TSS Inc (TSSI) 2021 Q3 法說會逐字稿

Welcome to the TSS third-quarter 2021 earnings call. My name is Hilda, and I'll be your operator for today. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Mr. John Penver. Sir, you may begin.

Thank you, Hilda. Good afternoon, everyone. Thank you for joining us on TSS' conference call to discuss our third-quarter 2021 financial results. I'm John Penver, Chief Financial Officer for TSS. Joining me today on the call is Anthony Angelini, the President and Chief Executive Officer of TSS.

As we begin the call, I'd 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, November 15, 2021.

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 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 will begin the call with a review of our third quarter of 2021 results, and then I'll turn the call over to Anthony for some comments on the business and changes we see coming.

Earlier today, we released a press release announcing our financial results for the third quarter of 2021. A copy of that release will be made available on our website at www.tssiusa.com.

I am pleased to say that our third quarter showed improved results compared to the first two quarters of 2021. We recorded operating income and net income and $476,000 of adjusted EBITDA in the third quarter, pushing our year-to-date adjusted EBITDA to a positive number. We indicated that we expected our third quarter to show improved results on our last earnings call.

The level of reseller and procurement revenues still fluctuates materially on a quarterly basis and can cause big differences in our reported revenues year over year. Our reported revenue of $4.6 million in this third quarter reflects this trend as our third quarter had $0.7 million of reseller revenues compared to $15.8 million of reseller revenues in the third quarter of 2020. So the change in reseller revenues drove the majority of the decrease in our revenue compared to the third quarter of 2020.

Our fourth quarter will show an increase in reseller revenues compared to Q3 and could top $10 million during the fourth quarter based on orders received and our pipeline of potential transactions. The exact timing of these transactions is mostly dictated by the end user and supply chain availability; therefore, results are beyond our control. This does make it difficult for us to accurately predict when these transactions will occur.

Aside from our reseller business, we've continued to see continuing fluctuations around our other business lines that have been impacted by supply chain shortages and restricted customer access, both directly attributable to the ongoing impacts of the COVID-19 pandemic. The delay in receipt of inventory has directly delayed many projects, including deployment of modular data centers as well as many of our integration projects, causing us to defer revenue into future quarters. We anticipate that these supply chain interruptions will continue for the remainder of 2021 and will negatively impact our initial projections for the fourth quarter.

We expect the adjusted EBITDA positive in the fourth quarter. Our backlog of projects continues to grow due to these supply chain issues, and we expect the first half of 2022 to show stronger financial results as we are able to complete many of these projects. To put some perspective around this, we have deferred over 5 million of modular data center deployments into 2022 as we await delivery of critical components. This will affect us in 2021, but they will occur in 2022.

Despite the lower revenue levels compared to the third quarter of 2020, we've been able to continue to take operating costs out of our integration business. Our integration revenues were down by $1.1 million or 44% compared to the third quarter of 2020, but we were able to reduce the direct cost of operating this business by $1.1 million compared to the third quarter of 2020. Meaning that our contribution from this business was only 1% lower despite the reduction in revenue.

During 2020, we incurred a lot of additional expenses as we adapted to operating our integration business during the initial stages of the COVID pandemic in a safe and protective manner. We added additional staff so that we could socially distance employees, added a segment facility and second shift, and incurred direct costs due to the pandemic. With the benefit of time and experience, we are now able to operate our integration facility with a much lower level of operating costs, and we have largely eliminated these incremental costs.

As we've said, our reseller transactions generate lower profit margins than our integration and facilities business. So when reseller transactions make up a large portion of our total revenues, you will see our gross profit margin decrease. Conversely, when reseller transactions comprise a smaller part of our total revenues, you would expect our gross profit margin to increase.

Our reseller transactions were 76% of our total revenue in the third quarter of 2020 but were only 15% of our total revenue in the third quarter of 2021. This decrease in reseller revenues as a percentage of our total revenue, along with the improved cost profile of our integration business, helped drive our gross profit margin up to 42% in the third quarter of 2021 compared to a gross profit margin of 13% in the third quarter of 2020.

Our actual gross profit was down $852,000 compared to the third quarter of 2020 due to the lower absolute revenue numbers. Our operating costs were approximately 108,000 or 6% lower than the third quarter of 2020, resulting in our operating income being approximately $700,000 lower than the third quarter of 2020. The operating income was an improvement of $580,000 compared to the operating loss we had in the second quarter of 2021.

As I indicated earlier, our facilities group will have a great impact in 2022 due to the component availability preventing us from completing the deployments of the modular data centers or the MDCs. In the first part of 2020, we endured physical site restrictions due to COVID that prevented us from accessing customer locations. Those restrictions finally began lifting in the middle of this year but have been replaced in the third quarter by supply chain challenges. Combining these factors have resulted in our deployment revenues decreasing by over $1.8 million or 65% compared to the first 3 quarters of 2020.

As I said, we have also over $5 million of MDC deployment projects moving to financial year 2022 as we await the components needed to complete the deployments. Our customers have continued to update and refresh or repair their existing MDCs, and revenues from these activities was up by $1.6 million or 414% during the first-three quarters of 2021, offsetting some of the deferrals of the projects I previously mentioned. Based on current anticipated component delivery schedules, we would expect to see a large rebound in our deployment revenues in the first and second quarter of 2022.

Our integration revenues were down 44% compared to the third quarter of 2020 due to elements of supply chain shortages, reseller revenue, and project timing. We've been able to manage our cost structure to better align with current demand and visibility, and we're seeing improvement in product and service mix as we work through these changes. And we anticipate our level of integration services will improve beginning in the first quarter of 2022.

Changes in our balance sheet since we last reported in June were predominantly the result of upcoming fourth-quarter reseller transactions. Our inventories increased by $3.5 million. We collected $4.5 million in cash ahead of completing the reseller transactions. And our accounts payable increased by $8 million compared to June.

The other major change since Q2 is that our long-term notes payable are now classified as a current liability as they mature in July of 2022, i.e., less than 12 months away.

So let me give you a few more details on the third-quarter results. Our revenue for the third quarter of 2021 was $4.6 million. This compared to $20.8 million in the third quarter of 2020 and revenue of $3.1 million in the second quarter of 2021.

Changes in the reseller revenues are primarily responsible to this fluctuation in quarterly revenues. Our reseller revenues increased by $0.6 million from the second quarter, but they were $15.2 million lower compared to the third quarter of 2020.

As I indicated earlier, the timing environment of these resell and procurement transactions is up and beyond our control, and this continues to drive the large fluctuations in our quarterly revenues. And our medium- to longer-term goal will be to drive more consistency from this revenue stream.

Our facilities business generated $2.5 million of revenue during the third quarter of 2021. This was 4% higher than the third quarter of 2020 and was up by $858,000 or 53% compared to the second quarter of 2021.

Year to date, the facilities revenue of $5.7 million is actually $356,000 or 6% lower than for the same period of 2020. This decrease is due to lower deployments of the modular data centers in 2021 as the ongoing COVID restrictions and, more recently, supply chain challenges have impacted our ability to deliver services in the field. We anticipate higher quarterly revenues from the facility business in the first half of 2022 as the supply chain issues begin to resolve, and we're able to deploy new MDCs.

Our integration revenues did increase marginally by 7% compared to the second quarter of 2021 but were down by 44% or $1.1 million compared to the third quarter of 2020. Our year-to-date integration revenues of $4.2 million are down by 32% or $2 million through the first-nine months of 2021 compared to the same period of 2020.

As I've mentioned earlier, we're seeing changes in product and service mix and supply chain delays. And as we work through these changes, we anticipate our level of integration services will increase during the fourth quarter and into 2022.

The gross profit margin was 42% during the quarter, up significantly from 13% in the third quarter of 2020. The two factors driving this improvement in our gross profit margin. The first is the lower proportion of reseller services, which do have a lower margin than our facilities integration revenues. The second factor improving our margins is a reduction in direct costs of operating the integration facility in 2021 compared to 2020.

Now the margins on our core facilities and integration business improved to 45% during the third quarter of 2021 compared to 31% in the third quarter of 2020. Year to date, the margin on our core facilities and integration business was 44%, which compared to 29% in the same period of 2020.

Our selling, general and administrative expenses during the quarter were $1.6 million, down $108,000 or 6% compared to the $1.7 million we had in the third quarter of 2020. This decrease was primarily compensation expense related.

After all of the above comments, we had an operating income in the third quarter of 2021 of $228,000. This compares to operating income of $966,000 in the third quarter of 2020 on substantially higher revenue, and this compares to the operating loss of $351,000 that we had in the second quarter of 2021. On a year-to-date basis, our 2021 operating loss of $730,000 is actually $470,000 higher than the operating loss of $260,000 that we recorded in the first nine months of 2020.

After interest and tax costs, we had a net income of $123,000 or $0.01 per share in the third quarter compared to a net income of $850,000 or $0.05 a share in the third quarter of 2020. Year to- date, our 2021 net loss of just over $1 million or $0.06 a share was $474,000 higher than the net loss of $558,000 or $0.03 a share that we had in the first nine months of 2020.

Our adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and stock-based compensation, was a profit of $476,000 in the third quarter of 2021. This compares to an adjusted EBITDA profit of $1.142 million in the third quarter of 2020. Our year-to-date adjusted EBITDA is a profit of $36,000 in 2021 compared to an adjusted EBITDA income of $369,000 in the first nine months 2020.

Turning to the balance sheet. Our balance sheet position remains healthy. The timing of events around the reseller transactions definitely has a material impact on the balance sheet. And increase in our cash balances and the changes in our inventories and accounts payable since the end of the second quarter are primarily due to the timing of cash receipts and payments related to reseller transactions that will be completed during the fourth quarter.

During the second quarter of 2020, we did repay $400,000 of our long-term debt, early following an incentive from the lenders to make an early settlement. We continue to feel good about the strength of the balance sheet and are looking at ways to utilize it to assist us in growing future growth and cash flows.

So with that, I will hand the call now over to Anthony for his comments on the third quarter, and how we see the business moving forward. Anthony?

Thank you, John. Our third quarter produced good results, but not as much as we anticipated based on the order book we have. Obviously, a large impact is timing and delivery of components to complete these orders.

As John mentioned, our backlog of orders are very strong. The timing of getting the last items from multiple vendors is challenging as a single part can hold up the entire order. We do believe that things are easing somewhat and will improve throughout 2022.

The good news is demand is very high. And while monthly or quarterly timing may be off slightly, we are also able to manage our costs very well and believe we will see increasing improvement as the supply chain constraints ease.

We have several large initiatives underway with unique capabilities to integrate the solutions. These capabilities require significant capital investment to our facility, which our partner has agreed to pay for. This will further our overall capabilities for next-generation system integration and pave the way for further volume well into the future.

While we feel very good about our positioning and backlog, the timing over the next several months may be difficult to time specifically. We still believe we will end the year with revenue in the mid- to high-20 million range. Our mix will make it difficult to hit the $1 million of adjusted EBITDA for the year, as some of the higher-margin projects have shifted into early 2022 due to the supply chain issues we previously mentioned.

Strategically, we are making good progress on a number of very exciting opportunities and are hopeful we can bring them to fruition very soon. All in all, we feel very good about the company and where we are positioned and the opportunities in front of us.

With that, I'll open it to questions.

(Operator Instructions)

Maj Soueidan, GeoInvesting.

I know this environment has been navigating and maybe not a great kind of acquisitions. But I'm assuming with that mix, the competitors are having (inaudible) environment, and I was wondering if you see the opportunity there, which you might be able to capitalize on?

Maj, it was pretty hard to hear you. Could you try that again?

I'm sorry. Is that any better?

Yeah, that's way better.

Yeah. So basically, what I just asked about -- and I know previously that you had some acquisition plans potentially to start pursuing, but the environment has changed, somewhat maybe to make it a little harder.

But on the same side, on token, I'm sure your competitors are also having issues too. And I'm wondering if there's -- is there a way you can make an acquisition work maybe in this environment at a better price than you would have in the past?

Like I said in my comment, we're making some good progress on a number of exciting opportunities. And we think some of them can be -- we can bring them to fruition very soon.

I think we're closer than we've been in the past. And obviously, until something gets done, it's not done. But yeah, there's some exciting stuff that we're looking at and feel very good about.

Are you seeing some of your competitors having issues? I mean, maybe you're taking [business] away from them. Are you having maybe better success overseeing than they might be? You're going to like -- now you're getting new market share you think because of this?

Yeah. Again, part of our strategy is to continue to evolve the company forward and move to the next level of, as we call it, where the puck is going. And so the opportunities we're generally looking help us tie together a lot of what we do, but also help us bring life cycle management and address a lot of the trends that are taking place in the IT market towards more life cycle management.

(Operator Instructions) And at this moment, we show no further questions. I would like to hand the call over to Mr. Angelini.

Okay. Well, thank you all for attending. It's been an exciting year. Obviously, there's some near-term timing issues in regard to some of the supply chain challenges. But it hasn't affected our order book.

So we feel very strong. We have the largest backlog that we've had in a very, very long time. And as components get released and delivered, we feel very good finishing the fourth quarter and going into the first half of 2022. So I thank you all for attending, and appreciate your support of the company.

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