TSS, Inc. (PNK:TSSI) Q3 2023 Earnings Call Transcript

TSS, Inc. (PNK:TSSI) Q3 2023 Earnings Call Transcript November 18, 2023

Operator: Good afternoon, everyone. My name is Briana, 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. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to John Penver, Chief Financial Officer. Please go ahead, sir.

John Penver: Thank you, Briana. Good afternoon, everybody. Thank you for joining us on TSS’ conference call to discuss our third quarter 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 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.

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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 also included in today’s press release. Darryll will kick off today’s call with an overview, and then, I’ll provide a review of our third quarter results and then turn the call back to Darryll to discuss our strategy and direction. Thank you, Darryll.

Darryll Dewan: Thanks, John. Earlier today, we released a press release announcing our financial results for the third quarter 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 Q3. We’re 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. 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 TSS and a more extensive sales organization. To this end, we’ve appointed Jim Olivier as the Chief Revenue Officer to lead our sales and 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 our primary businesses and introduce new service capabilities to the market by 2024. 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.

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Q&A Session

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. 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 on 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. Thank you. Did we lose, John?

John Penver: Thank you, Darryll. Sorry about that. As Darryll said, looking at our third quarter results, the results were very strong with year-over-year growth in revenue and gross profit and another quarter of strong operating profit and adjusted EBITDA. Our revenues year-to-date are up 52% compared to the first three 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. So let me go into some of the details. Our total revenue for the third quarter of 2023 was $8.9 million. This represents growth of $0.8 million or 10% compared to the total revenue of $8.1 million in the third quarter of 2022. This is down from the $14.5 million of revenue we had in the second quarter of 2023.

The growth compared to the third quarter of 2022 was primarily from a $2.3 million increase in our procurement and reseller activities compared to 2022, offset by a $1.5 million 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 $5.2 million decrease in our procurement and reseller activities and a $0.7 million decrease in our systems integration revenue as our OEM demand fell. The 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 third quarter 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 often beyond our control. During the third quarter 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. In fact, the gross value of all the procurement and reseller transactions processed during the third quarter was $41 million compared to $24.4 million in the third quarter of 2022. But based on the accounting treatment of agent transactions, we recorded $5.4 million 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 do impact this business and our interest expense associated with these transactions of $661,000 during the third quarter was up substantially from $262,000 in the third quarter of 2022 because of higher interest rates and the higher gross value of transactions financed. 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 third quarter 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 $1.3 million 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 deployment and maintenance services, generated $1.8 million of revenue during the third quarter of 2023. And this was $1.5 million or 46% lower than such revenue in the third quarter 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. This has helped offset part of the $3.6 million decrease in onetime deployment project revenue as the number of new deployments has fallen compared to 2022. We anticipate that our level of rack — system integration services, particularly rack integration, will continue to be slow in the fourth quarter of this year before rebounding next year based on forecast from our customers.