as a result of these challenges.

We've continued to operate our production facilities through the COVID-19 pandemic and incurred much higher operating costs in labor and other services, as we operate in a socially distanced way that protects our workforce and allows us to meet our customer needs. We also incurred additional costs as we onboarded new business from an OEM partner during the quarter. That was the main factor in the increase in revenue and costs.

Our overall level of operating expenses is higher than in 2019, as we added additional staff to prepare for growth in our business and assist the added activity of our sales team to drive new customer acquisition. We believe we've made significant progress in the development of new customer opportunities, despite delays related to the changes in business activity due to the pandemic.

We've begun to see some of the COVID impacts reversing in the third quarter, as most businesses have stable operations with new protocols. We have begun more MDC deployments in July after a number of delays and the supply chain challenges we were experiencing during the second quarter have started to be overcome.

We anticipate that our third-quarter revenues will increase substantially from the second-quarter levels and that our operating results will return to profit in an amount that will offset the losses we incurred in the second quarter.

We did benefit in April from the receipt of almost $890,000 in loan proceeds from the Small Business Administration Payroll Protection Program of the Coronavirus Aid Relief and Economic Security Act of 2020, also known as the CARES Act. We intend to apply to the lender for forgiveness of some or all of this loan amount in the third quarter.

With the amount, which may be forgiven equal to the sum of our 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. There is no guarantee, however, that we will receive forgiveness for any fixed amount of the loan proceeds received.

So let me provide some more details into the second-quarter 2020 results. Our revenue for the second quarter of 2020 was $6.5 million. This compares to $3.5 million in the second quarter of 2019 and $10.7 million in the first quarter of 2020. Also, that particular quarter -- first quarter included $6.8 million of reseller revenues.

For the second quarter of 2020, revenues included $3 million from reseller activities. Our facilities business was down $0.5 million or 24% compared to the second quarter of 2019 as travel and site restrictions imposed due to the COVID-19 pandemic because the number of customer deployments of modular data centers to be delayed. The systems integration business was up 227% or $3.4 million compared to the second quarter of 2019.

As the 2020 number included $3 million from IT reseller services, which we were offering in the second quarter of 2019. Absent the reseller business, our systems integration business was still up $381,000 or 25% compared to the second quarter 2019, mainly due to additional revenues from onboarding a new business unit from one of our OEM partners.

On a year-to-date basis, our revenues of $17.1 million are up $8.9 million or 108% from the $8.2 million we had in the first half of 2019. And this increase reflects $9.8 million of reseller services in 2020, offset by a $1.3 million or 26% decrease in our facilities revenue, which was due to the inability to provide the deployment services as those travel and customer restrictions emanating from the COVID-19 pandemic prevented us from completing services.

As I said, supply chain challenges in our system integration business also make that approximately $8 million of reseller revenues have moved from the second quarter into the third quarter of 2020, which had a direct impact on our second level -- second-quarter level of profitability.

The increasing volume of business and the stability of volume in the systems integration business is key to us sustaining and increasing operating profits of the company because of the large fixed overhead associated with operating the integration facility.

As we witnessed in 2019 and this year, the volumes can fluctuate significantly on a quarterly basis due to changes in customer demand, including demand for modular data centers from component availability and from other factors.

So we are actively seeking to add more customers and services to increase 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 hope to accomplish this growth.

Our gross margin -- profit margin of 12% for the quarter was down significantly from 41% in second-quarter 2019. The impact of our reseller services and our margin is the main factor that causes this year-over-year decrease.

Margins in our core business did decrease compared to the previous year because of higher operating costs in our integration facility during the quarter. We incurred significantly higher labor and safety costs to safely operate our facilities during the pandemic as well as higher facility costs as we added temporarily additional storage and workspace to continue upgrading. As we've gained more experience operating through the pandemic, we have seen these costs that's come down and returned to more traditional levels.

Our selling, general, and administrative expenses during the second quarter of 2020 were $1.7 million were up $266,000 or 18% compared to the $1.5 million we had in the second-quarter 2019. Our headcount and related expenses were higher than the prior year as we invested in additional personnel to drive new customer acquisitions and to improve our sales operations that will benefit future periods.

We had higher facility costs but experienced lower travel expenses because of the pandemic. Year to date, the operating expenses of $3.6 million, a $558,000 or 18% higher than the $3 million we had in the first half of 2019. The primary reason for this increase was the additional personnel related expenses compared to the prior year.

After the above, we recorded an operating loss of $949,000 in the second quarter of 2020 compared to an operating profit of $2,000 in the second quarter of 2019 and operating loss of $277,000 in the first quarter of 2020. After interest and tax costs, we had a net loss of $1,042,000 or $0.06 a share in the second quarter of 2020 compared to a net loss of $94,000 or $0.01 per share in the second quarter of 2019.

Year-to-date basis, our net loss in 2020 is $1.4 million or $0.08 a share, which compared to a net loss of $125,000 or $0.01 per share in the first half of 2019. Our adjusted EBITDA, which excludes interest taxes, depreciation, amortization, and stock-based compensation, was a loss of $724,000 in the second quarter of 2020, our largest EBITDA loss in some time.

This compares to an adjusted EBITDA profit of $168,000 in the second quarter of 2019. And year to date, our adjusted EBITDA loss of $773,000 compares to an adjusted EBITDA profit of $370,000 in the first half of 2019.

Then turning to the balance sheet, despite the poor second-quarter operating performance, our balance sheet position remains strong. The timing of events around their reseller transactions definitely has a material impact on our balance sheet. And the increases in receivables, inventories, and accounts payable since the first quarter rolled to the timing of reseller transactions, including the ones that moved into the third quarter from the second quarter.

Compared to our year-end balance sheet, our total cash position is down about $1.5 million, and we ended the quarter with $7.1 million of cash and equivalents on hand. This was up from $5.3 million at the end of the first quarter. To date, we've been able to structure the reseller transactions in such a way as to minimize their overall impact on our liquidity by using trade creditors 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 within a particular reporting period. We currently believe we have adequate trade credit to continue financing our reseller activities as we grow this business during 2020.

It is possible as this business evolves and as we introduce new partners and customers that we may need access to additional credit to continue growing this business. Our net working capital position decreased by $1.6 million compared to the end of 2019, which is primarily due to our net losses and from investments we made in the integration facility in 2020.

And we obviously -- we helped finance those losses through the loan proceeds we received from the PPP program in April. And we intend to apply for forgiveness of this loan amount in the third quarter. But of course, there can be no guarantee we will receive forgiveness for any or all of the loan proceeds.

With that, I will now hand the call over to Anthony for his comments on the second quarter and how we see the business going forward into 2020. Thanks, Anthony.

All right. Thank you, John. As John explained, and we've put it in our press release, our second quarter was impacted by business factors that are attributable to the COVID-19 pandemic that affected customer deliveries and deployments. We continue to see field deployments of MDCs be delayed as travel and other customer specific site restrictions resulted in delays of deployment projects.

And therefore, deployment revenues were down compared to the first half of 2019. Fortunately, beginning in July, we have seen most of these restrictions get sorted out with appropriate safety measures. And we have begun to do more deployments. This will result in an improvement in our third-quarter facilities revenue from both the facilities portion of the business and integration.

We also experienced supply chain challenges that prevented us from recording about $8 million in reseller revenues in the second quarter. These transactions have now occurred in July. And as a result, we will see substantial improvement in reseller as well as core services revenues in the third quarter.

Assuming that we can deliver what we expect in the third quarter, our revenue could approach $20 million and result in adjusted EBITDA near $1 million, excluding any benefit from the PPP loan forgiveness that John mentioned.

As we look beyond Q3, we are hesitant to provide guidance until we better understand the effects of the pandemic and further reopening of the economy. That being said, there are a number of opportunities in the pipeline that could significantly diversify our customer base.

We continue to work to develop these new opportunities as soon as possible, but the current environment with the virus has greater delayed timing as many new customers were focused on adapting to the virus and involved deeply in their own internal challenges. As most businesses have adapted, we are beginning to see progress accelerate.

While we caution on the limited visibility we have, we are seeing and believe that the delivery of technology infrastructure will continue to be in strong demand for the foreseeable future. We believe the services solutions we provide continue to resonate in the market. The infrastructure we have can continue to be scaled within our existing customers as well as new customer opportunities.

And we are seeing a number of OEMs come to us to deliver solutions as data centers are attempting to move people and service work outside their facilities. It only strengthens and accelerates our opportunities for further growth as we present a compelling model for OEM delivery. I think John has covered the rest in some detail.

Therefore, Darrell, we'll now open the call up for questions.

(Operator Instructions) Edward Gilmore, Little Grapevine.

Hey, thank you. Hey, Anthony and John, thanks for taking my call. Just a quick question for you, I was wondering if you could talk about your efforts to focus more on the maintenance and integration services versus some of the lower-margin project management and design projects that you have been doing.

Yes, I wouldn't characterize those as some of those as lower margin or mix margin. Our maintenance business is a good margin business. Our deployment of solutions tends to be at higher dollars, but little bit lower margin. We end up with a strong mix between deployments and services and ongoing maintenance.

So on the front end, as you mentioned, we -- a lot of what we do on the front end in regard to project management and consultative services on working on new deals that tends to come as part of our sales process. Generally, we tried to get compensated for most of that as we move through. But there are a number of things with existing customers that we provide them as they have potential deals on the table that we work with them to solve.

So in a sense, it's the cost of customer acquisition that we project in program acquisition that we work on. So as we look forward, I think that we're going to continue to see that overall mix.

And I think we -- the biggest push for us is not only to continue to harvest within our largest OEM, but also add other OEMs, some of which can be as significant as the current largest OEM that we have. So those are the opportunities we're playing out to trying to hit the back half of 2020 as well as into 2021 and beyond.

Okay. Thanks, Anthony. And just one more question, if I could.

Sure. Of course.

In light of all the pandemic in some businesses doing more virtual services, are there any kind of services or solutions that you think might be coming up for TSSI to be able to provide virtually to some of the customers?

Yes. So there's several things in that area. One is that we believe that the push to remove some of the, I'll call it integration work and services that were happening in the field into a second touch factory have been on our radar screen and what we've been pushing for the greater part of a year or so, what has happened is the pandemic has only accelerated that.

So -- and what I mean by that is that the most businesses and most data centers, et cetera, want to get the work out of the data center and into a second facility, which will do all of the validation configuration, et cetera.

So when -- so it's a very limited time of third parties arriving at the data center and plugging in additional capabilities. So we've seen a great acceleration in the team that we were already working on anyway because we believed it was a more efficient delivery mechanism.

The second part of your question is we're also looking at how do we use some of the tools out there in the way? I won't completely use artificial intelligence but in a way where we can take personnel that are used in the servicing of the equipment and limit the amount of travel they have by using tools where they have the on-site person instead of being supplemented by one or two or three other people can do some of that virtually.

So we again, on the theme of limiting the number of people in the data centers, limiting number of people in the field, but being able to have a cockpit that can see everything they're doing and help direct them. And so we're in the initial stages of implementing some of those things, which we believe ultimately will put us in a good position going forward as to how to more efficiently deliver the same service level without having people get on airplanes and travel to locations, so which will ultimately be much more efficient.

And I think most of us are experiencing some level of benefit, albeit at some detriment within the current environment. In that we're finding like Zoom meetings or Microsoft Team meetings or Google meetings, and less travel being somewhat more efficient in a number of areas.

Obviously, there's nothing like the human touch, but at the same time, the scalability opportunities that are in front of us as everybody embraces the new, what I call the new normal. We're not going to have as many people on planes and as many people going to specific locations to actually deliver the service, but we need to be more virtual in how we how we can facilitate that.

So again, that's an area that we're in the process of developing tools and things for our employees to be able to use. That will enhance our overall capabilities, and I think position us much better in the new marketplace as we move forward.

Okay. Thank you and appreciate you taking my call.

Of course.

(Operator Instructions)

Okay, Darrell, give it a few minutes and see if anybody else has a question.

All right (Operator Instructions)

Okay. It appears we did a fairly good job of explaining the situation. So I appreciate that all of you joining the call. And if there's further questions you think of afterwards, certainly reach out to John or myself. And we look forward to a strong third quarter and talking to you late fall. Thank you.

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