TSS, Inc.

His addition to our leadership team is a key part of our ongoing commitment to building and strengthening our organization. Speaking of growth and opportunities, let me share some insights on our current position and future trajectory. 2024 marks a pivotal transition for TSS, building momentum for accelerated growth and expansion for 2025 and beyond. Our current trajectory demonstrates significant progress, setting the stage for even greater achievements ahead. On today's call, I will provide additional context to illuminate our position and share why we're optimistic and poised for acceleration. Our turnaround strategy has progressed through key milestones as we've previously communicated in the earnings call and announcements. To review, we began with a comprehensive operational cleanup completed in the first half of this year and culminating in our ISO certification. Next, through our investment in people, systems and physical layout of our main facility, we successfully demonstrated our ability to scale within our current capacity, addressing a crucial concern for our customers. Now we're entering a third phase, ramping up revenue, earnings, and cash flow. We are already seeing the beginning of this growth as our Q2 results reflect. Our execution has been established by solid operational foundation and proven scalability, positioning us for accelerated expansion ahead. Our performance in the first half of this year underscores our significant progress. We delivered $28 million total revenue, a 33% year-over-year revenue growth while simultaneously investing in the business and expanding profitability. The growth was driven by our more profitable businesses, our systems integration and facilities management, This growth translated to even more impressive bottom line results. Operating income surged 530 percent. Adjusted EBITDA increased 331 percent. And we achieved 1.4 million in net income, a remarkable turnaround from last year's $500,000 loss. Our financial performance stems from our unwavering focus on operational excellence, our commitment to strengthening and expanding our team, and our enhanced go-to-market efforts. This strategic approach has not only driven our financial success, but also solidified our position as a trusted partner in delivering infrastructure crucial for AI and high-performance computing occurring in our increasingly digital world. As we move forward, these results validate our strategy and set the stage for continued growth and innovation. We're not just improving our numbers, we're helping to shape the future of digital Infrastructure. Operationally, our success is driven by our ability to meet the demands of rapidly evolving AI landscape and a need for high-performance computing infrastructure while remaining responsive to our customers' needs. The demand for AI continues to catalyze our expansion, creating significant opportunities for TSS as we support our primary OEM partner, expand capacity, and enhance services to meet their needs as well as those of other prospective partners and end customer. Allow me to share some insights on the AI market, current state, cutting through the speculation that dominates headlines. AI presents significant challenges in infrastructure procurement and planning, primarily due to the rapid evolution of compute power. At the data center level, we're seeing an unprecedented surge in power density. Just recently, a single rack would typically consume 10 to 15 kilowatts of power. Today's AI racks push 80 kilowatts, and we anticipate soon reaching 120 to 150 kilowatts in the next couple of generations. Industry roadmaps project over 200 kilowatts within a couple of years. This is an incredible growth in power density in a remarkable short period of time. This swift advancement is causing uncertainty for data center equipment buyers and may cause some lumpiness in our growth trajectory. However, there's no doubt that AI is dramatically accelerating the overall data center capacity pipeline. Moreover, this compute density increase brings a formidable challenge, heat. Cooling methodologies are evolving rapidly to keep pace with the increasing power density. This evolution presents both challenges and opportunities. TSS is positioned not just to adapt, but to lead in this rapidly changing landscape. Our nimble operational model enables us to adjust quickly as customers seek to make on-the-fly architecture changes. And our rapid testing capability provides more immediate feedback to customers by narrowing configuration options, including cooling. During Q2, we made a significant investment in our production capacity which came online at the beginning of June. This expansion significantly increased our volume capacity and decreased the cycle time to complete each rack within our existing facility. The expansion was driven by the surge in demand for server racks built in the pipelines of our customer, OEM customers. Our committed OEM customers are seeing the benefits of our actions and are very supportive. We have in recent times received customer funding for capacity and capability expansion to meet future needs, a compelling reflection of our customers' view of us as a partner. We continue to actively engage in discussions with them to further expand our capacity as we fulfill their needs and execute our goal to become a primary production partner for their future AI-related endeavor. We value our relationships. This is truly a partnership for success. Demand increased in Q2, and we began delivering complex AI integration solutions on time. And I want to stress, on time, including the first stage of a highly publicized program. That initial program began in June and is being carried out into Q3. As a result, we finished the quarter with a record run rate of RAC integration revenue. RAC integration revenues from the first half of this year are just a bit under what we achieved for all of 2023. Our procurement business, where we source third-party hardware, software, and services, delivered another solid performance in Q2, although it was down slightly year over year. Following a modest slower Q2, Q3 projections for our procurement business indicate very robust growth, potentially surpassing $50 million in revenue for the quarter. For those familiar with our history, we recall that our procurement segment often experiences quarter-to-quarter fluctuations due to size, timing, and revenue recognition methods of the deal. However, its overall trajectory remains upward, consistently contributing to our profitability. While we're encouraged by this growth trend, we maintain a prudent outlook on this business line and remain cautiously optimistic. Our modular data center business, or MDC business, continues to show year-over-year growth and remains a promising long-term opportunity for TSM. While the overall MDC market hasn't expanded at the rate analysts initially predicted, largely because rapid industry growth favored greenfield site development over capacity augmentation using MDCs, modular data centers, we're now seeing signs of a potential shift. The challenges I've highlighted earlier Rapidly increasing compute density involving evolving cooling requirements may finally usher in the area for modular solutions. Whether this materializes as predicted remains to be seen. However, TSS, we are strategically positioned to capitalize on this trend, particularly if AI clusters start being delivered as freestanding racks or modules. To be clear, the overall volume ramp that we've been anticipating is now underway. Our OEM customers have very robust pipelines, and we're seeing deals begin to close. We believe our Q2 performance is a harbinger of the good things to come. Our strategic inclusion in key customer programs signals a bright future as OEM pipelines materialize. This growth trajectory may not be a smooth, upward, linear line. The pipeline deals of our OEM partners are large, and we anticipate some variability as the market adapts to rapid technological changes. But make no mistake, we're witnessing a dawn of a transformative era in our industry, and TSS is at the forefront. This is not just exciting, it's validating. It confirms our strategy, our investments, and more importantly, the tireless efforts of our exceptional team. I'm proud of this team, and as we navigate this dynamic landscape, We're just not riding the wave of AI revolution. We're helping to propel it forward. So now let me turn it back to Danny to discuss our numbers. Danny?

Thanks, Daryl. I'm excited to be here and excited to share the detailed financial results of another strong quarter for TSF. Before I jump into the earnings for the quarter, I'd like to make a couple of observations about our financial position. We again ended the period debt-free with an untapped available line of credit and just over $8 million of cash on hand. As Daryl mentioned earlier, an OEM partner with whom we work closely agreed to fund a significant portion of the capital investments we made during the quarter to enhance our capacity to rapidly build AI-enabled server and network racks for them. You can see this $1.7 million capital investment in our statement of cash flow. The portion of the reimbursement not yet amortized into revenue is included in our balance sheet as part of the deferred revenue balance. You'll also notice a $2.6 million increase in inventory compared to December 2023. That relates to configuration and systems integration work that was ongoing at the end of June. Our contract and other receivables also increased by just under $3.5 million, as the majority of our annual facilities management contracts were renewed July 1st, and the invoices for those were sent out shortly before quarter end. The revenues for those, as in past years, will be recognized primarily over the next 12 months. Now I'd like to turn to the operating results for the second quarter. Ordinarily, I wouldn't be very enthusiastic about sharing with you a 16% decrease in our total revenue. However, if you look at the gross profit for the quarter, it's up 41%, driven by a revenue shift mix to higher yielding services. The revenue decrease was driven by a $5.7 million or 54% decrease in our procurement revenue. It's a great business that adds to the bottom line and will take as much of it as we can get. Plus, it provides some cross-selling opportunities for systems integration work. The movements in revenues from the procurement business itself have a much smaller impact on our overall gross profit and bottom line than do movements in our facilities management and systems integration businesses. We had a 46% growth rate in revenues from facilities management activities, largely tied to a couple of discrete projects during the quarter, and an impressive 108% increase in systems integration revenue. That last item is particularly exciting, as it was driven largely by our starting to integrate AI-enabled RAC, which began late in Q2. At least in the near term, we expected demand from this business to be a bit lumpy, as Daryl mentioned, with some spikes and valleys in demand from our OEM partners and customers, and somewhat dependent on the timing of the next generation of AI chipsets from the big chip manufacturers. That being said, in the first six months of the year, our systems integration team processed more than 80% of the system racks we integrated in all of 2023. As of the date of this call, we've already eclipsed the number of racks we integrated in the full fiscal 2023. Our SG&A expenses increased a bit in dollar terms and improved 8 percentage points to 59% of gross revenues from 67% this quarter last year. Through effectively leveraging our expense structure, the 41% growth in gross profit translated into a 74% improvement in operating income, ending the current period at $1.7 million. Our net interest expense represents almost exclusively the cost of factoring our accounts receivable from our largest customer. This factoring arrangement ends up having an effective interest rate of only around 6%, a far lower rate than we could get if we were to utilize a bank loan or revolving line of credit to finance those receivables ourselves. The net result of the above factors is that net income swelled to $1.4 million. up 345 percent from this quarter last year. And EPS moved from one cent in the prior year period to six cents per share in the current period. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and stock-based compensation, was just under two million, up from 1.2 million this quarter last year. Now, let's take a look at the six-month period into June 30 compared to the comparable period of 2023. Total revenues were up 33%. With a good portion of the overall growth in total revenues coming from higher-yielding services, our gross profit increased 48% to $7.3 million. Similar to what we saw in the quarter, our SG&A costs improved to 70% of gross profit from 90% in a prior year-to-date period. Adjusted EBITDA was a bit more than threefold what we produced year-to-date last year, ending the period at $2.5 million. The gross value of procurement transactions processed in the second quarter of 2024 was $21 million compared to $42.9 million in the second quarter of last year. In the current year-to-date period, we processed $40.9 million of gross value of procurement deals compared to $49.6 million this period last year. Procurement revenues are highly dependent on the timing of customer needs and can fluctuate widely from quarter to quarter. All in all, it was a great quarter for us financially, and we look forward to achieving similar results as we continue to scale the business. With that, I'll turn the call back over to Daryl to share some insights into our expectations for the future and provide some closing comments.

Daryl? Thanks, Gary. It's great to have you on board, bud. Thank you. We, TSS, remain strategically positioned to drive growth in both the burgeoning generative AI market and traditional cloud computing. AI's transformative impact spans every sector, and TSS, alongside our partners, stands ready to meet this surging demand. Looking ahead, we anticipate continued growth in our rack integration business, Expansion of our capacity completed in Q2 will yield significant benefits throughout the second half of 2024 and into 2025. Our ability to also provide on-site rack integration on a customer site with cabling services opens up new high-margin opportunities for TSS, expanding our total addressable market and customer base. Our expertise in handling complex integrations and our maintenance capabilities uniquely position us to capitalize on these trends and growing market demands. We believe we have the physical capacity to handle near-term growth that we anticipate. We also believe there is a potential demand looking into 2025 that might and may outstrip our capacity. We have begun initial exploration into further capacity expansion. Our procurement business remains strong despite quarterly fluctuations. In our modular data center business, while we've seen year-to-year, over-year improvement, we're now engaged in promising discussions with prospective customers. Our focus is on building a solid backlog to fuel revenue growth in 2025 and beyond. We're observing increased refresh activities in existing installations. though new builds are taking longer, particularly for AI solutions due to high GPU demand and anticipated technology releases. In the long term, we see potential synergy between AI and modular form factors, especially for use cases like autonomous vehicles and other time-sensitive applications in underserved areas. So in conclusion, TSS now has the capacity, expertise, and track record to deliver for our partners and customers. We are very well positioned for the next wave of growth, and we continue to explore avenues to enhance our growth potential. I'm very optimistic of our future and proud of our team, and with that, I'll open the line up for any questions. Operator?