TSS, Inc. Q4 FY2024 earnings call

• 2024 was an exceptional year with 172% organic revenue growth, diluted EPS growing from near breakeven in 2023 to $0.24, and positive cash flow over $15M.
• Procurement services grew 205% in 2024 to $117.5M. Facilities management grew 13%, representing ~5% of total revenue with gross margins >50%. Integration services grew 157% to $22.6M driven by AI infrastructure demand.
• Signed multiyear agreement with largest customer, expanding Texas facility with ~$25M-$30M investment, set to start initial production in April and reach full capacity in June.
• SG&A expenses improved as a percentage of gross profit, adjusted EBITDA for full year 2024 was $10.2M, up 283% from 2023.

TSS, Inc. saw strong performance across segments in Q4 2024 and full year 2024. Procurement services delivered robust growth of 205% with total revenue of $117.5 million, up from $36.5 million in 2023. Facilities management (MDC business) grew 13%, representing approximately 5% of total revenue in 2024, with gross margins generally exceeding 50% of revenue. Integration services, including AI racks, saw a tremendous surge, growing 157% to $22.6 million in 2024. For the full year 2024, organic revenue growth was 172%, diluted earnings per share increased to $0.24, and positive cash flow from operations was over $15 million.

• Expect Q1 2025 revenue to be higher than Q4 2024, with first half 2025 revenue exceeding second half 2024. 2025 adjusted EBITDA expected to be at least 50% higher than 2024.
• Anticipate near-term impacts on GAAP net income from new facility costs but confident in the business model's strength.

• Seasonality in procurement revenues tied to federal government buying.
• Uncertainties in sales cycle for facilities management due to technology changes (e.g., shift from air to direct liquid cooling).
• Quarter-to-quarter fluctuations in orders for AI infrastructure.

Q: Hi Darryll. Quick question on facilities management, I think you said you expect to see some growth in 2025 from that division. I was wondering if you could maybe expand on where you see that coming from? I mean, do you see it accelerating a little bit in terms of where it was last year, for example, that is a higher-margin part of the business?

A: Yes, hey Maj, good to hear from you. We do believe there is opportunity for the MDC business. We are working with a variety of opportunities that we think will turn into business for us in the larger container. The reason for some of the -- the length in the sales cycle is largely because of technology changes going from air to direct liquid and requiring a different design point for the actual container. But we're pretty excited that we're going to see some business growth there. We're also very excited about some of the conversations we're having about different design points on the modular unit. And I'd like to go a little bit more detail, but I don't think it'd be appropriate. But I think where we can provide an AI solution to an enterprise to deploy a certain amount of power cheaper, better, faster than their alternative. And that alternative could be a co-lo, could be a hyperscaler, could be expanding their own existing data center space. All of those options have a plus and minus to it. But we're trying to get to a point where in our modular business, we can make it easier to make a cheaper, better, faster decision to deploy modular. And we're working with our partners in that respect. And we're looking for other partnerships, which we had -- we continue to have conversations about how do we shorten that sales cycle to get containers faster and the componentry faster. That's the long pole in the tent, getting the equipment faster to make it a little bit easier to make a decision on modular versus something else.

Q: Kris Tuttle: Okay. Thank you. And then just I was curious, you guys have already done a tremendous job at shortening the turnaround time and the cycle-time on the rack integration business. I'm just curious, do you think you've got more room to improve there? Or you've already got it down to lean and mean? And are there any implications on what you could do in the new facility in terms of the speed with which you could perform integrations?

A: The way I'd answer that, Kris, is if you've ever met Todd Marrott, you'd know that he's never really satisfied. He's working really hard to make it even better than it's been. I mean we were in weeks before, now, we're in hours and two days. So, there's some room. And as we work with our key customer on technology enhancements, we're looking for ways to optimize and get more throughput and speed. And on one concept around direct liquid, he's got an interesting idea that can make it even faster to get it deployed. So, there's room, but now we're really -- we're going from a couple of days to hours. And the biggest benefit is behind us, but there's always room to improve.

Q: Unidentified Analyst: Yes. I was just having a question about the analyst coverage. I know with the great quarters you had back-to-back, I was wondering if there's been any discussion about having increased analyst coverage for the firm?

A: Yes, do you want to take that? Danny Chism: Yes, I appreciate the question. Yes, we've had a number of conversations with sell-side analysts over time to try to establish some coverage. As I'm sure you can imagine, whenever we filed our shelf registration statement, we got a whole lot of calls from investment bankers. I think a lot of them were disappointed when we reiterated the same thing that we announced publicly that, hey, we have no plans to issue anything under that currently. But that certainly generated a few conversations from analysts reaching out to us. I think some of them -- I would say we've had some good productive conversations with several that I think may ultimately lead to some of them picking up coverage. But obviously, if you're familiar with that market, they don't charge for that coverage. And if they do, it's always suspect coverage. So, they need to see some path to making some money someday, meaning issuing debt, issuing equity, helping us do M&A activity, something along those lines. So, good productive conversations, but nothing ready to be announced today.

Q: Brad Stevenson: Hello, thank you. Danny, I'll provide some coverage for you, I won't charge you anything. Does that work? Darryll Dewan: It's called value pricing, Brad. Danny Chism: I appreciate it. Hey Brad, I think there's something else, too. When I talk about chillers, I'm talking about direct liquid capability and testing. We have 150 tons where we're at today capacity. We're going to 1,650. That's a big jump. The technology is changing so much. If we don't do that, we're done. We have to do it, and we're doing it. And I believe we're going to -- well, I probably shouldn't tell you this, but we're more than doubling our direct liquid cooling lines or validation lines. I don't want to give you a specific number, but it's substantially bigger than it was, if that helps any, 4 times. I said doubling, I'm being conservative. I'm getting a signal that it's more than that. Come and visit. We'll show you around.

Q: Maj Soueidan: Yes. Just one quick question because I meant to ask you earlier. In the fourth quarter, were there any one-time type of costs that were incurred in the quarter related maybe to any maybe move-in kind of costs, new facility, or any other kind of cost on severance costs, any like that at all?

A: Yes, not so much on move-in costs. Most of those costs are being capitalized. There's a little bit of that, that's not capitalizable. There was some -- what I consider one-time costs for severance that's included in SG&A. I'd rather not put a specific number on that just for confidentiality purposes, but it was six figures. It's related primarily to the elimination of an executive position.