Tss Inc

Good afternoon and welcome to the TSS first quarter 2024 earnings call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one a second time. I will now turn the call over to Mr. John Penver, Chief Financial Officer. Please go ahead.

Thank you, Brianna. Good afternoon, everyone, and thank you for joining us on TSS's conference call to discuss our first quarter 2024 financial results. I'm John Penver, Chief Financial Officer of TSS, and joining me today on the call is Daryl Dewan, President and Chief Executive Officer for TSS. As we begin the call, I'd 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 today's conference call. This call will contain time-sensitive information as well as forward-looking statements which are accurate as of today, May 14th, 2024. TSS expressly disclaims any obligation 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 the date indicated, unless otherwise required by applicable law. For a list of the risk 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, and 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. So Darrell will kick the call off with an overview and commentary about the first quarter's performance. I'll provide some more financial detail and then hand the call back to Darrell to recap with our strategy and direction. Darrell?

Yeah, thank you, John. Coming off our most successful fourth quarter in history, I'm excited to report that we continued the momentum around our core business objectives in the first quarter of 24. We continued to focus attention to operational excellence, built and strengthened our team, improved our go-to-market efforts in business execution, and increased our focus on developing and expanding partner relationships. Those efforts resulted in strong revenue growth and improvement in gross revenue and operating profits and improved adjusted EBITDA compared to the prior year. Some of the key highlights for the first quarter of 24 include first quarter overall revenue of 15.9 million compared to 6.6 in the first quarter of 23. Procurement revenues were 11.6 million in the first quarter of 24 compared to 1.7 million in the first quarter of 2023. Increased gross profits by 1 million or 61% compared to the first quarter of 23, improved operating income by $918,000 to income of $253,000 in the first quarter of 24, and compared to an operating loss of $665,000 in the first quarter of 23. Net income of $15,000 or zero per share in the first quarter of 2024 compared to a net loss of 786,000 or four cents negative per share in the first quarter of 23. And finally, adjusted EBITDA of 475,000 in the first quarter of 24 compared favorably to an adjusted EBITDA loss of 436,000 in the first quarter of 23. Our strong Q1 revenue growth and improvement in gross and operating profits and adjusted EBITDA compared to Q1 of the prior year were driven by the strength in our procurement business. In the short term, we have benefited in the procurement business from overall increased data center demand, and beneath the financial coverage, the changes are extremely positive. The fundamental changes we have dedicated our efforts to have not yet materialized in visible financial results, but our sales funnel is growing at a very rapid pace in our systems integration business in particular, and we expect this to become visible investors in 2024. I'd say this is quite a turnaround from where we were 18 months ago. We are seeing increased demand for our RAC integration services driven by this seemingly limitless demand for generative AI computing solutions. Customer engagement along with our OEM partner is at a scale we have not previously experienced. RAC quantities that used to be measured in the tens are now in the hundreds, and quantities that used to be in the hundreds are now in the thousands. Our historical financials have been plagued by cycles of low RAC volumes spiking rapidly and temporarily. This historical rack demand volatility does not support investment in capacity capabilities. We have completed planning and begun to expand our production capacity. This time, however, this expansion is occurring in partnership with our customers, including our largest OEM partner. Our customers require scalability. We require greater consistency. Again, this is all in the context of the extreme shift in market demand. The market shift we are in the middle of demands quick response, flexibility and high quality integration related services. Does this sound familiar? Since joining TSS, I have echoed on investor calls, we are not the biggest and not the cheapest integration partner for OEMs, but we are the highest quality and our flexibility and nimble response time has made us the ideal partner, especially in the current environment. This is why we've invested in the way we have in our operations team. We must be the best. There are many unknowns in the AI influence area of the IT market today. The rapid advancements from chip providers such as NVIDIA seem to be causing a new trend in data center design and evolution. Existing data center footprint is showing a need to incorporate new technologies as they are introduced. Many of these bring along with them ancillary changes such as in power and cooling modalities. As an example, extremely dense high-performance compute solutions are leaning more towards direct liquid cooling solutions, which brings an entirely new consideration to data center design. All this has been the motivation behind our data center moves offering, which I touched upon in a previous call. Still in its infancy, although with a growing pipeline, this service could address the changes in existing data center footprint that will occur as new technologies are implemented. This becomes an interesting market opportunity. While our systems integration business is benefiting directly from the increased demand, there remains questions over the role of and for modular data centers. It would be logical that over time, packages of racks with differing powering or cooling requirements, for example, would be fitted into modular solutions for ease of deployment and ongoing operation. As I mentioned during our last call, operationally, we are in the process of scaling our integration business investing in both the factory team and technology to be able to increase our rack integration capacity up to at least 10x our current volume. Our expansion is scaling with the growth and data center infrastructure spending that we are witnessing. Our improved operations along with guidance from proven leadership and our team that has executed ambitious goals in the past is allowing us to meet the demand and make the appropriate investments while improving and maintaining our financial strength. We will continue to make improvements to the skilled labor force that is required to support our growth. These investments will provide benefits in the second half of 24 and carry us into 2025. Launched with less fanfare, but also critically important, was our Cybersecurity in a Box solution. This innovative offering integrates, configures, and delivers top tier cybersecurity solutions to customers, high performance computing, and IT infrastructure, providing robust protection against security breaches in a timely matter. This is another service which TSS, because of our experienced team and position at the intersection of high performance computing and demand, are uniquely qualified to deliver. We understand the complexity of the customer's IT infrastructure, how it all works together including cyber recovery solutions, and how speed and quality cannot be compromised. Leveraging our decades of experience, in delivering integration services and solutions, the new cybersecurity offer extends that legacy, ensuring both data and systems are safeguarded, including comprehensive cyber recovery integration services. Our capabilities don't pay the bills if no one knows about them. And so we've continued to expand our go-to-market brand awareness activities with product announcements, media coverage about our company and new services, and delivery of several articles that will be running in the next several weeks. These efforts have started to deliver new leads that the sales team is working to move to opportunities. We're early in these efforts, but pleased with the initial results. So Q1 was a busy and exciting quarter as we continue to deliver on the commitments we've made to our partners, customers, and long-term investors. Focused on the core elements of our business, we expect to see operational improvements and investments in growth driving improved financial results in 2024 and beyond. We would like to say we're at one of the busiest intersections in the technology sector and have the experience, the expertise, and the solutions to grow it more efficiently and effectively than others. So with that, I'd like to turn it back to John, who will provide more detail around our financial performance before closing with thoughts about the rest of the year. John?

Thanks, Daryl. Our first quarter revenue was $15.9 million. This represents growth of 142% compared to the $6.6 million of revenue we had in the first quarter of 2023. In this quarter, our revenue was made up of $11.6 million from procurement services, $2.1 million from our facilities business and $2.1 million from our systems integration business. Our procurement business revenues grew by $9.9 million compared to the first quarter of 2023. Our facilities revenue were down by $0.1 million and our systems integration revenues were down by $0.5 million compared to the first quarter of last year. The gross value of transactions processed in the procurement business was 20 million. This included 61 transactions. In the first quarter of 2023, we'd processed 6.7 million in transactions made up of 31 different transactions. Our systems integration revenue, as I said, of 2.1 million were down by 0.5 million. Now the facilities business was up by 47% or 0.7 million compared to the fourth quarter of 23. as we delivered a non-side assessment service, delivered a new modular data center deployment project and completed some refresh of modular data centers in several locations. The revenues were down compared to the prior year as we had a large deployment project occurring during the first quarter of 2023. Our gross profit margin of 17% during the first quarter of 2024 was down from 26% in the first quarter of 2023 but it was actually up from 13% that we had in the fourth quarter of 2023. Our gross profit margin is significantly influenced by our revenue mix and the accounting treatment of transactions in the procurement business. Overall, the gross profit of $2.7 million was an increase of 61%, or $1 million compared to the first quarter of 2023. Our selling general and administrative expenses during the first quarter of 2024 were $2.4 million, They were up 127,000 or 6% from the 2.3 million we had in the first quarter of 2023, and this increase was primarily in higher headcount costs. Our operating income was 253,000 in the first quarter, compared to an operating loss of 665,000 in the first quarter of 2023, which is an improvement of $0.9 million. Nearly all of our interest expense relates to our 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 reason for the increase in interest expense. Our net interest expense in the first quarter of 2024 was $228,000 compared to $112,000 in the first quarter of 2023. After interest and tax costs, we had a net income of $15,000 or zero cents per share. This compared to a net loss of $786,000 or minus four cents a share in the first quarter of 2023, an improvement of $801,000. Our adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and stock-based compensation, was $475,000 in the first quarter of 2024, compared to an adjusted EBITDA loss of $436,000 in the first quarter of 2023, an improvement of $911,000, or 209%. Our balance sheet position remains healthy. We generated $2.6 million in cash from operating activities during the first quarter of 2024. The timing of events around the procurement transactions has a material impact on our working capital composition. And so the year-to-date changes in cash, accounts receivable inventories, payables and deferred revenue are primarily due to the timing of cash receipts and the payments related to our procurement transactions. So with that, I will hand the call back over to Daryl for some closing comments. Thanks, Daryl.

Yeah, thank you, John. I want to highlight how our ability to deliver high-complex AI solutions at high volume places us in a unique position in the OEM and customer ecosystem. We're building our momentum and capabilities to support the unprecedented growth in the industry driven by AI. and a growing demand for more traditional rack integration driven by cloud computing and more advanced IT systems. We are very well positioned for continued growth. The turnaround executed last year is bearing fruit. The success in Q1 on the strength of our procurement business and the prospects for our systems integration business in particular are very exciting for the rest of 24. The impacts of the changes we've made and talked about over the last few quarters will become increasingly more evident. This is an exciting time for the team at TSS, and we appreciate the continued support of our shareholders. We are focused on delivering value to our customers, to our team and employees, and to you, our shareholders. So with that, we'll take any questions you might have.

We will now open the line for questions. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad to raise your hand and join the queue. To withdraw your question, simply press star 1 a second time. Again, please press star 1 to join the queue and ask a question. Seeing no questions at this time, I will turn the call back over to Mr. Daryl Dewan for any closing remarks.

Thank you.

I've talked to many of you, and it's refreshing to hear the comments about investors' view of where we've been, where we're going, and long-term perspective, and we appreciate that. The AI demand is real. The growth for on-prem technology is real. Our rack integration capacity, as a result of a plan built 15, 18 months ago, is now bearing fruit. So we've got a plan, a multi-year plan, to continue to execute, to do more with our existing customer, and to grow outside of our existing customer. Both can happen in concert. I'd say we only have just begun, and I appreciate everybody's support and time, and if you have any questions at another time, please let me know. Thank you.

This will conclude today's conference call. Thank you for your participation and you may now disconnect.