Earnings Call
TSS, Inc. (TSSI)
Earnings Call Transcript - TSSI Q1 2022
Operator, Operator
Welcome to the TSS First Quarter 2022 Earnings Call. My name is Daryl and I will be your operator for today's call. As a reminder, this conference call is being recorded. I will now turn the call over to John Penver. John, you may begin.
John Penver, CFO
Thank you, Daryl. Good afternoon, everyone. My apologies for the late start. We had a few technical issues in getting the call moving, but thank you for joining us on this call today to discuss our first quarter 2022 financial results. We have been experiencing some challenges with a change in system with our earnings call, so I apologize for the delay and appreciate your patience. I'm John Penver, the CFO for TSS. And joining me on the call today is Anthony Angelini, the President and Chief Executive of TSS. As I begin the call, I'd 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 this conference call. This call contains time-sensitive information as well as forward-looking statements which are only accurate as of today, May 16, 2022. TSS expressly disclaims any obligation to update, amend, supplement or otherwise review any information 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 measures. A reconciliation of the differences between these measures and 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 first quarter of 2022 results, then turn the call over to Anthony for some comments on the business and how we see 2022 shaping up. Earlier this afternoon, we released a press release announcing our financial results for the first quarter of 2022, and a copy of that release will be made available on our website at www.tssiusa.com. Overall, our revenues were very similar to the first quarter of 2021. However, due to a change in our sales mix, we were able to improve our gross profits by $361,000 or by 28%, which flowed through to our bottom line and allowed us to record a small adjusted EBITDA profit in the first quarter of 2022 compared to the $334,000 EBITDA loss we had in the first quarter of 2021. The change in sales mix occurred in our procurement reseller services and in our facilities business. Our level of reseller revenues has historically fluctuated on a quarterly basis. In the current year, we had more transactions where we simply acted as an agent in the transaction, meaning that we were not in custodial control of the underlying inventory. For these agent-type transactions, we record our revenue as the net amount of the commissions or earnings. So although our reseller revenue was down by 22% or $478,000 compared to the first quarter of 2021, we actually increased our gross profit from this revenue stream by $130,000 compared to the first quarter of 2021. Our facilities business grew by 32% or $499,000 compared to the first quarter of 2021 as deployments of modular data centers increased, in part due to an improvement in the supply of equipment needed for deployments. This improvement in supply chain for deployment revenues grew by 216% compared to the first quarter of 2021, which was offset by a decrease in revenue from refurbishment and refreshment of older modular data center units as the new deployments are starting to replace older units in the field. As long as these supply chain issues continue to mitigate, we would anticipate strong year-over-year growth in our facilities business for the remainder of fiscal 2022. Overall, when looking at the business that replaced reseller revenues with revenues from our facilities business, our total revenue increased by $22,000 compared to the first quarter of 2021. Because we had higher margins on our facilities revenue than on procurement and reseller activities, we were able to increase our gross profits by 28% from 2021 on flat revenue. Revenues in our systems integration business were down marginally by 4% compared to the first quarter of 2021. Towards the end of this first quarter, we did see some improvement in supply chain constraints that we've been dealing with since mid-2021, and we were able to start fulfilling some of the record backlog that we've built up. We anticipate that our second quarter will show improved results in this business as the supply chain constraints continue to improve. We do expect that supply chain interruptions will continue throughout the remainder of 2022 and impact our integration business based on comments from our vendors and customers. Our first calendar quarter of each year does have higher operating expenses compared to our other quarters as we complete our annual audit and deal with SEC compliance costs. This year, the costs were down marginally compared to the first quarter of 2021. Our revenue for the first quarter of 2022 was $5.2 million, which compared to $5.2 million in the first quarter of 2021 and $14.6 million in the fourth quarter of 2021. Changes in the level of reseller revenues are primarily responsible for fluctuations in our quarterly revenues. Our reseller revenues, for example, decreased by $10 million from the fourth quarter of 2021 and were $0.5 million lower compared to the first quarter of 2021. The timing of these reseller and procurement transactions is often beyond our control and continues to drive large fluctuations in our quarterly revenues. Our medium to longer-term goals will be to drive more consistency in this revenue stream. During the first quarter of 2022, most of our procurement and reseller transactions were agent transactions where we have no control of the goods or services before they transfer to the customer. Our facilities business generated $2.1 million of revenue during the first quarter of 2021. This was $0.5 million or 32% higher than such revenue in the first quarter of 2021 and also $0.7 million or 47% higher than the $1.4 million that we had in the fourth quarter of 2021. This improvement was driven by a large increase in deployment revenues. Our deployment revenue increased by $836,000 or by 216% compared to the first quarter of 2021. This business has been impacted since mid-2020 by the COVID pandemic as travel and site restrictions and recently, supply chain challenges have impacted delivery. As these supply conditions have improved, we've been able to deliver on our backlog of deployment projects and we anticipate higher deployment revenues over the next several quarters. Our integration revenues decreased by 4% or $55,000 in the first quarter of 2022 compared to the first quarter of 2021. This operation has been more impacted by supply chain issues, in part attributable to the impacts of the COVID pandemic. Towards the end of the first quarter, we saw an improvement in component supply that has allowed us to start fulfilling some of the backlog. We anticipate our level of integration services will increase in the next quarter from the Q1 levels. Our gross profit margin of 32% during the first quarter was up from 25% in the first quarter of 2021. The improvement in margin as a percentage of revenue was primarily attributable to the decrease in the level of procurement and reseller revenues. Our overall gross profit in dollar terms improved by $361,000 or by 28% to $1.7 million in the first quarter of 2022 compared to $1.3 million of gross profit in the first quarter of 2021. The margins on our core facilities and integration businesses were 40% in each of the first quarters of 2022 and 2021. Our selling, general and administrative expenses during Q1 2022 were $1.7 million. They were down 46% or 3% compared to the $1.8 million in the first quarter of 2021. We anticipate a decrease in operating expenses in the second quarter as a result. After all the above, we recorded an operating loss of $173,000 in the first quarter of 2022 compared to an operating loss of $607,000 in the first quarter of 2021. After interest and tax costs, we had a net loss of $308,000 or $0.02 a share in the first quarter of 2022 compared to a net loss of $699,000 or $0.04 a share in the first quarter of 2021. Our adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and stock-based compensation, was a profit of $43,000 in the first quarter of 2021, compared to an adjusted EBITDA loss of $334,000 in the first quarter of 2021. Turning now to the balance sheet, our balance sheet position remains healthy. The timing of events around our reseller transactions definitely has a material impact on our balance sheet. The changes in cash balances, deferred costs, inventories, and accounts payable since the prior year are primarily due to the timing of cash receipts and payments related to reseller transactions. Due to the timing of upcoming reseller projects at the end of March 2022, we were able to be paid from customers but had yet to pay vendors and suppliers for these projects, causing our accounts payable and accrued expenses to increase by $4 million during the quarter. Our deferred costs on reseller projects consumed $1.3 million during the quarter, with an increase in inventory consuming $0.6 million, offset by an increase in deferred revenues of $0.4 million. 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 cash flows. We believe we'll have adequate trade credit available to continue financing the reseller activities as we grow this business in 2022 and beyond. Last week, we added a new $1.5 million revolving loan credit facility with our new bank to provide more financial flexibility as the business grows during 2022. With that, I will now hand the call over to Anthony for some comments on the first quarter results and how we see the business evolving during 2022. Thanks, Anthony.
Anthony Angelini, President and CEO
Thank you, John. And echoing John's remarks, we apologize for the delay. There were some issues with our provider that we had to work through. I'll start my comments by noting that despite some macro environment challenges, particularly supply chain challenges, we were still able to achieve a small amount of positive adjusted EBITDA in Q1. As John mentioned, our first quarter has additional operating costs due to our audit fees and other professional fees. This has been consistent over the years. It is best to compare the first quarter year-over-year, and we saw improved gross margins and bottom line results compared to 2021. As we see supply chain issues beginning to ease and delivery of materials becoming more predictable, we expect continued improvement quarter-over-quarter throughout the year. We have already seen good improvement in the second quarter. Our current expectations are to finish the year with revenue in the mid- to high $20 million range, margins in the mid- to high 20% range, and adjusted EBITDA profit north of $2 million for the year, with positive net income for the year as well. We are carefully navigating the current market conditions and continue to hold a large overall backlog of projects. As we look at growth opportunities, we remain focused on delivering our core business and its backlog efficiently. We continue to explore both organic and potential M&A opportunities to diversify our customer base and expand our overall services. In the near term, we will monitor the macro dynamics while focusing on maximizing profitability and cash flow. We believe as we progress through the year, we will deliver increasing cash flow from operations that will further strengthen our balance sheet. Our service capabilities and balance sheet are positioned both to weather any bumps in the road and to provide opportunities for expansion. Demand for IT and data center infrastructure will continue to grow. The capabilities provided by the infrastructure we deliver through our services are important investments for many companies to help offset inflation challenges by increasing efficiency in operations. In general, we believe we are taking the right steps to maximize our resources and deliver positive cash flow in 2022. With that, we'll be happy to take your questions.
John Penver, CFO
Okay. Thank you, Daryl. We again apologize for the delay in the call and if that impacted anyone. We feel good about the year and how we're navigating the marketplace. We look forward to talking to you late summer and showing you the results we're starting to achieve. Thank you.
Operator, Operator
And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.