All right. Well, welcome back everyone to our Needham Tech, Media, and Consumer Conference. I'm Matt Calitri. I work on our infrastructure software and cybersecurity research team here at Needham. It's a pleasure today to be joined by TSS, Inc. CEO Darryll Dewan and CFO Danny Chism. They're gonna walk through a presentation, and then we'll have time for questions. Just a quick housekeeping item. There should be a question bar below the screen for anyone watching. Please feel free to submit questions. We'll try to get to as many as we can after the presentation. I'll kick it over to Darryll and Danny. Thanks for being here, guys.
Thanks, Matt.
Appreciate it, Matt. I'll point everybody just to the quick forward-looking statements, market and industry data, just as kind of the CYA presentation. With that, we can go ahead and jump in. Darryll, I know you had some issues with your laptop this morning. I'm not sure if you can see the deck or not.
Yeah, I can, Danny. I'm happy to be here, so thank you, everybody. Thanks, Matt. Danny, I'll take a couple shots at this slide here. I think, in summary, what do we do? We are a systems integration company focusing in on three or four areas. One is advanced and high-performance computing rack integration and systems integration. We have a procurement services business. We do deployment and config of modular data centers as well. Our strengths, candidly, we think, our flexibility in the complexity and handling complexity of the technology and the demands of our customers' customers, and the speed in which we do it. We think we do a good job of partnering and delivering on time and executing. Our tagline is, We try to simplify the complex. We work on quality and innovation. Benefits get reduced complexity.
Solution that's delivered, you plug it in. Faster time to value. We believe we can do it faster than anybody else. We know that it works because we spend a lot of time doing validation and testing, and we hope to deliver superior customer service at the end. We think the investment thesis has these steps to it. There's obviously robust demand, you know, driven by what's happening in the world around AI, and also the availability of technology that, you know, feeds into number two. The AI boom is all around us. The customers we're dealing with are, you know, big name companies, Marquee enterprises. We're excited to be working with them closely. We interface with the customers when they're on our site. It's a rather exciting business to be in.
The demand for our offerings, according to all indications, has never been stronger. We have multiple levels of growth. We have new offerings that we're working on. We have investments in some of our co-selling, if you will, alongside our key customer. We have expanded capacity, which we can talk about at the Georgetown facility, which we moved to about a year ago, and we really started ramping our production that began about seven or eight months ago. We have expanding partnerships, which is part of our strategy, and the economics of what we do today is pretty compelling.
You know, one thing I'd add there, Darryll, is not only AI, right? That's certainly been a nice tailwind for us, but we've been in this business for a long time. We also do rack integration for traditional data center racks, network racks, compute racks. A lot more to the story than just AI, and I think, you know, some pretty good staying power there.
Good points.
You want to touch on the market opportunity?
Yeah. You know, the numbers are what they are, these are, I guess what I'm trying to say is they're big. You know, the global server market's big. The end user spending for cloud-related activity is big. It's never been bigger, the modular edge computing market is a exciting opportunity for us as well. The server market, which is kind of interesting and of intrigue for us, is we've largely been focusing in on providing integration services for our key customer, which serves a segment of the overall market. There are other players in the market, of course. We're proud to be with this customer because they're leading in the space. There's a lot of servers that are going into enterprises that frankly aren't coming from an OEM.
We're entering conversations to see if we can provide services through that route to market that's not competitive with what we have today with our key customer. It's a, it's a fine line that we've got to walk, and which we're happy to do, because that's how we roll. We wanna be a trusted partner, but there's a market out there that we're looking at to figure out a way that's not necessarily competitive with our existing customer that's out there as well. The market's big, no matter how you look at it. Here's some of the numbers that, you know, people like to talk about and look at. They're big.
The thing that strikes me when I see this one also, you guys don't see a bar chart over time. I'm updating this deck every quarter. What strikes me is every quarter these numbers increase, every single quarter. The market size or the addressable market is not just big, it's continually growing.
Okay, our offerings, as I mentioned earlier, I think I touched upon this, we do procurement. We'll buy and sell technology from our customer, from non, from other third-party providers, sometimes it's software, sometimes it's componentry, network cards, storage devices or whatever. We'll integrate that and send it to an end user customer. The numbers, you know, in the procurement area, we've done a variety of modular data centers over the years. We have some under existing sustaining maintenance, i.e., a support and service contract. Our systems integration business, which is what we refer to as our rack integration business, as Danny pointed out, it's suddenly AI, but it's high-performance computing. The high-performance computing line is still very active with us, and that's all handled in our Georgetown facility.
The advantage of what we have in Georgetown is we've doubled our space over our Round Rock facility, and we have a lot more power, and we're adding more power as we speak, and we'll talk about that. The three areas are our modular data center business, which is tucked into facilities management, systems integration and procurement. Here's a chart showing revenue growth year-over-year, 2025 versus 2024. Any question, we'll talk about I'm sure we'll get into more detail on this one here when we get into the presentation or after for Q&A.
Yeah. The only thing I would point out here is you can see that the procurement business makes up a huge piece of the total revenue. Being a thinner margin piece of the business, or more to the point, the other lines of business being a more robust margin, you can see they add more towards gross profit and pre-tax income as a proportion of the total.
Danny, you want to take this one?
Yeah, sure. The general trend over time has all been up and to the right, exactly what you would expect or what you would want. This quarter is a little bit unique, particularly in the procurement business, where we had a ridiculous volume of activity. Looks like the laptop's working finally.
Hang on, let me shut this off. I was able to get in.
There you go. Awesome. This quarter last year, we just had a ridiculous level of procurement volume. Typically, that runs more like $30 million-$40 million per quarter. We were $90 million this quarter last year, so really what you're seeing is a comp against an incredibly strong Q1 last year. Over time, everything continues to be kind of up and to the right. One thing that we're particularly happy about with the systems integration business all but doubling. It was up 88% this quarter over revenues this quarter last year. That combines with a margin expansion from, I believe we were at about 21% this quarter last year, to 37.5% this last quarter.
I'd expect that to continue, not necessarily at exactly the same margin, but certainly an improved margin over time. Looks like we may have lost Darryll again. Hopefully, he'll be able to rejoin us quickly. Facilities management business also, that one continues to be a strong line of business. You see Q4 spiked up to $3.5 million. There are two pieces of facilities management business. One is kind of the ongoing maintenance of modular data centers that Darryll mentioned a second ago. That remains relatively consistent quarter- after- quarter. Then we've got discrete projects in there too. Q1 through Q3, we were a little bit lighter last year in the discrete projects, where Q4 we had a huge spike in some of those discrete projects.
I expect that from time to time, but that was great to see there. I don't see Q1 as a negative in comparison to that. It was just a really good Q4 volume activity. Strategy, right? The right place at the right time. Number one is expanding the ability to drive the demand, maintain intense customer focus, right? We are very focused on addressing all the needs of our primary customer. If you read through our 10-Q, you'll see they represent 99% of our revenue right now. Obviously, we wanna keep that customer happy. At the same time, we are continually seeking ways to expand beyond that customer. If you read some of our public announcements, you'll see we just recently created the position and filled the position of Chief Strategy Officer.
And we also just brought on a Chief Technology Officer for the first time. Both of them with some history with our primary customer, but they also have a really good view of the overall market. We anticipate will be able to help us expand not only with that customer, but also expand beyond that customer. Then operational excellence, that's just table stakes, right? You've got to deliver at a high level to stay in this business. Pursuing strategic partnerships. We're continuing looking at opportunities to expand again within our current products and services, but then also beyond that and beyond our current customer base. Financial performance, again, this is just more kind of reiteration of everything tends to be up and to the right, as you would hope, as you'd expect.
I would say 2025, remember that included that $90 million of procurement activity in Q1, that'll be tough to comp. Frankly, that is the smallest margins of the business, I'm not particularly concerned about that. Again, it was just enjoying that Q1 last year. Similar chart here, right? Operating income, you can see in Q1 that continues to be strong, year-over-year, continuing up. Again, the comp to last year included that strong procurement in Q1. Diluted EPS continues to go up. One thing that when you look at diluted EPS compared to 2025, it looks like it's down a bit in Q1. I would point out also, we removed all the valuation allowance on our deferred tax asset in December.
Roughly 1/3 of the decrease in EPS from 2025- 2024 in Q1 was just because now we have to actually record income tax expense. Doesn't change the cash taxes, but does change what gets reported. From an adjusted EBITDA standpoint, we continue to grow that year-over-year as well. All again, the general trend continues to be up and to the right. Darryll, you rejoined just in time. You were talking about some of the recent business developments.
Yeah, happy to, Danny. Again, I apologize to everybody here. This is maddening. My computer's acting up, so I'm on my iPhone. Yeah, two things have happened in the last period of time. One is we upped our agreement with our key customer to add multiple years. We uplisted in Nasdaq in November 2024. As some of you may know, we raised some cash in August of last year that we've parked specifically for strategic growth initiatives, not only organic with our existing customer, but also strategic pursuits which we're entertaining. We relocated to Georgetown about a year ago, which was a epic move. It took four months, a little bit over 4-5 months, between 4-5 months to get up and running.
That was epic, pursuit. We've recently extended our long-term agreement, which I talked about, with our primary customer.
Yeah. One of the keys I'd point out with that move to Round Rock, Darryll touched on it a minute ago, but we were previously in our Round Rock location, we were under 3 MW of power there. We have 15 MW available in our building today, and the local power provider has indicated they've got the ability and willingness to provide incremental power if and when needed, which as computer racks continue to get more and more powerful could be a differentiating factor that'll be great for us.
Okay, Danny, I'll take this one. You know, in the three and a half years that I've been associated with TSS, we focused on a couple things. One is we focused on the quality of our workforce and the talent there, and we had a out-of-balance share of resource that was temp versus perm. We found that we got a better employee force when we moved some of the quality temp people to perm. We were able to reduce the headcount and have a higher quality and less expensive workforce, oddly enough. Secondly is we worked on building our management team and key capacities.
Over time, as we started to grow and experience the volume of activity and the market shifts and the dynamics of what's happening in the AI industry and the infrastructure space, we felt it was really needed for us to put some, if you will, wood behind the arrow around what we're doing and strategy. It's one thing to say, Yeah, we've got an idea. It's another thing to actually take action with it and put the kind of resources needed to go chase those ideas and to build a firm game plan. We brought Matt on recently in a consulting mode, and very impressed, very senior strategy leader, and we brought him on board as our Chief Strategy Officer just recently and formalized the agreement from consulting to on full-time.
We also recently added David Hull as our Chief Technology Officer. David is a very skilled and experienced executive leader in the infrastructure space, has been very involved in the engineering and design of racks and modular data centers in his experience, very well connected in the industry, respected with our key customer and others. We're pleased to have David on board. The combination will allow us, I think, to get out in front of technology changes, so we're actually leading versus catching, that'll help us when we move to the part of our strategy that would be in addition to our existing customer, which I want to highlight. It's important to us to get and to diversify. It's also important for us not to compete with our existing relationship. We know how to do that.
We're executing a plan to go do that and make it happen. David and Matt are going to work closely with Danny, the executive team, and myself to go make that happen. We're excited about them being on board. We won an award as the Best Deployment Partner a year ago. We got a nice trophy. It's nice. We're proud of that, and we're looking to do it again and more. We're heading in the right direction. Here's our team. I've been here three and a half years. Danny's been here two and a half, Danny? Is that right?
coming up on two.
Two. Seems longer. Todd is here 1 week longer than me. Very pleased to have Danny on the team. We have a collaborative, enjoyable, committed to excellence leadership team. By adding both David and Matt alongside what we're doing with Janet, who leads our, she's our Chief People Officer. We have Jim Woodward and KB, refer to as KB as Kieran Brennan leading our business development. Jim Woodward leads our facilities management business, i.e., the modular data center business. I think we've got a heck of a team to get us to the next level. Danny, you want to take this one?
Yeah. I won't necessarily run through this in great detail. I would point out, you know, when I look at cash and cash equivalents that might on the surface be worrying, dropping $20 million, really that's tied primarily to our procurement business, where we will periodically have a pretty big spike in cash along with a big spike in payables, then we'll pay down those payables. Really I watch more networking capital. We're a drop $20 million in cash. We actually increase a little over $2 million in networking capital once you net out the difference with AP. That's the biggest one. Stockholders' equity continues to go up, right? Everything kind of heading in the right direction. Continuing to service the long-term debt.
We took on $20 million of debt a couple of years ago, or last year whenever we built out the Georgetown facility, and we're just servicing that debt now. This one, I won't walk through the details, just meeting the obligation of showing the reconciliation. That's it from the live presentation. Darryll you got any closing comments you want to share before we open it up for questions?
No, Danny. Thank you. We're proud of what we've been doing. There's more to come. We're excited about the growth opportunity. We certainly appreciate the relationships that we have with our investor community. We're open-minded. We're gonna treat everybody respectfully and fairly. We're very committed to excellence and putting points on the board and growing the business profitably where everybody wins, and that's our game plan.
Great. Well, thank you guys so much for running through all that. Certainly a lot of exciting momentum there, and been great seeing the results, which I guess speaking with pretty timely how the conference fell with you guys just reporting your first quarter results last week. Nice to see the strong execution there. What went well during the quarter and where's your focus now as you look to the rest of the year?
Thanks, Matt. I'll hand it over to Danny in a second. One is we executed to our plan, especially around systems integration. We had some nice growth in all categories of that compared to Q1 of last year, compared to Q4, when you break down the growth from the volume of racks. Number two is we're able to guide to the upper end of our EBITDA guidance, which we gave range of $20 million-$22 million when we announced our Q4 return. I think that was in March. We upped that based on our optimism in the market, and we think we've got more to go. We're executing to that. The third is hiring some key leaders, which just recently came on board, which we talked about with Matt and David.
Fourth is I'm very excited about the conversations we're having to grow strategically, now we just have to execute and do that. Talk is cheap. Now let's go make it happen. Those are the combinations of things. Danny, what am I leaving out?
I don't think you're leaving out anything. You touched on them, right? We're continuing to see good expansion, not only in revenue, but in margins as well. You know, all this kind of according to plan. I guess the only other thing I might add, you know, we were pretty clear when we raised the capital in August that that was for growth, right? It was to invest both to grow with our existing customer and outside. We continue to maintain that discipline. We didn't deploy that quite as quickly as we would have wanted. Frankly, we were in some conversations with some other folks that ended up not being where we wanted to go.
We didn't deploy the capital, which some can see as negative, but, really, I look at it more as good discipline around making sure that it's gonna be accretive when we put that to use. You know, that's the discipline that we continue to maintain in the capital allocation.
That's great. We saw the slide with the showing the robust systems integration growth, as rack volumes continue to ramp in the Georgetown facility. You noted as well that you can see volumes doubling this year. What are you seeing on that front in terms of momentum, and how does that ultimately translate into revenue?
Good question, Matt. The optimism that we have is reinforced by our key customers' public statements around their outlook for the fiscal year, not only in revenue, but in pipeline growth, number one. Number two is you can't read and turn anywhere these days without reading and hearing something about AI. There's a massive sprint on many different levels to get their arms around technology that helps people deploy new solutions. We're excited about the future around agentic, you know, being a layer on top of you know, company's operating environment. That'll open up some other opportunities for us, I believe, as well, not only with our existing customer and what we do today, but also in some of the areas that we're moving and having conversations about strategic growth.
We're excited about that as well and hope that all plays out. You know, our longer- term agreement gives us comfort. It doesn't get us where we wanna be. It gives us a comfort to know that the investments we're making are solid, and for good reason. Our challenge is to make sure that we optimize our execution and our operating environment to be as fast with as much quality and deliver on time so our customers at the end benefit by, you know, time to value. They can get their hands on the technology faster than any other way. That's what we're trying to do, and we're optimistic about the pipeline, we're optimistic about our ability to execute.
Yeah. Our primary customer has been great as well to work with as far as when we need to make incremental investments, they understand we need to recapture that over time. Our agreement incorporates the means to recapture that over time as we integrate and deliver racks over multiple years.
Maybe on that point too, for anyone who might be a little bit newer to the story, can you sort of explain how the agreement with the primary customer works and then the revenue multiplier on top of those minimum commitments?
Danny, you wanna take that so I don't go out of bounds?
Yeah, exactly. I wanna be a little careful, you know, around sharing more of our customer's business than we need. The general structure, they've been a great I think of it as partner. They're careful about using the word partner, right? That has specific meaning for them. We view them as a great partner there in realizing when we put in CapEx, we need the means to recapture that. From that and basically having a facility that's largely dedicated to them, they understand we need the ability, regardless of volume, to cover that CapEx investment, to cover the rent, triple net, kind of all the fixed costs that you would anticipate.
Our arrangement takes that into account and compensates us for all that over a period of time, plus a reasonable margin, which we negotiate with them. It then also says, okay, we all assume we're gonna build a certain number of racks, and they've committed to that as a minimum. We structured it such that we and our customer both make more money when we actually build racks, right? We enjoy a larger margin when we actually build the racks. We also knew we would be incurring some labor costs, power costs that we're gonna incur whether or not we're building racks, and our customer understood that. Because we can't control the supply chain, we can't control the demand, we've built in basically a minimum floor.
Think of it as a take or pay arrangement. Again, we make less money when we're not actually building them, but we're protected from a downside so that we will still be paid for having people and facility and power ready and available to meet their needs.
Awesome. Yeah, that's great. When you talk about the like how strong that relationship is, you also note on the most recent earnings call that there's gonna be more capital investment as you guys explore continuing that relationship. Can you help us understand what exactly you guys are investing in here?
Sure. Infrastructure in our facility, more power, more chillers, different configuration and additional Cooling Distribution Units, namely CDUs, and our ability to get the, if you will, the size of the power lines updated to our validation test systems so that we can handle the new technology that's coming down the pipe that Danny talked about earlier, specifically with [Arabia] and hopefully a little bit beyond that.
That's great. How should we be thinking about how much capacity that TSS needs in order to continue to grow revenue and how quickly you can stand up capacity and how much of this you can do in the existing facilities versus expanding? How do you guys think about all that?
I've publicly stated, I think we can grow 2x to 3x times over our minimum capacity in the agreement. We have the space, we have the expertise, we have the ability to get more power if we need it. We're working collaboratively on the things that I talked about in an earlier call around the validation test time. It's really important for us to try and knock that down. The complexity today requires a good test period, and if we can reduce that, if we could just cut it in half, that gives us a lot more capacity to or capability to grow the volume of racks that we push through with the system. We think we have some competitive advantages.
Our existing Georgetown facility, which gives us the ability to handle more of the complex. We think that we've upgraded our internal operations within IT and people and process flow. Danny, I don't know if we talked about in this call, but the Round Rock facility, it will be used for inventory management with our existing relationship. We'll be able to generate some positive return because of that, and we're in the process of getting that up and running. It started May 1st. Our ability, I'm optimistic, if we really needed to, we could go get another facility and light that up in 4- 5 months. As we think about strategic growth, there's a possibility we might have to do that as well. That's on our radar.
I'm not pre-announcing anything by any stretch, but the strategic growth for us may require us to do that, and if we do, great, we can handle it. We've done it before.
Awesome. Yeah, sorry, not trying to trap you there, but.
Matt, I mean, Matt, I'll trap myself, Matt. Thank you.
I do like to point to investors too of just how quickly you guys were able to stand up that Georgetown facility and begin shipping racks out of there. It is a real testament to how well you guys are able to execute on this. I think that's an important piece to think about on that. How do you think too about other opportunities? I know Danny, you sort of alluded to, like, being disciplined in capital allocation and thinking about ROI and what's the best opportunity.
Where else could you see operations expanding when you think in terms of customer diversification?
Yeah. Darryll, you wanna take that?
Sure. Without disclosing some of our, I wanna call it secret stuff, see if we can give you the highlight. When we test and complete, package, and ship a rack, we wave goodbye. Have a good life. There's an opportunity for us to follow that rack and to provide some services inside of a data center. That's intriguing to us. That's not at all competitive. It's an added value service offering that we could potentially add on our own and deliver on our own or in conjunction with our existing customer. That's an interesting business for us. We're looking at it. There's a opportunity to take our rack integration skill set and deploy that as well in new markets, and we're looking at that in a way that's not competitive to our existing relationship.
That may or may not require some additional investments. One of the reasons why we brought on Matt and David is to help us get out in front of that work because that would require us to do some things we don't do today, we don't have to do today, like engineering, like even procurement of components that go into the racks that we deliver today, and even logistics planning. We have a very good PMO office and skill set, project management office, for our procurement and configuration services business, which what I'm describing is we grow strategically in the areas that I've just mentioned. We're gonna need some skills to manage that, and we know how to do that. We just may need a couple of headcount to do that. It's all exciting to us.
It's tangential to what we do today, in the respect that we're in the infrastructure integration business or if you will, the infrastructure world, and we're excited about the opportunities that we're having conversations about.
Yeah, you gave a great overview too of the new hires. Are there any other executive hires you're expecting to make, or is the team set there now, and what other sort of operational efficiencies are you looking to drive through the business?
Okay. On additional hires, I think we're good for the time being. You know, if we get to a position where we're gonna need another facility, for example, for the growth reasons, we'll probably get some infrastructure people that would report into the operating environment that we have today, just because of arms and legs, we're gonna need more resource. You know, I wanna be very clear that we're very mindful of the investment. We're looking to make sure we do it well, and we're not way out in front of our headlights, so to speak, on adding people and costs to the model.
In terms of, you know, the strategic growth, some of the opportunities, as Danny mentioned, if it turns into something that we would potentially bring on board, it would have to be creative and certainly friendly to the investment community. Otherwise, we won't do it.
Yeah. Maybe just one more big picture one before we wrap up here, but what do you think is most misunderstood or underappreciated about the TSS story, and what do you want investors on the call today to walk away from this with?
Matt, that's a great question. Danny, you could add to it, please. I think the nature of our business, and the transition of our business to what we call the running game, which is the rack integration, systems integration business, that's core to what we do. It's a nice business for us. It's exciting. We handle it complex. We serve a good market. I think we've got a lot to grow. I think sometimes folks will look at our procurement business and get a little confused on the top line impact and what the bottom line impact is, and what does it all mean. It's clear for us that our game plan is to go focus on our systems integration business and ways to expand around that, and to make our procurement business a nice to have.
It's, you know, I call it the gravy on what we do. It's, it's integral to what we do. But I think sometimes people get a little bit confused with what's the difference between the revenue line associated with procurement and the operating environment around rack integration and systems integration. It's clear, what I'd like to have everybody understand is that our real primary focus is improving our systems integration business and growing that as fast as we can. Procurement's important as well, but that's not our number one priority. We expect that business to provide a continued return to the company. It's not like we're de-emphasizing it. It's quite the contrary. We'll take whatever we can get, but we're really looking forward to the systems integration growth.
Is it-
Danny, you got anything to add?
a great message.
Yeah. The only thing I'd add, Darryll, is, you know, when we talk to our customer and ask them, What do you value in us? Without hesitation, one of their executives shared, "Partnership, execution, flexibility." We run the business every day that way, right? We're in it. We're not sitting in an ivory tower. We're sleeves rolled up, let's go make stuff happen. That's the attitude of the entire company.
Awesome. With that, we're out of time. Darryll and Danny, thank you so much for doing this. Anyone who's interested in learning more, we'd be happy to facilitate an introduction, and thank you to everyone for attending the conference this week.
Back at you, Matt. Thanks, buddy.
Thanks.