TSS Inc (TSSI) 2023 Q1 法說會逐字稿

Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the TSS first-quarter 2023 earnings conference call. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise. (Operator Instructions)

Thank you, and I will now turn the conference over to John Penver, Chief Financial Officer. You may begin.

Thank you, Abby. Good afternoon, everyone. Thank you for joining us on our conference call to discuss first-quarter 2023 financial results. I'm John Penver, the Chief Financial Officer for TSS, and joining me today on the call is Darryll Dewan, the President and Chief Executive Officer for 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, May 15, 2023. TSS expressly disclaims any obligation to update, amend, supplement or otherwise review any information or forward-looking statements made on this conference call 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, and a reconciliation of the differences between these measures with the most directly comparable financial measures calculated in accordance with GAAP is included in today's press release.

Darryl will kick off today's call with an overview; I'll provide some detail on our first-quarter 2023 results. And now, I'll turn the call over to Darryl to discuss our strategy and our direction going forward. Darryl?

Hey, John, thank you very much. Hello, everybody. Earlier today, we released a press release announcing our financial results for the first quarter of 2023. A copy of that release will be made available on our website at www.tssiusa.com.

Overall, we made great strides on our plan in Q1. Our plan can be summed up as: number one, operationally restructure our systems integration business, where we were in a loss-making position in the latter part of 2022, and we were not able to demonstrate to our key customer, our ability to scale that business. We talked about that in our Q4 earnings call, and we're going to continue to focus on as we go forward.

Number two, build out a high-level team. This will support our own ability to drive demand for our existing services. We rely heavily on a single, large OEM customer, and we must be selling directly to end customers and, in many cases, alongside our OEM partner.

Number three, develop capabilities to build our core strengths and open up new markets to drive significant long-term growth. Our first quarter results were largely in line with, although they were directly impacted by the slippage of two large reseller transactions, representing almost $600,000 in combined profit.

We have or expect to close those transactions in the second quarter. While not uncommon with larger deals, we need to develop more pipeline and cover for these types of situations, something we commented on in our Q4 earnings call and something that we continue to focus on.

During Q1, we made significant progress to lower the run rate of our labor costs and to improve overall efficiency in our systems integration business in particular. We've reduced our total headcount, including contract labor in this business by 25% since December 31, '22, and you will see the impact of this in our second quarter and beyond.

Todd Marrott, Senior Vice President of Operations has done a lot to improve the efficiency of our factory and to return this business to profitability. Compared to the first quarter of '22, revenues in this business were up 90% as our rack and stack in our fulfillment activities both increased from higher customer demand.

We have also made planned investments during this quarter. We hired an experienced sales leader to drive revenue growth and business growth in both our facilities management and our systems integration business. We are looking to expand our customer base and generate more leads for our services, and we expect over the next several quarters, you will see the benefits of these investments.

We anticipate that our second-quarter results will show a substantial increase in revenues and that we will return profitability. I'll dive into this further, but let me first turn it back to John to provide some financial detail. John?

Thanks, Darryll. As Darryll said, looking at the first quarter, the results were really impacted by several reseller transactions that we had expected to close during the first quarter. One deal has revenue of $7.4 million and has already shipped in the second quarter. The second is anticipated to close at any time.

These two transactions would have provided $600,000 of operating income and allowed us to have positive EBITDA in the first quarter. But these items moving into the second quarter, we should anticipate our revenue and profits to turnaround in the second quarter.

So let's look at the first quarter. Our total revenue for the first quarter of 2023 was $6.6 million. This compared to total revenue of $5.2 million in the first quarter of 2022 and compares to $10.9 million in total revenue in the fourth quarter of 2022. Increased revenue in our system integration business of $1.2 million was the primary driver of the growth compared to the first quarter of 2022.

Changes in the level of procurement and reseller revenue are the main driver of change compared to the fourth quarter of '22 as our reseller revenues decreased from $5.9 million or by $5.9 million. So that was $7.6 million in the fourth quarter of 2022 and $1.7 million in the first quarter of 2023.

Our facilities business, which includes our modular datacenter deployment and maintenance services generated $2.2 million of revenue during the first quarter of '23, and this was $0.2 million or 8% higher than such revenue in the first quarter of 2022. This was $1 million or 83% higher than the $1.2 million we had in our facilities business in the fourth quarter of 2022 as we completed a large MDC deployment during the first quarter after having no deployments during the fourth quarter of last year.

The most significant change in Q1 was in our systems integration from both revenue and operational perspectives. Revenues, as I said, were $2.6 million in the first quarter of 2022. So we've seen strong growth of 90% compared to the prior year and 24% compared to the preceding quarter. This growth was driven by substantial increase in our rack business and from the large fulfillment project that drove further revenue growth.

Our rack business has grown 80% compared to '22 -- 2022 due to strong demand from our OEM partner. We anticipate that our level of integration services will stay at similar levels in the second quarter and help drive strong revenue growth later in the year.

We've also restructured several processes within the business to improve labor efficiency, which is still our largest operating cost. The labor efficiency will be more visible in Q2, and our production schedule is still impacted by the availability of components needed in production, although these supply chain issues are not as severe as what we experienced in 2022.

Our reseller revenues of $1.7 million were the same as the level in the first quarter of 2022. As I said, they were down $5.9 million compared to the fourth quarter of 2022. The timing and volume of these resell and procurement transactions is often beyond our control.

During the first quarter of 2023, we had 31 reseller transactions, of which 25 are what we call agent transactions. There, we recognized GAAP revenue as the amount of our fees or commission that we have paid, and some of these agent transactions can be quite large.

The gross value of all the procurement and reseller transactions during the first quarter was $6.7 million. Put that into perspective, that compared to $34 million of gross transactions in the fourth quarter of 2022 and $10.2 million in the first quarter of 2022. But based on the accounting treatment of the agent transactions, we recorded $1.7 million in revenue during the quarter. We recommend investors focus on the gross profit generated by this business, which we'll also continue to report.

We financed most of these deals for a shorter period -- for a short period of time. Higher interest rates impact this business, and our interest expense associated with these transactions of $90,000 was down from $390,000 in the fourth quarter because of the lower gross value of the transactions that we financed. We increased our pricing for procurement services in the latter part of 2022 to account for the higher interest rates and to protect our earnings.

In total, a gross profit margin of 26% during the first quarter of 2023 was down from 32% in the first quarter of 2022, but it was up from 18% in the fourth quarter of 2022. Our gross profit margin is directly influenced by several factors, including the mix of revenues between systems integration, facilities, and our reseller and our accounting of the reseller revenues.

In Q1 '23, reseller revenues were 26% of our total revenue compared to 34% of total revenues in the first quarter of 2022, and our reseller revenues have been skewed towards these agent transactions. And overall, the actual gross profits were up 1% compared to the first quarter of 2022 to $1.7 million.

Our selling, general, and administrative expenses during the quarter were $2.3 million. This was up $533,000 or 31% compared to the $1.7 million we had in the first quarter of 2022. It was down from the $2.6 million we had in the fourth quarter of 2022.

In the first quarter, we also recorded the remaining P&L impact of the leadership transaction -- transition that occurred in '22, including our CEO transition and the addition of Todd Marrott. These nonrecurring costs associated with these changes were approximately $180,000. We don't expect to incur any Q2 expenses relating to leadership transition.

After the above, we recorded an operating loss of $665,000 in the first quarter of '23. This compared to an operating loss of $173,000 in the first quarter of 2022 and an operating loss of $723,000 in the fourth quarter of 2022. After interest and tax costs, we had a net loss of $786,000 or $0.04 a share in the first quarter. This compared to a net loss of $308,000 or $0.02 a share in the first quarter of 2022.

Our adjusted EBITDA, which excludes interest taxes, depreciation, amortization, and stock-based compensation was a loss of $436,000 (sic - see press release " $438,000") in the first quarter of 2023, and that compared to an adjusted EBITDA profit of $43,000 for the first quarter of 2023.

Turning to the balance sheet, our balance sheet position remains healthy. The timing of events around our reseller transaction definitely has a material impact on the balance sheet. And the changes in our cash balances and the increases in deferred cost inventory or even payables since year end are primarily due to the timing of cash receipts and payments related to reseller transactions.

At the end of 2022, we were able to be paid by our customers for a number of reseller transactions, but we had yet to pay our vendors for those same projects. This resulted in an increase of approximately $14 million net cash and accounts payable into 2022, which reversed when we paid those vendors during this first quarter. This decrease in accounts payable was partially offset by a $7 million increase related to the procurement of inventory for a reseller transaction that we completed in April.

We continue to feel good about the strength of our balance sheet, and we're looking at ways to utilize it to assist us in growing future growth and cash flows. We believe we'll have adequate trade credit available to us to continue financing the reseller activities as we grow the business during 2023 and beyond.

Last week, we also renewed our revolving line of credit facility with Susser Bank. This $1.5 million line of credit was extended for another 12-month term and provides us with additional financial flexibility as we attempt to diversify our customer base.

With that, I'll give the call back over to Darryll for some comments and how we see the business evolving over the remainder of 2023. Thanks, Darryll.

Hey, John. Thank you. Okay. At the outset of the call today, I revisited our plan for TSS, and we're moving quickly on all fronts. Let me review that. Let's begin with operational efficiency in our systems integration business. We are balancing our labor force, and that's a real important thing to do because between the direct intent to lower our overall labor costs.

We have improved the process flow in our assembly lines to gain velocity and provide for scale. Our confidence to do this was based on the strength of our customer relationships and the visibility that we are getting into upcoming projects. We now get a better demand signal from our key customer, which helps us a lot.

We had good progress in Q1, and this will play out over the balance of 2023. In Q1, we increased our rack and stack business by 80% compared to the first quarter a year earlier, 80%. We are expecting to continue on this pace and even expand the business from current run rates.

We've also refocused on our competitive differentiation in the systems integration business. A key value to our customers is our flexibility and our capabilities in the combination of integration and deployment. There are other larger, lower-cost integrators, but we perform the more challenging programs often associated with new offerings from our OEM customers or those that require greater levels of customization and more white glove service.

As we invest in systems to run our factory more efficiently, we are mindful of the speed and flexibility that we have to onboard customer programs. This is a competitive differentiator. As we have honed in on this messaging, we are finding it resonates with our customers.

Second, we're building out our team with A players. I mentioned Todd earlier. In his first six months with us as a leader in our SI business, Todd has made an immediate impact. Beyond Todd, we hired an experienced revenue leader for our facilities management business. We announced today in a press release.

And in the five weeks ago, the conversations that I'm involved with now are significantly more exciting and business impacting, I believe, with our existing customer as well as new potential customers in this exciting space. We are maniacally focused on profitable growth in each of our business segments, in rack and stack integration fulfillment, in our resale business, and our facilities management business.

Our facilities management business has a lot of potential, and we are in active conversations with potential new partners to expand this business. As a reminder, this business deploys and maintains pre-integrated, configured modular data centers. Growing this business takes time, and it is important to note that it's a longer-term play compared to our integration and reseller services.

Component lead times continue to be long, and the process to sell and close modular data centers is complex. We have consulted with industry leaders on this business, and we feel we're on the right track. Hiring a demand gen leader is a critical step, and we're excited about this space.

We have a high level of urgency in the management team at TSS. And so while restructuring our systems integration business and bringing on new talent, we've begun to explore new market opportunities. It's early days, but we believe there's demand for high-value integration paired with deployment and maintenance of critical infrastructure.

So in summary, I joined TSS because I believe there's a significant opportunity to profitably grow our business. I said that in our last call, and I'm going to say it again because I believe it. I am more convinced about this business five months later.

We have tried today to carefully explain the higher Q4 and Q1 costs we experienced, and the steps we're taking to lower the run rate of those costs going forward. We are investing in the people, training, systems, and the sales demand gen to be able to profitably and substantially grow our company.

With that let me turn the call back over to John, and we will go over any questions you may have. John?

Okay. Actually, Abby, let's see if we have any questions from our listeners.

(Operator Instructions) Maj Soueidan, GeoInvesting.

Hey, Darryl. Thanks for the nice summary today. I just had a quick question again on in terms of the diversification away from your large OEM. I think you touched upon it, but I want to know more about like what the plans are to do that and how you're doing that and what kind of customers we could expect that could be maybe in the future?

Well, in particular, where you -- when you say diversification, are you asking in general or you're asking about in the area of our business, like on the systems integration, rack and stack, or --

Yeah. Look, I mean, I think -- yeah, I think the system integration is where I'm really thinking about there.

Okay. Well, Maj, I think you know that we take a demand signal from a customer, and we jump -- we do everything we can to delight that customer and their end user. We will continue to do that, and we'll do it with scale. So we have the growth capability within our facility now through the good work that Todd has been leading to do more volume of that work.

We're also expanding, and we've -- as I mentioned, we hired -- we've got a tremendous business development leader on the team now, who's going to help us with our federal focus and also our OEM relationship with that particular customer. We're seeing early results of demand increasing in our sales force, if you will -- our sales force implementation, how we track our pipeline, and that sector is doing better.

Unfortunately, it's never enough. No matter how good it is, it's never enough, but we're improving. I think the exciting area that we're really digging into that we have opportunity in is in the modular data center business, in our facilities management business. There's a lead time that is required to get out in front of building these units or deploying these units, lead for supply, if you will, and also lead time to the selling process.

And with the addition of Jim Olivier, who we announced earlier today as our leader in that space, I have absolutely no doubt that Jim and Jim Woodward and our team teaming up will expand on the conversations we've had just a few weeks. So let me give you a specific -- there are consulting companies that influence the end user customer on whether -- and what to buy in a modular data center. We haven't ever talked to those people; we are now talking to them.

That is an influence activity that I think hopefully will bear fruit. We are looking at having conversations with additional OEMs, and we've initiated some conversations there, which is exciting. And as we said many, many times, we need to go drive more demand beyond what we're doing today, and we've been receiving. Now, we've got to get the driver seat and make it happen.

So there are some areas in our business -- so we talked a little bit about the (technical difficulty) or a new biz dev leader. We're going to do more of that with our rack and stack business inside of our existing partner customer, help them sell. And we'll do a lot more exciting things with Jim's leadership teaming up with Jim Woodward in the facilities management business.

Hopefully, that gives you a little bit more insight.

(Operator Instructions) And with no further questions at this time, I would like to turn the call back to Mr. Darryll Dewan for closing remarks.

Yeah. To everybody here, I appreciate, we appreciate, the team appreciates your support, your interest in what we do. Being not profitable is not acceptable, period, end of story. But -- so to wrap this call up, I think we've got a plan. Hopefully, we've explained an update today where we're at with the plan.

Thank you for participating today. And certainly, we look forward to sharing our Q2 results with you in due order. So thank you, and keep safe.

Ladies and gentlemen, this concludes today's conference call, and we thank you for your participation. You may now disconnect.