TSS Q3 2023 Earnings Call Transcript

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November 13, 2023

There are 3 speakers on the call.

Operator

Good afternoon, everyone. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome you to the TSS Third Quarter 2023 Earnings Call. Please note that this call is being recorded. All lines are now in listen only mode.

Operator

After the speakers' remarks, there will be a question and answer session. To withdraw your questions. I will now turn the call over to John Penver, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Thank you, Brianna. Good afternoon, everybody. Thank you for joining us on TSS' conference call to discuss our Q3 2023 Financial Results. I'm John Pender, the Chief Financial Officer of TSS. And joining me today on the call is Daryl DeJuan, the President and Chief Executive Officer of TSS.

Speaker 1

As we begin the call, I would like to remind everybody 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, November 13, 2023. TSS expressly disclaims any obligations 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.

Speaker 1

In addition, we will be referring to non GAAP financial measures. A reconciliation of the differences between those measures with the most directly comparable financial measures calculated in accordance with GAAP is also included in today's press release. Daryl will kick off today's call with an overview, and then I'll provide a review of our 3rd quarter results, and then turn the call back to Daryl to discuss our strategy and direction. Thank you, Daryl.

Speaker 2

Thanks, John. Earlier today, we released a press release announcing our financial results for the Q3 of 2023. A copy of that release will be made available on our website at TSS.com. Overall, we achieved very good financial results in Q3. For balancing, maintaining, sustaining, profitable operations while simultaneously making strategic investments in our future, so we can propel TSS to greater levels of revenue and profitability.

Speaker 2

We have diligently explored a variety of options to expand our business both internally with our group of global OEM partners and externally into new markets with additional capabilities. We are confident that we are that there are substantial growth prospects to be realized with both our current and prospective customers. However, achieving our ambitious goals necessitates a fresh perspective within the TSS and a more extensive sales organization. To this end, we've appointed Jim Oliver as the Chief Revenue Officer to lead our sales and to spearhead strategic business development initiatives. As part of Jim's initial efforts, we have made significant investments in new sales personnel to drive to take advantage of the growth potential in primary businesses and introduce new service capabilities to the market by 2024.

Speaker 2

Since we last spoke, we have been working on several initiatives that I'll summarize now and elaborate a little bit more later in the call, including the following. We have been making investments in marketing, sales positioning and enablement. A large part of our revenue comes through our OEM channels. And so one of our biggest challenges is that end user customers are unaware of TSS and the value we deliver as part of an OEM solution. We endeavor to engage with those end customers as subject matter experts alongside our OEM partners as we are investing in marketing and PR to make our value more visible.

Speaker 2

In parallel, We will be working in 2024 to ramp Investor Relations activities in order to make our value clear to the investment community. We will soon announce a new set of service capabilities, extensions of what we do today that our existing customers can utilize and that it also opened up new markets beyond our current customer base. We expect to close this year with strong growth in revenue, net profit and EBITDA compared to 2022. Our Q4 revenue opportunities could result in revenue growth as high as 60% for 2023, the full year. So John, let me turn it back over to you to provide the financial detail.

Speaker 2

Thank you. Did we lose John?

Speaker 1

Thank you, Daryl. Sorry about that. As Daryl said, Looking at our Q3 results, the results were very strong with year over year growth in revenue and gross profit and another quarter strong operating profit and adjusted EBITDA. Our revenues year to date are up 52% compared to the 1st 3 quarters of 2022. And despite higher operating expenses as we funded a number of strategic initiatives during 2023, we're able to maintain our adjusted EBITDA as well.

Speaker 1

So let me go into some of the details. Our total revenue for the Q3 of 2023 was 8 $900,000 This represents growth of $800,000 or 10% compared to the total revenue of $8,100,000 in the Q3 of 2022. This is down from the $14,500,000 revenue we had in the Q2 of 2023. The growth compared to the Q3 of 2022 Was primarily from a $2,300,000 increase in our procurement and reseller activities compared to 2022, offset by a $1,500,000 decrease in our facilities revenues as the number of new modular data center deployments has fallen since 2022. The decrease from the prior quarter was due to a $5,200,000 decrease in our procurement and reseller activities and a $700,000 decrease in our systems integration revenue as our OEM demand fell.

Speaker 1

Fluctuations in the level of transactions in our procurement and reseller business have the largest impact on the changes in our quarterly financial statements. As I just indicated, the most significant change in the Q3 compared to both the prior year and the immediately preceding quarter was from the changes in revenue and profits from our procurement and reseller services. The timing and volume of these reseller and procurement transactions is up and beyond our control. During the Q3 of 2023, we had 64 reseller transactions, 53 of which are what we call agent transactions, where we recognize GAAP revenue as the amount of any fee or commission that we have paid. The gross value of some of these agent transactions can be quite large.

Speaker 1

In fact, the gross value of all the procurement and reseller transactions processed during the Q3 was $41,000,000 compared to $24,400,000 in the Q3 of 2022. But based on the accounting treatment of agent transactions, We recorded $5,400,000 in revenue during the quarter. We recommend investors focus on the gross profits generated by this business, which we'll continue to report. We financed most of these procurement and reseller transactions for a short period of time. Higher interest rates to impact this business and our interest expense associated with these transactions of $661,000 during the Q3 was up substantially from $262,000 in the Q3 of 2022 because of higher interest rates and the higher gross value of transactions financed.

Speaker 1

Now 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. Our systems integration business was flat compared to the Q3 of 2022 and offset by a decrease in MDC fit out revenues as the level of MDC deployments have decreased. Our rack integration revenues are up 47% or $1,300,000 in 2023 due to higher pricing despite flat year over year demand from our OEM partners. Our facilities business, which includes our modular data center Point and Maintenance Services generated $1,800,000 of revenue during the Q3 of 2023, and this was $1,500,000 or 46% lower and such revenue in the Q3 of 2022. Our recurring revenues from maintenance contracts have increased by 30% since 2022 due to a higher number of MDCs under annual maintenance contracts.

Speaker 1

This has helped offset part of the $3,600,000 decrease in one time deployment project revenue as the number of new deployments has fallen compared to 2022. We anticipate that our level of rack up system integration services, particularly rack integration will continue to be slow in the Q4 of to reflect decreased demand and to ensure we effectively manage our labor costs, which is our largest operating cost in the integration unit. Our production schedule is still impacted by the availability of components needed in production, particularly with regard to service for AI and for fiber optic cables, delaying projects for our integration business. Now for the 9 month period ended September 30, 2023. Our total revenues of $30,000,000 are up by 52% or by $10,300,000 from the $19,700,000 that we had in the 1st 9 months of 2022.

Speaker 1

As with the trends in our Q3 revenue, The growth in 2023 has been driven by a $12,100,000 increase in our procurement and reseller business, a 31% or 1 point increase in our integration revenues and a decrease of $3,400,000 or 38% in our facilities revenue from the decrease in MDC deployments. During the 1st 9 months of 2023, we actually processed 140 procurement and reseller transactions and OpD's 113 were agent type transactions. The gross value of transactions processed The 1st 9 months of 2023 was $90,500,000 and that translated into $17,700,000 of revenue for GAAP purposes and $3,500,000 of gross profit. If you compare this to the 1st 9 months of 2022, we processed 61 transactions, of which 55 were agent type transactions. And the gross value of those transactions processed in 2022 was $39,000,000 and that translated into $5,600,000 of reported GAAP revenue and $1,100,000 of gross profits.

Speaker 1

Our gross profit margin of 32% during the Q3 of 2023, it was down from 34% in the Q3 of 2022, segment, but it was up from 22% that we reported in the Q2 of 2023. Our gross profit margin is directly influenced by several factors, including the mix of revenues between our systems integration facilities and our reselling activities. And as this reselling business represents a larger portion of our total revenues, we expect our total gross margin to decrease as a result. So in Q3 'twenty three, reseller revenues were 61% of revenues compared to 39% of revenues in the Q3 of 2022, and these reseller revenues were skewed towards these agent type transactions. Overall, the actual gross profit increased by 2% compared to the Q3 of 2022 and it was $2,800,000 Year to date in 2023, our gross profit margin is 26 compared to 36% in the 1st 9 months of last year.

Speaker 1

And the decrease in margin is because of the higher proportion of our total revenues coming from procurement and reseller activities in 2023. These revenues have represented 59% of our revenue in 2023 compared to 29% of our revenues in the 1st 9 months of 2022. In dollar terms, our gross profit has actually improved by $700,000 to $7,700,000 this year, up from $7,000,000 in the 1st 9 months of 2022. Our selling, general and administrative expenses during the Q3 of 2023 were $2,000,000 and that's up $217,000 or 12 percent compared to the $1,800,000 that we had in the Q3 of 2022. Year to date, our selling, general and administrative expenses of $6,500,000 were up $1,300,000 from $5,200,000 in the 1st 9 months of 2022.

Speaker 1

These increases were primarily in higher headcount costs, including cost investments made as we've expanded our sales and leadership teams during the last year to help position the company for future growth. And after the above, we recorded an operating profit of $715,000 in Q3 of 2023. This compared to an operating profit of $871,000 in the Q3 of 2022. For the 9 month period ended September 30, 2023, our operating income of $1,025,000 compared to an operating profit of $1,637,000 in the 1st 9 months of 2022. Our interest costs increased substantially during the Q3.

Speaker 1

As I explained, the increase is due to the financing costs associated with funding procurement reseller transactions. $587,000 of our interest expense in the Q3 was related to these procurement reseller transactions. As compared to $224,000 in the Q3 of 2022. You should expect large fluctuations in the level of interest expense as long as the volume and value of our reseller transactions continue to fluctuate quarterly. And as I said earlier, the gross value of our transactions financed during the Q3 was $41,000,000 compared to $24,400,000 in 2022.

Speaker 1

After interest and tax costs, we had net income of $209,000 or $0.01 per share in the Q3 of 2023. This compared to a net income of $605,000 or $0.03 a share in the Q3 of 2022. And for the 9 month period, we had a net loss of $262,000 or $0.01 a share compared to net income of 1,068,000 or $0.05 a share in the 1st 9 months of 2022. Our adjusted EBITDA, which excludes interest, taxes, depreciation, amortization stock based compensation was a profit of $940,000 in the Q3 of 2023 that compares to an adjusted EBITDA profit of $1,043,000 in the Q3 of 2022. For the 9 month period ended September 30, 2023, our adjusted EBITDA was a profit of $1,727,000 This compares to an adjusted EBITDA profit of $2,202,000 in the 1st 9 months of 2022.

Speaker 1

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 the changes in our cash balance and the increases in our accounts receivable, inventories, accounts payable and deferred revenue since the prior year are all primarily due to the timing of cash receipts and payments related to reseller transactions. The volume of reseller activities was higher at the end of the Q3 of 2023 compared to both the Q3 of 2022 and the end of fiscal 2022. At the end of this most recent quarter, we were able to be paid by our customers for a number of large procurement projects, but we had yet to recognize revenue or to pay our vendors for these same projects.

Speaker 1

This resulted in an increase of approximately $11,000,000 in our deferred revenue and approximately $10,000,000 in our outstanding payables at September 30, 2023 compared to September 30, 2022. And compared to our financial year end 2022 balances, our deferred revenues have increased by $11,000,000 Now receivables have increased by $4,000,000 because of the higher level of reseller activities, helped driving the $8,300,000 increase in cash during 2023. As we ship these projects and recognize revenue during our Q4, you should anticipate a large decrease in our payables, deferred revenue and our cash on hand at the end of 2023 compared to the balances at the end of September. With that, I will now hand the call over to Daryl for some additional comments on the business and how we see it evolving in 2024. Thanks, Daryl.

Speaker 2

Thank you, John. During the previous earnings call, I shared an update on our company's strategic focus and progress. I want to ensure that I continue to remind everyone of our key areas of focus and provide updates on our progress. Our goals are to improve our systems integration processes and business model, pursue and place talent to prepare for accelerate and prepare for and accelerate our growth and develop a strategy to capitalize on emerging trends in the markets. I'm happy to report that we've continued to make solid progress in each of these areas.

Speaker 2

We have modernized our integration facility here in Round Rock, Texas. We can now service 4 to 5 times the level of rack integration business at less cost than before with fewer and more skilled TSS personnel. We're working closely with our OEM partners to share our insight into the complicated requirements of these solutions, including form factors, cooling and deployment, which results in our ability to rapidly embrace emergency technologies such as AI and direct liquid cooling. We've been focused on building a high caliber leadership team that can drive our existing business while exploring new opportunities. We've made substantial progress on this front with several key hires.

Speaker 2

With this team in place, we're confident in our organization's ability to realize their goals and take on new challenges. The progress of our organization is inextricably linked to our ability to attract and retain top tier talent. Today, what excites me and the team at TSS is that our services and solutions provide IT users with a level of customization that is unparalleled in the industry. Our core value prop includes flexible, agile, high quality IT systems integration and deployment services. This value proposition has been recognized as key to our OEM partners and end customers.

Speaker 2

As IT and data center infrastructure rapidly Evolv based on the developments such as AI and machine learning, our OEM partners offerings and strategies to deliver new offerings must adjust and ramp quickly. As a result and as an example, the density of compute solutions to deliver AI is rising very quickly, driving advancements in direct liquid cooling, And this is all happening as data centers are moving to be as green as possible. The end customer of our OEM partners are increasingly asking how they can get compute solutions as quickly as possible. Hopefully, this example explains why our OEM partners not only open to our participation within customer discussions, they are seeking it. On November 14, 2022, almost a year ago, I embarked on my journey with TSS and it has been an exhilarating one.

Speaker 2

I vividly recall my first earnings call where I admitted to being unfamiliar with the building, but that was then. Today, I stand confident in my knowledge and experience and I'm optimistic about our future path as a business. I'm immensely grateful to our investors who have stood by us along the way and every step of the way and to the entire TSS team whose unwavering dedication has enabled us to deliver exceptional value to the marketplace. Our future is bright with endless growth opportunities and I'm excited to be on the team and leading the way. So thank you for your continued support as we work towards achieving our goals.

Speaker 2

I will now turn the call back over to John to answer questions you may have. Thank you.

Speaker 1

Brianna, can you see if there's any questions?

Operator

Thank you. Seeing no questions, I will turn the call back over to Mr. Daryl DeJuan for closing remarks.

Speaker 2

Thank you, Brianna. As I mentioned, I'm proud of this team. I thank our investors. I thank our customers for their trust and our ability to make things happen and to provide a way to provide value to our customer base. So thank you again for participating in our earnings call and I wish everybody a happy Thanksgiving and we'll talk to you soon.

Speaker 2

Thank you.

Operator

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

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Earnings Conference Call
TSS Q3 2023
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