TSS, Inc. (PNK:TSSI) Q4 2023 Earnings Call Transcript

TSS, Inc. (PNK:TSSI) Q4 2023 Earnings Call Transcript March 28, 2024

TSS, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to the TSS Fourth Quarter and Fiscal 2023 Earnings Call. I would now like to welcome John K. Penver, Chief Financial Officer, to begin the call. John, over to you.

John Penver: Thank you, Mandeep. Good afternoon, everyone. Thank you for joining us on TSS’ conference call to discuss our fourth quarter and our fiscal 2023 financial results. I’m John Penver, the Chief Financial Officer of TSS. And joining me today on the call is Darryll Dewan, 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 that’s contained in the press release we issued today. That same language applies to comments and statements made on this conference call. This call will contain time-sensitive information as well as forward-looking statements, which are accurate as of today, March 28, 2024.

TSS expressly disclaims any obligations 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’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. A reconciliation of the differences between those measures with the most directly comparable financial measures calculated in accordance with GAAP is included in today’s press release. Darryll will kick off today’s call with an overview, and then I will provide more of a review of our fourth quarter and fiscal ’23 results and then turn I will turn the call back over to Darryll to discuss our strategy and direction.

Darryll?

Darryll Dewan: Great. Thanks, John. Earlier today, we released a press release announcing our financial results for the fourth quarter and for the full year of 2023. A copy of that release will be made available on our website at www.tssiusa.com. On behalf of the entire TSS team, I’m very pleased to report that we achieved very strong financial results in Q4 and fiscal year that contributed to a strong 2023 as well. As I forecasted in our last earnings call, we anticipated a strong fourth quarter in revenues, operating income, net income, and EBITDA, and we delivered. We achieved our plan and recorded 24.4 million in revenue in our fourth quarter, our highest quarter revenue ever, which helped drive our full year 2023 revenues to 54.4 million.

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Q&A Session

This was a 78% increase compared to our 2022 revenues of 30.6 million. This increase in revenue drove year-over-year improvements in our gross profits, which were up 68% compared to the fourth quarter of 2022, and 1.4 million increase in our operating profits compared to the fourth quarter of 2022 as well as a $1.5 million improvement in our net income compared to the fourth quarter of 2022. For the year, we increased our operating profits by 91% compared to 2022, and we increased our adjusted EBITDA by 60% compared to 2022. We achieved these strong results while making operational and go-to-market strategic investments in the business throughout the year. Our results convinced me that we are taking the right steps to enable TSS to aggressively scale and serve the growing demand for our configuration services business.

We have introduced several new services since our last call, including in-field rack integration and cabling services where, based on customer requirements, we can build and integrate rack’s and systems on-site at customer locations. We are excited about this growth opportunity as it will leverage our in-house expertise and extend to a more broad market for delivering that quality service on-site at a customer facility. We also introduced a formalized data center move service to enable enterprise customers to outsource the management of data center facility relocation or consolidation. We can arrange the physical movement of sophisticated IT equipment from one location to another using our specialized project management personnel. As we listen to the challenges of our customers having optimizing their investment or IT infrastructure, we will continue to identify additional ways in which we can profitably help our customers.

We are witnessing an increase in demand for generative AI-based computing technology from a variety of technology providers, and we are prepared to scale our capacity and increase in this demand. We have modeled plans to scale our data center rack integration business up to 10x over our 2023 rack integration results, and we are positioned to implement them in 60 days. We expect to benefit from this growth beginning in the second half of this year, 2024. So, with that, let me turn it back over to John to provide additional financial info. I appreciate you listening.

John Penver: Thanks, Darryll. As Darryll said, looking at fourth quarter, the results were very strong with year-over-year growth in revenue, gross profits, operating and net income compared to the fourth quarter of 2022. Our Q4 revenue of 24.4 million is the highest quarterly revenue we’ve ever recorded and was driven by strong growth in our procurement services business. We also saw improved performance in our system integration business as well. For the financial year, we increased annual revenues to 54.4 million, improving gross and operating profits and EBITDA, and turning our net loss into a small net profit for the year. So, let me go into some of the details. Our revenue for the fourth quarter of 2023 was 24.4 million.

This represented growth of 13.5 million, or 123%, compared to revenue of 10.9 million in the fourth quarter of 2022. This was also up substantially from the 8.9 million of revenue we had in the third quarter of 2023. The growth compared to the fourth quarter of ’22 was primarily from the $13.2 million increase in our procurement business compared to 2022 and small increases in both our facilities and our system integration businesses compared to the fourth quarter of 2022. We are changing how we describe our procurement service business to make the results more clear for investors, given the revenue volatility that we experience. The total contract value we process in this segment every quarter may be relatively consistent, but our GAAP revenue is heavily impacted by the revenue recognition methodology.

It should be noted, while our revenue and cost of sales are impacted by accounting methods, our profit is not. Because we have limited discretion in selecting accounting methods, we will focus for reporting purposes on the total contract value each quarter in procurement services. So the gross value of all the procurement transactions we processed during the fourth quarter of 2023 was $32.6 million compared to $33.8 million in the fourth quarter of 2022. Our recorded revenue increased from 7.6 million in 2022 to 20.8 million in the fourth quarter of 2023. Our systems integration revenue of $2.2 million in the fourth quarter of 2023 were up by 0.5 million or 31% from the prior quarter, as we undertook several AI-related rack integration projects in this last quarter, including infield integration services for an AI customer.

The systems integration revenues were up 3% compared to the fourth quarter of 2022 by way of comparison. Our facilities business recorded 1.5 million in revenue during the fourth quarter of 2023. This was up 240,000 or 20% compared to the fourth quarter of 2022, but was down by 19% or 340,000 compared to the third quarter of 2023. This business is materially impacted by the timing and number of modular data centers that we implement or deploy. And 2023 has been characterized by low levels of new MDC deployments and lower levels of refresh activity. Building backlog and increasing sales of new MDC units is a sales priority for the company in 2024. For the year ended December 31, 2023, our revenues were 54.4 million. This was 23.8 million or 78% higher than the 30.6 million in revenue we had in fiscal 2022.

Similarly to our fourth quarter results, the majority of this increase in 2023 was attributable to a 25.3 million or 191% increase in procurement revenues compared to 2022, a 1.6 million or 23% increase in systems integration revenues compared to ’22, and it was offset by a decline of 3.1 million or 31% in our facilities business compared to ’22 due to a decline in the number of MDC deployments that we completed in ’23 compared to ’22. The gross value of transactions processed in our procurement business was $123.2 million in 2023. This included 188 transactions processed. In 2022, we processed $72.8 million in transactions, which was 98 transactions. We recorded full year revenues of $38.5 million in 2023 compared to revenue of $13.2 million in 2022.

Our systems integration revenues were $8.8 million in 2023, increasing by 1.6 million or 23% from the $7.2 million that we had in 2022. The majority of this increase was due to improved pricing and due to an increase in demand during the fourth quarter of the year. Our facilities business recorded revenues of 7.1 million in 2023. This was down 31% or 3.1 million from the 10.2 million that we’d recorded in 2022 and it’s comparable to the levels that we’d had back in 2021. Our recurring revenues from maintenance contracts have increased by 24% since 2022 due to a higher number of modular data centers under annual maintenance contracts, and this has helped offset the $3.7 million decrease in one-time deployment project revenue as the number of new deployments has fallen compared to 2022.

We anticipate that our level of system integration services, particularly rack integration, will continue to improve in 2024, driven by an increase in AI-based systems and hyperscale computing centers based on forecasts we’re getting from our customers. Our production schedule is still impacted by the availability of components needed in production, particularly with regard to chipsets and GPUs and the service for AI applications, as well as fiber optic cables for these projects. Our gross profit margin of 13% during the fourth quarter of 2023 was down from 18% in the fourth quarter of 2022 and down from 32% in the third quarter of 2023.Our gross profit margin is directly influenced by several factors, including the percentage of our total revenue that comes from procurement services.

There’s an inverse relationship such that an increase in the percentage of our total revenue coming from procurement services will cause a decrease in our overall gross profit margin as the margins on procurement are approximately one-third that as the margins from our integration and facilities businesses. So in the fourth quarter our procurement revenues were 85% of our total revenue compared to being 70% of our total revenue in the fourth quarter of 2022. The gross profit on our integration and facilities businesses was 42% in the fourth quarter of 2023 and this compared to 16% in the fourth quarter of 2022 when we had much higher operating costs in our integration business. As reported earlier our team is focused on increasing our integration and facilities business in 2024 and we expect margins to improve in 2024.

Overall in dollar terms our actual gross profit increased by 68% or $1.3 million compared to the fourth quarter of ’22 to a level of 3.3. For the year our gross profit margin was 20% compared to 29% in ’22 and again this was because of the proportion of revenues that we earned from procurement activities in ’23 where procurement revenues were 71% of our total revenues compared to 43% back in 2022. In dollar terms our gross profit improved by $2 million in ’23 to $11 million up from $9 million in 2022. Our selling, general and administrative expenses during the fourth quarter of ’23 were 2.5 million this was down 57000 or 2% from the 2.5 million we had in the fourth quarter of 2022. On an each date basis, our selling general and administrative costs were $8.9 million up $1.2 million from the $7.7 million we’d had in 2022.

These increases were primarily in higher headcount costs, including higher variable compensation costs as our revenue increased. There was also approximately a $1 million in cost and investments made by us during 2023 as we’ve expanded our sales and leadership teams during the last year to help strategically position the company for future growth. After consideration of all the above, we recorded an operating income of 724000 in the fourth quarter of ’23 compared to an operating loss of 723000 in the fourth quarter of 2022. So this was an improvement of $1.447 million compared to the fourth quarter of last year. For the year ended December 31,’23 our operating profit of 1.750 million compared to an operating profit of 914000 in 2022.So this was a 61% increase in operating profit compared to our 2022 results.

We had a substantial increase in our level of interest expenses compared to the prior year. Nearly all of our interest expense relates to the procurement business where large transaction receivables are financed for a short period. So the higher volume of business transacted through the procurement business is the main reason for the increase in interest expense. So our interest expense in the fourth quarter was 498 000 compared to 410 000 a year before and for the year, our total interest expense was almost 2 million it was 1.971 million and this was a $1 million higher than what we had the year before. After interest and tax costs we had a net income of 335000 or $0.02 per share in the fourth quarter of 2023.This compared to a net loss of 1.141 million or $0.05 a share in the fourth quarter of 2022.

This represents an improvement of 1.476 million in net income compared to the fourth quarter of 2022. And for the year ended December 31, 2023 we had net income of 74000 or $0.00 a share this compared to a net loss of 73000 or $0.00 a share in 2022. Our adjusted EBITDA which excludes interest taxes depreciation, amortization and stock-based compensation was a profit of 923000 in the fourth quarter of 2023 compared to an adjusted EBITDA profit of 90,000 in the fourth quarter of 2022.For the year, our adjusted EBITDA was a profit of 2.651 million, this compared to an adjusted EBITDA profit of 1.662 million in 2022 and represents growth of 989000 or 60%compared to 2022. Now turning to the balance sheet, our overall balance sheet position remains healthy.

The timing of events around the procurement transactions has had a material impact on the balance sheet. The changes in our cash and increases in receivables, inventory payables and deferred revenue since the prior year are primarily due to the timing of cash receipts and payments relating to procurement transactions. So the volume of procurement activity was higher at the end of ’23 compared to the end of 2022. At the end of 2022 we actually were able to be paid for multiple large procurement projects, but had yet to pay vendors for these same projects and this resulted in an increase of approximately $14 million in our cash and our accounts payable at the end of 2022.So during the first quarter of this year we paid those vendors and our cash and accounts receivable accounts payable balances decreased by the same amount.

The increase in inventory and receivables in 2023 compared to last year is really attributable to the timing of in progress procurement projects. With that, I will hand the call back to Darryll for some comments on the fourth quarter and how we see the business evolving in 2024? Thanks, Darryll.

Darryll Dewan: Yeah, great, John, thank you. The end of 2023 marked my 14 months and a very exciting first year with TSS and in the industry. It really was a transformational year for the company. We set the table for growth by investing in the efficiency and scalability of our integration services business as we sometimes refer to as the factory here in Round Rock and our company-wide go-to-market selling capacity. We are proud of our financial results and increases in year-over-year revenue net income in EBITDA but we’re not done we’re not completely where we want to be yet. I like to say amongst our team our job number one is execution. We will continue to focus our attention on meeting our financial goals and becoming a more recognized and relevant provider of integration services in the marketplace.