TSS, Inc. (TSSI) Q2 2022 Earnings Report, Transcript and Summary

Welcome to the TSS Second Quarter 2022 Earnings Conference Call. My name is Hilda, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, the conference is being recorded. I will now turn the call over to John Penver, Chief Financial Officer. John, you may begin.

Thank you, Hilda. Good afternoon, everyone. Thank you for joining us on TSS' conference call to discuss our second quarter 2022 financial results. I'm John Penver, the Chief Financial Officer for TSS. And 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 contained in the press release 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, August 15, 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 replay to reflect events or circumstances that may arise after today's date, 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 those measures and most directly comparable financial measures are calculated in accordance with GAAP is included in today's press release. So I’ll begin the call with a review of our second quarter 2022 results and then turn the call over to Anthony for his comments on how the business and how we see 2022 shaping up. Now earlier today, we released a press release announcing our financial results for the second quarter of 2022. A copy of that release will be made available on our website at www.tssiusa.com. Overall, we had very strong operating results during the second quarter of 2022. We had strong growth compared to the first quarter of 2022 in both of our reporting segments and very strong results when compared to the second quarter of 2021 where the impact of the COVID pandemic on our business and our operating results was more pronounced. We've seen an improvement in supply chain challenges during the second quarter, particularly in our Facilities segment, as components supply improved, we've been able to increase the number of MDC deployments such that our deployment revenues year-to-date have increased by $2.7 million or 274% compared to the first half of 2021. In fact, deployment revenues during the second quarter of 2022 of $2.4 million were greater than the $1.5 million of deployments we did for the entire fiscal 2021 year. This increase in MDC deployments in particular, along with strong growth in our integration business, helped drive an increase of $3.4 million or 109% in our revenue compared to the second quarter of 2021, which led to an increase of $1.2 million or growth of 80% in our gross profits compared to the second quarter of 2021. Combined with lower operating expenses, this allowed us to achieve a $1.3 million improvement in our operating profit from a loss of $351,000 in 2021 to a profit of $939,000 in 2022. Our adjusted EBITDA also improved by a similar amount going from a loss of $106,000 in the second quarter of 2021 to a profit of $1,116,000 in 2022. The improvement in supply chain has allowed us to fulfill some of our record backlog, and we still have a very large backlog in our integration business. We anticipate that the second quarter performance will lead into a strong third quarter for the company as well and we will achieve strong annual results for 2022 as a result. Our facilities business has grown by $2 million, or 123% compared to the second quarter of 2021. And we had $3.6 million in revenue from our facilities business during the second quarter of 2022. As I indicated a moment ago, we had $2.4 million of deployment revenues during the quarter. This was $0.6 million in the second quarter of as we were able to get all the necessary components to complete deployment projects. Year-to-date, our facilities revenue of $5.7 million has grown by $2.5 million, or by 78% and compared to the first half of 2021. And based on backlog, we expect our third quarter facilities revenue to be strong again which will help drive strong third quarter 2022 operating results. Our system integration business also saw a strong recovery when compared to the second quarter of 2021. Our revenue of $2.1 million for the second quarter of 2022 was up by 55% or $0.7 million when compared to the second quarter of 2021. This improvement was also attributable to an improvement in the supply chain challenges we've experienced in this business over the last 18 months. Our customers were able to do a better job getting the necessary components to us to enable us to complete our integration services for them. We are still experiencing some challenges with supply of components and foresee that this will continue for the remainder of 2022 based on comments from our vendors and our customers. Our procurement and reseller services revenue did increase by $0.2 million or 10% during the first half of 2022 compared to the first half of 2021. So far during 2022, we've had more transactions where we simply acted as an agent in the transaction, meaning we were not in custodial control of the underlying inventory. And in these agent type transactions, we're procuring goods or services for a third-party, but not taking possession of any goods or services. In these cases, we record our revenue as the net amount of commissions or earnings. So although our revenue only increased 10% in the first half of 2022, we actually increased the gross profit from this line of business by $0.3 million compared to the first half of 2021. Overall, looking at the business, we've had solid growth across all of our revenue streams, and this allowed us to generate much higher gross profit as a result. Our operating cost structure is largely unchanged and meaning our higher gross profits dropped through our bottom line, allowing us to record healthy operating and net income and adjusted EBITDA for the quarter. So let me give a little bit more detail on some of the second quarter 2022 results. So revenue for the second quarter of 2022 in total was $6.4 million. This compared to $3.1 million in the second quarter of 2021 and compares to $5.2 million in the first quarter of 2022. The changes in the volume of MDC deployments and improvement in our integration service businesses are primarily responsible for fluctuations in our quarterly revenue. Our facilities business generated $3.6 million of revenue during the second quarter of 2022. This was $2 million or 123% higher than facilities revenue in the second quarter of 2021. This was also $1.5 million, or 73% higher than the $2.1 million we had in the first quarter of 2022. The improvement, as I've said, was driven by a large increase in deployment revenues from the deployment of new modular data centers, and our deployment revenues increased by $1.8 million or 312% compared to the second quarter of 2021. On a year-to-date basis, the deployment revenues have grown by $2.7 million or 274% compared to the first half of 2021. And this is what drove our first half total facilities revenues up by $2.5 million or 78% to $5.7 million in the first half of 2022 compared to $3.2 million in the first half of 2021. This business has been impacted since mid-2020 by the COVID pandemic, as travel and site restrictions and more recently, supply chain challenges have impacted the delivery of needed equipment and our ability to deliver services at customer locations. As the supply conditions have improved in 2022, we've been able to deliver on our backlog of deployment projects and we anticipate high deployment revenues over the next several quarters as a result. And as our efforts focused on new MDC deployments by our customers, revenues from refurbishment, upgrade and refresh activities decreased compared to the prior year. Our integration revenues were $0.7 million or 55% higher in the second quarter of 2022 compared to the second quarter of 2021. On a year-to-date basis, revenue from this business has increased by $0.7 million or by 24% to $3.4 million in 2022. This operation has been more impacted by supply chain issues, in part attributable to the impacts of the COVID pandemic. And towards the end of the first quarter, we saw an improvement in component supply that allowed us to start fulfilling some of the record backlog that we've had in this operation. This continued into the second quarter, helping drive an increase in our rack business and in the number of MDCs we built prior to deployment. We anticipate that our level of integration services will stay at similar levels in the next quarter and hopefully, this will continue for the remainder of 2022. Our reseller revenues increased by $0.6 million from the second quarter of 2021, but they were $1 million lower compared to the first quarter of 2022. The timing and volume of these resell 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 in this revenue stream. During the second quarter of 2022, most of our procurement and reseller transactions were, what I call, agent transactions, where we have no control of the goods or services before they're transferred to the customer. In these instances, we're acting as an agent and recognized revenues, the amount of any fee or commission that we expect to be entitled to after paying the other party for the goods of services provided to our customer. So because we had more of these agent transactions compared to previous periods, even though our revenue increased by 10%, the gross profit actually increased by $300,000 compared to the first half of 2021. Our gross profit margin of 41% during the second quarter was down from 47% in the second quarter of 2021. The margins on our core facilities and integration revenues were 44% in the second quarter of 2022 compared to 48% in the second quarter of 2021. The change in margin reflects lower margins on our integration services compared to our facilities business. Our overall gross profit improved by $1.2 million or 80% to $2.6 million in the second quarter of 2022 compared to the $1.45 million gross profit we had in the second quarter of 2021. Our selling, general and administrative expenses during the second quarter were $1.6 million. This was down $64,000 or 4% compared to the $1.7 million we had in the second quarter of 2021. Traditionally, our first quarter operating expenses are higher than subsequent quarters due to audit and compliance costs we incurred in the first calendar quarter. So absent those costs this quarter, the level of G&A expenses was in line with what we expected. After the above, we recorded an operating profit of $939,000 in the second quarter of 2022. This compares to an operating loss of $351,000 in the second quarter of 2021. On a year-to-date basis, we've recorded an operating profit of $766,000 in 2022, compared to an operating loss of $958,000 in the first half of 2021. Our interest expense has increased by 44% compared to the first half of 2021. This is due to the number of agent type reseller transactions that we've had this year. The gross value of our reseller transactions was over $14.5 million in the first half of 2022, even though we only reported revenues against that of $2.5 million. And we incurred financing costs under gross value and this drove the increase in interest expense, compared to the comparable periods of 2021. After interest and tax costs, we had net income of $771,000 and or $0.04 a share in the second quarter of 2022. This compared to a net loss of $456,000 or minus $0.03 a share in the second quarter of 2021. On a year-to-date basis, we've reported net income of $463,000 or $0.02 a share in the first half of 2022 as compared to a net loss of $1,155,000 or minus $0.06 a share in the first half of 2021, so an improvement of $1.6 million. Our adjusted EBITDA, which excludes interest, taxes, depreciation, amortization and stock-based compensation was a profit of $1,116,000 in the second quarter of 2022, and that compared to an adjusted EBITDA loss of $116,000 in the second quarter of 2021. Year-to-date, we've had an adjusted EBITDA profit of $1,159,000 in the first half of 2022. We had an adjusted EBITDA loss last year in the first half of $439,000, meaning we've improved our adjusted EBITDA by $1.6 million, compared to the first half of 2021. Now 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 our balance sheet and changes in cash and our deferred cost inventory and accounts payable since the prior year are primarily due to timing of cash receipts, and payments related to reseller transactions. We continue to feel good about the strength of our balance sheet and are looking at ways to utilize it to assist us in growing future growth and cash flows. We believe we've got adequate trade credit available to us to continue financing our reseller activities as we grow the business during 2022 and beyond. In May, we added a new $1.5 million revolving line of credit facility with a new bank called Susser Bank to provide more financial flexibility for us as the business grows during 2022. In July, we repaid in full all of the outstanding balances of our notes payable to MHW Capital using our existing funds on hand to repay this debt. We now have no long-term debt, excluding our operating lease liabilities outstanding and we have a clean balance sheet. In July, MHW also exercised their outstanding warrants that have been granted in conjunction with his debt, and we received $0.4 million in proceeds from this warrant exercise. Note that the shares underlying the warrants have been included in our EPS computation most since they were granted back in 2015 and 2017. So, with that, I will hand the call over to Anthony for his comments about the second quarter and how we see the business evolving during the remainder of 2022. Thank you, Anthony.

Thank you, John. We are very pleased with our second quarter results. As we discussed on our last call, we expected to see improving results as we move throughout the year. The good news is that the uptick we expected began late in the second quarter and has very good momentum into our current third quarter. While we were able to deliver on some of our backlog in the second quarter, our expectations is that our backlog, which is slightly lower, will remain strong at high levels throughout the year. We continue to receive new orders while we deliver on existing orders. Fundamentally, we are seeing higher demand overall and believe our momentum in our core business will continue to improve, while potential deal flow in our reseller business is ticking up as well. We anticipate that we will deliver our highest EPS and adjusted EBITDA for a full year in over a decade. This is net of any one-time event. Our current third quarter is shaping up to be extremely strong with both our core businesses and the reseller business, delivering improved bottom-line results. Therefore, we anticipate our third quarter will deliver higher EPS and adjusted EBITDA over the second quarter. While our fourth quarter is a little less clear, we are seeing good indications of new deal flow and we anticipate that will continue to deliver positive EPS and adjusted EBITDA in the fourth quarter as well. There are a few areas to discuss to assist in understanding our results and outlook. First, while the macro environment is difficult to fully understand, our businesses support the delivery of enterprise IT infrastructure within North America. This area continues to perform well and the current trend towards regionalization should benefit our capabilities. In addition, our services enable our customers to deliver more services internally rather than using traditional channel partners. We also believe this trend is in the early stages and will continue to build over the coming years. Our reseller business, while opportunistic and still difficult to forecast, is now a known delivery method with our customers and our customers can utilize to improve their margins. As John noted, there are reseller deals that we record on either a gross revenue basis or as an agent with net revenue recognition. We are delivering some very large net revenue opportunities that will flow through to our bottom-line with high-margin percentages and net gross dollars to us. For example, we may support a $25-plus million deal on a net cash/agent basis that can generate close to $1 million in agent revenue with only a relatively small amount of interest and internal related costs. While it's still difficult to forecast these opportunities, we are seeing continued momentum in both gross and net deals. We are agnostic to the method of accounting and focused on the gross profit dollars they generate. It may appear at times that we are relatively small -- smaller revenue business. However, the income streams of our customers that we support are not only large, but extremely strategic. We deliver in excess of $1 billion of customer products annually, with most of this being consigned material. We believe the model has strong legs and will continue to support the underlying trends that I referenced and deliver solid results. We are continuing to look at new inorganic opportunities and are cautious to valuation expectations in the current changing landscape. While we still spend some operating dollars in this area, we will not do an acquisition unless we determine that the risk and opportunity profiles align with our longer-term goals. We have paid off all our long-term debt and have positioned our balance sheet to support our current businesses as well as the ability to support accretive acquisitions. After many years of positioning the business for profitability, and positive cash flow, our current model is performing well. We are continually looking for increased operational performance, further improvements to maximize cash flow and operational efficiencies. On our May call, we said that, our outlook for the year was revenue in the mid to high $20 million range and adjusted EBITDA north of $2 million. As we stand today, we believe the revenue to be in the higher level of that guidance, if not potentially above that level depending on the type of reseller deals at close, albeit gross or net deals. And we believe we can achieve adjusted EBITDA of near $3 million or higher with EPS closing closer to $0.08 to $0.10 for the year. With that, I'll open it up for questions.

Thank you, Hilda. We appreciate those that are attending the call. As we move through the balance of the year, we feel we've got our business very well aligned. And we'll be next talking to you in early November to just update you on the results of the third quarter, and how we foresee the fourth quarter. So thank you all for joining.

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