TSS Q2 2023 Earnings Call Transcript

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August 14, 2023

Key Takeaways

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Earnings Conference Call
TSS Q2 2023
00:00 / 00:00

There are 3 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the TSS Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Followed by the number 1 on your telephone keypad. Thank you. It is now my pleasure to turn today's call over to Mr. John Penver, Chief Financial Officer. Sir, please go ahead.

Speaker 1

Thank you, Brent. Good afternoon, everyone. Thank you for joining us on TSS' conference call to discuss our Q2 2023 financial results. I'm John Penber, the Chief Financial Officer for TSS. And joining me today on the call is Daryl Duham, the President and Chief Executive Officer for TSS.

Speaker 1

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 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, August 14, to 2023. TSS expressly disclaims any obligation to update, amend, supplement or otherwise review any information for forward looking statements made on this conference call or the 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.

Speaker 1

In addition, we will be referring to non GAAP financial measures. 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. Daryl will kick today's call off with an overview, and then I will provide a review of our Q2 'twenty three to results and then turn the call over to Daryl to further discuss our strategy and company direction. Daryl?

Speaker 2

Thank you, John. Earlier today, we released a press release announcing our financial results for the Q2 of 2023. A copy of that release will be made available on our website at www.tssiusa.com. Overall, we achieved very good financial results in Q2. We announced in our last earnings call that we would focus in 3 key areas and we're glad to report solid progress in each.

Speaker 2

Number 1, improve our systems integration processes and business model. Number 2, pursue and place talent to prepare for and accelerate our growth and number 3, to develop a strategy to capitalize on emerging markets. 1st, through successful restructuring of our systems and integration business, where we were formally in a loss making position, We have proven our capability to cater to complex and demanding customer build requirements and adapt our business to changes in demand. Our efforts have led to increased efficiency and profitability in Q2 and have paved the way for continued growth and success. 2nd, We committed that we will selectively invest in our leadership team and we announced the addition of Janet Morrison as our Chief to People Officer and Corporate Communications Leader.

Speaker 2

Janet is working closely with our team to assess our talent needs to drive and support our growth. She will also lead our effort to publicly share news about key wins, company awards and major accomplishments. 3rd and very exciting for us all is we embarked on a plan to enhance our core selling strengths and develop new capabilities to tap into fresh markets for to sustained growth. We are evaluating multiple go to market routes for the modular data center business that we expect will drive significant long term growth. We are already making progress with our sales plan.

Speaker 2

Jim Oliver, the Senior VP of Sales is leading the effort working closely with Jim Woodward, the Director of Facilities Management Services and leader of our Development and Facilities Management business. They're working closely together to identify exciting new opportunities. We're exploring ways to solve supply chain issues to minimize the long lead time for certain modular data center components. Much of our excitement is fueled by the market opportunity to create and deploy new solutions. We will invest resources to focus on demand gen to address these opportunities and in other words to sell our integration services.

Speaker 2

We will cover more of this later in our call. I am focused on building a management team of A players. We've talked about this before. We will drive our growth strategy by forging new competencies and building direct connections with end users of the IT markets we serve, while enhancing our existing OEM partnerships. Our Q2 focus ensured we hired the right talent to drive tactical business, while evaluating where to invest selling resources to achieve our next level of strategic goals.

Speaker 2

We anticipate that our 3rd quarter results will reflect a continued increase in revenues compared to 2022 and that we will maintain our profitability. There is a growing expectation for macroeconomic slowdown and our main customers voicing their expectation for a temporary slowdown in demand. We have already taken action to address this in Q3. I'll dive into this further, but let me first turn the back turn this call back over to John to provide some financial details. John?

Speaker 1

Thanks, Daryl. As Daryl said, looking at our Q2, the results were very strong with year over year growth in revenue, gross and operating profits and adjusted EBITDA. The 2 reseller transactions that we mentioned on our last call that had slipped from Q1 both closed during the Q2 and helped drive these strong results. Our revenues were up 126 compared to the Q2 of 2022. And despite higher operating expenses, we were able to improve our adjusted EBITDA as well.

Speaker 1

So let me go into the details. Our total revenue for the Q2 of 2023 was $14,500,000 This represented growth of $8,100,000 or 126 percent compared to the total revenue of $6,400,000 that we had in the Q2 of 2022. This also compares favorably with the $6,600,000 of revenue we had in the Q1 of 2023. This growth was primarily from the $9,800,000 increase in in our procurement and reseller activities compared to 2022 and an increase of 16% or $300,000 in our integration business. This was offset by a $2,000,000 decrease in our facilities revenue as the number of modular data center deployments has fallen since 2022.

Speaker 1

As I just indicated, the most significant change in the Q2 was from the growth in revenue and profits from our procurement and reseller services. The timing and volume of these reseller and procurement transactions is often beyond our control. During the Q2 of 2023, we had 45 reseller transactions, 34 of which were what we call agent type transactions, where we recognize GAAP revenue as the amount of any fee or commission that we have paid. Now the gross value of some of these agent transactions can be quite large. To the gross value of all the procurement and reseller transactions processed during the Q2 was $42,900,000 compared to $6,700,000 in the Q1 of 2023 $4,300,000 in the Q2 of 2022.

Speaker 1

That based on the accounting treatment of the agent transactions, we recorded $10,600,000 in revenue during the quarter. We do recommend that our investors focus on the gross profit 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, to higher interest rates to impact this business and our interest expense associated with these transactions of $628,000 during the Q2 was up substantially from $90,000 in the Q1 of 2023 $90,000 in the Q2 of 2022 because of the higher gross value of transactions financed. We have increased our pricing for procurement services in the latter part of 'twenty two to account for the higher interest rates and to protect our profits. Our systems integration business had 16% growth in revenue compared to to the Q2 of 2022, driven by a strong RAC integration business, more fulfillment projects and offset by to the Q1 of 2019.

Speaker 1

Our RAC integration revenues are up 48% for $900,000 in 2023 due to higher demand from our OEM partners. Our Facilities business, which includes our modular data center deployment and maintenance services, generated $2,400,000 of revenue during the Q2 of 2023. This was $2,000,000 or 57 percent lower than such revenue in the Q2 of 2022. Our recurring revenues from maintenance contracts have increased by 18 since last year due to a higher number of MDCs under annual maintenance contracts. This helped offset the 2,100,000 to the decrease in the one time deployment project revenue as the number of new deployments has fallen compared to last year.

Speaker 1

We anticipate that our level of system integration services, particularly rack integration will slow in the 3rd Q4 of this year before rebounding next year based on forecast from our customers. As a result, in August, we've adjusted our staffing levels and integration business to reflect this decreased demand, but to ensure we effectively manage our labor costs, which is our largest operating cost integration unit. Our production schedule is still impacted by the availability of components needed in production, while these supply chain issues are not as severe as we experienced in 2022. For the year to date 6 month period ended June 20, 23, our total revenues of $21,100,000 are up by 82% or by $9,500,000 from the $11,600,000 that we recorded in the first half of twenty twenty two. Like the trends in our Q2 revenue, the growth in 2023 has been driven by a $9,800,000 increase in our procurement and reseller business, to a 46% or $1,600,000 increase in our integration revenues and a decrease of $1,900,000 or 33% in our facilities revenue that is from a decrease in the MDC deployments.

Speaker 1

So for the first half of twenty twenty three, We processed 76 procurement and reseller transactions, of which 60 were agent type transactions. The gross value of transactions processed in the first half of in 2023 was $49,600,000 and that translated into $12,300,000 of revenue for GAAP purposes at $1,900,000 of gross profit. This compares to the first half of twenty twenty two, where we processed 38 transactions, of which 35 were agent to the company's website and the gross value of those transactions was $14,600,000 which was reported as $2,500,000 of GAAP revenue and 0 point $4,000,000 of gross profit. Our gross profit margin of 22% during the 2nd quarter was down from 41% in the Q2 of 2022 and down from 26% in the Q1 of 2023. Our gross profit margin is directly influenced by several factors, including the mix of revenues between system integration, facilities maintenance in procurement and reseller services.

Speaker 1

We make a lower margin on our procurement and reselling activities. So as this business represents a larger portion of our total revenues, we expect our overall gross margin to decrease as a result. So in the Q2 of 'twenty three, reseller revenues were 76 and we will now turn the call over to our operator today. At this time, I would like to welcome everyone. Of our total revenue compared to 12% of total revenues in Q2 of 2022, and our reseller revenues were skewed towards agent type transactions.

Speaker 1

Overall, our actual gross profit increased by 23% or $600,000 compared to the Q2 of 2022 to up to $3,200,000 from $2,600,000 a year ago. Year to date for the first half of twenty twenty three, that gross profit margin was 23% compared to 37% in the first half of twenty twenty two. And this decrease because of the higher proportion of our total revenues that we got from procurement and reseller activities in 'twenty three. And the procurement reseller revenues were 58% of revenue in 2023 compared to 22% in the first half of twenty twenty two. In dollar terms, our gross profit improved by $600,000 in the first half of twenty twenty three to $4,900,000 up from $4,300,000 last year.

Speaker 1

Our selling, general and administrative expenses during the Q2 of 'twenty three were $2,200,000 This is up $556,000 or 35 compared to the Q2 of 2022 and year to date our selling, general and administrative expenses were $4,400,000 which is up $1,100,000 from the $3,300,000 we had in the first half of twenty twenty two. These increases were primarily in higher headcount costs, including cost and investments made as we've expanded our sales and leadership teams during the last year to help position the company for future growth. After all of the above, we recorded an operating income of $975,000 in the Q2 of 2023. This compares to operating income of $939,000 in the Q2 of 2022. This was also a $1,600,000 improvement from our operating loss of $665,000 that we had in the Q1 of this year.

Speaker 1

Year to date, our operating profit of $310,000 compares to an operating profit of $766,000 in the first half of last year. Our interest costs increased substantially during the Q2 compared to the previous year. And as I said, this increase is due to the financing costs associated with funding, procurement and reseller activities. $628,000 of our interest expense in the Q2 related to procurement and reseller compared to $27,000 a year ago. And you should expect large fluctuations in the level of interest expense as long as the volume and value of our reseller transactions continues to fluctuate on a quarterly basis.

Speaker 1

As I said earlier, the gross value of transactions financed was $42,900,000 this year compared to $4,300,000 last year. After interest and tax costs, we had net income of $315,000 or $0.01 per share in the 2nd quarter. This compares to net income of $771,000 or $0.04 per share in the Q2 2022. For the 6 month period ended June 30, we had a net loss of $471,000 or $0.02 a share and that compares to net income of $463,000 in the first half of twenty twenty two. Our adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, stock based compensation with a profit of $1,223,000 in the Q2 of 2023, and that compares to an adjusted EBITDA profit of 1,100 to $16,000 in the Q2 of 2022.

Speaker 1

For the 6 months ended June 30, our adjusted EBITDA profit was $796,000 and this compares to an adjusted EBITDA profit of $1,159,000 in the first half of twenty twenty two. Turning now to our balance sheet. Our balance sheet position remains healthy. The timing of events around our reseller transactions and the changes in our cash balances and the increases in our accounts receivable, inventories and accounts payable since prior year are primarily due to the timing of cash receipts and payments related to reseller transaction. At the end of June, for example, $9,400,000 of our accounts receivable and $32,000,000 of our accounts payable were related to our reseller activities.

Speaker 1

We continue to feel good about the strength of the balance sheet and looking at ways to utilize it to assist us in growing future growth and cash flows. We believe we have adequate trade credit available to us to continue financing our reseller business as we grow this business during 2023 and beyond. In May, we also renewed our revolving line of credit facility with Susser Bank. This $1,500,000 line of credit was extended for another 12 month term and provide us with additional financial flexibility as we move to diversify our customer base. So with that, I'll hand the call back to Daryl for his comments on the Q2 and how we see the business evolving over the balance of 2023.

Speaker 1

Thanks, Daryl.

Speaker 2

Okay, John. Thank you. At the outset of this call, we have a plan for TSS and we're working quickly and moving quickly on all fronts. Let's begin with our integration business. This business was the one in the most challenging condition when I started.

Speaker 2

We lack the ability to scale up or back with volumes that can vary dramatically. More importantly, when we approached our key OEM to customer for additional volumes. Concern was expressed about our ability to scale. That has completely changed in the first half of this year. We have managed our overall costs now while cleaning up our process.

Speaker 2

We can now service more business even twice the level of business at less cost than before. Labor is critical for us and we have restructured our approach to hiring for our integration business. Balancing our labor force between direct employees in temporary workers is critical to have capacity for growth while maintaining profitability. We have accomplished this with significant reductions in labor costs overall. This enables us to be more nimble and to quickly react to periods of lower and or higher demand.

Speaker 2

2nd, we continue to build out our A team of players. I mentioned Todd Merritt in Q1. He continues to lead the transformation of our integration business. He's doing a great job. We hired Jim Oliver in Q2 to lead our modular data center revenue activities.

Speaker 2

In his 1st 3 months with TSS, he's uncovered new routes to market and a handful of important opportunities. We have most recently decided to move 100% of all of our TSS revenue generation under Jim. Kiernan Brennan, who formerly manages, will refocus his attention on new customer expansion and partner selection and management. And we recently hired Janet Morrison to lead our talent development and selection efforts as well as corporate communications to provide for our growth. Our third focus area is our plan to strategically expand our business.

Speaker 2

We believe the market is rapidly searching for ways to leverage newer and more to Carpool Solutions for advanced compute technology implement AI, cybersecurity protection and data analytics solutions. We are working with our IT OEM partners to understand the complicated requirements of these solutions, including form factors, to issues such as power and cooling and deploy ability based on where compute resources may sit. GSS offers speed and flexibility of integration, including prefabricated form factors, large and small, coupled with high end deployment and post deployment maintenance. For new programs such as those that may serve emerging trends such as AI, Flexibility and scalability are key. Historically, we've been too reactive, letting our IT OEM partners to figure out solutions to bring programs to us.

Speaker 2

We will and we have to adjust our go to market model to begin our selling activity earlier in the to end user customer engagement cycle alongside our OEM partners, and we expect to invest in new routes to market to expand our reach beyond one customer. This new strategy enables us to pursue offerings for services across a broader range of the IT infrastructure market. We will continue to develop our selling and planning relationships with our key OEM customer. While we expand into these new markets and go to market relationships, I fully intend to make announcements that support this game plan soon. As I stated, we have a high level of urgency in the management team at TSS.

Speaker 2

And while restructuring our SI business and bringing on new talent has been our recent focus for actively exploring new market opportunities, It is very important to me personally as CEO to lead our team to expand our existing business and to pursue these new areas of business leading to profitable growth. I remain convinced there is a significant opportunity to grow our business and what is today versus today versus what it was 8 months ago when I started. We're implementing organizational change, deploying new selling methods to achieve these goals. Our leadership team is more focused than ever to capitalize on these exciting industry opportunities. I commented earlier that we anticipate some decrease in demand for our integration business over the next few quarters and we still expect our revenues will grow in 2023 versus 2022, and we project being profitable with strong EBITDA comparable to 2022.

Speaker 2

Our investments and actions are helping us in 2023 and paving the way for growth. With that, let me turn the call back over to John to go over any questions you may have. Thank you.

Operator

We'll pause for just a moment to compile our Q and A roster. There are no further sorry, there are no questions at this time. I will now turn the call back over to the CEO, Mr. Daryl Dwan.

Speaker 2

Okay. I think that summarizes our call. Thank you for your attention and participation. I'm looking forward to an exciting future. Stay tuned for some announcements and have a good afternoon.

Speaker 2

Thank you very much.

Operator

Ladies and gentlemen, thank you for participating. This does conclude today's conference call. You may now

Speaker 1

disconnect.

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