TSS, Inc. (TSSI) Earnings Call Transcript & Summary

Welcome to the TSS First Quarter 2021 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. Thank you for joining us on TSS' conference call to discuss our first quarter 2021 financial results. I'm John Penver, the Chief Financial Officer for TSS. Joining me today on the call is Anthony Angelini, the President and Chief Executive of TSS. As we begin the call, I would like to remind everyone to take note of the cautionary language regarding forward-looking statements that is contained in the press release we issued today. That same language applies the 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 17, 2021. TSS expressly disclaims any obligation 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 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. So I'll begin the call with a review of our first quarter 2021 results, and then I'll turn the call over to Anthony for his comments on the business and changes we see coming. So earlier today, we issued a press release announcing our financial results for the first quarter of 2021, and a copy of that release will be made available on our website at www.tssiusa.com. It isn't that long since we reported our annual results from 6 weeks ago. I think it's fair to say we started 2021 a little slower than 2020. The level of reseller and procurement revenue still fluctuates materially quarterly and was down $4.6 million compared to the first quarter of 2020, explaining most of the decrease in our revenue numbers this year compared to the first quarter of 2020. We continue to build a large pipeline of potential procurement transactions. However, the exact timing of these transactions is mostly beyond our control, making it difficult for us to accurately predict when these transactions will occur. And we anticipate that we will continue to have large quarterly fluctuations with our procurement and reseller transactions during 2021. Overall, we have seen continuing fluctuations around most of our revenue streams. The lower gross profit from our reseller transactions as compared to the first quarter of 2020 flowed through to our bottom line and is the primary reason for the first quarter results being lower compared to the same period of 2021. Our facilities group is still operating with physical site restrictions due to the COVID-19 pandemic. Our Q1 2020 facility results were not significantly impacted by the pandemic, which really didn't start to impact us until the second quarter of 2020. Our facilities revenues were down 25% from the first quarter of 2020 due to a lower level of modular data center deployments. We are finally starting to see a rebound in field deployments. We expect that as the number of new modular data center deployments to increase over the next 3 quarters that our facilities business revenues for '21 -- of 2021 will show an increase over our 2020 level. Our integration revenues were down 17% compared to the first quarter of 2020 due to elements of lower demand and project timing. We have been able to adjust our cost structure to better align with current demand and visibility. We've been able to eliminate much of the incremental cost that we incurred during 2020 as we adjusted the facility operations due to the pandemic. We are seeing changes in product and service mix. And as we work through these changes, we anticipate that our level of integration services will improve. We traditionally incur higher operating costs in the first calendar quarter of each year due to our audit and compliance costs, and we expect that some of our operating costs will decrease in the second quarter. These operating costs in 2021 were consistent with the cost we had in the first quarter of 2020. If you recall, at the end of 2020, we had generated over $10 million in positive cash flow in the fourth quarter. Much of this is related to the timing of cash flow in our reseller business. And as we've discussed, our cash-to-cash cycle within our reseller business is generally favorable. The timing of reseller transactions have resulted in us having collected money but not yet paid to related vendors. We did indicate this scenario would reverse in the first quarter of 2021, and this, in fact, did occur. Our level of accounts payable decreased by over $10.5 million during the first quarter, with a corresponding decrease in our level of cash and equivalents. We did end the quarter with approximately $8.9 million of cash on hand comparable to where we stood at the end of the third quarter last year. Otherwise, there was not a lot of significant changes in our balance sheet compared to the end of 2020. So let me provide a few more details on the first quarter results. Our revenue for the first quarter of 2021 was $5.2 million as compared to $7.2 million in the fourth quarter of 2020 and to $10.6 million in the first quarter of 2020. Changes in the level of reseller revenues are primarily responsible for this fluctuation in our quarterly revenues. Our reseller revenues decreased by $1 million in the fourth quarter of 2020 and by $4.6 million compared to the first quarter of 2020. As I indicated earlier, the timing and volume of these reseller and procurement transactions is often beyond our control and this continues to drive a large fluctuations in our quarterly revenues and our gross profit margins, and our medium to longer-term goal will be to drive more consistency in this revenue stream. Our facilities business was $1.4 million or 47% lower than the fourth quarter of 2020, and it was $0.5 million or 25% lower than the first quarter last year. The decrease in the prior quarter is due to a large number of refresh projects we did in Q4 on some older modular data centers that we were able to complete in the fourth quarter. The decrease compared to the first quarter of 2020 is due to lower deployment levels for these modular data centers compared to the prior year. We do anticipate quarterly fluctuations in the facilities business in 2021. But overall, I anticipate this business will continue to grow as our customers continue to replace older deployed modular units and continue to refresh and upgrade their modular data center base. Our integration revenues did decrease by 17% compared to the first quarter of 2020, but were actually up by $0.3 million or 26% compared to the fourth quarter of 2020. As I mentioned earlier, we are seeing changes in product and service mix. As we work through these changes, we anticipate that our level of integration services will improve. Our gross profit margin of 25% during the quarter was up significantly from 15% in the first quarter of 2020 and was up from 23% in the fourth quarter of 2020. The impact of lower reseller services, which are lower margin, was the main factor that caused this year-over-year increase. As we've discussed, the reseller business can influence our overall margin depending upon its percentage of overall revenue due to its much lower margin profile. Margins on our core facilities and integration businesses increased to 40% during the first quarter of 2021 compared to 34% in the previous year. Our selling and general and administrative expenses during the first quarter of 2021 were $1.8 million. That was up $16,000 or 1% compared to $1.8 million we had in the first quarter of 2020, consistent with my earlier comments. Absent these first quarter charges, we anticipate our selling, general and administrative expenses will decrease next quarter. After the above, we record an operating loss of $607,000 in the first quarter of 2021. This compared to an operating loss of $277,000 in the first quarter of 2020 and an operating profit of $140,000 in the fourth quarter of 2020. After interest and tax costs, we had a net loss of $699,000 or $0.04 per share in the first quarter of 2021, compared to a net loss of $368,000 or $0.02 a share in the first quarter of 2020. Our adjusted EBITDA, which excludes interest, taxes, depreciation, amortization and stock-based compensation, was a loss of $334,000 in the first quarter of 2021. This compared to an adjusted EBITDA loss of $49,000 for the first quarter of 2020. Turning now to the balance sheet. Our balance sheet position remains strong. The timing of events around the reseller transactions definitely has had a material impact on our balance sheet and the decrease in our cash balances and the changes in accounts payable since the last quarter, primarily due to timing of receipts and payments related to the reseller transactions. As I discussed earlier and indicated on our last call that we would see reversal of cash flows relating to some year-end 2020 reseller transaction. 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 in the business and in cash flows. With that, I'll now hand the call over to Anthony for his comments on the first quarter results and how we see the business into 2021. Anthony?

Thanks, John, and thank you all for joining the call. We continue to work to make progress on many fronts and believe as we move through 2021, we will see those benefits. As our business has many services that we provide to deliver and maintain IT infrastructure, we continue to look to evolve those services to many of the changes within the IT infrastructure market. At points in time, we will see fluctuations in revenue and profits on a quarterly basis. These are related to timing of product releases, potential supply chain constraints changing corporate strategies and a number of other variables. We do believe in our capabilities and are working diligently to further position them to grow consistently. Our first quarter was lower due primarily to the ongoing fluctuations within the reseller aspect of our business. As we previously discussed, we look at this reseller business as both incremental and opportunistic. Our core business is performing at a consistent -- at consistent levels albeit lower growth levels than we have believed we would see. We believe many of these levels will increase as we move through the back half of the year as timings of deployment projects and timing of product deliveries improve. As far as diversifying our business further, we continue to look for service and customer extensions that can help us grow at a faster clip. As things begin to loosen up and COVID protocols lighten, we believe we will be able to reduce cycle time and increase the activity and most importantly, reduce the close times. The ability to engage with customers outside of just video and other communication methods are important to our model. We believe as we move through the balance of the year, we will be able to ramp up our results and end the year with comparable results to last year and hold some optimistic goals to do better than that. Finally, we made some changes to our Board recently. Dan Phelps has resigned after over 8 years on the Board. Jerry Gallagher, who has been with the company for decades, did not seek reelection, and will leave the Board at our Annual General Meeting next month. We have added Dick Metzler effective last month, and he is up for election at our AGM. I'd like to thank Dan and Jerry for their service to the company. Their support and guidance has been extremely helpful. I look forward to working with Dick and gaining much from his perspectives and experience. With that, we'll open the call to questions.

[Operator Instructions] And it doesn't look like we have any questions at this time. I'll turn the call back to Anthony.

All right. Thank you, Darryl. Well, we appreciate those that have participated on this call and continue to support the company. And we will next discuss a call at the end of our second quarter when we report our results. Thank you.

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