TSS, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Strong Financial Performance: Total revenue grew 523% year-over-year to $99 million, with diluted earnings per share at $0.12 and positive cash flow from operations. Diluted earnings per share improved significantly from near breakeven a year ago.
• AI-Driven Demand: Demand for AI rack integration and procurement services remained robust. Procurement services benefited from customers ramping up infrastructure investments for AI workloads, while systems integration surged due to increasing demand for AI-enabled infrastructure.
• New Facility Progress: Began production in early May 2025 at the Georgetown, Texas facility. The facility has 15 megawatts of power, designed specifically for AI rack integration, and is expected to provide a competitive advantage. The build-out is progressing according to plan with full production capacity anticipated by June.
• Profitability Focus: Emphasis on profitable growth, with a planned payback period of approximately 2 years for the $25 million to $30 million investment in the Georgetown facility, supported by strong OEM partnerships.

Segment Performance

• Procurement Services: Generated revenue of $90.2 million in the first quarter of 2025, a significant increase of 676% year-over-year. This segment contributed 77% of the total revenue. The gross value of procurement transactions rose 431% to $106 million, with gross profit jumping 674% to $7 million.
• Systems Integration: Saw a tremendous surge in revenue, growing over 250% to $7.5 million from $2.1 million in the first quarter of 2024. Driven by the increasing demand for AI-enabled infrastructure, excluding noncash rent, gross margins improved from 28% to 32%.
• Facilities Management: Revenue declined 40% to $1.3 million, representing just over 1% of total revenue. The segment is transitioning towards modular data centers and edge computing for AI, with a new 213,000 square foot facility in Georgetown, Texas, under construction and expected to reach full production capacity by June.

Guidance

• Revenue Outlook: Anticipates continued strong performance, with the first half of 2025 expected to exceed the revenue of the second half of 2024.
• Adjusted EBITDA: Expects full-year 2025 adjusted EBITDA to be at least 50% higher than the prior year, driven by higher volume, improved operational leverage, and strategic investments made over the past year. The company remains confident in the overall growth trajectory despite quarter-to-quarter fluctuations.

Risks

• Tariffs and Supply Chain: Tariffs are expected to increase IT hardware costs, complicate supply chains, and potentially lengthen order processing times. The fluidity of international trade adds to uncertainty in buying patterns and supply chain management.
• Technology Evolution: Rapid advancements in data center technologies (chip, power, cooling) impact customer buying patterns and create uncertainty in the timing of purchases. The pace of evolution requires constant adaptation to stay relevant.
• Macro Economic Factors: The company, while in a secular growth segment, is not immune to macroeconomic changes affecting the IT hardware supply chain, which can impact order processing and overall business operations.

Question and Answer

• Q: Concerns about AI integrated racks obviating TSS's value-add A: Darryll Dewan responded that technology is becoming increasingly complex, and TSS is focused on adding value by integrating solutions faster with higher quality. The direct liquid cooling capability and power requirements are escalating, and TSS is well-positioned to remain relevant in the evolving landscape.
• Q: Carrying costs and leasing of old facility A: Darryll Dewan mentioned that TSS is carrying costs for the old facility in Round Rock, has options to expand operations there or sublease it, and has favorable lease terms with renegotiated rates better than current market conditions.
• Q: Procurement services sustainability A: Darryll Dewan and Daniel Chism expressed optimism about procurement services growth, noting investments in resources to penetrate opportunities. However, they acknowledged quarter-to-quarter fluctuations due to discrete projects and the challenge of securing multiyear large-scale deals.
• Q: Recruitment and team stabilization A: Darryll Dewan highlighted the importance of people, with a focus on leveraging technology to source talent and an incentive system to maintain quality. The company has reduced reliance on temporary agencies through strategic hiring and leadership efforts.
• Q: Durability of AI infrastructure spend A: Daniel Chism suggested enterprise AI infrastructure investments may have a 5-6 year horizon, while hyperscalers may need quicker replacement due to rapid technology advancements. This insight is based on observations of industry trends and expected obsolescence of technology in shorter periods for hyperscalers.
• Q: Customer base evolution and exposure beyond Dell A: Darryll Dewan stated the company is focused on growing revenue sources without violating relationships with existing customers. It aims for net incremental growth through partnerships and new opportunities, while carefully managing potential competition and maintaining trusted connections with key customers.