TSS, Inc.

Greetings 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.

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.

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 and 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 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 are 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 bringing 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's 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?