TSS Inc (TSSI) 2020 Q4 法說會逐字稿

Welcome to the TSS fourth quarter and fiscal 2020 earnings call. My name is Anna, 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, Mr. Penver, you may begin.

Thank you, Anna. Good afternoon, everyone. Thank you for joining us on TSS's conference call to discuss our fourth quarter and our fiscal 2020 financial results. I'm John Penver, Chief Financial Officer of 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 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, March 29, 2021. TSS expressly disclaims any obligation to update, amend and 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 this 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 Securities and Exchange Commission.

In addition, we will be referring to non-GAAP financial measures and a reconciliation of the differences between those 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 fourth quarter and our fiscal 2020 results. And I'll turn the call over to Anthony for his comments on the businesses and the changes we see coming. Now earlier today, we released a press release announcing our financial results for the fourth quarter in our fiscal 2020, and a copy of that release will be made available on our website at www.tssiusa.com.

Overall, I think we can say that TSS has weathered 2020 and the pandemic reasonably well and certainly better than many others. We were able to achieve year-over-year revenue growth of 37% and increase our annual EBITDA, despite the many challenges that 2020 provided to us.

Our results could fluctuate quarterly quite a bit, a trend that we hope to improve on. And there were both positive and negative factors influencing our business throughout 2020, none bigger than the COVID-19 pandemic.

We had to adjust our business model and incur additional costs to continue operating our integration facility safely through the pandemic. And travel and customer restrictions as well as supply chain interruptions all impacted our ability to provide goods and services to our customers at different points during the year. We were able to take advantage of government financial assistance and benefited from a PPP loan in the second quarter of 2020 that helped to defray some of the additional costs that we'd incurred.

Our fourth quarter results continued with the improved performance in the third quarter. And we again recorded positive EBITDA and net income this quarter. We also recorded $996,000 gain on the forgiveness of our PPP loan during the fourth quarter that also favorably impacted our financial results.

The primary ongoing impact of the COVID pandemic has been around the uncertainty of our sales outlook. Many of our customers still have site and travel restrictions that impact our ability to deliver services. And their own uncertain outlooks have negatively impacted demand for our maintenance and integration services.

We still are experiencing some supply chain inefficiencies and delays that are attributable to the pandemic. But we've had more time to manage the impact of the pandemic on our business and to reduce the incremental cost of operating under a pandemic while continuing to deliver and deploy services for our clients.

Now, our reseller and procurement services business fluctuates on a quarterly basis and the timing of these transactions can result in large quarterly fluctuations particularly in reported revenue. So the swings in our quarterly revenue in 2020 are all largely attributable to the timing of these transactions.

The volume of reseller transactions was down in Q4 compared to Q3 and even in Q4 of 2019. But when looked at over the calendar year, our reseller and procurement revenues were actually up by 68% or $11.6 million from [$19.5] in 2019 and contributed most of the $12.3 million increase in revenue that we had in 2020 compared to 2019.

Our core integration and facility management services saw a revenue increase of $0.7 million or 4% in 2020, despite the impact of the pandemic. We were able to replace the modular data center deployment business with upgrade and refresh projects as our customers get older MDCs in the field and deferred the replacement of these modular units.

Our integration business also saw higher volumes compared to 2019 as our largest customer managed production challenges during 2020 and redirected additional business to us. This helped offset a decrease in integration services related to the MDC business. But our fourth quarter volume in the integration facility did decrease from the level of Q3 due to lower demand from our OEM partner.

Overall, our facilities business revenues decreased by 3% in 2020, primarily reflecting effects of the pandemic with the travel and customer site restrictions impacting on our ability to do on-site deployment for our customers. A number of projects were deferred multiple times, and we anticipate that in 2021, we'll be able to recapture some of this business and grow our facilities business unit revenues compared to 2020.

We've continued to operate our production facilities through the COVID-19 pandemic and incurred higher operating costs in labor and other services as we adapted to operate in a socially distanced way that both protected our workforce and allowed us to meet our customer needs.

We also incurred additional costs in 2020 as we onboarded new business from our OEM partner as would be expected. And we've been working to reduce these incremental costs as we get experience with our new operating normal.

Our overall level of operating expenses were higher in 2020 than 2019 as we added additional staff in 2020 to deal with the pandemic, to prepare for growth in the business, and to assist the added activity of our sales team to drive new customer acquisitions. We believe we've made significant progress in the development of new customer opportunities despite delays related to the change in business activity due to the pandemic. And we also took steps to our operating expenses towards the end of 2020.

Now, we ended the year with over $19 million in cash and equivalents on hand. We were able to generate over $10 million of positive cash flow during Q4 from the timing of reseller transactions in December where we've been paid for providing procurement services but not yet paid the related vendors. So, there's a substantial increase in our level of accounts payable at year end compared to the prior quarter that reflects the other side of those transactions.

Now as we pay those vendors in 2021, you can expect to see both accounts payable and cash decrease in Q1 as these reversals occur. Otherwise, there was not a lot of significant changes in the balance sheet compared to the prior quarter, and we continue to generate cash.

So, let me give me a few more details on the fourth quarter and our fiscal results. So, our revenues for the fourth quarter were $7.2 million, this compared to $20.8 million in the third quarter of 2020 and $20.4 million in the fourth quarter of 2019.

Our reseller revenues decreased by $12.7 million from the third quarter at $13.8 million compared to the fourth quarter of 2019, which is the majority of the fluctuation in quarterly revenues. And as I indicated just earlier, the timing and volume of these reseller and procurement transactions continues to drive large fluctuations in our quarterly revenues and our gross profit margins. And our medium to longer term goal will be to drive consistency of this revenue stream.

Our facilities business was $1.2 million or 68% higher than the fourth quarter of 2019, and it was actually up $0.6 million or 26% from the third quarter of 2019 -- sorry, third quarter of 2020, driven by several large refresh projects on some older MDCs that we were able to complete in Q4.

We do anticipate quarterly fluctuations in the facility business in 2021. But overall, anticipate this business will continue to grow as our customers continue to replace older deployed modular units and continue to refresh and upgrade part of their MDC base.

Integration revenues did decrease in the fourth quarter by $1.4 million compared to the third quarter as our OEM customer managed to restructure of a number of business units, including some that utilize our integration services. And our integration revenues were down by $0.5 million compared to the fourth quarter of 2019.

For the year, we reported revenues of $45.1 million. This is an increase of 37% or $12.3 million compared to the $32.8 million that we recorded in 2019. $11.6 million of this increase was from the growth in the reseller and procurement services and $0.7 million from was attributable to the facility and integration services.

As we saw in the fourth quarter with a decrease in our systems integration business, increasing and maintaining the volume of business and the stability of volume in our systems integration business is important to us sustaining and increasing operating profits for the company. And we witnessed this in both 2020 and 2019, volumes can fluctuate significantly on a quarterly basis due to changes in customer demand, including demand for modular data centers due to component availability and other factors.

Our gross profit margin of 23% during the fourth quarter was up significantly from 10% in the fourth quarter of 2019, up from 13% in the third quarter of 2020. The impact of our reseller service on our margin is the main factor that caused this year-over-year increase. The margins on our core business decreased to 33% compared to 38% in the prior year.

We incurred higher labor and safety costs to safely operate facility during the pandemic as well as higher facility costs as we temporarily added additional storage and workspace in our second facility. And as we've gained more experience operating through the pandemic, we're starting to see these costs come down and return to more traditional levels.

Our selling, general and administrative expenses during the fourth quarter were $1.7 million. That's up 223,000 or 15% compared to the $1.4 million in the fourth quarter of 2019. Our headcount related expenses were higher than the prior year as we invested in personnel to drive customer acquisition, improve our sales operations that will benefit future periods.

We had higher facility costs. We experienced lower travel expenses because of the pandemic. And year-to-date, our selling general administrative expenses of $6.7 million were $0.9 million or 16% higher than the $5.8 million we had in 2019.

After the above, we recorded an operating loss of $140,000 in the fourth quarter of 2020, this compared to an operating profit of $966,000 in the third quarter, and operating profit of $440,000 in the fourth quarter of 2019.

As I mentioned earlier, during the fourth quarter, we were notified by the Small Business Administration that our request for forgiveness of our payroll protection program loan had been approved. We took out this loan in the second quarter of 2020 after the SBA had provided this program to help companies deal with the impact of the COVID pandemic. Forgiveness of this loan resulted in us recording an $896,000 gain on debt forgiveness during the quarter.

After the loan forgiveness, interest, and tax costs, we had net income of $637,000 or $0.4 a share in the fourth quarter of 2020 compared to net income of $346,000 or $0.2 a share in the fourth quarter of 2019. On a year-to-date basis, our net income in 2020 was $79,000 or $0.00 a share, that's compared to net income of $126,000 or $0.1 per share in 2019.

Now our adjusted EBITDA, which excludes interest taxes, depreciation, amortization, and stock-based compensation was a profit of $1.047 million in the fourth quarter and this compared to an adjusted EBITDA of $690,000 in the fourth quarter of 2019.

For the full fiscal year in 2020, our adjusted EBITDA profit of $1.417 million compares to a 2019 adjusted EBITDA profit of $1.208 million. So, an increase of 17% from the prior year.

Now turning to the balance sheet. Our balance sheet position remains strong following strong operating performance in the second half of 2020. The timing of events around the reseller transactions definitely has had a material impact on the balance sheet. And the increases in our cash balances and changes in accounts payables to last quarter are due to the timing of those reseller transactions that I just mentioned earlier, where we're took in $10 million in cash in December from reseller transactions but have not yet paid those vendors.

So compared to our prior year-end balance sheet, our total cash position is up over $10.3 million, and we ended the quarter with $19 million of cash and equivalents on hand. This is up $9.5 million from the end of the third quarter. And of course, these transactions are going to reverse in the first quarter as we pay the vendors for those reseller transactions. So, you should expect to see both our cash and our accounts payable decrease by a similar amount during the first quarter of 2021.

To date, we've been able to structure our 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 at the end of a particular reporting period, just like we did at the end of 2020. And we currently believe, we've got adequate trade credit to continue to finance our reseller activities as we grow this business during 2021 and beyond.

And net working capital position is up by approximately $0.4 million since the end of 2019, reflecting our operating performance. And overall, we retain a healthy balance sheet. We do evaluate alternative sources of funding from time to time that might be necessary to help us continue to grow the reseller business. And our core business has different customer opportunities present themselves to us and as we evaluate other strategic initiatives.

After a lot of talking, so with that, I'll hand the call over to Anthony for some comments now on 2020 and how we see the business going forward into '21. Thanks, Anthony.

Oh. Thank you, John. Thank you all for joining the call. As in the past, John has covered a lot of ground regarding our results. I'll focus on how we continue to drive further improvement. We believe our opportunities are there as digital transformation continues.

While we're not a technology company per se, our services are directly aligned with deploying, delivering, and maintaining technology infrastructure. And our internal capabilities, leverage technology to enable us to deliver our services in an efficient manner.

In looking at 2020, it was a year that hopefully we'll never all see again. While we were fortunate to have weathered it and the many challenges it introduced, we believe that as things normalize towards what we call the new normal, we'll be in a great position to take advantage of the increasing requirements for data center and edge build-out. The world is going more digital, and we're positioned to support the deployment and maintenance of that infrastructure.

While nothing is ever perfect or linear, so as we look at our business, we continue to focus on evolving the company for changes towards delivering full end-to-end solutions, whether delivered by our internal staff or through partners we manage.

We anticipate 2021 as being a year, we can position the resources we have while continuing to explore inorganic opportunities that could accelerate our growth. It is a different environment to develop opportunities right now. However, we believe we can continue to grow as our addressable market is very large. In our view, we have a solid platform and infrastructure to layer many evolving services onto that platform, whether organically or inorganically.

We do focus on delivering profitability each and every day while working on expanding our customer base and service offerings. While it was more difficult to diversify our customer base in 2020 due to the challenges of the pandemic, we end the related personal interactions. We do see an uptrend of potential new relationships as we all adjust to the macro environment.

We feel we're on track to produce similar results to 2020 without the pain of the COVID transition issues. And excluding the benefit of the PPP forgiveness. We will do this while investigating and building our business for future growth and acceleration of profitability during the decade. While I say that, we are we also have some major potential opportunities that can significantly change our base case to the upside.

With that, I'll open the call to questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

And we have a question from [Roger Nedrow]. Please go ahead.

Yeah. Looks like a fairly decent report and certainly have some good things to look forward to this year. In regard to the PPP, as we get the 890-some-odd thousand dollars forgiven this year. Didn't they do a second round of the PPP? And if so, did you apply for it?

John, you want to grab that one

Yeah, I'll grab that. The government did introduce a second round of PPP loans in 2021. However, they excluded company -- public companies from that program. So, we're ineligible to participate in it -- in that program.

Okay, thanks.

No problems.

(Operator Instructions) And we have no further questions at this time. I will now turn the call over to Mr. Angelini for closing remarks.

Okay. Thank you. We appreciate everybody's attention to the company during the past year. Obviously interesting year for everyone. But we continue to work on growing the business and appreciate all your support. Hopefully we'll hear from both of you or from all of you in the next coming weeks as we report the first quarter. Thank you.

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