TSS, Inc. (TSSI)·Q1 2025 Earnings Summary

Executive Summary

• TSS delivered outsized growth in Q1: revenue $98.96M (+523% y/y) and diluted EPS $0.12 (vs. ~$0.00 y/y), powered by Procurement ($90.18M, +676%) and Systems Integration ($7.48M, +253%) with Adjusted EBITDA of $5.24M .
• Mix drove lower consolidated gross margin (9.3%) as Procurement’s larger share diluted the blend; SI margins would have been ~32% ex ~$0.76M of straight-line rent for the new facility, and management expects SI margins to improve in the next three quarters .
• Capacity/capability inflection: new Georgetown facility began production in early May, targeting full production in June with power rising from 6MW to 15MW by summer; this is designed specifically for high-density AI rack integration and extensive DLC validation capacity .
• Guidance maintained/updated: H1’25 revenue expected to exceed H2’24; FY25 Adjusted EBITDA expected to be at least 50% higher than FY24, supported by robust AI demand and expanded capacity; management flags tariff/macroeconomic uncertainty and procurement variability as watch items .
• Potential stock catalysts: visible capacity ramp, SI margin expansion as noncash rent normalizes into pricing, multi‑year OEM agreement underpinning volumes, and possible Facilities Management (MDC) pipeline conversion later in 2025; risks include procurement lumpiness, tariff-driven supply and timing distortions .

What Went Well and What Went Wrong

• What Went Well

  • Explosive top/bottom-line growth: revenue +523% y/y to $98.96M; diluted EPS $0.12; Adjusted EBITDA $5.24M, “more than tenfold” y/y; CEO: “exponential increases… driven by robust growth in our Procurement and Systems Integration segments” .
  • Strategic capacity milestone: “began production” at new Georgetown facility in early May; full production by June; designed from the ground up for AI rack integration, with power scaling to 15MW and large DLC validation expansion .
  • Cash generation and balance sheet progress: cash from operations $20.6M in Q1 (vs. $2.6M y/y), cash $27.34M at quarter-end, funded $14.9M of Q1 capex, and drew $11.3M on the construction loan post‑quarter .

• What Went Wrong

  • Consolidated gross margin compressed to 9.3% (from 17.1% y/y) due to mix shift toward lower‑margin Procurement; management reiterated Procurement margins are structurally below corporate average .
  • SI GAAP gross margin diluted by ~$0.76M noncash straight‑line rent from the new facility carried pre‑revenue; ex this, SI gross margin improved from 28% to 32% y/y, but reported SI margin appears down vs. last year .
  • Facilities Management declined 40% y/y to $1.30M; management highlighted long sales cycles, evolving AI/DLC design points, and timing of discrete projects; pipeline conversion is needed to re‑accelerate .

Financial Results

Segment breakdown (Q1 2025 vs. Q1 2024):

Q1 2025 KPIs:

Notes:

• Consolidated gross margin decline driven by Procurement mix; Procurement GAAP margin ~7.8% in both current and prior-year quarter; “non-GAAP gross value” procurement margin improved from 4.6% to 6.6% .
• SI GAAP margin impacted by ~$0.76M noncash rent; ex this, SI margin improved to 32% (from 28% y/y); management expects SI margin improvement in the next three quarters as pricing steps up with new facility rent .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “We are off to a strong start in 2025… driven by robust growth in our Procurement and Systems Integration segments, including incremental contribution from AI rack integration services.” – CEO, Darryll Dewan .
• “We have begun production at our new facility… at full capacity, this new facility enables us to integrate several times the number of data center racks… a strong differentiator.” – CEO .
• “Consolidated gross margin was 9.3%… decrease primarily due to mix with lower‑margin procurement… when viewed on a non‑GAAP gross value basis… procurement gross margins improved from 4.6% to 6.6%.” – CFO, Daniel Chism .
• “Approximately $760,000 of rent expense on our new Georgetown location recognized on a straight-line basis… excluding [this], SI gross margins improved… to 32%… [and] we expect [SI] margins to improve in the last 3 fiscal quarters of 2025.” – CFO .
• “We… expect total revenue in the first half of 2025 to exceed total revenue in the second half of 2024… and [FY25] Adjusted EBITDA to be at least 50% higher than 2024.” – CEO .

Q&A Highlights

• SI margin trajectory: GAAP SI margin depressed by ~$0.76M straight‑line rent; pricing with partner “more than made whole” as facility rent begins, implying margin expansion across the next three quarters .
• Procurement sustainability: Expect fluctuations; Q1 exceeded expectations; seasonality tied to U.S. federal cycles but pipeline remains solid; not every quarter will be $90M .
• Facilities Management outlook: Down y/y due to timing of discrete projects; “can move significantly with a couple of new deals”; margins attractive (~55% historically) .
• Capacity/visibility: 90–150 days is typical, with occasional last-minute accelerants; new facility power and DLC validation expansion provide significant headroom .
• Macro/tariffs: Tariff risk may stretch buying patterns and introduce uncertainty, but order pipelines at OEM customers remain “extremely robust” .

Estimates Context

• Wall Street consensus (S&P Global): No consensus estimates were available for Q1 2025 revenue or EPS; S&P Global data retrieved showed no entries for “Primary EPS Consensus Mean” or “Revenue Consensus Mean” for Q1 2025, only actuals post‑report [GetEstimates].
• Implication: With no formal consensus, we cannot characterize beats/misses; going forward, SI margin progression and procurement cadence will likely anchor estimate revisions as coverage develops .

Key Takeaways for Investors

• Q1 prints show powerful demand across AI infrastructure: revenue nearly doubled sequentially and >5x y/y; SI growth remains strong even before full facility ramp .
• Margin quality set to improve in SI as straight‑line rent transitions into offsetting pricing; watch for sequential SI margin expansion through 2025 .
• Procurement is a double‑edged sword: it turbocharges revenue/EBITDA but compresses blended GM%; expect variability and monitor seasonality into Q3/Q4 .
• Capacity is a differentiator: power rising to 15MW and expanded DLC validation should enable materially higher AI rack throughput and stickier OEM relationships .
• Facilities Management is a latent call option: high‑margin MDC pipeline could convert as enterprises adopt AI modules; a few wins can move the P&L .
• Guidance is constructive and reiterated: H1’25 revenue > H2’24 and FY25 Adjusted EBITDA ≥ +50% y/y; track execution vs. these markers each quarter .
• Key risks: tariff-driven cost/timing shifts, procurement mix and deal timing, concentration with key OEM, and power/chip availability constraints in the ecosystem .

Additional context and prior quarters:

• Q4 2024 revenue $50.03M; diluted EPS $0.08; consolidated gross margin 14.4%; Adjusted EBITDA $3.39M; outlook then already pointed to high 2025 EBITDA growth and facility ramp .
• Q3 2024 revenue $70.07M; diluted EPS $0.10; consolidated margin 11.3%; multi‑year OEM agreement announced; uplisted to Nasdaq .

Other press releases:

• We found one Q1 press release tied to “TSS Solutions” (defense radar/SATCOM) that appears unrelated to TSS, Inc.’s data center/A I integration business and is not material to Q1 financials .