TSS, Inc.
Q2 2021 Earnings Call Transcript

Published: 16 Aug 2021

[Operator:]

Welcome to the TSS Second Quarter 2021 Earnings Call. My name is Darrell and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to John Penver. You may begin.

[John Penver:]

Thank you, Darryl. Good afternoon, everyone. Thank you for joining us on TSS' conference call to discuss our second quarter 2021 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 Officer 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 16, 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 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 difference between those 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 second quarter 2021 results. And then I will turn the call over to Anthony for his comments on the business and changes we see coming. Earlier today, we released a press release announcing our financial results for the second quarter of 2021. A copy of that release will be made available on our website at www.tssiusa.com. Similar to our first quarter, our second quarter of 2021 was a little slower than 2020. The level of reseller and procurement revenue still fluctuates materially quarterly and was down $2.9 million compared to the second quarter of 2020, explaining most of the decrease in our revenue numbers this year compared to the second quarter of 2020. We continue to build a large pipeline of potential procurement transactions; however, the exact timing of these transactions is mostly dictated by the end user and, therefore, 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've seen continuing fluctuations around most of our revenue streams that have been driven by supply chain shortages and restricted access to customer facilities due to the ongoing effects of COVID-19. Despite the lower revenues compared to the second quarter of 2020, we've been able to significantly reduce our level of operating and net losses compared to the second quarter of 2020 due to lower production costs in our integration business. In 2020, as we are adapting to operating our integration business in a COVID-19 world, we added staff so that we could socially distance our employees, added a second facility and incurred higher costs as we learn to operate our business in a safe and protective manner. With the benefit of time and experience, we are now operating our integration facility at a much lower level of operating costs as we have largely eliminated these incremental costs. As a result, our cost of revenue as a percentage of total revenue decreased from 88% in 2020 to 53% in 2021. This resulted in our gross margin increasing from 12% in the second quarter of 2020 to 47% this year. These cost savings largely fell through to our bottom line and is why we were able to reduce our operating loss by almost $600,000 or by 63% and improved our net loss by $586,000 or 56% compared to the operating and net losses we recorded in the second quarter of 2020. Our facilities group is still operating with physical site restrictions due to the COVID-19 pandemic. The impacts of the pandemic and operating restrictions really started impacting our business around April of 2020. So the first quarter of 2020 was not impacted, which is why year-to-date, the 2020 revenues from the facility group are higher than our 2021 revenues. Revenues from deployment of modular data centers were down 35% or $0.5 million in the first half of 2021 compared to the first half of 2020. The second quarter facilities revenues improved by 4% compared to the second quarter of last year. Our customers have continued to update and refresh or repair their existing modular data centers, and revenue from these activities has helped offset the decline in deployment revenues such that total revenues in our facility business was only down 13% compared to the first half of 2020. We are starting to see a rebound in orders for modular data center deployments, and we expect that as a number of new modular data center deployment increases over the next several quarters, but our facilities business revenues will show an increase over our 2020 levels. Our integration revenues were down 29% compared to the second quarter of 2020 due to elements of supply chain shortages and project timing. We've been able to manage our cost structure to better align with current demand and visibility, and we are seeing changes in product and service mix as we work through these changes, and we anticipate our level of integration services will improve during the second half of 2021. There was not a lot of balance sheet changes since we last reported. During the quarter, we did repay $400,000 of our long-term debt on favorable terms after the lenders provided us an incentive to repay the debt early. We do have some in-process reseller transactions that have resulted in $2.9 million of our deferred revenues and $1.4 million of deferred costs on our balance sheet as of June 30. So let me provide a little bit more detail on the second quarter results. Our revenue for the second quarter of 2021 was $3.1 million. This compares to $6.5 million in the second quarter of 2020 and $5.2 million in the first quarter of 2021. Changes in the level of reseller revenues are primarily responsible for this fluctuation in our quarterly revenues. Our reseller revenues decreased by $2 million from the first quarter of '21 and by $2.9 million compared to the second quarter of 2020. And as I indicated earlier, the timing and volume of these reseller and procurement transactions is often beyond our control, and this continues to drive the large fluctuations in our quarterly revenues and our gross profit margins. And our medium- to long-term goal will be to drive more consistency of this revenue stream. Our facilities business generated $1.6 million of revenue during the second quarter of 2021. This was $55,000 or 4% higher than the second quarter of 2020 and was comparable to the level in the first quarter of 2021. Year-to-date, the facilities revenue of $3.2 million is $464,000 or 13% lower than the first half of 2020. This decrease is due to lower deployments of modular data centers in 2021 as the ongoing COVID restrictions have impacted our ability to deliver services in the field. Our activities focused on repair and maintenance of existing modular data centers instead of the deployment of new units as our customers have delayed deployment. We anticipate higher quarterly revenues from the facility business in the remainder of 2021 as our customers begin to replace older deployed modular units and continue to refresh and upgrade their MDC base. Our integration revenues did decrease by 29% compared to the second quarter of 2020 and they were down 23% or $0.8 million for the first six months of 2021 compared to levels of 2020. As I mentioned earlier, we are seeing changes in product and service mix and supply chain delays. And as we work through these changes, we anticipate that our level of integration services will increase during the third quarter. Our gross profit margin of 47% during the second quarter was up significantly from 12% in the second quarter of 2020 and up from 25% in the first quarter of 2021. There are two factors driving this improvement in our gross profit margin. The first is the impact of lower reseller services, which have a lower margin than our facilities and integration services. As reseller revenues decreased as a percentage of total revenue, this will be reflected as an increase in our gross profit margin. The second factor improving our margin is the reduction in direct costs of operating our integration facility in 2021 compared to 2020. And as I said, during 2020, we incurred higher labor facility and safety costs to safely operate the facility during the pandemic and added additional storage and workspace in a second facility. As we've gained experience through the pandemic, we've seen a reduction in these costs which has helped improve our gross profit despite lower revenues. Margins on our core facilities and integration business increased to 48% during the second quarter of 2021 compared to 19% in the previous year. Year-to-date, the margin on our core facilities and integration businesses was 44% compared to 27% in the first half of 2020. Our selling, general and administrative expenses during the second quarter of 2021 were $1.7 million. They were up $83,000 or 5% compared to the $1.6 million we had in the second quarter of 2020. The increase was primarily compensation expense related. Note that our selling, general and administrative expenses decreased by $108,000 or 6% compared to the first quarter of 2021. After the above, we recorded an operating loss of $351,000 for the second quarter of 2021. This compared to an operating loss of $949,000 for the second quarter of 2020 and an operating loss of $607,000 in the first quarter of 2021. Year-to-date, our 2021 operating loss of $958,000 and was $268,000 or 22% less than the operating loss of $1,226,000 that we recorded in the first half of 2020. After interest and tax costs, we had a net loss of $456,000 or $0.03 a share in the second quarter of 2021. This compared to a net loss of $1,042,000 or $0.06 a share in the second quarter of 2020. Year-to-date, our 2021 net loss of $1,155,000 or $0.06 a share was $255,000 or 18% lower than a net loss of $1.41 million or $0.08 a share that we recorded in the first half of 2020. Our adjusted EBITDA, which excludes interest, taxes, depreciation, amortization and stock-based compensation was a loss of $106,000 in the second quarter of 2021. That compares to an adjusted EBITDA loss of $724,000 in the second quarter of 2020. Our year-to-date adjusted EBITDA is a loss of $439,000 in 2021. This was $334,000 or a 43% reduction compared to adjusted EBITDA loss of $773,000 in that we had in the first half of 2020. Turning now to the balance sheet. Our balance sheet position remains healthy. The timing of events around the reseller transactions definitely has had a material impact on our balance sheet, and the decrease in our cash balance and the changes in accounts payable since financial year-end are primarily due to timing and receipt of payments related to reseller transactions. During the second quarter of 2020, we did repay the $400,000 of long-term debt early following 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 in cash flows. So with that, I will now hand the call over to Anthony for his comments on our second quarter results and how we see the business moving forward. Thanks, Anthony.

[Anthony Angelini:]

All right. Thank you, John. As I mentioned on our last call, we expected the first half of the year to be lower on the revenue side as we work through supply chain delays and the lingering effect of COVID on deployments. I also said we expect and are seeing significant turnaround in Q3 and especially Q4. Therefore, we expect to end the year with revenue in the mid-to-high $20 million range and adjusted EBITDA at $1 million and probably a bit higher. This represents a second half of at least $1.6 million of adjusted EBITDA. As John mentioned, there are a number of moving parts in our various revenue streams. The reseller business is still difficult to predict, and we are working on getting more consistent volume. In fact, we see a large increase in reseller activity for the back half of the year. The deals are generally fairly large, and we are getting better visibility. Our facilities business is still feeling some effect from both supply chain challenges and deployment schedules. We are seeing improvement toward the end of the year and rolling into 2022. Our integration business definitely has felt the impact of supply chain challenges as one component delays the whole project. We are working diligently on timing of deliveries of parts to better predict revenue recognition, and it does seem the supply chain disruptions are easing. There are a number of trends that we believe will begin to improve our revenue opportunities, primarily 5G and the related business with the telecom industry. We have also made significant progress regarding the cost structure within our integration business. And through the first half of this year, we have made an $800,000 reduction in our operating expenses year-over-year. These reductions have improved our margins and resulted in improved results over 2020. This will serve us well as we ramp up volume through now and the end of the year. We are fundamentally a set of services businesses. This general generally requires a high level of relationship building in our sales process, where customers are able to meet with us, to our operations and connect to our solution development efforts. While this is happening virtually, it is not the same. As vaccination rates increase, we are seeing improvement in that personal interaction. This is versus a complete shutdown on direct client interaction that we experienced last year. While there has been some impact on direct customer interaction caused by the Delta variant, we are much more open and have manageable protocols in place to improve interaction. This will assist us in extending relationships. We continue to look at strategic options to continue our growth and extend our services. There is an improving pace in this area, and we are seeing some interesting opportunities. Our balance sheet remains strong as evidenced by us paying down some term debt in the second quarter. We are focused on protecting our equity, especially at these recent levels in any activities we're exploring strategically. With that, we'll open the call for questions.

[Operator:]

And we do have a question from . Go ahead. Go ahead with your question.

[Unidentified Analyst:]

Just a quick question. I mean maybe I missed it because I joined in a little late. You ended here the conversation talking about some of your -- looking at some strategic alternatives within the business, I guess, partnerships and acquisitions, maybe. Could you kind of expand upon what you're looking at maybe potentially for the Company and what it would mean for the Company and what areas you're looking at doing those things in?

[Anthony Angelini:]

Yes. In general, we're taking our services block that we have right now, which is very stable and obviously, subject to some of the recent events, but in general, growing at a good clip. We're looking at now how do we extend those services in some other areas that will allow us to kind of, I'll call it, go to where the puck is going as opposed to where the puck has been. And so we are pretty focused on looking at some opportunities and have some stuff in the pipeline that looks promising that we can extend our service capability with some good synergies that tied to our core base.

[Unidentified Analyst:]

And do you think that would make -- some of these moves make a big dent in your diversification of customers?

[Anthony Angelini:]

Sorry. Yes, yes. Obviously, that's part of the mix and the whole thing is how do we diversify our customer base a little bit more and again, move the whole thing forward. Yes. So the answer is yes. But we're trying not to do. We have a good capability in what we're doing today. So we're trying to extend that as the market and services evolve. So we're looking forward as opposed to, let's call it, not a roll up, more of a how do we extend our services to the next place and diversify the customer base. Yes. By the way, all with the idea of how do we have kind of developed more of a reseller base or I mean a recurring base of revenue that will -- so we can sell once and reap many, if you will.

[Operator:]

And we don't have any more questions at this time. I'll turn the call back to Anthony Angelini.

[Anthony Angelini:]

Okay. Thank you, Darryl. Well, we've been through an interesting 18 months. We feel like this -- we're going to have a blockbuster second half of the year, and that will roll us into 2022 pretty favorably. We feel like timing has affected things, both from COVID and supply chain issues, but we're feeling very good about how we look over the next basically a year. So with that, we'll look forward to talking to you all in November.

[Operator:]

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Speakers, please stand by for your post conference.