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. [Operator Instructions] 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 Darryll Dewan, President and CEO of TSS and Danny Chism, the Company's CFO. As we begin the call, I'd 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. 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 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, Darryll, 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 the 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 $0.01 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 historically…

Thanks, Darryll. 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 8x to $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 are 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 are 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…

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 the Q&A.

Certainly. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And your first question today is coming from [Pradeep Jonjua] from [indiscernible]. Pradeep, your line is live. Please go ahead.

Hey, guys. Thanks for taking the question and congratulations on the uplist to NASDAQ. That's huge. Certainly opens you up to several near-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 about around a potential delisting risk. So there's a very high probability that you'll be taking on a majority of their customers. So that's a company that was trading out 30x 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?

Pradeep, 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 say, 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 it, we'll take as much as you can give us and we'll go from there.

The other I would share on that Pradeep is, as we move to 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 1x, 2x or 3x 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 one not just the same kind of volume that we've done in the last four months, but really up to 2x, 3x, 4x that amount.

Hey, Pradeep. Does that answer your question?

Yes, it did. I do have a follow-up here, if you entertain it.

Please.

Sorry, I know that – 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, 2x to 3x 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.

Pradeep, look, I mean, we have an obligation to a lot of constituents and many, 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.

Awesome. Thank you very much.

All right. Thank you.

Thank you. [Operator Instructions] Your next question is coming from Kris Tuttle from Blue Caterpillar. Kris, your line is live. Please go ahead.

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, like how attractive do you think that is qualitatively long-term? Like, 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.

Hey, Kris, thanks for the question. If you research the market and the growth trajectory in a 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, the 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 little longer than we want and I think that the market wants, so it's going to come down, it's going 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 on rack 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 2025 and 2026. 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.

Thanks, Kris.

Thank you. Your next question is coming from [Ian Karr]. Ian, your line is live. Please go ahead.

Hey, guys. Thanks for taking a chance to answer the 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 I know 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?

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 Marrott, 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 rack 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 spend 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 spent a lot of time surveying the market, we know where the players are for additional space. So I think we're good.

The other one I want to 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 is 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.

Awesome. Thank you, guys. Appreciate it. Good luck for the rest of the year.

Ian, thanks buddy. Appreciate your question.

Thank you. [Operator Instructions] And we have a question from [Max Borges]. Max, your line is live. Please go ahead.

Hey, Max.

Max Borges, your line is live. You may proceed with your question.

Sorry, I had it on mute. How 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?

Power.

Power and probably availability of NVIDIA chips to our customers.

Yes. I think – go ahead.

And what kind of impact do you think that will have as far as topping out how quickly you can grow? 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?

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 not – 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.

Yes. 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.

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. As Danny said, Danny and Todd have been working really hard on this as well as the people representing us with this site. And look man, there's no guarantee anywhere in this world, but I think we're in a good spot.

Okay. Great. Thanks, guys. Appreciate the answer.

Yes. Thanks, Max.

Thank you. And we have a question from [Charles Hutchinson]. Charles, your line is live. Please go ahead.

Hi guys. 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.

Charles, you don't have anything better than that. Come on man, give me a better question.

Yes. 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?

I wish I didn't say anything, we were good at no. The timeline, a lot of it depends on the demand signal. But we are good. I think, I mentioned once before that we have the capacity to grow 10x. And I'm comfortable that we have that capacity. So the timeline, couple of years may be 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 – Pradeep brought up the super micro. 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.

Great. Thank you, guys.

You bet.

Thank you. This does conclude today's Q&A session. I would now like to turn the floor back to Darryll Dewan for closing remarks.

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.

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.