TSS, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Business Transformation: Over the past 1.5 years, TSS has seen 88% revenue growth YTD 2025, adjusted EBITDA up 59%, and positive cash flow from operations of $18.5 million.
• Procurement Impact: Affected by government shutdown, with processing delays, but demand remains. Cautious on Q4 forecast for procurement due to uncertainty in deal processing timelines.
• Systems Integration Progress: New Georgetown facility opened, but ramping was delayed by process rework, ERP integration, hiring, and physical security additions. Steps taken in Q3 to address these, with Q4 expected to have higher rack volumes.
• Facilities Management Outlook: Smallest segment but sees new opportunities, expects growth in Q4 as a discrete project pipeline is anticipated to flow in.
• Financial Strength: Successful secondary offering strengthened the balance sheet, providing capital for strategic new opportunities and enhancing shareholder value.

Segment Performance

• Procurement Services: This quarter, revenue was over $30 million but down year-over-year due to a high revenue base in Q3 last year. Year-to-date, revenues have more than doubled. It's impacted by government shutdown delays, with cautious Q4 forecast. Contribution varies with customer order timing.
• Systems Integration: Revenue grew 20% fueled by AI demand. A new facility in Georgetown was opened but faced delays in ramping due to process improvements, hiring, and physical security needs. Rack volume in Q3 was below expectations, but Q4 is expected to see higher volumes.
• Facilities Management: Revenue declined 19% year-over-year but was up 7% sequentially. It's the smallest segment (~4% of total revenue), sees new opportunities, and expects growth in Q4.

Guidance

• 2025: On track for a record year, expects Q4 adjusted EBITDA rebound. Full-year 2025 adjusted EBITDA outlook is 50%-75% growth compared to 2024.
• 2026: Initial guidance of 40%-50% organic growth in EBITDA year-over-year, driven by organic growth and strategic acquisitions like M&A and partnerships.

Risks

• Government Shutdown Impact: Delayed processing of deals in procurement due to government shutdown, creating uncertainty in timing of closing jobs.
• Facility Ramping Delays: Systems integration faced delays in Q3 due to process improvements, hiring needs, and physical security additions, affecting rack volume.

Question and Answer

• Q: Commentary on end markets shift to inference and enterprise demand A: Demand for complex CSP solutions continues, with enterprise activity emerging as AI transitions from training to inference.
• Q: New Board member and customer mix diversification A: Vivek Mohindra's background brings strategic experience to expand routes to market beyond current customers.
• Q: Mixed vendor rack integration A: Confidential, but facility is secure and focused on key customer, with some diversification through integration with multiple providers.
• Q: Operational requirements affecting rack volumes A: Issues with power, ERP integration, new hires, and communication led to delays in Q3, but steps taken to improve processes.
• Q: Equity raise and expansion announcements A: Plans to make strategic moves like M&A and joint ventures, expecting announcements soon to leverage raised capital for growth.
• Q: EBITDA guidance and M&A opportunities A: 2026 guidance is based on improved visibility, with M&A opportunities being accretive and actively explored.