TSSI earnings call analysis

NASDAQ:TSSI Q4 2025 Earnings Call Transcript Generated on 6/6/2026 Operator | Conference Operator: Greetings ladies and gentlemen and welcome to the TSS Incorporated 4th Quarter 2025 Earnings Results Conference Call. At this time all participants are placed on a listen only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad and please note this conference is being recorded. I will now turn the conference over to your host, Mr. James Carbonara of Hayden IR. Sir, you may begin. James Carbonara | Host, Hayden IR: Thank you, Operator, and good day, everyone. Thank you for joining us for TSS's conference call to discuss the company's fourth quarter and full year 2025 financial results. Joining me today on this call are Daryl Doohan, President and CEO of TSS, Danny Chisholm, the company CFO. As we begin the call, I would 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, March 11, 2026. TSS expressly disclaims any obligation to update, amend, supplement, or otherwise review any information or forward-looking statements made on this conference call or the replay to reflect events or circumstances that may change or arise after the date indicated, except as otherwise required by applicable law. For a list of the risks and uncertainties that may affect the company's future performance, please refer to the company's periodic filings with the SEC. In addition, we will be referring to non-GAAP financial measures, a reconciliation to the difference between these measures and the most directly comparable financial measures calculated in accordance with U.S. GAAP is included in today's press release. With that, Darrell, I will turn the call over to you. Daryl Doohan | President and CEO, TSS Incorporated: Thank you, James. I appreciate it. Thanks, everyone, for joining us today. I'm pleased to report a very strong fourth quarter that caps the transformational 2025 for TSS. During the year, RAC integration volumes in our new Georgetown, Texas facility came online and grew late in the year, setting us up for an exciting 2026 as industry demand continues to grow. In the fourth quarter, we delivered year-over-year growth in both revenue and profitability with sequential improvement over our third quarter. Adjusted EBITDA for the full year reached approximately $18.6 million, ahead of our guidance range of 50% to 75% from a foundation of 15 million to 17 million, and up from 10.2 million last year. That represents rapid growth resulting from both higher AI volumes and continued operating discipline across our entire business. As we exited the year, the run rate of our business improved meaningfully from mid-year levels. Higher rack integration output better absorb fixed costs in our facility. This step up in Q4 gives us confidence that the structural investments we've made in capacity, systems, and talent can scale and increase demand for our AI infrastructure. The market environment and customer momentum. So the environment in which we operate is dynamic, but one thing is clear, AI demand is not slowing. Hyperscalers and large enterprises continue to invest in accelerated computing infrastructure. next-generation servers, and the associate power and cooling infrastructure. Recent results and outlooks from OEMs in the AI infrastructure market underscore this trend with strong growth in servers and networking driven by AI and traditional server demand and an expectation of continued revenue and EPS growth in the fiscal 26 or in the year 26 or fiscal 27. Customer adoption of AI is broadening beyond early adopters into mainstream enterprise. Multiple independent studies now indicate that a substantial majority of medium and large enterprises are actively piloting or planning to implement AI in production workflows for inferencing with adoption rates commonly cited in the 70% to 80% range or higher across larger revenue tiers. As these initiatives move from experimentation into scale deployment, customers are seeking trusted partners who can deliver even more complex power dense technology at speed with high quality. And that is exactly where we, TSS, are positioned. We were pleased to extend and expand our relationship with our primary customer under a multi-year contract. We view this modification and extension as both validation of our execution and a key pillar of our growth strategy. The agreement was amended to address certain circumstances that were not expected in the original version, such as additional fixed costs associated with power infrastructure required on site, and a few other items. Our partner agreed this amendment provided an opportunity to reset the agreement's term, a very positive signal as to the strength and durability of the relationship. Fiscal 25 was truly a year of transformation for TSS. We scaled our new Georgetown facility, upgraded the IT systems, and refined processes to support much higher volumes of AI-related rack integration. We worked through the operational challenges of bringing a new facility online, and by Q4, we made substantial progress improving speed, quality, and time to market for our customers. 2026 will be about the next chapter of growth for TSS. We are constantly improving the operations of our facility. That job is never done. 2026 is about seizing market share and AI rack integration, extending our modular data center capabilities into the AI world, and strategically expanding our service offering to capture broader opportunity and AI data centers. The progress of the AI chip market plays directly to our capabilities. Racks are larger, heavier, more complicated, require more power, and more coolant. Our Georgetown facility is purpose-built to integrate racks of this nature. Paired with rapid delivery timelines, growing rack complexity should drive more market share for TSS. This market is extremely dynamic. Deal sizes can be enormous. The supply chain can be challenging. And the latest and primary example being the memory shortages are rapidly driving price increases for memory and delays in overall data center deployment timelines. This all makes forecasting rack integration volumes more difficult to predict with precision. We began 26 with an internal forecast based on near-term visible deals in our pipeline, driven by our customers' pipelines, and already we are seeing volume forecasts surpassing our plan. In fact, we've begun discussions about potentially expanding our capacity even further. That is how quickly this market is moving. So with that, let me turn the call over to Danny for a much more detailed discussion of our financial results. Danny? Danny Chisholm | CFO, TSS Incorporated: Thanks, Darrell. Appreciate it. This is another record quarter and full year for TSS as we continue to raise the bar of our financial and operational performance. We also have a few unique items affecting this quarter's results, so let's jump into the details. I'll focus my comments primarily on the full year with some specific highlights from Q4. If you look towards the bottom of the income statement, you'll see that we recorded an income tax benefit this period of $7.6 million, comprising about half of the net income for the full year. By the way, that's half of a net income figure that's up 153% over the prior year's net income, so still a strong double-digit growth in pre-tax income, even without that. So why the big income tax benefit? Several years ago, we established a full valuation allowance on our DTA or deferred tax asset due to our history of net operating losses in past years. With a significant improvement in pre-tax income over the last two years, punctuated by the amendment to our long-term AI RAC integration agreement that Daryl mentioned just a second ago, signed in December, management now has a high degree of confidence in utilizing the DTA in future periods. Accordingly, we removed the valuation allowance on almost all of the DTA, essentially coming in as a one-time gain this period. Future income statements will show an income tax expense more in line with what you typically expect. This will vary some, but currently we expect our 2026 effective tax rate to be approximately 21 to 22 percent. As part of reversing the valuation allowance on the DTA, You'll also see a $7.9 million DTA on our balance sheet representing the future reduction in cash taxes we expect to realize as we utilize our accumulated net operating losses to offset future taxable income. Excluding the large income tax benefit, this quarter was still quite strong. In fact, the $7.9 million adjusted EBITDA this quarter was 50% higher than the prior record adjusted EBITDA we posted in the first quarter of 2025. And full-year adjusted EBITDA of $18.6 million is 83% higher than last year's $10.2 million, topping the high end of our prior guidance, as Daryl mentioned. Let's jump into the details of what drove the strong performance. Consolidated total revenue increased by 66% in 2025 to $245.7 million, up from just over $148 million last year. That increase was driven by significant year-over-year growth in our two largest service lines, procurement and systems integration, with facilities management revenues very near the prior year level for the full year. Full-year revenue from procurement services totaled $197.5 million, up 68% from the $117.5 million in 2024. With gross profit margins on procurement expanding 100 basis points from 6.7% in the prior year to 7.7% in the current year, gross profit growth from procurement grew at a faster pace than revenues, up 94%. Even when viewed on a non-GAAP gross basis, regardless of whether procurement deals were counted for as gross or net, total transaction values increased 65% to almost 200% $80 million, and gross profit margins increased from 4.6% to 5.4%. To be clear, those margins and gross value transactions are non-GAAP, but we find them useful internally as they allow us to analyze the underlying economics of the procurement business, ignoring the U.S. GAAP requirement to record only our agent fee on net deals. Revenue firm facilities management, comprised of typically annual maintenance contracts, and some discrete or one-time project work totaled $7.9 million, down 1% from $8 million last year. Our maintenance revenues in the segment were down 12% for the full year, driven primarily by year-over-year decreases in the first two quarters. Maintenance revenues in Q3 and Q4 were up 9% and 8%, respectively, over the prior year. In addition to the maintenance revenues, the facilities management segment also earns revenues from discrete or non-recurring project work. I mentioned last quarter that through the first three quarters of the year, discrete project work was a bit behind the prior year, and that we expected a reversal of that trend in the Q4. That's exactly what we experienced. Revenues from discrete projects in the fourth quarter were $2.5 million. up 263 percent from $700,000 in the fourth quarter of last year. Including those strong Q4 results, the full year discrete project revenues increased 12 percent from $3.6 million to $4 million. For the full year, revenue from the systems integration segment increased 78 percent year-over-year to $40.3 million. In the fourth quarter, revenues in this segment increased from $7.9 million last year to $14.2 million in the fourth quarter of this year. While a good portion of that increase relates to strong organic growth in rack integration volumes in the current year and more recent quarter, there are a couple items included in that uptick that I want to point out for more thorough understanding of the drivers of the lift. First, if you recall, I mentioned last quarter that in response to our customers' increasing needs, the Q3 results reflected incremental costs related primarily to depreciation of additional fixed assets we added beyond our initial plans and investments in securing and maintaining additional electrical power at the building, now at 15 megawatts, but that our revenue stream would not likely reflect the benefit of those incremental investments until Q4. In December 2025, we signed an amendment to our long-term AI rack integration agreement with our largest customer, taking into account these incremental investments we've made as well as updating pricing for current RAC configurations. As a result, Q4 results include approximately $1 million of additional revenue related to activities and expenses we incurred in Q2 to Q3 2025. The contract amendment also extended the agreement for an additional two years beyond the initial multi-year term, giving us enhanced visibility of expected revenue growth. Second, when we first began ramping our AI rack integration volumes in 2024, we received a reimbursement from one of our customers to enable our former integration facility in Round Rock, Texas, to integrate AI racks. We were recognizing related revenues over a 36-month estimated useful life of those assets, with roughly half of that recognized to date. With our integration operations now fully moved to our Georgetown facility, we determined it's no longer likely we'll use those assets to perform AI RAC integration activities in our Round Rock facility. As a result, we accelerated recognition of the remaining $800,000 of the reimbursement in the fourth quarter of 2025, pulling forward most of the revenue we expected to be recorded in 2026. This has no impact on cash flows as the cash was all received in 2024. Related directly to this, you'll also see on the income statement a charge of $658,000 for a loss on disposal of assets in 2025. Just like the reimbursement from our customer was being amortized into revenues over a 36-month period, the related fixed assets we added with those funds in 2024 to enable us to integrate AI RACs in our Round Rock facility were also being depreciated over that same 36-month period. Commensurate with the determination that we needed to accelerate recognition on the reimbursement, this loss on disposal represents the acceleration of depreciation we would have otherwise recognized mostly in 2026. As part of the amendment to our long-term RAC integration agreement signed in December, we extended the agreement for an additional two years beyond the initial multi-year term, giving us enhanced revenue visibility even further into the future. Consolidated gross margin was 18.6% in the current quarter, up from 14.4% in the fourth quarter of last year, heavily influenced by the impact of signing the amendment to our long-term AI RAC integration agreement. For the full year, consolidated gross margins were 13.2% compared to 15.1% in 2024. In 2025, we first started allocating the operations-related depreciation of our Georgetown facility to cost of revenues, accounting for more than half of the difference in gross margin. With procurement revenues bearing a smaller gross margin than our other revenue streams, the outsized growth in our procurement business in 2025 drove much of the remaining year-over-year consolidated blended margin decrease. Breaking your gross margin down by segment. Based on recorded GAAP revenues, procurement gross margins improved to 7.7% in the current year, up 100 basis points from the prior year. When viewed using non-GAAP gross values of the transaction, which we see as more apples to apples comparison, gross margins improved to 80 basis points to 5.4% in the current year. Facilities management gross margins were down slightly at 60% compared to 62% in the prior year, reflecting a slight decrease in higher margin maintenance revenues seen in the first and second quarters of the year. As a result, gross profit from the FM business was $4.8 million compared to $4.9 million in 2024. Systems integration gross margins decreased from 42% in 2024 to 31% in the current year. As I mentioned a moment ago, we first started allocating operations-related depreciation to this segment in 2025, accounting for seven percentage points, or more than half of the overall decrease in SI margins. If you recall, I also mentioned last quarter that we spent more than we originally planned on capital expenditures in our new Georgetown facility and significantly increased the available power at the new building. both in response to changing needs from our customer. The higher cost per power included not only capital investments and equipment, but also higher period costs related to charges from the local power company. The revenues to which we were entitled under our long-term AI rack integration agreement we had in place did not yet reflect those additional investments and costs. The amendment to the agreement signed in December not only amended future pricing to incorporate those additional costs, and those incurred in the December quarter, it also allowed us to recapture roughly $1 million of costs incurred earlier in the year. Lastly, as mentioned earlier, the current quarter and full-year revenues for the systems integration segment reflect the accelerated recognition of approximately $800,000 of revenue. This represents revenue contemplated in our prior 2026 EBITDA guidance. Importantly, though, we are not lowering 2026 EBITDA guidance. The bar against 2025 EBITDA was just raised on impacts to 2025 results from the amended agreement. SG&A expenses of $20.7 million in 2025 increased 56% or $7.4 million over last year. Over a third or $2.7 million of the increase relates to non-cash stock compensation with the remainder related to higher headcount and related compensation costs, to strategically support the growing scale of the organization, combined with higher accruals for incentive compensation tied directly to the year's improvement in sales and earnings. Also included in the current year are incremental costs for the 2025 annual audit and SOX control work. Depreciation and amortization expenses not allocated to COGS were $1.1 million compared to $608,000 last year. That increase is related to amortization over ERP implementation costs and depreciation of other assets related to the overall growth of the business. To provide greater transparency and ability to forecast future results, we've now broken out separately in our income statement bank factoring fees, which were previously grouped with our interest expense. Bank factoring fees increased from $2.7 million in the prior year to $3.7 million in 2025, reflective of a higher level of billings on which those fees are charged. As a percentage of recorded revenues, those fees are 1.5% in the current year, down from 1.8% in the prior year. As a net result of the above factors, for the full year, operating income increased 10% from $5.8 million in the prior year to $6.3 million. The change driven primarily by $10 million increase in gross profit, net of the $7.4 million increase in SG&A expenses and other items discussed. Now that we've broken out separately the bank factoring fees, the $651,000 of the interest expense represents exclusively interest on our outstanding bank loan, net of amounts capitalized earlier this year, while we were building out our Georgetown integration facility through around May. Interest income this year increased from $562,000 last year to $1.7 million this year, primarily due to the higher average cash balance held this year. The net result of these items is a net income for the year of $15.1 million, up 153% from 2024's net income of $6 million. Our diluted EPS improved 133% from 24 cents per share to 56 cents per share. Adjusted EBITDA was $18.6 million, an increase of 83% compared to $10.2 million in the prior year. Excluding the $800,000 accelerated recognition of the customer's reimbursement, which we previously expected to recognize in 2026, adjusted EBITDA would have been $17.8 million up 75% over the 2024 adjusted EBITDA. Now taking just a quick look at a couple of things from our balance sheet. We ended 2025 with $85.5 million of unrestricted cash and cash equivalents, a $62.3 million increase from year-end 2024. In August, we raised $55.3 million of net proceeds in a secondary offering to fund future strategic growth opportunities. Cash flow from operations increased significantly from $15.3 million in 2024 to over $30 million in 2025. This, together with $9.8 million of net borrowings and $6.8 million received from our landlord in Q4 for tenant improvements, funded $32.7 million of CapEx and the repurchase of $4.9 million of Treasury stock, as employees' net settled upon investing in restricted stock and option exercises. Net working capital also improved from $1.3 million at year-end 2024 to $46.1 million at the end of 2025. In the fourth quarter alone, net working capital improved by $11.7 million. As you can see, there was a lot going on throughout 2025 and the fourth quarter in particular. After normalizing for the non-recurring benefits and costs and the impact of the DTA evaluation allowance reversal, this remains our strongest EBITDA quarter ever, and net income and EPS showed a nice increase. This, combined with significant increases in demand publicly announced by our largest customer, sets a great foundation for continued growth in 2026 and beyond. With that, I'll turn the call back over to Daryl for some closing comments. Daryl Doohan | President and CEO, TSS Incorporated: Okay. Thanks, Danny, for the financial detail and update. Folks, we love these market dynamics. We're very highly optimistic about our business outlook for 26. Our Q4 results demonstrate that we can handle record systems integration volumes, and given the excitement of recently reported record demand projections, we are ready to deliver more. The added visibility provided by our long-term customer agreement gives us an additional optimism about the future of our business. We are forecasting continued growth and earnings in 26 with adjusted EBIT expected in the 20 to 22 million range. We believe this to be a conservative estimate reflecting supply chain volatility, the timing of deal closing, and a robust demand forecast from industry leaders. Over time, we see this potential to grow well beyond the guidance. Our strategic planning process is well underway with a clear mandate to evaluate multiple routes to market, including deepened partnerships, selective acquisitions, and potential JVs, joint ventures that can expand our capabilities, diversify our revenue base, and enhance our position in the AI infrastructure ecosystem. We're focused on both organic growth and strategic growth that is complementary to our existing business relationships. This is important to us. We expect to share more about this plan soon and how the capital we raise will support the long-term value creation. So to summarize, we're proud. We delivered solid results in the fourth quarter and for the full year. We exceeded our EBITDA guidance and exited 25 with strong momentum in a market where AI demand continues to accelerate. It has been a great year of transformation for the company, marked by improved operational excellence, deeper strategic alignment with key customers, and a sharper focus on speed, quality, and time to value as our key differentiators. I'd also like to recognize the good work performed by our factory team. They are in the trenches making all this happen. We are very excited and optimistic about the future. Customers' modernization journeys are occurring at historic rates, and the adoption of AI is expanding rapidly, and enterprises increasingly recognize the need for trusted partnerships to help them implement these complex, power-intensive infrastructure solutions. TSS is well-positioned to deliver. So thank you all for joining us on this journey. Operator, I'll turn it back to you for questions. Operator | Conference Operator: Thank you. Ladies and gentlemen, at this time we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue, and you may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question is coming from Matt Calitri with Needham and Company. Your line is live. Matt Calitri | Analyst, Needham & Company: Hey, guys. This is Matt Colicchio over at Needham. Thanks for taking the questions. Can you give any more color on the amended agreement with your largest customer? Was there any change in the minimum order volume attached to that, or is it more focused on recouping those fixed investments like you talked about? Anything there would be helpful. Daryl Doohan | President and CEO, TSS Incorporated: Hey, Matt. Daryl, thanks for the question. Really, it's a combination of adjustments. One is the term length, which is encouraging. That's always a good sign. Two is, you know, we're investing in infrastructure, power, water, so to speak, direct liquid cooling capabilities or thermal management, and the opportunity to scale volume. So from a foundation standpoint, the base structure of the, if you will, volume commitments is the same. The term is extended. The investments that we're making are being rewarded, so to speak, financially in the agreement. So we're getting more support that way, which is always a good thing. And what that ultimately means is that we're working more closely together on how do we scale and do more. We're very optimistic about our systems integration business and the RAC volume demand increase. And we're uniquely positioned because of these investments to have more power, to have more liquid capability. And frankly, the weight of the future technologies coming down the pike is going to get a lot heavier. And that speaks to some of the things that we've done here locally. So hopefully that answers your question. Danny Chisholm | CFO, TSS Incorporated: Yeah, Matt. Yeah. This is Danny. I'd add just a little bit to Daryl's point, right? A lot of that was recognition of the capital expenditures that we put in and needing to recapture that cost over time. The other piece of that is also that we are incurring or have been incurring throughout a good portion of this year some fixed power costs as well that weren't originally contemplated in the agreement. That has now been contemplated in the agreement so that we've got much better comfort that those costs are covered as we move forward. So not just recapture past costs, but being able to cover the recurring costs moving forward. Matt Calitri | Analyst, Needham & Company: Awesome. Very helpful. And great to see the growth in systems integration. We're clear these investments are coming through. Daryl Doohan | President and CEO, TSS Incorporated: Thanks, Matt. And one other thought, too. You know, our key customer has recently gone public and talked about their increase in pipeline and outlook. It's a massive increase year over year. And we're well positioned to do everything we can to get our fair share of that growth. And we want to get as much of that as we can. Matt Calitri | Analyst, Needham & Company: Absolutely. I guess, like, on that same thread, can you help us contextualize how the rack order volume this quarter compared with internal expectations? And then, like, how should we be thinking about the amount of catch-up volume you saw this quarter compared to what you think the steady state growth rate is there? Daryl Doohan | President and CEO, TSS Incorporated: Well, I'm going to grin when you say steady state. We wish it was steady state. It's a crazy state is what it is. Our Q4 rack volume almost exceeded what we did for Q1 through Q3. Our expectation for 26, calendar year 26, is that we will double the business that we did in 25. In fact, we've got a first half outlook. Our short-term forecasts are actually exceeding our plan. So we're very optimistic about where we're going to go with volume, okay, of the racks that go through the factory. Matt Calitri | Analyst, Needham & Company: Okay, awesome there. And I guess, like, is there any sort of rule of thumb for how we should be thinking about modeling, like, volume increases and how that translates to revenue? Danny Chisholm | CFO, TSS Incorporated: That's a great question. Given the fact that we've got the minimum commitments, until we get over that minimum, building more RACs does benefit. Once we get over that minimum commitment, the improvement in revenue contribution is roughly four times what it is below that. So there is incremental benefit as we build more RACs, but until we get over those minimums in any given period, the positive impact is muted a little bit. Frankly, I say it not even, that the positive side is muted more that we've got some really good downside protection in periods when there's less volume. We've not put out specific guidance around the division between those two, and frankly, from a competitive standpoint, probably don't want to go into too much detail on that. Matt Calitri | Analyst, Needham & Company: That makes sense. Unidentified Participant: I hope I'm not putting my foot in my mouth, but, you know, when we talk individually, we can share what we think about the opportunity, and then you can do your math and figure out how to go model it, and we'll help as much as we can. Matt Calitri | Analyst, Needham & Company: Awesome. Yeah, no, it makes tons of sense. Maybe just one more on On the procurement side, which also grew during the quarter despite the supply chain volatility you mentioned, I'm wondering what you're seeing in the U.S. federal business with the government shutdown and continuing resolution being resolved. Is there any sort of catch-up in deals getting done, or do you kind of expect to see everything slide based on those earlier delays? Daryl Doohan | President and CEO, TSS Incorporated: Well, we commented that in previous quarter that we thought that was going to be disruptive, and it was to a degree. I'm not that concerned right at the moment. The procurement business is a really good business for us. We're really proud to have that business, and yes, it's largely fed, a major percentage. We are involved in opportunities that we think can play out in this year, and the unique part of the procurement business is that it can happen literally overnight. So it might not be in the pipeline today, but it could be next week. So right now we're optimistic about it. We're just being conservative in our outlook because of, yeah, it's such a great year. And, you know, we're rebuilding pipelines and we're trying to be a little bit more cautious for the reasons you talked about. But we'll see what happens. I mean, we're well positioned either way, but we're involved in some really good things. And I'm more optimistic about the procurement than... Unidentified Participant: we're probably showing on paper. Matt Calitri | Analyst, Needham & Company: Awesome. Thanks, guys, so much for your time. Thanks, Matt. Operator | Conference Operator: Thank you. Our next question is coming from Alex Furman with Lucid Capital. You're live. Alex Furman | Analyst, Lucid Capital: Thanks very much. Thanks for taking my question, guys, and congratulations on what was really a big breakout year last year. Daryl, I wanted to ask you about, you alluded to in your prepared remarks, the memory chip shortage that we've all been reading about and how a lot of data center projects has been delayed as a result of that. But it sounds like your integration business, year to date, has been going as good or better than you thought it would at the beginning of the year. Can you just talk more about why... you haven't been impacted to that by the memory chip shortage, and are there any bogeys that we should potentially be looking out for for the rest of the year? Daryl Doohan | President and CEO, TSS Incorporated: Sure, Alex. Thanks for the question. You know, on one hand, we're somewhat isolated from that because our key partner is masterful at managing a global supply chain. I mean, they're really, really good and effective with it. And while we pay attention to it And we have considered some of that variances in our model, especially in how we forecast the future, but it's one of the reasons why we've been more conservative. But given the announcements and the pipeline outlook that people have publicly stated, I'm not so concerned about that at the moment. could be different, but our business is somewhat insulated from that level of complexity. Alex Furman | Analyst, Lucid Capital: Okay, that's really helpful. Thanks, Daryl. And then one other thing I just wanted to ask about here is, I mean, it seems like definitely one of the biggest themes going on in your business is that these AI server racks are getting bigger, heavier, you know, they consume more power. I imagine that trend is going to continue, you know, throughout the year and into next year. How do your economics change as these server racks keep getting bigger? I mean, is it ultimately a similar markup to labor and things like that, or does the model start to change as these racks get two, three, four times the size? Daryl Doohan | President and CEO, TSS Incorporated: So, good question. We've modeled to a certain configuration size, which drags a certain amount of power requirement, which drags a certain amount of direct liquid capability and testing capability. And we're in the conversations now of anticipating where it's going to go next. So from an economic standpoint, it's all about getting the product out the door as fast as we can. And the model that we have, financial model, pays us well to go do that. The future is to be determined. You know, when you start talking about 300 kilowatts to 600 kilowatts to a megawatt a rack, you're talking about a different complexity, and we're working together on that, and I'm sure that if it involves an opportunity for us to make more money as it gets more complex, we'll have a good conversation with our partner. So right now, we're not at that point where we have to change things, but we're all open about how we do the best we can to get things done, if you will, and renegotiating is always an opportunity. Alex Furman | Analyst, Lucid Capital: Okay, that's really helpful. Thanks, Daryl. Operator | Conference Operator: Thank you. Our next question is coming from David Marsh with Singular Research. Your line is live. David Marsh | Analyst, Singular Research: Hey, guys. Thank you so much for taking the questions. Good morning, good morning. Congrats on the quarter. It's really a great result, great outcome, good job. I wanted to start with, if I could, with just a couple of housekeeping questions. I noticed on the balance sheet, it looks like restricted cash is gone. Is there something behind that? Am I reading that correctly? Danny Chisholm | CFO, TSS Incorporated: Yeah, you are. In fact, in the fourth quarter, we had the right under our credit agreement to ask the bank to apply those restricted funds as a paid annual principal. So you'll see also the 10K should get filed next week. You'll see on there on the statement of cash flows a pay down of almost $7 million of debt this year. So we had the bank apply that restricted cash as basically a $5 million pay down on the debt. So the restricted cash is gone and the debt is down. David Marsh | Analyst, Singular Research: Got it. Yeah, that was going to be my next balance sheet question was on the debt reduction. So that's great. Good job there. That's good progress. Just turning to the kind of more of the operational side, I mean, I guess, you know, one of the things that really jumped off the page to me was the increase on the facilities management, especially sequentially. Can you just give us a little bit more color there? And is that, you know, is that a sustainable run rate going forward? I mean, I know that's a core area of focus with the kind of recurring nature of that business. Danny Chisholm | CFO, TSS Incorporated: Yeah, so that business, to your point, has one piece that's very predictable and recurring, which is kind of the manual maintenance agreements. Those are highly predictable. There is another part that is discrete projects. So if you think about major rework of containers that were previously deployed, the batteries and those things for backup are pretty expensive. so a complete battery replacement or filter media replacement, those can be what I call discrete projects or kind of one-time projects. I think I had even mentioned in our Q3 call that Q1 through 3, we saw less of those in the first three quarters of the year, but we expected a spike in that in Q4. And that's exactly what drove the difference. We had about $2.5 million of those discrete projects in Q4 compared to about 700,000 this quarter last year. That is an unusually large amount for one particular quarter, but I would expect periodic spikes like that as we have more discrete projects. David Marsh | Analyst, Singular Research: Yeah, that's really helpful. I appreciate that. Danny Chisholm | CFO, TSS Incorporated: Unfortunately, those are a little less predictable. David Marsh | Analyst, Singular Research: Yeah, yeah, understood, understood. Just following up on that, you know, earlier question about the amendment, I think the previous caller asked about kind of guaranteed minimum volumes. I mean, I didn't, I may have missed your response to that part of that question, but is there a change to your guaranteed minimum volumes in the new agreement? No. Okay. Okay. Danny Chisholm | CFO, TSS Incorporated: No, we did update the pricing to take into account the current complexity of RACs. Again, right, most of what we get paid for is the work that we put into it and the power that we consume in doing that and then the cost of the fixed facility. But the actual minimum commitment didn't change. We just updated the pricing and the length of the agreement. David Marsh | Analyst, Singular Research: Got it. Appreciate that caller. All right. Thanks, guys. Appreciate you taking the questions. Danny Chisholm | CFO, TSS Incorporated: Thanks, David. Operator | Conference Operator: Thank you. As we have no further questions in queue at this time, I would like to turn it back over to Mr. Duan for any closing remarks. Daryl Doohan | President and CEO, TSS Incorporated: Okay. Thank you so much. Folks, thanks for joining us. As stated in previous calls, we're again pleased after reporting another quarter, a strong quarter and a great year. but we're not satisfied. So all I can say is at this point on your behalf, you can count on us to do our part to help customers modernize and transform using advanced technologies. We're in this to win, and we thank you for your time. Operator | Conference Operator: Thank you. Ladies and gentlemen, this concludes today's conference, and you may disconnect your lines at this time, and we thank you for your participation. jsPDF 3.0.3 D:20260606090510-00'00'

NASDAQ:TSSI Q3 2025 Earnings Call Transcript Generated on 6/6/2026 Operator | Conference Call Operator: And welcome to the TSS, Inc. Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. We will open the floor for your questions and comments after the presentation. Should you wish to join the queue to ask a question at any time, you may press star 1 on your telephone keypad, and you may press star 2 should you wish to remove your line from the Q&A queue. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Carbonara, Investor Relations at Hayden IR. Thank you, sir. You may begin. James Carbonara | Investor Relations, Hayden IR: Thank you, Operator, and good afternoon, everyone. Thank you for joining us for TSS's conference call to discuss the company's third quarter 2024 financial results. Joining me today on this call are Daryl Duan, President and CEO of TSS, and Danny Chisholm, the company's CFO. As we begin the call, I would 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, November 14, 2024. PSS 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 a list of the risks and uncertainties that may affect the company's future performance, please refer to the company's 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. With that, Darrell, I'll turn the call over to you. Daryl Duan | President & CEO, TSS: Great. Thank you, James, and good afternoon, everyone. Thank you for joining us today for our third quarter 2024 earnings conference call. I'm very excited to share that today marks my two-year anniversary with TSS. I'm very proud of our team's accomplishments to date and we look forward to continuing this journey together. You will hear today we have a lot of exciting things going on. We delivered exceptional results in the third quarter across all key financial and operational metrics, and customer satisfaction remains high. By all measures, it was a great quarter for TSS. This strong performance demonstrates that we are successfully executing our business strategy to deliver growth in revenue, earnings, and cash flow while scaling our business and operations The actions we took in 2023 to streamline our operations by investing in people, systems, and a physical layout of our main integration facility are producing excellent outcomes. We are delivering for our customers, our shareholders, while laying a foundation for accelerating growth. For the third quarter, we delivered $70.1 million in total revenue, representing year-over-year growth of 689%, a nearly 12-fold increase in net income compared to the third quarter of last year and an exponential increase in diluted EPS from just a penny in Q3 of last year to $0.10 in Q3 of this year. Importantly, the increases were driven by growth across all of our service offerings. These impressive financial results are a direct outcome of our commitment to operational excellence, strengthening relationships with our customers, and highly attractive market in which we operate. As you may recall, we made a significant investment in our production capacity in the second quarter. With these operational improvements, we have decreased our cycle time to complete racks and thereby increased our volume throughput. Computer racks that have historically taken a company two to three weeks to complete are now regularly down to turn times of less than one day. The first stage of a highly publicized integration program for AI-enabled racks came online at the beginning of June. The initial program carried well into the third quarter. Our procurement business, where we source third-party hardware, software, and services, delivered an outstanding performance in Q3. In last quarter's earning call, we shared that we expected procurement revenues in the third quarter to exceed $50 million in revenue. I am proud to report that we exceeded that target by a fair margin of with 60.5 million procurement revenues in a quarter compared to 5.4 million this quarter a year ago. For those familiar with our history, you'll recall that our procurement segment often experiences quarter-to-quarter fluctuations due to size, timing, and revenue recognition methods used for these orders. Although volumes may fluctuate quarter-to-quarter, this business line's overall trajectory remains upward, consistently and increasingly contributing to our profitability. Shifting to a quick look at our facilities management activities, primarily for our modular data center, or MDCs as we refer to it, we continue to experience moderate overall growth with the segment's revenue up 8% this quarter. This is a more predictable business line for us with healthy gross margins, typically north of 50%. I've previously highlighted a few challenges in this business, primarily from rapidly increasing compute density and evolving cooling requirements. We believe the expanding adoption of AI-enabled technology will drive incremental demand for MDCs and produce revenue in 2025 and beyond, due primarily to long lead times for the new modular data centers. Whether this materializes as predicted remains to be seen. We are strategically positioned to capitalize on this trend particularly if AI clusters are delivered as freestanding racks or modules. We believe this may be an attractive option for medium to large enterprises that want computing power. They may not have the ability to scale to justify the cost of installing new direct liquid cooling systems needed to support the next generations of expected AI rack technology. And MDC may be a cost-effective way for enterprises to enter that space. Our key customers have robust pipelines and deals are beginning to close. So our strategic inclusion in key customer programs signals optimism by us as pipelines materialize. Subsequent to quarter end, we entered into a long-term agreement with our primary customer, solidifying our position as a key partner for executing its technology roadmap by developing required integration and testing capacity to meet the demand driven by high performance infrastructure supporting generative AI. This agreement greatly mitigates operational risk for each of us, enhances our revenue visibility, and consequently greatly supports our ability to finance the needed investment in capacity and capabilities. It is a significant milestone for TSS and speaks volumes as to the status of our relationship with this important customer. The base case scenario for volumes stipulated in agreement is is similar to or greater than the peak volume of AI-enabled RAC integrations that we delivered earlier this summer. Volume expectations are dependent on sales execution by our OEM partner, but our partner has shown great confidence in TSS by committing to help to smooth what otherwise could be a feast or famine business. In the end, the negotiation of the agreement was underpinned by our mutual recognition that we are in the very early stages of the development of AI infrastructure, which we both expect to be a massive multi-year market opportunity. While the operational improvements we made in the second quarter in our facility were a great interim step, we recognize that given current market trends, the expected increasing power requirements of upcoming generations of AI rack technology, our customers' technology outlook and our goal to become the primary production partner for the AI-related technology roadmap, we need to deliver and further expand our capacity. So in concert with this new customer service agreement, plans are underway for our relocation of our factory and headquarters to a new location just a few miles from where we stand today. This is a substantial next step in positioning our business for continued rapid growth. Given our current trajectory, and accelerating demand for AI-enabled technologies, we need more space and access to increase power. We expect our volume of rack integrations to be at or above the volumes that we experienced since June 24, but importantly, the next generation of racks will consume up to six times more power than those being produced today. At the new facility, we will expand our capacity by more than 60%. from 105,000 square feet today to almost 170,000 square feet of operating space, and more importantly, we will gain access to significantly greater power to accommodate the foreseeable technology roadmap. In capacity planning, one key reason we're favored by our partners is our ability to be agile and our ability to quickly modify production lines and process to meet custom and new requirements. That trade is manifested manifested in our systems and physical layout of any building we move to. Site plans call for investment of approximately $25 to $30 million for improvements, with a significant portion of that cost allocated to bring in additional power into the building. The investment will provide greatly expanded cooling capacity for our rack testing and validation stations, tripling our capacity to test and validate direct liquid-cooled racks in addition to the more traditional air-cooled racks. As we have alluded to in recent announcements, cooling methodologies are in development for RACs with dramatically increasing power consumption, the thermodynamics of which will all but require direct liquid cooling to effectively dissipate the heat generated. Our flexibility to handle air cooling and or direct liquid cooling is a critical differentiator of our service. We have explored several buildings that are in the process of finalizing a lease agreement for our preferred property. and we are exploring bank debt financing alternatives for the leasehold improvements. Based on the structure of this multi-year agreement with our customer, we are comfortable that the revenues generated from that will be sufficient to cover the variable and fixed costs related to our RAC integration activities, including the incremental lease obligation and debt service on any debt we incur to finance the capital investments. We expect to begin operations at this new facility after the first of the year and to be fully operational and supporting our long-term customer agreement from this new location in early 25. Turning to corporate governance for just a second, we recently announced the appointment of Michael Fahey as an independent director to our board and as a member of our audit and compensation committee. Michael has a proven track record leading digital transformation and advanced new technology solutions that delivers significant revenue growth. He has been involved in IT infrastructure and supply chain businesses with customers including many of the largest technology companies in the world. Mike will be an invaluable member of the team as we continue to execute our growth strategy and further scale our business. With Mike's appointment, our board now is comprised of four directors, three of whom are independent. Concurrent with our earnings, we began trading today on the NASDAQ capital market. This is a great milestone. We pursued this up listing to improve our investors trading liquidity and to widen the pool of potential investors, including institutional investors whose investment policies may prevent them from investing in companies trading over the counter. We believe this is a huge accomplishment and a step forward, another sign of the maturing of our company. Our ticker symbol has not changed and there should be no disruption to clearing of trades already executed. Serving our customers with the highest levels of quality and integrity is the bedrock of our company. It is the basis by which we operate and is critical to our success. We were thrilled to be awarded the Professional Services Best Deployment Partner Award for 2024 by our largest customer. The award highlights our rapid adaptability and unwavering commitment to our customer service. Our dedicated service and collaborative spirit have enabled us to execute, meet, and often exceed our customers' expectations. The award is an incredible honor as is the opportunity to serve this customer each and every day. We value this relationship. We are pushing the boundaries of what's possible in AI and high-performance computing infrastructure. The market for AI infrastructure continues to advance. Customers are raising significant capital to deploy AI infrastructure. Many of the initial adopters are data center and cloud technology companies building specifically for AI. The vast majority of the market likely will be medium and larger enterprises that will build high-performance compute environments, not just for large language models and other training, but for AI application deployment. We are working with our key customer partners and directly with end-user customers to begin to understand how hyper-dense compute required for AI will be implemented in the vast majority of data center sites. We'll have more on this and report more on this in the quarters to come. So allow me now to turn the call back to Danny to discuss our numbers in a little bit more detail. Danny? Danny Chisholm | Chief Financial Officer, TSS: Thanks, Darrell. By all accounts, it was a great quarter for TSS. Let's jump into it. Consolidated revenues for the third quarter of this year was $70.1 million. Almost eight times the $8.9 million total revenues reported this quarter of last year. This is also a substantial increase in sequential results, up from $12.2 million in the second quarter of 2024. The increase was driven in large part by growth in our lower margin procurement services business, as well as growth in our higher margin systems integration business. Revenue this period grew in all major product lines compared to this quarter last year. Our segment reporting looks a little different this quarter than it did last quarter. Beginning in the third quarter, we're breaking out our systems integration and facilities management revenues in a bit more detail to increase the transparency and give investors a clearer picture of the drivers of our business. Particularly within the systems integration segment, we're providing a bit more detail to understand the portion of growth driven by the procurement activities versus systems integration activities And in the MD&A section of the 10-Q filed earlier this afternoon, you'll find a tabular presentation of the procurement activities in particular in a bit more detail, not only the revenues, but cost of goods, gross profits, and gross margins for each of those components of the systems integration segment. Total revenue from the systems integration segment increased from $7.1 million in the prior year quarter to $68.1 million in the current quarter. Current quarter segment revenues are comprised of $7.6 million from integration services and $60.5 million from procurement services. The integration services revenues of $7.6 million represents growth of 361% compared to $1.7 million in the year-ago quarter. The growth was driven by an increase in the AI-enabled rack integrations, which began late in the second quarter. Demand for this business is robust, And the recently signed multi-year agreement mentioned by Daryl to provide these services greatly reduces the effect of fluctuating demand or supply chain issues that are inherent in this business, allowing us to maintain the facility and staffing levels to quickly serve our customers' needs, enhancing our flexibility and ability to delight our customer. Revenue from facility management totaled $2 million compared to $1.8 million in the same quarter last year, up 8% year over year. As Darrell mentioned, this is generally a fairly predictable revenue stream with gross profit margins generally above 50%, though that was down slightly this quarter. We see the potential for more robust growth in this segment in 12 to 18 months as more medium and large enterprise clients consider using modular data centers as a cost-efficient means to harness the power of AI technology without the need to build out full data centers with all the requisite cooling capacity. Revenue from procurement services totaled $60.5 million, up more than 1,000% compared to $5.4 million in the year-ago quarter. Recognized procurement revenues and related costs, as well as the resulting gross margin percentage based on recorded values, can be heavily influenced by whether we transform the product. If we do something to transform the product, we report the gross value of the transaction along with the gross costs of those goods, called gross deals, often resulting in recognized gross margins as low as 3% to 4%. If we merely act as an agent in buying and selling the product, we record our revenue as an agency fee called net deals, resulting in 100% margin. In periods where we have an increase in the proportion of procurement activities that are gross deals versus net deals, it tends to inflate our gross revenues and costs and decrease the recognized gross margin percentage and vice versa without much impact, if any, on the gross profit dollars recorded. This in turn can also have an impact on the company's blended gross margin percentages based on recorded values as the procurement business has much lower margins than the remainder of our business. Increases in the recorded amount of gross procurement activities will have a downward effect on the company's overall margin percentages reported. In the third quarter of 2024, the majority of procurement activities were gross deals, and in the comparable prior year quarter, the majority were net deals. As a result, the procurement gross margin percentage based on recorded U.S. GAAP values was 6.1% in the current quarter versus 30.4% in the prior year quarter while the gross profit dollars increased 125% from $1.7 million to $3.7 million. In analyzing what I consider the true economics of our procurement activities, while it's non-GAAP, I find it most useful for me to look at the gross revenues and gross costs of procurement activities, regardless of whether they were recorded as gross or net deals. On that basis, our gross revenues were up 94% from $41 million in the prior year quarter to $79.6 million in the quarter ended September 30, 2024. Gross profits increased from $1.7 million to $3.7 million, just like the gap figures, and the resulting gross margin percentages based on these gross values improved from 4% in the prior year quarter to 4.7% in the current quarter. On the same basis, year-to-date gross procurement revenues increased 33% from $90.5 million in the prior year-to-date period to $120.6 million in the current year-to-date period, with gross margins on that basis improving from 3.9% to 4.4%. As we continue to scale and grow, the mix of our revenues will likely drive quarter-to-quarter fluctuations in our gross margins. The overall gross margin for the entire company was 11.3% this quarter compared to 31.9% in Q3 of 2023. This decrease is primarily due to the dramatic increase in revenues from our lower margin procurement services business combined with a greater portion of those sales being recorded as gross deals. This business line, while lower in margin, serves as a conduit to providing some higher value add, higher margin integration services. And it contributes nicely to the bottom line all by itself. Individual customer engagements in this business may be much larger than our typical integration or facilities management engagements. While procurement revenues may remain at elevated levels for the next three to six months in comparison to historical trend, we don't currently expect them to be at quite the same level that we saw this quarter. As much of our procurement activity is ultimately related to federal government buying, we believe this can contribute to some seasonality in these revenues. As the federal government budget ends on September 30th each year, we believe this may generally lead to an increase in procurement revenues in the quarter ending September 30, and again in the quarter ending December 31st each year as federal agencies receive their budgets for the new fiscal year. Because revenues can be heavily impacted by gross versus net procurement deals even without any difference in economic reality, I prefer to view our consolidated costs as a percentage of gross profit rather than percentage of revenues, which is generally the same regardless of, the gross profits are generally the same regardless of how procurement activity is recorded and therefore more comparable between periods. SG&A expenses improved as a percentage of gross profit to 49% in the third quarter of 2024, down from 72% in the year-ago quarter. On a dollar basis, SG&A expenses increased to $3.9 million in the third quarter of 2024, up from $2 million in the year-ago quarter. Our SG&A costs have increased as we've invested in people, capacity, and processes. The current quarter SG&A expenses also include some larger than normal accruals for commissions and other incentive compensation driven by the outsized operating results. Through the use of well-designed incentive compensation plans, we believe we can reward and encourage outstanding performance by our staff, like we saw this quarter, while automatically scaling back costs in periods with results that may not be as robust. Operating profit margin in the third quarter of 2024 was $3.8 million and 48% of gross profit, respectively, compared to $0.7 million and 25% in Q3 of 2023. Calculated as a percentage of recorded total revenue rather than gross profits, our operating income margin was 5.4% in the current quarter compared to 8.1% in the prior year quarter. This was largely driven by the large increase in gross procurement deals discussed earlier. During the quarter, we had net interest expense of $1.1 million. This was comprised of $1.3 million of interest expense tied to factoring receivables from our largest customer, mostly related to procurement activity, partially offset by $0.2 million of interest income earned from cash on hand. This compares to net interest expense of $0.5 million in Q3 2023, comprised of $661,000 of interest expense, partially offset by $179,000 of interest income on bank deposits. Combining the impact of all these items, net income for the third quarter of 2024 was $2.6 million, more than 11 times the $209,000 net income in Q3 of 2023. Earnings per diluted share was 10 cents for the third quarter of 2024, up from just a penny in the third quarter of last year. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and stock-based compensation, was $4.3 million, up from $0.9 million in the year-ago quarter. Turning to the year-to-date results for a second. For the nine months ended September 30, 2024, Total revenues were up 227% to $98.1 million compared to $30 million in the year-ago period. Gross profit for the first nine months of 2024 increased 96% to $15.1 million, and our SG&A costs improved to 59% of gross profit, down from 84% year-to-date 2023. Year-to-date, our net income was $4.1 million compared to a net loss of $262,000 in the 2023 year-to-date period. And diluted EPS improved from a one-cent loss to 16 cents in the current period. Turning to our balance sheet. As of September 30, 2024, we had cash and cash equivalents and short-term deposits totaling $46.4 million. and again, ended the period debt-free. The cash balance is somewhat inflated as we get paid almost immediately for billings to our largest customer through a financing program they have in place, whereas we typically get 30 to 45 day terms to pay our vendors. In periods such as the current quarter, when procurement activities are unusually large, we carry a larger than normal cash balance. We estimate that after removing the float we enjoy by receiving payments on factored receivables, prior to needing to pay our vendors, the remaining unrestricted cash balance available to fund daily operations or invest for growth is currently about $10.6 million. For the first nine months of 2024, we generated cash flow from operations of $36.9 million, including the timing benefit from procurement activities, compared to $8.6 million in the first nine months of 2023. Networking capital, which nets out temporary fluctuations due to timing of payments to vendors and receipts from customers, increased from $893,000 at the beginning of this year to $4.3 million at the end of September 2024. As Darrell mentioned, while we have not yet finalized the lease agreement, and there's always risk until it's completed, We've had very productive discussions with our bank to finance the majority of the $25 to $30 million we plan to invest in our new facility with an eye to aligning debt service payments with revenues from our AI rack building activities. Although other banks have expressed strong interest in financing this need, we believe we'll be successful in putting in place a facility with our existing bank with repayment terms that include a fully amortizing term loan. All in all, it was another great quarter financially. While we're not providing specific financial guidance at this time, based on our current visibility, we expect profitability in the fourth quarter to be slightly below the third quarter level due to the timing of incoming projects and a smaller pipeline of procurement deals in Q4 compared to Q3. The additional contribution from procurement deals is nice when they spike, but with limited overhead, direct labor, or square footage dedicated to these activities, We don't need to cover significant costs in periods with lighter procurement activities. We expect the first half of 2025 to be in line with our second and third quarters of 2024 in aggregate. With that, I'll turn the call back over to Darrell to share some insights into our expectations for the future and provide some closing remarks and Q&A. Daryl Duan | President & CEO, TSS: Great. Thanks, Danny. Folks, to recap, I'm very proud of our TSS team's ability to execute our operational commitments and our vision and the high level of collaboration, planning, and teamwork that we have with our key customer. Our detailed focus on the customer and those relationships is critical to our continued success. This allows us to continue to innovate and execute in ways that have laid the foundation for long-term success for TSS, our customers, and our investors. So, Tom, if it's okay with you, I'll turn it back and we can handle Q&A. Operator | Conference Call Operator: Certainly. Ladies and gentlemen, the floor is now open for questions. If you wish to join the queue to ask a question at this time, please press star 1 on your telephone keypad. You will hear a brief tone to indicate you have successfully joined the queue. Should you wish to remove yourself from queue, you may press star 2. Once again, if you wish to join the queue at this time to ask a question, please press star 1 on your telephone keypad at this time. And we do ask if listening on speakerphone today that you pick up your handset while asking your question to provide optimal sound quality. Please hold a moment while we poll for questions. Thank you. And your first question today is coming from Gurdip Janjua from Murchison. Gurdip, your line is live. Please go ahead. Gurdip Janjua | Analyst, Murchison: Hey, guys. Thanks for taking the question, and congratulations on the uplist to NASDAQ. That's huge. Certainly opens you up to several new term catalysts as well. So your business has obviously seen tremendous growth in the last little bit here. And it looks like this growth is expected to continue for the foreseeable future with this multi-year agreement. I think there's been some talk on Twitter about you guys actually building the XAI supercomputer for Elon Musk. So when I look at the financial position of the company today and the very strong stance that the company has taken against any dilutive equity financing, it really increases my confidence in management's ability to drive home that long-term shareholder value. Now, my question is around future growth. So you seem like you're the hottest play in AI right now. And on top of that, we saw today that SMCI, your biggest competitor, is facing serious concerns around a potential delisting risk. So there's a very high probability that you'll be taking on a So that's a company that was trading out 30 times EV EBITDA back in June before all their internal control issues were brought to light. So how do you plan to execute on the potential upside scenario here and maybe mirror that valuation multiple? Daryl Duan | President & CEO, TSS: For Deep, a lot of questions baked in there and some assumptions. So let me see if I can answer overall. Thank you for your question and appreciate your comments. As you know, we can't comment on the customers and some things that you brought up, but we're very proud of what we're doing. On the growth trajectory, one of the reasons why we're moving is to accommodate growth, and we expect that there's going to be some spikes. We anticipate the spikes. We're prepared for those spikes, and we're also prepared for what we think is a more robust line of business, like we stated just a few minutes ago, that we started to see in the middle of the year with a large project. We're excited about that. We think it's going to continue. We're prepared for that. And all I'm saying is bring it on. We'll take as much as you can give us, and we'll go from there. Danny Chisholm | Chief Financial Officer, TSS: The other I would share on that, Gardeep, is as we moved our new facility, part of what we're looking at is not only what the current needs of our customer are, but really can we build out to take on two or three times that kind of volume if that exists. At least when we do our channel checks, it looks like there's a pretty significant amount of volume of the AI rack building coming. And so we're preparing ourselves to be ready to take on not just the same kind of volume that we've done the last four months, but really up to two, three, four times that amount. Gurdip Janjua | Analyst, Murchison: Hey, Pradeep, to answer your question? Yes, it did. I do have a follow-up here if you'll entertain it. I know Dell prefers to outsource a lot of this work to you guys, but it seems like you'd be a great sort of in-house or buyout target for them at a price that is at least, I would say, anywhere two to three times more than where you're currently trading at. So the question is, is that something that you would entertain? I'm just curious to hear your thoughts around that. Daryl Duan | President & CEO, TSS: Pradeep, look, I mean, we have an obligation to a lot of constituents and many on this call today. And we will entertain anything that's good for the business, the future growth, our shareholders, our investors, our employees. So really nothing's off the table. But I can promise you that we are singularly focused on just execution and let everything else happen as it may. Gurdip Janjua | Analyst, Murchison: Awesome. Thank you very much. All right. Thank you. Operator | Conference Call Operator: Thank you. As a reminder, ladies and gentlemen, if you wish to join the queue at this time, you may press star 1 on your telephone keypad. Once again, that will be star 1 if you wish to join the queue to ask a question. Your next question is coming from Chris Tuttle from Blue Caterpillar. Chris, your line is live. Please go ahead. Chris Tuttle | Analyst, Blue Caterpillar: Hi, thank you. Nice to see you guys are keeping busy. My question is, and I think it'd be generally interesting to people, the facilities management business, right? How attractive do you think that is qualitatively long-term? Is this a business that could look could be as good as the integration business in a few years. I'd just love to get your perspective on how we should be thinking about that business over the longer term. Daryl Duan | President & CEO, TSS: Hey, Chris. Thanks for the question. If you research the market and the growth trajectory and the compounded average growth rates, IDC has some interesting stats in that space of around 12% to 13% CAGR growth. That's exciting because there's a lot of money involved. I can tell you that we think there is an opportunity for MDC growth around AI. One of the long pole in the tents is getting the container. Lead time in a container, especially now as you think about what the design point needs to be for the container to accommodate direct liquid, is a little longer than we want and I think that the market wants. So it's got to come down. It's got to shrink. And the players in that space know that. I think we're going to see some activity. I don't know if it could reach the volumes of what we're talking about in RAC integration, because those volumes are significantly expanding. But I do think in the near term, I'm optimistic that we should be able to talk more about what we see happening that is around the bookings level by the end of the year that will produce revenue in 25 and 26. So I would say just let's see how this plays out. And I'm optimistic that we'll see something positive. Okay, great. Thanks a lot, guys. Gurdip Janjua | Analyst, Murchison: Thanks, Chris. Operator | Conference Call Operator: Thank you. Your next question is coming from Ian Carr. Ian, your line is live. Ian Carr | Analyst: Please go ahead. Hey guys, thanks for taking a chance to answer this question and congrats again on the great quarter. So I just have a question about your new facility. I know you mentioned it's able to handle a lot more volume, but do you think you guys chose a facility that is large enough? And if you do keep growing at the rate you are growing and hope to grow at, is this facility going to be able to handle that? And in the current industrial park of where this facility is, are you going to be able to get a bigger facility if needed? And what does that timeline look like? Daryl Duan | President & CEO, TSS: Ian, you sound like you've got some inside information here. No, just a follower of the company, that's all. All right. Yes, for the time being, we think it's sufficient. Todd Merritt, you know, runs our operations, and Todd's got a variety of scenarios that allow us to plan out the growth, a lot of it on the RAC integration side, primarily based on test times, the percentage of direct liquid versus air, the power needed, et cetera. I think we've got a variety of different options in front of us that this facility will handle for a while. Incidentally, where the facility is, there's additional space stone throw away that is available should we need it. And we also have a facility we're in, which is another 100,000 square feet, that we have the option to sublet or to utilize as a buffer. So I think we're good. And by the way, what we spent time working on is moving inventory to get more production capacity space in our existing facility, working with our customer on that. And that's actually been a pretty good move. So we're not wasting space storing stuff. So I'm optimistic, I think Danny is, and I know Todd is, that we've got a plan. And if we're in a fortunate position where we blow through this plan, we know the market. We spend a lot of time surveying the market. We know where the players are for additional space. So I think we're good. Danny Chisholm | Chief Financial Officer, TSS: The other one I'd add on to that is really the primary driver of the move wasn't even square footage. We could have handled a good bit more volume where we are based on square footage. It was really power requirements. So it was going to take us probably 18 to 24 months to get the power that we would need in the existing facility to do the kind of volume and the higher-powered racks that we see coming. We've got roughly 2.5 megawatts coming into this building, a little bit more than that. And we will have upwards of 12 megawatts pretty quickly in 2025 and looking out at 20 or more megawatts within a year after that. So really, that was more the gating item than the square footage. So that opens up a tremendous amount of opportunity with getting that. Ian Carr | Analyst: Awesome. Well, thank you guys. Appreciate it. Good luck for the rest of the year. Daryl Duan | President & CEO, TSS: Ian, thanks, buddy. Appreciate your question. Operator | Conference Call Operator: Thank you. And as another reminder, should you wish to ask a question at this time, you may press star 1 on your telephone keypad to join the queue. Once again, checking if... There should be any final questions, and you may press star one on your keypad to join the queue. And we have a question from Max Borges. Max, your line is live. Gurdip Janjua | Analyst, Murchison: Please go ahead. Hey, Max. Max Borges, your line is live. You may proceed with your question. Max Borges | Analyst: Sorry, I had it on mute. How are you doing, guys? Thanks for letting me ask a question. When you guys look at your future growth potential over these next few years, what do you think is the biggest potential bottleneck to that growth? Is it facilities? Is it people? Is it power? Danny Chisholm | Chief Financial Officer, TSS: Power. Power and probably availability of NVIDIA chips to our customers. Max Borges | Analyst: And what kind of impact do you think that will have as far as, you know, topping out how quickly you can grow? Like, is that the determining factor of how quickly you'll be able to grow is how quick you get those chips or the power, whichever one is your answer? Daryl Duan | President & CEO, TSS: You know, I think, Max, like I mentioned earlier, we do a lot of scenario planning. What if And we have a very close working relationship with our customers. And we're constantly talking about technology and how do we adapt to the future technology. I mean, a kilowatt, I'm sorry, a rack today might be 88 kilowatts. And I thought we were looking at mid, early 200s, and it's now approaching 300. And it's going to get even more powerful. So the good news is, as I mentioned Todd earlier, we're out in front of what that demand is going to be for power. So I say power because everybody's chasing power, and it's going to be something we're going to have to deal with too, but we're out in front of it. And I think we're okay. I mean, I'm not saying we're fat, dumb, and happy sitting back, laying back, and it's all good. It's a crazy world we live in. It's very frenetic, and we just have to be out in front of it. So I think we're okay for the time being based on our planning for anything in the next couple of years at least. Danny Chisholm | Chief Financial Officer, TSS: Yeah, and what we're moving, the city has been really cooperative in working with us on that. I believe they're, in fact, building a new substation near where we are. So I think that expands some possibilities for future expansion still. Daryl Duan | President & CEO, TSS: You can't see it, but I'm smiling here because we're in Texas. And usually around here, when a guy or a woman or somebody says to you that you got a deal, it's good, it's good. So we've got a really good relationship with the city, where we're going, and where we're at, actually. And I think we're okay. You know, as Danny said, Danny and Todd have been working really hard on this, as well as the people representing us with this site. And, you know, look, man, there's no guarantee anywhere in this world, but I think we're in a good spot. Max Borges | Analyst: Okay, great. Thanks, guys. Appreciate the answer. Gurdip Janjua | Analyst, Murchison: Yep. Thanks, Max. Thank you. And we have a question from Charles Hutchinson. Operator | Conference Call Operator: Charles, your line is live. Please go ahead. Hi, guys. Charles Hutchinson | Analyst: I was wondering if you guys were operating near your full capacity when you guys were working on the June project. Short answer is no. Okay. That's it. Daryl Duan | President & CEO, TSS: Charles, you don't have anything better than that. Come on, man, give me a better question. Charles Hutchinson | Analyst: Yeah, I mean, I guess I would be curious how much of your capacity were you guys utilizing, and I guess what is the timeline on kind of utilizing that full capacity if you have one? Daryl Duan | President & CEO, TSS: I wish I didn't say anything. We were good at no. The timeline, a lot of it depends on a demand signal, but We're good. I think, you know, I mentioned once before that we have the capacity to grow 10X. And I'm comfortable that we have that capacity. So timeline, a couple years maybe before we start to get a little tight, but I think we're good for the time being. Great. Thank you, guys. Now, but I'll also say this. I mean, somebody, it was Pradeep brought up the Supermicro I don't want to ever speak badly of anybody. I don't wish any ill will on anyone in our industry. If there's a demand increase because of something related to that, we will adapt and adjust to it. And that would be a spike that we're not planning for, but we can prepare and adjust to. So, like I said earlier, bring it on. We'll take it on. Gurdip Janjua | Analyst, Murchison: Great. Thank you, guys. You bet. Operator | Conference Call Operator: Thank you. This does conclude today's Q&A session. I would now like to turn the floor back to Daryl Dewan for closing remarks. Daryl Duan | President & CEO, TSS: Thank you, Tom, and thank you, everybody, for listening to the call and, Danny, for your support here. As I've said in previous calls, we remain focused on execution, and we're excited to be an integration services leader at the intersection of advanced computing and AI. We could not have accomplished this alone. We have a lot of people helping us, We thank each of them and you, our investors, for believing in our company. We remain optimistic about our future and our growth opportunities. So thank you. I appreciate your participation today. Operator | Conference Call Operator: Thank you. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you once again for your participation. jsPDF 3.0.3 D:20260606090512-00'00'

NASDAQ:TSSI Q2 2025 Earnings Call Transcript Generated on 6/6/2026 Operator: Welcome to the TSS, Inc. Second Quarter 2025 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. I will now turn the conference over to your host, James Carbonara. You may begin. James Carbonara | Host: Thank you, Operator, and good afternoon, everyone. Thank you for joining us for TSS's conference call to discuss the company's second quarter 2025 results. Joining me today on this call are Daryl Duan, President and CEO of TSS, and Danny Chisholm, the company's CFO. As we begin the call, I would 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 6, 2025. TSS expressly disclaims any obligation to update, amend, supplement, or otherwise review any information or forward-looking statements made on this conference call or the replay to reflect events or circumstances that may change or arise after the date indicated, except as otherwise required by applicable law. For a list of the risks and uncertainties that may affect the company's future performance, please refer to the company's periodic filings with the SEC. In addition, we will be referring to non-GAAP financial measures. A reconciliation of the differences between these measures and the most directly comparable financial measures calculated in accordance with the U.S. GAAP is included in today's press release. With that, Daryl, I will turn the call over to you. Daryl Duan | President and CEO: Thank you, James, and good afternoon, everyone. Thank you for joining us today for our second quarter 2025 earnings conference call. The demand for complex, high-performance computing systems, particularly those enabling AI applications, continues to accelerate at a remarkable pace, and we are squarely positioned to address that demand. This past quarter marked a major transformative milestone in our company's journey and positions us for what we expect will be a record year. I'm pleased to report that we are Successfully operating in our new facility, state-of-the-art, 213,000 square foot facility in Georgetown, Texas, and is now fully operational. It's also at less than 100 degrees today. The build-out is testament to detailed planning, teamwork, and the team's ability to execute. It is more than just additional square footage. This facility is a strategic asset purpose-built to support rapid scaling of integration services of the most advanced and complicated computing solutions. The facility became operational across all capabilities late in the second quarter. With systems now validated and capable of running at full capacity, we're beginning to capture tangible benefits. We continue to produce faster delivery cycles, generate greater operational efficiency, and increased ability to support larger, more complex customer deployments. The completion and activation of this facility marks the turning point, and we are incredibly bullish about what lies ahead. In terms of our financial results, we delivered on our commitment of revenues in the first half of this year, exceeding the revenues in the second half of 2024. And comparing the first half of this year to the first half of last year, We tripled our diluted earnings per share and more than tripled our adjusted EBITDA. We are on track for what we believe will be a record year for our company. Our momentum is accelerating, the market is thriving, and rich with opportunities, and we're excited about the execution and our focus and precision. So let me walk through a few of the highlights for the second quarter. We achieved record year-over-year revenue growth of 262%, highlighting the accelerating demand for our solutions, the depth of our customer relationships, and the strengths of the market environment we are operating in. Adjusted EBITDA increased more than 100% to $4 million in Q2 of 2025. We also generated positive cash flow from operations for the first six months of the year, further strengthening our financial foundation, reinforcing durability of our business model. The exceptional performance was driven by growth in our two largest service offerings, procurement and systems integration. So let me break this down by segment. Starting with procurement services, where we source and resell third-party hardware, software, and services, revenue grew more than 572% year over year to $33 million in the quarter, driven by increased infrastructure investments to support AI workloads. The growth continues to underscore both our value as a strategic sourcing partner and the strong execution of our operational team. While the business may experience quarter variability, the overall trajectory remains positive, and we remain very optimistic about the contribution from this segment. Systems integration, which includes AI rack integration, delivered another strong quarter with revenue growth increasing 91%, fueled by growing demand for AI-enabled infrastructure. This growth reflects the accelerating momentum behind AI deployments as enterprises begin to modernize and expand their compute environments, while hyperscalers remain in rapid expansion investment mode. We believe we are still in the early stages of the AI infrastructure build-out cycle, and we expect continued robust growth as customers scale investments to meet evolving compute requirements in the quarters and years ahead. I'll speak more to this in a minute. In our facilities management business, which primarily includes our modular data center business, revenues declined 35%. While this segment represents a smaller portion of our overall business, approximately 3% of the total revenue in the quarter, it has historically delivered stable high margin contributions. The modular market is evolving. Modular data centers are no longer used solely to augment traditional data centers, but are increasingly viewed as prefabricated solutions for delivering dense computing capacity more efficiently. Additionally, edge computing and emerging AI-driven segment is well-suited to modular deployment. As adoption of AI technologies accelerates, we expect modular data centers to play a growing role in our strategy through 2025 and beyond. So it's clear to me that we're still in the early days of AI and demand for high performance computing. That demand is growing, our capabilities and partnerships are expanding, and our pipeline continues to strengthen. Importantly, we're successfully executing our business strategy and delivering substantial growth while scaling our operations and positioning the company to capture a meaningful share of the rapidly growing and complex AI infrastructure market. So let me turn the call over to Danny for more detailed conversation and discussion of our financial results. Danny? Danny Chisholm | Chief Financial Officer: Thanks, Daryl. Consolidated total revenue increased by 262% in the second quarter of 2025 to $44 million, up from $12.2 million in the second quarter of 24. As Daryl mentioned, the increase was driven by significant year-over-year growth in our two largest service lines, procurement and systems integration. Revenue from procurement services totaled $33 million, up 572% compared to $4.9 million in the year-ago quarter, driven primarily by purchases from the federal government combined with a mixed shift with a greater proportion of revenues coming from gross deals as opposed to net deals. As a reminder, revenue in this segment represents a mix of gross and net deals whose revenue recognition method varies based on the contractual terms of whether we modify the product in some way or just act as an agent in the transaction. The gross value of all procurement transactions, regardless of how accounted for, increased 213% from the prior year quarter to $65.7 million this quarter. Based on recorded GAAP values, procurement gross margins were 7.7% in the current quarter compared to 14.7% in the prior year quarter. When viewed using the non-GAAP gross value of all transactions, which we see more as apples to apples comparison because it ignores the gross versus net difference, gross margins improved from 3.4% in the prior year quarter to 3.9% in the current quarter. The margin expansion worked in concert with the 213% increase in the gross value of procurement transactions, driving 251% growth, in procurement services gross profit to $2.5 million, up from $700,000 this quarter last year. Revenue from the facilities management totaled $1.5 million, down 35% from $2.3 million in the same quarter last year. Although currently the smallest segment of all our businesses, facilities management holds significant strategic potential. We're actively pursuing new opportunities while maintaining readiness to address customers' needs for modular data centers, or MDCs, when that demand picks back up. We're also seeing some discrete projects planned for the second half of this fiscal year on MDCs that were deployed in past years. In addition to year one revenues, new deployments typically generate multi-year maintenance contracts, further enhancing our earnings profile. Revenue from the systems integration segment increased to $9.5 million, up 91% compared to $5 million in the second quarter of 2024, driven primarily by the continued growth in the integration of AI-enabled racks, which began with significant volume in June of 2024. Our work here is pursuant to the multi-year agreement signed in October 2024 to integrate AI-enabled racks for our largest customer. We expect systems integration revenue in the next several quarters and next several years to grow substantially from current levels. Consolidated gross margin was 17.8% this quarter, down compared to 37.3% in the second quarter of 2024, and up compared to 9.3% in the first quarter of this year. The year-over-year decrease is primarily due to the mix of revenues with lower margin procurement services representing a much larger portion of the total revenue compared to the prior year quarter. Breaking down the components of the consolidated margins, systems integration gross margins improved from 43% to 44%. Facilities management gross margins remained robust at 74% in each period. And as mentioned earlier, the gross margins on procurement activities improved from 3.4% to 3.9% in the current quarter when viewed on the basis of the gross value of transactions. So the downward movement in blended consolidated margins is driven by the outsized growth in the larger, I'm sorry, in the lower margin procurement business combined with a greater portion of of the procurement deals being recorded as gross deals compared to the prior year where more were net deals. SG&A expenses were 61% of gross profit in the second quarter, on par with 60% in the year-ago quarter. On a dollar basis, SG&A expenses increased to $4.7 million in the second quarter of 2025 from $2.7 million this quarter last year and decreased sequentially from $4.9 million in the first quarter of this year. The year-over-year increase was primarily due to the higher headcount and related compensation costs. The current quarter's SG&A expenses include $930,000 of non-cash equity-based compensation compared to $155,000 in this period last year. It's worth noting that as a result of the growth of our market capitalization and revenues, we'll no longer be considered a smaller reporting company at the end of 2025. We'll instead be an accelerated filer. As a direct result to that, our external auditor must for the first time perform an integrated audit, including testing and opining on our internal controls over financial reporting. We're starting to incur new higher audit and accounting costs as we prepare for both a more robust internal audit of these controls, as well as a first-time external audit of these controls pursuant to the Sarbanes-Oxley Act Section 404 . Depreciation and amortization expenses increased year-over-year to $844,000 compared to $117,000 in the year-ago quarter. The increase is due to two full months of depreciation recognized on our new facility, which we put into service in May 2025. I expect the quarterly run rate of depreciation to increase ratably in the third quarter as we see a full quarter's depreciation related to the new facility versus only two months' worth of depreciation on that facility in the current quarter. Consolidated operating income in the second quarter of 2025 was $2.2 million, up 32% compared to $1.7 million this quarter last year. While higher in dollar terms, this represents a lower operating margin from 37.5% this quarter last year to 28.6% this quarter, as the growth in depreciation outgrew the pace of growth in gross profit. As revenues continue to ramp at the new factory We anticipate operating income in the final six months of 2025 will exceed the comparable period of 2024, as well as the first half of this year. If we're successful in subleasing our Round Rock, Texas facility, our operating income will be further enhanced in future periods. We've seen some interest in the facility, but we wouldn't expect to see any sublease consummated this fiscal year. Interest expense increased to $859,000 in the second quarter of 2025, compared to $378,000 in the year-ago quarter. The increase was due to an increase in the gross value of procurement transactions and other revenues from our primary customer compared to the prior year quarter, as well as interest on the $20 million construction loan related to our new Georgetown facility, where we had no outstanding debt in the prior year quarter. Partially offsetting that interest expense was $175,000 of interest income earned from cash on hand compared to $106,000 of interest income this quarter last year. As a net result of all the factors mentioned, net income for the second quarter of 2025 was $1.5 million, up 6% from $1.4 million this quarter last year. Diluted earnings per share was $0.06 in each period. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and stock-based compensation, was $4 million, up 103% from just under $2 million this quarter last year. Now let's take a look at the year-to-date results. For the six months ended June 30, 2025, total revenues were up 410% to $142.9 million, compared to $28.1 million in the year-ago period. As Darrell mentioned, the first half 2025 revenues exceeded second half 2024 revenues of $120.1 million, a sequential increase of 19%. By segment, procurement revenues increased by 645% and systems integration revenues increased by 140%. The increases were somewhat offset by a 37% year-to-date decrease in revenues from facilities management. This decrease is primarily due to the timing of discrete projects in this segment and a smaller decrease in ongoing maintenance revenues. Based on our current pipeline, I expect a bit of an increase in discrete projects in the back half of the year compared to what we saw in the first six months. Gross profit for the first six months of 2025 increased 135%. to $17 million, and our SG&A costs improved to 57% of gross profit, down from 70% in the year-ago period. Year-to-date, our net income was $4.6 million compared to $1.5 million in the first half of last year, an increase of 215%, and diluted EPS nearly tripled to 17 cents in the current period, up from 6 cents in the prior year period. Turning to the balance sheet. As of June 30, 2025, we had $36.8 million of unrestricted cash and cash equivalents, plus another $5 million of restricted cash securing our bank loan, up from $23.2 million at year-end 2024. The increase was driven primarily by cash generated from operations and $11.3 million of current quarter proceeds from bank financing used to support the construction at our new Georgetown facility. These inflows were partially offset by the capital expenditures tied to the facility's build-out. To support anticipated increases in production, as well as to support more and more powerful racks, as Darrell discussed, we completed the move of our new headquarters and production facility to a new location during the second quarter of 2025. Through the end of the second quarter, we invested approximately $31.6 million in improvements to that leased facility, primarily to significantly increase the available electrical power and related cooling capabilities for both air-cooled and direct liquid-cooled racks. That amount is the amount invested both last year and this year to date. This is a bit higher than the $20 to $25 million we previously indicated that we plan to invest. The increased investment was primarily in response to changes in anticipated technology roadmap from our OEM customers which require even more power and cooling capacity than what was initially planned. We expect these incremental investments in CapEx will lead to incremental future revenues. To date, funding for the investments has consisted of $20 million of bank debt, with the remainder coming from our cash on hand. The loan converted to a fully amortizing loan on July 5th this year, with monthly principal and interest payments through January 2030. Net working capital will decrease from $1.3 million at the end of 2024 to a negative $16.3 million at the end of second quarter 2025, primarily reflecting the investment in those capital expenditures. The use of the working capital, including the growth in accounts payable at the end of the period, is primarily related to procurement transactions and the funding of those construction costs. Due to the conversion of our debt to a term loan about a month ago, $5 million of cash that is a deposit securing our loan was reclassified from a current asset cash to a non-current asset restricted cash. In Q3, we anticipate receiving $6.8 million of tenant improvement funds from our landlord, reimbursing us for CapEx we've invested to date. We've also requested to exercise the accordion feature on our bank loan, allowing us to borrow an additional $5 million on that loan in recognition of the additional capex that we have to date funded with cash on hand. These sources of funds will further improve the strong cash position showing on our balance sheet. For the first six months of 2025, we generated cash flow from operations of $37 million, which compares favorably to $1.7 million of cash used in operations in the first six months of last year. The improvement was driven by much stronger earnings combined with the timing of cash flows in our procurement activities discussed above. Overall, it was another great quarter, and we look forward to a strong back half of the year. With that, I'll turn the call back over to Darrell for some closing comments. Daryl Duan | President and CEO: Thanks, Danny. I appreciate it. I commented earlier that our Georgetown facility is a strategic asset, and I'd like to expand on that before turning the call over to questions. I've described in previous calls how the amount of compute power in each rack is growing as a result of advancements in chip technologies such as GPUs from leading providers. Our close relationship with the leading IT OEM provides us an operational view of the roadmap ahead for chips and resulting rack densities. As a couple of years ago, a rack might have required 30 kilowatts of power. We are now preparing integrated racks with 300 kilowatts of power. on our way to a megawatt of power, possibly within the next year. The layout and capabilities of our facility that integrates 300 kilowatt racks is very different to a facility that integrates 30 kilowatt. We have invested in a new facility beyond our initial expectation because racks of greater density are approaching faster than we expected. More availability of electrical power is certainly the case, and we're targeting in a year more than double the current availability of electricity. We've also invested in cooling infrastructure, including direct liquid processing, required to address racks of dramatically higher power. The point to all of this is we are seeing great growth opportunity as the new facility comes online. Looking out over the next 12 to 24 months, our facility will become more and more critical for IT OEMs to deliver the product roadmap. Interestingly, We also expect to see more investment in the enterprise marketplace as the AI rollout continues and small, very dense compute resources are located closer to the end user. In summary, we expect continued strong performance for the remainder of this year. Given the strength of our first half and our increasingly visibility into the second half of the year, we are raising our full year 2025 adjusted EBITDA outlook as we've said previously, from at least 50% growth to at least 75% growth compared to 2024. We remain focused on driving long-term profitable growth and delivering lasting shareholder value. So with that, let's open up the line for Q&A. Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Once again, please press star 1 if you have a question or comment. Once again, please press star one if you have a question or a comment. The first question comes from Bradley Stevenson with Breakout Investors. Please proceed. Bradley Stevenson | Analyst, Breakout Investors: Hi, guys. How are you doing? Pretty good. How are you, Bradley? Good, good. It's good to talk to you again. I've got a few questions, and we'll see how you feel about answering those. One of the things that we've never talked about, or at least I've never heard you talk about it, is where does TSSI stand in the priority order for Dell for rack integration projects? We know they have in-house rack integration Daryl Duan | President and CEO: sites as well and then we also know they use you and i believe maybe another vendor or two as well possibly but can you comment on that at all bradley i think um the way i would answer that is we um our desire is to make it really easy to pick tss to do the total solution um we've positioned ourselves for the more complex future and to be the cheaper, better, faster alternative than anything else in the marketplace. So in terms of a priority, in our world, we are never satisfied. We want to be the top priority. We're working hard to be the top priority. And in the scheme of things, I probably can't go into any more detail than that, the top percentages or whatever, but rest assured, we want our unfair results share of the business and we're making it as easy to do that as possible. Bradley Stevenson | Analyst, Breakout Investors: Okay. Thanks. You talked a little bit about growing organically in your press release and also exploring strategic alternatives. I think that comment was about expanding beyond Dell. Am I reading that correctly? And if so, can you talk a little more about that or provide any more detail on that thought? Daryl Duan | President and CEO: Yeah, so organic growth is doing more with what we've got with our existing relationship. I think that's pretty obvious. We're doing everything we can to grow organically, and so far so good. Every day is a new day, and we strive to be better every day. So we want to continue to grow organically on the Outside of that, you know, there's a number of different ways that we can expand. We talked about some of that in the past by doing some on-site rack integration, for example, in a customer facility. But, you know, there's a, if you will, a respect involved where people that we have working with our existing customer are not going to put somewhere else. I mean, we're just on a competitive environment. We're just not going to do that. But that doesn't mean we can't have other teams dedicated to other technologies, and we're exploring doing that. So that's one way to grow in a customer facility. Another way is to grow through providing our kind of solution to the channel, you know, the channel market out there that actually resells current customer technology and other technology wants someone or a firm to do the integration work that we have invested a lot of money in, you know, $25, $35 million as we talked, In our world, there's a lot of money. So we want to make sure that we invest and use that. Why would a channel partner be faced to have to make that kind of investment to satisfy their customer? They can route the technology through us. We'll do the integration. We have the facility in Round Rock, which we could use for that if that ever comes up. So that's an opportunity. And then third, there's a whole other level of technology that's out in the marketplace that I think our existing relationship would be okay with if we were to partner in and with. And I can't go into a whole lot more detail here, but let's put it this way. I think we're interested in anything that works, that helps us grow, that doesn't damage our existing relationship, and that is done fairly and profitably. Okay. Bradley Stevenson | Analyst, Breakout Investors: Thank you. Procurement. It's a big number. It's a lot smaller than last quarter, a whole lot bigger than a year ago quarter. Is there any way to correlate that with anything else in your operation? I guess what I'm trying to say, I find myself, like I was surprised with the $90 million last quarter. I didn't expect to see a number that big. This quarter, $33 million. I won't say I was surprised. I just didn't really know. I find myself not having really any idea of knowing what to expect. Is there any guidance you can give on that? Daryl Duan | President and CEO: Well, if you, yes, there is. We inspect our pipeline frequently. And if you were surprised by the 90 million, so were we in the respect that it was such a big number and a big quarter for us. If you recall, we did 60 million in Q3 last year, and that was an eye-opener. And we traditionally haven't had that kind of a large procurement quarter in the beginning of a year. And we've felt and we still feel there's a little bit of a propensity to dial closer to the federal buying cycle, which usually is the third quarter of the calendar year. I can tell you that we're optimistic about the full year. I think you'll hopefully be pleasantly surprised again someday. And we're working hard to make that happen. So the corollary to anything other than the federal buying cycle and the fact that we've put more muscle behind working transactions than we ever did before, I think it's paying off. So in other words, internal resources allocated to go after opportunities that drive revenue for procurement. That also leads into business that we're driving in our configuration services business. And we've realigned our team internally to place, if you will, more attention and talent into the config services business, which really is connected to the procurement business, And, you know, eventually and hopefully very soon we'll see the benefits of that. Danny Chisholm | Chief Financial Officer: Yeah, to be clear on that, Bradley, while the configuration services gets a lot of that volume fed from the procurement activity, those numbers for configuration services are classified in the systems integration segment. Daryl Duan | President and CEO: Okay. Bradley, I mean, I can tell you that I've been here almost now three years, and what Danny just said is something we always kind of go, now, how does that work? You know, it is what it is. But at the same time, Danny is completely right. They feed each other and they work closely together. And we can also grow config services without procurement, which is what we're trying to do. And in order for that to happen, we had to change some people. And we're continuing to invest in a software platform and software technology to automate the process that makes it a lot easier to deliver the end result. And we're doing that from operational money. It's not a lot of money, but it just takes time. Bradley Stevenson | Analyst, Breakout Investors: Gotcha. And I wasn't trying to say I was disappointed in 33 million. I just didn't, I just didn't know what to expect. That's all I was really saying. Daryl Duan | President and CEO: I was just trying to figure out where you're coming from. Cause next time you ask a question, I might not take the answer question. Bradley Stevenson | Analyst, Breakout Investors: So I have, I'm going to call what you said about EBITDA guidance. Um, you can correct me if you don't want it referred to as guidance, but, um, If I've done my math right, if to do 75% more than last year, that would mean breaking even with the quarter we just finished over the next two quarters on average. While that's a good number, do you see upside potential beyond that scenario? Danny Chisholm | Chief Financial Officer: Yeah, we absolutely view that as the floor, right? If you think about, you may not have picked up on the exact words Daryl's used in communicating that, but it was, we see at least 75% uptick. Daryl Duan | President and CEO: So last year we did 10 million. Bradley Stevenson | Analyst, Breakout Investors: Okay. So if you do four, and I guess what I'm trying to say, maybe I misunderstood what you meant, but If you hit, say, $4 million in the third quarter, $4 million in the fourth quarter, that gets you about a 75% uptick, I think. Daryl Duan | President and CEO: Yeah, I think your math is somewhat close. The first half of this year, Danny, correct me if I'm wrong, I think first half we did about $8.2 million EBITDA. Last year we did 10. We're saying at least 75%. Danny Chisholm | Chief Financial Officer: First half of this year was 9.2. 9.2? Daryl Duan | President and CEO: Yep. What's a million dollars amongst friends? 9.2, 8.2, 9.2. So I think the – so there's your – hopefully that answers your question. If we're looking at the full year, we're increasing the guidance to at least 75%. Got it. Bradley Stevenson | Analyst, Breakout Investors: All right. Well, I appreciate it, guys, and good quarter, and thank you for answering my questions. spk07: Thank you, Bradley. All right, buddy. Operator: Once again, if you have a question or a comment, please indicate so by pressing star 1 on your touchtone phone. Once again, that's star 1 if you have a question or a comment. Please continue to hold while we poll for questions. spk07: The next question comes from Chris Tuttle with Blue Caterpillar. Operator: Please proceed. Chris Tuttle | Analyst, Blue Caterpillar: Hey, fellas. Thanks for taking my questions. I was hoping there would be more coverage on this call. In the old days, analysts would introduce companies with this kind of growth and fundamentals. But anyway, a couple quick ones just from me. In terms of Georgetown, where are we? Did you say you weren't completely 100% operational there or at capacity? I just want to clarify what you said about that. And if it's not 100%, sort of what's your timeframe on getting there? Daryl Duan | President and CEO: We are now 100%. Chris, good to talk to you, by the way. We're now at 100%. We started the transition around the early part of May. and we segwayed into 100%, so we're full capacity, full production capability right now. spk07: Okay. Danny Chisholm | Chief Financial Officer: Capability. Chris, I'm sorry. Sorry, Chris, you're pixelating a little bit. spk07: Sorry. Operator, we can't pick them up. I'll have to call you back. Okay, Chris, we'll take your question once you come back into queue. The next question comes from Maj Fauden with GEO Investing. Operator: Please proceed. Maj Fauden | Analyst, GEO Investing: Hey, guys. I just took another call. One quick question, and I might have missed it because I missed a pair of remarks, so if I did, excuse me for asking again. I've been already answered. But did you address anything going on around the Rock facility, like any kind of movement there in terms of opportunities, or are you just 100% concentrated in the Georgetown facility now and just wanted to know if you addressed that at all? Danny Chisholm | Chief Financial Officer: The opportunity as in sublease or as in doing additional business there? Maj Fauden | Analyst, GEO Investing: Yeah, I guess both. I mean, I'm assuming, too, that's kind of that facility allows you to maybe do stuff that's not also potentially an assumption also. Daryl Duan | President and CEO: You're right, Hamish. It is available. We've had some interested parties to sublease to. It's also something on our list to go expand our configuration services business. It's got adequate power for that and some DLC capability, direct liquid cooling, which is obviously what we used to do there. But it's 110,000 square feet, and we're working angles to try and figure out how to best use it. It does open up opportunity for us to grow beyond our existing relationship in a way that doesn't upset our existing relationship. But nothing yet that we can talk about here, but we're working it. Maj Fauden | Analyst, GEO Investing: Great. That's the only question I really had. Thanks. Daryl Duan | President and CEO: Okay. spk07: Great. Thanks, Bosh. Yeah. Operator: This concludes the Q&A portion of our call, and I'd like to turn the floor back over to Darrell Dewan for closing remarks. Daryl Duan | President and CEO: Thank you, sir. Folks on the call, we're really grateful and glad to be in our new facility. It's been an effort, an extreme amount of work by a great team to get here, so the execution to get here is quite amazing. We're doing everything we can to position a company to scale and be ready to address these advanced technologies by the investments we're making and by the people that we've got here. I can tell you that we're focused daily and quarterly and on an annual basis to continue to execute and to produce shareholder value. In a big picture, this is exciting space. The AI world is just amazing. We appreciate you, our investors, for your commitment and your support. We're doing everything we can to give you a good return on your investment. And my phone and my door is always open as the management team here, so appreciate any of your feedback or questions. As we've said before and I've said before in a previous call, wish us luck. So thank you. Have a good day. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. jsPDF 3.0.3 D:20260606090513-00'00'