TSS, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights:

• The demand for complex high-performance computing systems, especially for AI applications, is accelerating.
• TSS's new 213,000 square foot facility in Georgetown, Texas is fully operational, enabling faster delivery cycles, greater operational efficiency, and support for larger customer deployments.
• Q2 2025 total revenue increased 262% to $44 million, with adjusted EBITDA up more than 100% to $4 million.
• Procurement services revenue grew significantly due to increased federal government purchases and a shift to more gross deals.
• Systems integration revenue grew driven by growing demand for AI-enabled infrastructure.
• Facilities Management revenue declined but has strategic potential with modular data centers and emerging edge computing.

Segment Performance:

• Procurement services: Revenue grew more than 572% year-over-year to $33 million in Q2 2025, contributing approximately 75% of the total Q2 revenue of $44 million. The gross value of procurement transactions increased 213% from the prior year quarter to $65.7 million.
• Systems integration: Revenue increased 91% to $9.5 million in Q2 2025, driven by growth in AI-enabled infrastructure integration. It contributed ~21.6% of total Q2 revenue.
• Facilities Management: Revenue declined 35% to $1.5 million in Q2 2025, representing approximately 3.4% of total Q2 revenue. Historically, it has provided stable high-margin contributions but is currently the smallest segment.

Guidance:

• Raised full-year 2025 adjusted EBITDA outlook from at least 50% growth to at least 75% growth compared to 2024.
• Anticipate operating income in the final 6 months of 2025 to exceed the comparable period of 2024 and the first half of 2025.
• Potential sublease of the Round Rock facility could enhance operating income, but no sublease consummation is expected this fiscal year.

Risks:

• Dependence on the federal buying cycle which can cause variability in procurement revenue.
• Higher headcount and related compensation costs leading to increased SG&A expenses.
• Interest expense increase due to the construction loan for the Georgetown facility and growth in procurement transactions.
• Costs related to transitioning from a smaller reporting company to an accelerated filer, including external audit and internal control testing.

Question and Answer: Q: Where does TSS stand in Dell's priority order for rack integration projects?

A: TSS aims to be the top priority, working hard to be the cheaper, better, faster alternative and striving to be the preferred choice.

Q: Talk about strategic alternatives beyond organic growth.

A: Exploring on-site rack integration, partnering with channel partners, and entering new technologies while maintaining existing relationships to grow without upsetting current partnerships.

Q: Procurement revenue variability.

A: Tied to the federal buying cycle and internal resource allocation for pursuing opportunities, optimistic about full-year performance.

Q: Round Rock facility status.

A: The Round Rock facility is available for sublease or expanding configuration services, with work ongoing to determine the best use while maintaining existing relationships.