TSS, Inc.

Good afternoon, and welcome to the TSS, Inc. First Quarter 2025 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Carbonara. James, the floor is yours.

Thank you, Operator, and good afternoon, everyone. Joining me on this call are Daryl Doohan, President and CEO of TSS, Inc., 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, May 15, 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 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 cause actual results to differ, please refer to the company's periodic filings with the SEC. In addition, we'll be referring to non-GAAP financial measures. A reconciliation of the differences between these measures and most directly comparable financial measures calculated in accordance with USS GAAP is included in today's press release. With that, Darrell, I'll turn the call over to you.

Thanks, James. Hello, everybody. Thank you again, and good afternoon. Thank you for joining us today for our first quarter 2025 earnings conference call. Welcome to 2025. We're off to a strong start in the first quarter. Demand for AI RAC integration and procurement services business remains robust, and we once again are delivering outstanding financial results, driven by strong operational execution and our unlaboring commitment to customer service. We are successfully executing our business strategy, delivering substantial growth in revenue, earnings, and cash flow, while scaling our operations and positioning the company to capture a meaningful share of the rapidly growing and complex AI infrastructure market. Importantly, we're dramatically adding to our capacity to perform systems integration services work and have reached an important milestone, which I'll cover in a moment. So let me walk through some of the highlights from the quarter. First, we delivered total revenue growth of 523% year over year. Believe it or not, I've gotten a couple of texts saying that's not good enough. An extraordinary achievement that underscores the rising demand for our offerings, the strength of our customer relationships, and the attractive market dynamics in which we operate. Diluted earnings per share grew to 12 cents, a significant improvement from just over break-even a year ago in the quarter. We also generated positive cash flow from operations for the first three months of the year, further strengthening our financial foundation. This exceptional performance is driven by growth and our two largest service offerings. Breaking down the performance by segment, let me go. First of all, starting with procurement services where we source third-party hardware, software, and services, revenues grew by more than 600% to more than $90 million in the quarter as our customers ramped up infrastructure investments to support AI workloads This growth not only highlights our value as a strategic sourcing partner, but it also reflects the strong execution of our operations team in a rapidly scaling environment. As we've noted in the past, while this business can experience quarter-to-quarter fluctuations, the broader trajectory remains positive. We remain very optimistic about its contribution throughout the rest of this year. Our number two segment is systems integration. which includes rack integration, AI rack integration, experienced a tremendous surge in revenue this quarter, driven by the increasing demand for AI-enabled infrastructure. Revenue in this segment grew more than 250%, highlighting the momentum behind AI deployments. We are still in the early stages of the AI infrastructure build-out cycle, and we expect sustained high growth in this area as customers ramp up investments to meet evolving compute demands over the coming quarters and years. And in facilities management, our other segment, which primarily includes our modular data center business, or MDCs as we refer to them, revenue declined 40%. This segment has historically provided stable high margin revenue, despite representing a smaller portion of our overall business, just over 1% of total revenue in the first quarter. The modular market is changing. MPCs are no longer used primarily just to augment traditional data centers. This change, however, in modular is changing to where we are addressing a form of a prefab solution for delivering very dense computing more efficiently. In addition, edge computing and emerging and growing segment tied to AI is also likely to become modular. Given the accelerating adoption of AI-driven technologies, we expect MDCs to play an increasingly important role in our growth strategy in 2025 and beyond. To meet rising demand and support a long-term customer agreement, in 2024 we secured a multi-lease agreement on a 213,000 square foot facility in Georgetown, Texas. The build-out is progressing according to plan. That space, by the way, is twice as big as it is what we have today in Round Rock, Texas. So I'm excited to announce we have begun production of this new facility in early May, with support for a range of programs getting underway. We expect to reach full production capacity in this new facility by June. This is record achievement based on where we started in this facility to where we're at today. My congrats to our team. So let me take a minute to explain the strategic advantage this building represents. First of all, many of you who follow the data center market and its evolving role in delivering AI know power, the electricity power, is a major issue for data centers. Well, it's a major issue for data center infrastructure production as well. When a rack build is commissioned, the AI equipment and other components that come to our facility are that we add to a rack and cable it all together. Sounds simple, doesn't it? Well, today these servers are heavier. Cabling is challenging as each GPU in a AI rack needs to be able to talk to the other GPUs and the new element of cooling or water distribution for direct liquid cooling is added. Once all of this is complete, the rack needs to be powered up and tested. We have been asked by our largest OEM customers to be prepared to test many racks simultaneously. This drives a significant power demand. We have opened up our new facility with six megawatts of power. However, we have worked with the local municipality to augment the power supply to 15 megawatts by the summer. We're at 2.7 here in Round Rock. This is six times the power we have available in our legacy facility. We have discussions about adding more power that significantly improves where we're at in time, and the city is very supportive. And beyond having the power made available by the municipality, we need to be able to distribute that amount of power and water, for that matter, within the building. All in all, this is a building designed from the ground up for AI rack integration, and there are very few buildings like this in the market, providing us a significant competitive advantage. From a financial perspective, our total planned investment is between $25 and $30 million. This investment will scale over time as the complexity and the volume of RAC integration increases. We structured the project with a clear path to long-term profitability, and I underscore that. We're very focused on profitable growth, supported by our strong OEM partnership. Based on our current forecast, we anticipated a payback period of approximately two years, representing a highly attractive return on this invested capital. The AI infrastructure market is evolving rapidly, with significant capital flowing into development of high-performance compute environments. While the hyperscalers have led early adoption, we expect a broader wave of AI deployment for medium and large enterprises supporting applications far beyond large language modeling. We're hereby working closely with our key customers and partners to understand how hyper-dense AI compute will be implemented across a wide range of data center environments. This will remain a key area of focus for us in the quarters ahead, and we're excited about the opportunities this presents. After Danny has provided more detail on our financial performance for the quarter, I'll be back to address some questions about the market, tariffs, and our perspective on a positive future for the company. So Danny?