Earnings Labs

TSS, Inc. (TSSI)

Q2 2024 Earnings Call· Wed, Aug 14, 2024

$15.15

+0.40%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

+18.18%

1 Week

+65.09%

1 Month

+93.09%

vs S&P

+89.54%

Transcript

Operator

Operator

Good afternoon. My name is Brianna, and I will be your conference operator today. At this time, I'd like to welcome everyone to the TSS Second Quarter 2024 Earnings Call. Please note that today's 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. [Operator Instructions] I will now turn the call over to Danny Chism, CFO. Please go ahead, sir.

Danny Chism

Analyst

Thanks, Brianna, and good afternoon, everyone. Thanks for joining us for TSS's conference call to discuss our second quarter 2024 financial results. Joining me today on this call is Darryll Dewan, the President and CEO of TSS. As we 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 today's conference call. This call will contain time-sensitive information as well as forward-looking statements, which are accurate only as of today, August 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 replayed to reflect events or circumstances that may change or arise after the date indicated except as otherwise required by applicable law. For list of the risks and uncertainties that may affect our future performance, please refer to our periodic filings with the SEC. 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 U.S. GAAP is included in today's press release. Darryll will kick off the call with an overview and commentary about the quarter and year-to-date performance. Then I'll provide more details about our financial quarter results. And then turn the call back over to Darryll, to recap our strategy and direction. Darryll?

Darryll Dewan

Analyst

Thank you, Danny, and welcome to our team. Danny joined us in early June, and he's already making a significant impact bringing energy and innovative ideas to help drive our growth strategy. With over three decades of experience, Danny has a proven track record of delivering sound financial strategies and improving operational efficiencies during periods of rapid growth. His expertise spans crucial areas that will be increasingly important to TSS, including transactional experience, capital raising, and Investor Relations. His addition to our leadership team is a key part of our ongoing commitment to building and strengthening our organization. Speaking of growth and opportunities, let me share some insights on our current position and future trajectory. 2024 marks a pivotal transition for TSS, building momentum for accelerated growth and expansion for 2025 and beyond. Our current trajectory demonstrates significant progress, setting the stage for even greater achievements ahead. On today's call, I will provide additional context to illuminate our position and share why we're optimistic and poised for acceleration. Our turnaround strategy has progressed through key milestones as we previously communicated in the earnings call and announcement. To review, we began with a comprehensive operational cleanup, completed in the first half of this year and culminating in our ISO certification. Next, through our investment in people, systems, and physical layout of our main facility, we successfully demonstrated our ability to scale within our current capacity, addressing a crucial concern for our customers. Now we're entering a third phase, ramping up revenue, earnings, and cash flow. We are already seeing the beginning of this growth as our Q2 results reflect. Our execution has been established by solid operational foundation and proven scalability, positioning us for accelerated expansion ahead. Our performance in the first half of this year underscores our significant progress. We…

Danny Chism

Analyst

Thanks, Darryll. I'm excited to be here and excited to share the detailed financial results of another strong quarter for TSS. Before I jump into the earnings for the quarter, I'd like to make a couple of observations about our financial position. We again ended the period debt-free with an untapped available line of credit and just over $8 million of cash on hand. As Darryll mentioned earlier, an OEM partner with whom we work closely agreed to fund a significant portion of the capital investments we made during the quarter to enhance our capacity to rapidly build AI-enabled server and network racks for them. You can see this $1.7 million capital investment in our statement of cash flows. The portion of the reimbursement not yet amortized into revenue is included in our balance sheet as part of the deferred revenue balance. You'll also notice a $2.6 million increase in inventory compared to December 2023. That relates to configuration and systems integration work that was ongoing at the end of June. Our contract and other receivables also increased by just under $3.5 million. As the majority of our annual facilities maintenance management contracts were renewed July 1st and the invoices for those were sent out shortly before quarter end. The revenues for those, as in past years, will be recognized primarily over the next 12 months. Now I'd like to turn to the operating results for the second quarter. Ordinarily, I wouldn't be very enthusiastic about sharing with you a 16% decrease in our total revenue. However, if you look at the gross profit for the quarter, it's up 41%. Driven by a revenue shift mix to higher yielding services. The revenue decrease was driven by a $5.7 million or 54% decrease in our procurement revenue. It's a great business…

Darryll Dewan

Analyst

Thanks, Danny. It's great to have you on Board. Thank you. We, TSS, remain strategically positioned to drive growth in both the burgeoning generative AI market and traditional cloud computing. AI's transformative impact spans every sector, and TSS, alongside our partners, stands ready to meet this surging demand. Looking ahead, we anticipate continued growth in our rack integration business. The expansion of our capacity, completed in Q2, will yield significant benefits throughout the second half of 2024 and into 2025. Our ability to also provide on-site rack integration on a customer site with cabling services opens up new high-margin opportunities for TSS, expanding our total addressable market and customer base. Our expertise in handling complex integrations and our maintenance capabilities uniquely position us to capitalize on these trends and growing market demands. We believe we have the physical capacity to handle near-term growth that we anticipate. We also believe there is a potential demand looking into 2025 that might and may outstrip our capacity. We have begun initial exploration into further capacity expansion. Our procurement business remains strong despite quarterly fluctuations. In our modular data center business, while we've seen year-over-year improvement, we're now engaged in promising discussions with prospective customers. Our focus is on building a solid backlog to fuel revenue growth in 2025 and beyond. We're observing increased refresh activities in existing installations, though new builds are taking longer, particularly for AI solutions due to high GPU demand and anticipated technology releases. In the long term, we see potential synergy between AI and modular form factors, especially for use cases like autonomous vehicles and other time-sensitive applications in underserved areas. So, in conclusion, TSS now has the capacity, expertise, and track record to deliver for our partners and customers. We are very well positioned for the next wave of growth, and we continue to explore avenues to enhance our growth potential. I'm very optimistic of our future. I'm proud of our team. And with that, I'll open the lineup for any questions. Operator?

Operator

Operator

[Operator Instructions] Our first question comes from Maj Soueidan with GeoInvesting. Please go ahead.

Maj Soueidan

Analyst

Hi, Darryll. Thanks for taking the call. I have a couple of questions, really, and then I'll just go in the queue then. So obviously, it looks like you've got some growth in your rack integration, which is what we've been waiting for to see how that looks. Or kind of getting an idea of what that looks like in terms of the bottom line, based on what you've done in terms of efficiencies. So I guess my question is a couple of things here. Number one, can you start giving us an idea in terms of how much of your integration business is rack, so we can maybe start modeling a little bit in terms of your 10x kind of capacity expansion kind of goals moving forward? And number two...

Darryll Dewan

Analyst

Yes, I am happy…

Maj Soueidan

Analyst

I'm sorry. Go ahead. I like the answer to that.

Darryll Dewan

Analyst

That's okay. Don't make this too complicated. I'm trying. Fair enough. Keep going, man.

Maj Soueidan

Analyst

No, because I'm in the airport here and I want to make a noise in here. And so we're getting a glimpse of what you can do when you scale here at a rack integration. Are there more efficiencies down the line as you keep on growing that business? We're just trying to get an idea of what the larger picture might look like. And maybe the same question, really, with as modular it gets going, trying to understand the larger picture there as we move forward. That's really it right now.

Darryll Dewan

Analyst

Okay. See if I can take this apart. So first of all, to your question on 10x. Yes, I think we're on track to go do that. That is measured in terms of the quantity of racks. The mix of racks is changing in that we're getting more -- I think we're planning for the future where there's going to be an increase in direct liquid cooled solutions as compared to what we have today. When I mentioned about heat and cooling, the future is looking like it's going to move to a larger percentage of direct liquid. So we've got to accommodate that in our capabilities in our factory. And what we're going to run out of is power. And we're not sounding like anybody else, right? I mean, customers are clamoring for power and they're trying to figure it out. And we're not that much different. So at some point, depending on the percentage and the timing and the forecast that we're going to get, we are planning for more power. And it may be at a different facility, being blunt. And we're going to do that really carefully. And we're not going to go just run away and just do it for the sake of doing it. But we're going to have to lean in and make some decisions on that pretty soon. Now, I think on the modular, and by the way, I think we've got the capacity to grow here depending on the mix of business. But if it rapidly shifts to direct liquid, then we're going to have to more rapidly move to another facility. We have some sites in mind. We're planning for it. But we're just not ready to fully make a decision on that.

Danny Chism

Analyst

Yes, if I can jump in for just a second. One point I would make there also is we do have the ability to do some direct liquid cool today. We have that infrastructure. It's just not at the volume that we expect that to be in the future.

Darryll Dewan

Analyst

Okay. And on your modular question, part of the issue, Maj, is the lead time for componentry. When I first joined the company, I was told, lead time is anywhere from eight to 12 months to get a container, to get the power units, et cetera. And I said, that's nonsense. We can fix that. Well, we can't. But we can build tighter relationships with the folks who are doing that work, like the Verdas, the Schneider’s, the Eaton’s, et cetera. And we're doing that. We're taking steps to go get closer to those partners. What's that translate to? We do have -- we have an internal goal on the backlog and the pipeline that we want to build that will turn into revenue in 2025 and beyond, given the lead time. We're not where we need to be yet. But we're making progress. We've got a couple of deals that have closed. And we've got a couple of others insight. And we're working as aggressively as we can. I don't know if I answered your question. But if I didn't, let me know.

Maj Soueidan

Analyst

Yes, that was good, yes. I mean, maybe I guess one of my questions, if we can get more specific on it, or just maybe yes or no on it. Do you think that there's more efficiencies that come down the line here as you scale? You know, we got a glimpse of it here in Q2. Do you think the margin profile improves as you scale the business, especially with the rack integrations type of business, I guess, and maybe even modular?

Darryll Dewan

Analyst

The answer, absolutely, yes.

Maj Soueidan

Analyst

Okay, that was important there. Cool, cool. Yes, that's all I have for now, man. Thanks.

Darryll Dewan

Analyst

All right. Thanks, bud. Good to hear your voice.

Operator

Operator

Our next question comes from Jonathan Alvarado [ph], Private Investor. Please go ahead.

Unidentified Analyst

Analyst

Hi, congratulations. I've heard reports that you guys added around 200 employees during the second quarter. Is that true?

Darryll Dewan

Analyst

No, but we did add more people.

Unidentified Analyst

Analyst

Okay, and were they largely all put to work right away?

Darryll Dewan

Analyst

As soon as they hit the front door.

Unidentified Analyst

Analyst

All right. And we've heard reports that you're working on Elon Musk xAI Data Center. Is that true?

Darryll Dewan

Analyst

Jonathan, what we can't do is talk about the end user customer because it's very confidential to our relationship with our partner. So I wish I could answer that, but I can't.

Unidentified Analyst

Analyst

Okay. But you are a Dell Premier Partner, and would you get more work if Dell gets larger deals?

Darryll Dewan

Analyst

We are a Dell services partner, and we work very hard to get as much business as we can with our relationship. So it is our hope and our desire that as the market expands and Dell succeeds and potentially other customer partners succeed, we will succeed as well. We're also embarking on a game plan to go direct to the end user on certain services that would not be in conflict with any relationships that we do have with Dell or anybody else. And we're in the early stages of that. But right now, it's not material to report.

Unidentified Analyst

Analyst

And the current performance on your existing contracts that you just completed, does that set you up for more work on those same projects?

Darryll Dewan

Analyst

Jonathan, we hope so. We want as much business as we can get. So the better we do, the more we want.

Unidentified Analyst

Analyst

Great.

Darryll Dewan

Analyst

I would say, the level of expertise to which we executed, I think, demonstrates the skills that we've built internally and the expertise. And I do anticipate that will be recognized and probably should result in us winning more business.

Unidentified Analyst

Analyst

Great. Well, continued success. Thank you.

Operator

Operator

Our next question comes from Paul Simon, Shareholder. Please go ahead.

Unidentified Analyst

Analyst

Hello. Congratulations and great results. I just have a couple of questions that I think you may not be able to answer based on your last answer. But I was going to ask, what percentage of your total revenue comes from relationship with Dell?

Darryll Dewan

Analyst

I think we can’t talk about that publicly.

Unidentified Analyst

Analyst

No problem. No problem. Like I said, you can't answer it maybe because you just said you can't talk about relationships. That's fine. It's just something I had on my mind. But the second thing is you mentioned power. You mentioned power. And I'm curious about one. I haven't read anything about it or anything. I'm impressed with your results. Congratulations for everyone. I saw the stock jump up to $2.75 right before this thing. It's nice. Now, when you said power, are you considering solar or nuclear power or anything else to power these things? Because I understand that there's huge power demands. And like you said, you don't have enough power. Are there any other methods you're trying to use to make power, generate power?

Darryll Dewan

Analyst

Well, what we need is power to the facility, electric power. And it's measured in megawatts. We've got a good amount of megawatts of power in our current facility. And the lead time to go get additional megawatts is longer than we want. And like, so what do you do? You go to another facility and you do the pricing and the costing and you make a decision on timeframe and money. And we're looking at that. Solar, nuclear. If you think about what is, you know, consistent that you can count on, with probably nuclear probably comes the closest. But what I've seen so far is not many people want to put a nuclear portable unit next to their facility. Not yet anyway. I just purchased a company today that does something like that. It's called NNE. But anyway, that's not what I call it, of course.

Unidentified Analyst

Analyst

I was just curious about nuclear. Nuclear…

Darryll Dewan

Analyst

Okay, go ahead.

Unidentified Analyst

Analyst

This company's making portable nuclear, or not so much portable, but more portable than what, you know, normal huge thing would be, like three-mile island or whatever they call it. No, it's pretty, on a truck, it's portable. So, anyway.

Darryll Dewan

Analyst

I looked at one company. We were introduced to a company that's based up in Silicon Valley that is doing something on a portable nuclear level. And we're engaged. I don't know if it's the same company, but what we're looking for, it simply is just that we need more power to the facility. And we'll consider anything. Anything that can help us get there, we'll consider. But realistically, in the short term, we haven't seen anything that really we could talk about today, besides regular power.

Unidentified Analyst

Analyst

Solar can be bad, depending on the weather. And also, you have to have a lot of land for that. Or actually, roof space. Actually, roof space usually works, or sometimes. But no, thanks for the answer. And thanks for the great results. Like I said, I just noticed the thing jumped up to $2.75. I don't know, it just happened right at the end of the day, I guess. Thank you for the great results.

Darryll Dewan

Analyst

Yes. And Paul, for you and all other investors, I think on behalf of not only myself, but the management team, we appreciate your trust in the business. And if you're going to put money into our company, we've got an obligation to do everything we can to give you a very good return on your investment. So, we're focused on that and customer value. So, thanks for your investment.

Unidentified Analyst

Analyst

Well, thank you, sir. And I have a feeling we're going to see a rise tomorrow, because I think these over-the-counter markets obviously don't do much extended hours. I think tomorrow you're going to see a huge rise. That's just a prediction. I can't guarantee anything.

Darryll Dewan

Analyst

Paul, we're just focused, we are focused on execution and everything else happens fifth grade. Execution, that's our goal.

Unidentified Analyst

Analyst

Well, that's okay. I don't buy any stock that I don't see as executing. I guarantee you that. And every single one I have is executing. And so, you are definitely one of them. A guy at E-Trade told me, hey, that thing doesn't have much volume. Hey, this, that, and the other. I said, dude, look, I'm going to buy it for $1.75 and let's see what you say. Now, it's $2.75. Let's see what he says tomorrow. Anyway, he was just saying these small cap things, there's no volume, there's this and that. I said, listen, man, I know how to analyze. I went to college and I have a finance degree. Listen, this company has dominated this entire year. So, don't tell me about small cap, large cap. If you dominate, you dominate. So, thank you very much and have a great next quarter.

Darryll Dewan

Analyst

Thanks, Paul. Appreciate it, bud.

Operator

Operator

Our next question comes from Mitch Swergold, a Private Investor. Please go ahead.

Unidentified Analyst

Analyst

Hi, guys. Congratulations on a really great quarter. It looks like you're managing the growth of the company very, very effectively. I was impressed that you are receiving financing from your partner. Can you talk a little about the size and scale of that as well as how far in advance do you have to put the CapEx in before you can then generate revenue off of it? And then I have a follow-up question.

Darryll Dewan

Analyst

So, like earlier, I wish I could give you the answer to your question, but that's proprietary. Not out of disrespect to you. It's just private. And I'll underscore it by it doesn't come easy, and we are very respectful of our relationship with our partner and the fact that they put some money into what we're doing. It's a beautiful thing. As far as the other part of your question, I'm not quite sure I know how to answer that.

Unidentified Analyst

Analyst

Okay. The other question I have for you is I also have heard that you've done some significant hiring, so I just wondered if you can tell us, I think you had 80 employees at the end of last year. Can you tell us how many employees you had at the end of the quarter?

Darryll Dewan

Analyst

We've gone public before. We had 83, which is the last time we quoted any volume. And I think for the sake of confidentiality, we're not going to get into a whole lot more, but we've doubled at least our headcount, and we need to do that to accommodate. Go ahead.

Unidentified Analyst

Analyst

I didn't mean to interrupt you. So, in six months, you've more than doubled your headcount?

Darryll Dewan

Analyst

Yes.

Unidentified Analyst

Analyst

Okay.

Darryll Dewan

Analyst

And we remain focused -- go ahead.

Unidentified Analyst

Analyst

Okay. And you tripled your headcount.

Darryll Dewan

Analyst

I tried.

Unidentified Analyst

Analyst

Would it be safe to say that it's closer to triple than double?

Darryll Dewan

Analyst

No. I respect where you're going with it, but I don't want to go any further with it.

Unidentified Analyst

Analyst

Okay. Have you had a lot of turnover?

Darryll Dewan

Analyst

Not unexpected, based on the hiring trajectory we had. I've got to do a shout-out to our chief people officer and the management team. We were prepared and we were planning for growth at some point, and we did a lot of it through automation and heavy duty. We were interviewing and we were working weekends and nights, making this team what it is today. So, I just need to do a shout-out to the team, the management and leadership team, for making that happen. It would not have happened if we hadn't planned for it, we hadn't implemented some of the processes and the systems, and we had the people we've got in leadership positions. So, we did some really unique things in a very short period of time.

Unidentified Analyst

Analyst

That's great. Last question. Can you talk about the duration of, what kind of duration and revenue visibility do you have? Duration on the contract and revenue visibility for the coming quarters?

Darryll Dewan

Analyst

Let me answer it this way. We have much better signals today and information exchange between our factory leadership and also our partner than we've ever had. And while there's no guarantees in life, we have a working relationship, we've got trusted relationships that we know how it works. And I'm also ex-adult. So, not that that means a whole lot, other than when if you have any relationships with adult people, you know a lot of it's based on trust and integrity and relationship. And we really work hard on that, especially as it relates to future demand and investment decisions we make, because it impacts people. It impacts our business. And our partner knows that. So, it's a good, I call it bi-directional relationship, but I can't get into some of the details currently on the call. Please understand I'd like to, but I can't.

Unidentified Analyst

Analyst

Totally understand. Thanks so much for your candor.

Darryll Dewan

Analyst

Okay. You're welcome. Thank you.

Operator

Operator

We have no further questions at this time. I will now turn the call back to Darryll Dewan for any closing remarks.

Darryll Dewan

Analyst

Yes. Thanks, Brianna. To everybody here on behalf of the leadership team, we really do appreciate everybody's support of the company and what we're doing. Your info and involvement is respected. We appreciate it. We're optimistic about the future. We know what we have to do. We're focused on ROI for everybody, return on investment, and profitable growth. So, thanks for participating in the call. Wish everybody a good evening and afternoon, wherever you're at. And wish us luck.

Operator

Operator

This concludes today's conference call. Thank you all for your participation. You may now disconnect.