TSS, Inc. (TSSI) Q4 2021 Earnings Report, Transcript and Summary

Welcome to the TSS Fourth Quarter 2021 Earnings Call. My name is Daryl, 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, Daryl. Good afternoon, everyone, and thank you for joining us on TSS' conference call to discuss our fourth quarter and our fiscal 2021 financial results. I'm John Penver, the Chief Financial Officer for TSS, and joining me today on this 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 we issued today. That same language applies to comments and statements made by us 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 30, 2022. 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 today, 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 of the most directly comparable financial measures calculated in accordance with GAAP is included in today's press release. I will begin the call with a review of our fourth quarter and our fiscal '21 results, and then I'll turn the call over to Anthony for his comments on the business and how we see 2022 shaping up. Now earlier this afternoon, we released a press release announcing our financial results for the fourth quarter and for fiscal 2021. A copy of that release will be made available on our website at www.tssiusa.com. Overall, despite some significant impacts from supply chain shortages in the second half of 2021, we still achieved fourth quarter and annual positive-adjusted EBITDA in 2021. Our results did fluctuate quarterly throughout the year, and our second half in particular, showed a return to profitability. There were both positive and negative factors that influenced our results in 2021, none bigger than the impact of the COVID-19 pandemic during 2021. Travel restrictions, supply chain lead times, and restricted physical access to customer sites have negatively impacted our Facilities segment, because we're unable to access customer locations to provide our services. The site and travel restrictions continued throughout 2021, and we're only now beginning to see removal of some site restrictions from our customers. We have also witnessed supply chain disruptions during the second half of 2021 that have delayed the delivery of equipment needed for both our deployments and for our Integration services, further delaying customer projects. At this point, we do not know how long the pandemic and the supply chain challenges and their associated impact on our business will continue or if it will worsen or improve. To the extent that these supply chain delays continue, our business will continue to experience delays in delivering our services. And based on customer and vendor feedback, we're optimistic that this situation will begin to improve in the second half of 2022. So let me provide some more quantitative details on our fourth quarter and our fiscal 2021 results. Our revenue for the fourth quarter of 2021 was $14.6 million. This compares to $7.2 million in the fourth quarter of 2020, and $4.6 million in the third quarter of 2021. Changes in the level of Reseller revenues are primarily responsible for this fluctuation in our quarterly revenues. Our Reseller revenues increased by $11 million from the third quarter of 2021, and they were $8.6 million higher compared to the fourth quarter of 2020. The timing and volume of these Reseller and Procurement transactions is often beyond our control, and this continues to drive large fluctuations in our quarterly revenues. And our medium- to longer-term goal will be to drive more consistency on this revenue stream. Our Facilities business generated $1.4 million of revenue during the fourth quarter of 2021, and this was $1.6 million or 53% lower than the fourth quarter of 2020, and it was down by $1.1 million or 43% compared to the third quarter of 2021. The decrease is due to lower deployments of modular data centers in 2021, as ongoing COVID restrictions and more recently supply chain challenges, have impacted our ability to deliver these services in the field. We anticipate higher quarterly revenue from the Facilities business in the first half of 2022, as the supply chain issues begin to resolve, and we're able to deploy new MDCs and we've seen this beginning during the first quarter. Our Integration revenues did increase by $0.4 million or by 32% in the fourth quarter of 2021, compared to the fourth quarter of 2020. And they were marginally ahead by 5% or $69,000 compared to the third quarter of 2021. As I mentioned earlier, we're seeing changes in product and service mix and supply chain delays. As we work through these changes, we anticipate that our level of integration services will increase during the balance of 2022. For the full 2021 year, we reported revenue of $27.4 million. This was a decrease of 39% or $17.7 million, compared to the $45 million we recorded in 2020. $14.1 million of this decrease was from a 49% decrease in our Reseller and Procurement services business. Now because the gross margin on the Procurement and Reseller services is lower, this does not have a commensurate impact on our level of gross profits, and they fell 6% compared to 2020, as compared to the 39% decrease in overall revenues. Our traditional Facilities and Integration services revenue fell $3.5 million or 22% to $12.7 million in 2021 due to the impact of the pandemic on these operations. Our gross profit margin of 12% during the fourth quarter is down from 23% in the fourth quarter of 2020. There's 2 factors driving this change in our gross profit margin. The first is the higher level of Reseller revenues, which have a lower margin than our Facilities and Integration revenues. And so as Reseller revenues increase as a percentage of our total revenue, this decreases our gross profit margin. So our Reseller revenues were 80% of total revenue in the fourth quarter of 2021, but they were only 43% of total revenue in the fourth quarter of 2020. So this increase in Reseller revenues, as a percentage of the total revenue, helps drive our gross profit margin down to 12% in the fourth quarter of 2021, compared to a gross margin of 23% in the fourth quarter of 2020. The second factor that improves our margin is the reduction in direct costs of operating our Integration facility in 2021 compared to 2020. During 2020, we incurred higher labor, facility and safety costs to safely operate the Integration facility during the pandemic, and we added additional storage and workspace in the second facility. As we've gained experience operating through the pandemic, we have seen a reduction in these direct costs, and we were able to reduce the direct cost of operating this business by $2.4 million compared to 2020, which has helped improve our gross profit despite the lower revenues. For the year, we recorded a gross margin of 23% in 2021, which compares to a gross margin of 15% in 2020, and that was due to the higher Reseller revenue in 2020. In absolute terms, we recorded a gross profit of $6.4 million in 2021, which compared to a gross profit of $6.8 million in 2020, which was down 7% on the lower revenue. The margins on our core Facilities and Integration business increased to 42% during the fourth quarter of 2021, compared to 33% in the fourth quarter of 2020. For the year, the margin on our core Facilities and Integration business was 44%, and this compared to 30% in 2020. Our selling, general and administrative expenses during the fourth quarter of 2020 were $1.8 million. This was down $19,000 or 1% compared to the $1.8 million we had in the fourth quarter of 2020, and the decrease is primarily compensation expense related. Year-to-date, our selling, general and administrative expenses were flat with the level of those expenses in 2020. After the above, we recorded an operating loss of $100,000 in the fourth quarter as compared to an operating loss of $140,000 for the fourth quarter of 2020, and compares to an operating income of $228,000 in the third quarter of 2021. Year-to-date, our 2021 operating loss of $831,000 was $431,000 higher than the operating loss of $400,000 that we recorded in 2020. After interest and tax costs, we had a net loss of $264,000 or $0.01 per share in the fourth quarter of 2020. This compares to a net income of $637,000 or $0.04 a share in the fourth quarter of 2020. The fourth quarter of 2020 did include an $897,000 gain on the forgiveness of the PPP loan that we received during 2020. Year-to-date, the '21 net loss of approximately $1.3 million or $0.07 a share was $1.4 million higher than the net income of $79,000 or $0.00 a share that we had last year. And again, that 2020 number also reflected that $897,000 gain on the forgiveness of the loan amount. Our adjusted EBITDA, which excludes interest, taxes, depreciation, amortization and stock-based compensation, was a profit of $138,000 in the fourth quarter of 2021, and this compared to an adjusted EBITDA profit of $1.48 million in the fourth quarter of 2020. Normalizing the 2020 amount to exclude the loan forgiveness, the Q4 2020 adjusted EBITDA would have been $151,000 compared to the $138,000 this year. Our year-to-date adjusted EBITDA was a profit of $174,000 compared to $1.4 million in 2020. And again, if we normalize that 2020 number, that normalized adjusted EBITDA in the prior year would have been $521,000. Now turning to the balance sheet. Our overall balance sheet position remains healthy. The timing of events around the reseller transactions definitely has a material impact on our balance sheet, and changes in cash and the changes in our inventory and accounts payable in the prior year are primarily due to the timing of cash receipts and payments related to Reseller transactions. During the second quarter of 2021, we did repay $400,000 of our long-term debt early, following the incentive from the lenders to make an early settlement. During the fourth quarter of 2021, we signed a new 7-year lease on our Integration facility and this resulted in us adding approximately $5.4 million to our lease right-of-use assets, and a corresponding amount to our recorded lease liabilities on our balance sheet. 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 cash flows. So with that, I will hand the call over to Anthony for his comments on our fourth quarter and how we see the business evolving during 2022. Anthony?

Great. Thank you, John. I believe John has given a detailed explanation on the current market dynamics and the corresponding near-term effect on our results. I would say the largest, most influential factor on our near-term future results are supply chain shortages. We are sitting on a very large and growing backlog due to shortages of some components. Keep in mind that we provide integrated solutions. So a shortage of just 1 component can delay a whole system from shipping. Some of the supply chain shortages can be attributed to COVID. While the effects of the variant of COVID seem to be behind us in the U.S., that is certainly not the case globally and particularly in China, which feeds the global IT supply chain. Our expectation, based in part on consultation with our partner customers, is that we will see the supply chain situation improving throughout the year. Demand for our services and the products of our customers are in very high demand, and end customers are realizing the importance of planning and committing to future requirements, as lead times have been extended. The demand for data center and related IT assets has continued to grow at a rapid rate, and we don't see any signs of this slowing. Our expectation is that, because of expected demand, we will need to add additional capacity throughout the year. The timing of relief of shortages are beginning to occur, while demand for additional opportunities also continue to grow. These are all good signs for our business while the recent challenges begin to wane. Our team has done an amazing job of retaining and hiring labor, including all locations in which we operate and in particular, in the Greater Austin area, which is a very competitive market. Hopefully, much of this success is based on the track record we have had over the past couple of years, which at the very least, was challenging for all of us and our families. We continue to explore additional nonorganic opportunities that can continue our evolution as a company. While there are many interesting possibilities, we will focus on doing the right type of things in the interest of all stakeholders. Our balance sheet is secure, our business pipeline is robust, and we feel as though we have amazing opportunities despite some of the near-term headwinds. Personally, I see a great future for the platform we have built, despite some unforeseen challenges that none of us could have imagined over the last couple of years. I'm sure we will be -- I'm sure there will be more to come, but our greatest strength, as an organization, is the ability to remain flexible and deliver on our DNA as a company dedicated to service and flexibility. I don't just say this, but we hear it every day from our customers. Looking forward, we expect continuing growth in our results, and we expect this year to continue to provide ever-producing positive results, as we have the business, but need the material to finalize the build. We are in the right swim lane and the momentum and backlog is very strong. Please understand that we can't control all of the macro events, but we are very confident in our business despite the unpredicted events that have occurred over the last couple of years. I do believe that we will emerge throughout this year as a stronger company and remarkably well positioned for the future, not just words, but a clear understanding of the underlying capabilities we have built and the positioning we have done. We are financially sound and set up to deliver the opportunities in front of us. With that, we'll open it up to questions.

[Operator Instructions]. We do have a question from Maj Soueidan.

One question for you, really. I just -- it's probably early even to ask the question, but I just was curious. Demand is obviously ramping up for you even though you have supply chain issues. Can you just talk about your capacity to deliver on increased demand going forward? Like how -- I guess, how much revenue could your current facility deliver? And at what point would you have to actually add capacity? And what would that look like when you do that?

Yes. So there's a couple of aspects to this. We've got -- we have the ability, depending on how we manage the inventory levels, to basically double overall. But we also need to deal with the supply chain side, which is increasing holding period of inventory, not inventory on our books, but inventory overall. And then we have some new customers that are onboarding that are also requiring additional capacity. So big picture, with some incremental changes and managing the inventory and some of the overall space capacity, we could certainly double the business with a little amount of incremental costs.

[Operator Instructions]. And it doesn't look like we have any more questions. I'll turn it back to Anthony Angelini for closing comments.

Okay. Thank you, Daryl. As you all know, this quarter is our year-end quarter, so we tend to report later, because of finishing the audit and all the related information. So as you know, we're sitting at the end of the first quarter, basically right now. So -- and we'll be reporting that in the next 6 or so weeks. So I appreciate you all attending, and stay tuned for more positive results. Thank you.

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