Q1 2025 TSS Inc Earnings Call
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Operator: 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.
Speaker Change: Good afternoon, and welcome to the T. S. S 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 opened for your questions and comments after the presentation.
James Carbonara: 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.
Speaker Change: It is now my pleasure to turn the floor over to your host James Carbonara, James the floor is yours.
James Carbonara: Thank you operator, and good afternoon, everyone joining.
James Carbonara: Joining me on this call are Darryll Dewan, President and CEO of TSS Dink and Danny Chism, 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.
Speaker Change: Joining me on this call are Darryl doing president and CEO of TSS Bank and Danny Chism, the company's CFO.
Speaker Change: 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.
Speaker Change: 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.
James Carbonara: 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.
Speaker Change: P. S. S expressly disclaims any obligation to update and then supplement or otherwise review any information or forward looking statements made on this conference call a replay to reflect the events or circumstances that may change or arise. After the date indicated except as otherwise required by applicable law.
Speaker Change: For a list 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.
James Carbonara: In addition, we will 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.
Speaker Change: In addition, we will 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 U S. GAAP is.
Speaker Change: He is included in today's press release.
James Carbonara: With that, Darryll, I'll turn the call over to you. Thanks, James. Hello, everybody. Thank you again and good afternoon.
Speaker Change: With that barrel I'll turn the call over to you.
Thanks, James Hello, everybody. Thank.
James Carbonara: Thank you again and good afternoon.
Darryll Dewan: 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 unwavering 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.
James Carbonara: Thank you for joining us today for our first quarter 2025 earnings conference call.
James Carbonara: Welcome to 2025, we're off to a strong start in the first quarter demand for Iraq integration and procurement services business remains robust.
James Carbonara: And we once again are delivering outstanding financial results driven by strong operational execution, and our unwavering commitment to customer service.
James Carbonara: We are successfully executing our business strategy delivering a substantial growth in revenue earnings and cash flow while.
James Carbonara: While scaling our operations and positioning the company to capture a meaningful share of the rapidly growing and complex AI infrastructure market.
James Carbonara: We are dramatically, adding to our capacity 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.
Darryll Dewan: So let me walk through some of the highlights from the quarter. First, we deliver 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.
James Carbonara: First we delivered total revenue growth of 523% year over year believe it or not I've gotten a couple of tech scene is that good enough.
James Carbonara: And extraordinary achievement that underscores the rising demand for our offerings and the strength of our customer relationships and the attractive market dynamics in which we operate.
James Carbonara: Diluted earnings per share grew to 12.
James Carbonara: A significant improvement from just over breakeven a year ago in the quarter.
James Carbonara: We also generated positive cash flow from operations for the first three months of the year further strengthening our financial Foundation.
Darryll Dewan: This exceptional performance was driven by growth and our two largest service offerings.
This exceptional performance was driven by growth in our two largest service offerings.
Darryll Dewan: 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 wrapped 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.
James Carbonara: <unk> down to performance by segment, let me go first.
James Carbonara: First of all starting with procurement services, where we source third party hardware software and services revenues grew by more than 600%.
James Carbonara: More than $90 million in the quarter as our customers ramped up infrastructure investments to support AI workloads.
James Carbonara: This growth not only highlights our value as a strategic strategic sourcing partner, but it also reflects the strong execution of our operations team at <unk>.
James Carbonara: <unk> scaling environment as.
James Carbonara: 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.
Darryll Dewan: Our number two segment is systems integration, which includes RAC integration, AI RAC 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.
James Carbonara: Our number two segment in systems integration, which includes rack integration, a Iraq integration experienced a tremendous surge in revenue this quarter driven by the increasing demand for AI enabled infrastructure.
James Carbonara: 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.
We expect sustained high growth in this area as customers ramp up investments to meet evolving compete demands over the coming quarters and years.
Darryll Dewan: 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. MDCs 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, an emerging and growing segment tied to AI, is also likely to become modular.
And in facilities management, our other segment, which primarily includes our modular data center business or <unk> as we refer to him.
James Carbonara: Revenue declined 40%.
James Carbonara: 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 MDC are no longer you.
James Carbonara: Used primarily just to augment traditional data centers. This change however in modular.
James Carbonara: As phase two is forming is changing to where we are addressing a form of a preferred 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.
Darryll Dewan: 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.
James Carbonara: Given the accelerating adoption of AI driven technologies, we expect mdc's to play an increasingly important role in our growth strategy in 2025 and beyond.
James Carbonara: To meet rising demand and support a long term customer agreement in 2024, we secured a multi lease.
James Carbonara: Agreement on a 213000 square foot facility in Georgetown, Texas.
James Carbonara: 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 im 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.
Darryll Dewan: 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.
James Carbonara: 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 followed the datacenter market.
Darryll Dewan: 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. No 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 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.
James Carbonara: And it's evolving role in delivering AI no power.
James Carbonara: The electricity power is a major issue for data centers well, it's a major issue for data center infrastructure production as well.
James Carbonara: In Iraq build has commissioned the AI equipment and other components that come to our facility that we add to Iraq and cable it altogether. It sounds simple doesn't it well today. These servers are heavier cabling is challenging as each GPU.
James Carbonara: Iraq needs to be able to talk to the other gpus and the other in a new element of cooling or water distribution for direct liquid cooling is added.
Darryll Dewan: 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 a new facility with six megawatts of power. However, we have worked with a 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.
James Carbonara: Once all of this is complete direct needs to be powered up and tested we.
James Carbonara: We have been asked by our largest OEM customers will be prepared to test many racks simultaneously.
James Carbonara: This drives a significant power demand we have opened up a new facility with six megawatts of power. However, we have worked with the local municipality to augment the power supply to 15 megawatts by this summer.
Two seven here in round rock.
James Carbonara: This is six times the power, we have available and our legacy facility, we have discussions about adding more power.
James Carbonara: At <unk>.
James Carbonara: Significantly improves where we're at in time and the city is very supportive.
Darryll Dewan: 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.
James Carbonara: 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.
Darryll Dewan: 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 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.
James Carbonara: From a financial perspective, our total planned investments between $25 million to $30 million. This investment with scale over time as the complexity and the volume of rack integration increases.
James Carbonara: 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.
James Carbonara: Based on our current forecast, we anticipated a payback period of approximately two years, representing a highly attractive return on this invested capital.
Darryll Dewan: 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.
James Carbonara: The AI infrastructure market is evolving rapidly with significant capital flowing into the development of high performance compute environments, while the hyperscale as of late early adoption, we expect a broader wave of AI deployment for medium and large enterprises supporting applications far beyond <unk>.
James Carbonara: The large language modeling.
James Carbonara: We are here by 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.
Danny Chism: 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?
James Carbonara: I'll be back to address some questions about the market tariffs and other and our perspective on <unk>.
Danny Chism: <unk> future for the company so Danny.
Danny Chism: Thanks Darryll. It was another record quarter for TSS. Let's take a look at the financial results. Consolidated revenue increased by more than 520% in the first quarter of 2025 to $99 million, up from $15.9 million in the first quarter of 2024. The increase was driven by year-over-year growth in our two largest service lines, including growth of almost 700% in procurement revenues and 253% in our higher-margin systems integration business. Total revenue from the systems integration increased from $2.1 million in the first quarter of last year to $7.5 million in the current quarter, driven primarily by an increase in AI-enabled rack integration.
Danny Chism: Yes, Thanks, Daryl it was another record quarter for TSS, let's take a look at the financial results.
Danny Chism: Consolidated revenue increased by more than 520% in the first quarter of $2025 to $99 million up from $15 9 million in the first quarter of 2024.
Danny Chism: The increase was driven by year over year growth in our two largest service lines, including growth of almost 700% and procurement revenues and 253% and our higher margin systems integration business.
Danny Chism: Total revenue from the systems integration increased from $2 1 million in the first quarter of last year to $7 $5 million in the current quarter driven primarily by an increase in AI enabled rack integration demand for this business remains robust.
Danny Chism: Demand for this business remains robust. Revenue from facilities management totaled $1.3 million, down 40% from $2.1 million in the same quarter last year. This segment, while currently the smallest of our overall business, offers strong strategic potential. We are actively optimizing this business and focusing on a high growth opportunity. Given the fairly consistent visibility into this revenue stream, we anticipate more robust growth over the next 12 to 18 months, as Darryll mentioned, particularly as medium and large enterprise clients increasingly adopt modular data centers as a cost-effective solution to leverage AI technology. When we deploy new modular data centers, we also typically get multi-year maintenance contracts further enhancing our earnings profile with nice margin.
Revenue from facilities management totaled $1 3 million down 40% from $2 $1 million in the same quarter last year.
Danny Chism: This segment, while currently the smallest of our overall business offer strong strategic potential.
Danny Chism: We are actively optimizing this business and focusing on high growth opportunities given the fairly consistent visibility into this revenue stream, we anticipate more robust growth over the next 12 to 18 months as Darryl mentioned, particularly as medium and large enterprise clients increasingly adopt modular data centers as a cost effective.
Danny Chism: <unk> to leverage AI technologies.
Danny Chism: When we deployed new modular data centers, we also typically get multiyear maintenance contracts further enhancing our earnings profile with nice margins.
Danny Chism: Revenue from procurement services totaled $90.2 million, up 676% compared to $11.6 million in the year-ago quarter. In the first quarter alone, the revenue that we recorded from this segment amounted to 77% of the total recorded procurement revenues for all of 2024, which itself represented significant growth from prior years. As a reminder, revenue in this segment represents a mix of gross and net deals. whose revenue recognition method varies based on contractual terms and whether we modify the product in some way or just act as an agent in the transaction. The gross value of all procurement transactions increased 431% from the prior year quarter to $106 million.
Danny Chism: Revenue from procurement services totaled $92 million up 676% compared to $11 6 million in the year ago quarter.
Danny Chism: In the first quarter alone the revenue that we recorded from this segment amounted to 77% of the total recorded procurement revenues for all of 2024, which itself represented significant growth from prior years.
As a reminder, revenue in this segment represents a mix of gross and net deals.
Danny Chism: Whose revenue recognition method varies based on contractual terms and whether we modify the product in some way or just act as an agent in the transaction.
Danny Chism: The gross value of all procurement transactions increased 431% from the prior year quarter to $106 million.
Danny Chism: Gross profit increased 674% to $7 million. Based on recorded GAAP values, procurement gross margins were 7.8% in both the current and the prior year quarter. When viewed on a non-GAAP gross value of all transactions, which we see as a more apples-to-apples comparison as it strips out whether it's a gross deal or a net deal, gross margins improved from 4.6% in the prior year quarter to 6.6% in the current. As we continue to scale and grow, the mix of our revenues and the mix of gross versus net procurement deals will likely drive quarter-to-quarter fluctuations in our blended gross margin.
Danny Chism: Gross profit increased 674% to $7 million.
Danny Chism: Based on recorded GAAP values procurement gross margins were seven 8% in both the current and the prior year quarter.
Danny Chism: When viewed on a non-GAAP gross value of all transactions, which we see as a more apples to apples comparison as it strips out whether it's a gross deal or a net deal gross margins improved from four 6% in the prior year quarter to six 6% in the current quarter.
Danny Chism: Sure.
Danny Chism: As we continue to scale and grow the mix of our revenues and the mix of gross versus net procurement deals will likely drive quarter to quarter fluctuations in our blended gross margins.
Danny Chism: Procurement revenues have grown dramatically in recent quarters as we expect the general trajectory of this business to remain on an upward curve with some ups and downs in volume from one quarter to another. Much of our procurement business is ultimately related to federal government buying, which can fluctuate. We're pleased to be getting more and more of this business from our OEM customers, and we see a sufficient pipeline to give us near-term confidence that revenues will remain elevated from historical norms. We're selectively bolstering the team to continue to grow this offer. Our consolidated gross margin was 9.3% this quarter, down compared to 17.1% in the first quarter of 2024.
Danny Chism: Procurement revenues have grown dramatically in recent quarters as we expect and as we expect the general trajectory of this business to remain on an upward curve with some ups and downs in volume from one quarter to another.
Danny Chism: Much of our procurement business is ultimately related to the federal government buying which can fluctuate.
Danny Chism: We're pleased to be getting more and more of this business from our OEM customers and we see a sufficient pipeline to give us near term confidence that revenues will remain elevated from historical norms.
Danny Chism: We're selectively bolstering the team to continue to grow this offering.
Danny Chism: Our consolidated gross margin was nine 3% this quarter down compared to 17, 1% in the first quarter of 2024.
Danny Chism: This decrease is primarily due to the mix of revenues with lower margin procurement services representing a larger portion of the total revenue in the first quarter of 2025 compared to the prior year quarter. We discussed a minute ago the gross margins from the procurement segment.
Danny Chism: This decrease is primarily due to the mix of revenues with lower margin procurement services, representing a larger portion of the total revenue in the first quarter of 2025 compared to the prior year quarter.
Speaker Change: We discussed a minute ago, the gross margins from the procurement segment.
Danny Chism: I'd like to take a moment now to provide a bit more color on this quarter's gross margins in our second largest segment and one that's driving a lot of the improvement in our overall earnings, systems integration. Gross margins in the SI department were 22% this quarter compared to 28% this quarter last year. This quarter is a bit unique. Although we've not yet begun paying cash rent at our new production facility, the current quarter results include approximately $760,000 of rent expense on our new Georgetown location, recognized on a straight line basis, while still bearing the majority of the occupancy costs at our existing production facility in Round Rock, as it has in prior periods.
Speaker Change: I'd like to take a moment now to provide a bit more color on this quarters gross margins and our second largest segment and one that's driving a lot of the improvement in our overall earnings systems integration.
Speaker Change: Gross margins in the ASI Department were 22% this quarter compared to 28% this quarter last year.
Speaker Change: This quarter is a bit unique though.
Speaker Change: Although we have not yet begun paying cash rent at our new production facility. The current quarter results include approximately $760000 of rent expense on our new Georgetown location recognized on a straight line basis, while still bearing the majority of the occupancy costs at our existing production facility in round rock.
Speaker Change: As it has in prior periods.
Danny Chism: Excluding the non-cash rent at the new facility, systems integration gross margins improved from 28% in the prior year quarter to 32% in the current quarter, and gross profits improved from $0.6 million to $2.4 million. Since we started production from the new facility last week, we'll also begin paying rent at the new facility this month. And the fixed fee we earn from our customer under our multi-year AI RAC integration contract will also increase in lockstep by an amount more than sufficient to cover such incremental occupancy costs. As a result, we expect gross margins in the systems integration segment to improve in the last three fiscal quarters of 2025 compared to the first quarter, even before factoring in any organic growth.
Speaker Change: Excluding the noncash rent at the new facility systems integration gross margins improved from 28% in the prior year quarter to 32% in the current quarter.
Speaker Change: And gross profits improved from <unk> 6 million to $2 4 million.
Speaker Change: Since we started production from the new facility last week, we will also begin paying rent at the new facility. This month and the fixed fee. We earned from our customer under our multiyear AI rack integration contract will also increase in lock step by an amount more than sufficient to cover such incremental occupancy costs.
Speaker Change: As a result, we expect gross margins in the systems integration segment to improve in the last three fiscal quarters of 2025 compared to the first quarter, even before factoring in any organic growth.
Danny Chism: SG&A expenses improved to 53% of growth profit in the first quarter of 2025, down from 88% in the year-ago quarter and 59% in the fourth quarter. On a dollar basis, SG&A expenses increased to $4.9 million in the first quarter of 2025, up from $2.4 million in the year-ago quarter as we continue to invest in talent, capacity, and process improvement. Depreciation and amortization expenses increased modestly year over year but do not yet reflect the increase expected once we begin depreciating the build-out costs at our new facility. based on the $25 to $30 million total estimated capex of that facility.
Speaker Change: SG&A expenses improved to 53% of gross profit in the first quarter of 2025 down from 88% in a year ago quarter and 59% in the fourth quarter.
Speaker Change: On a dollar basis SG&A expenses increased to $4 9 million in the first quarter of 2025 up from $2 4 million in the year ago quarter, as we continue to invest in talent capacity and process improvements.
Speaker Change: Depreciation and amortization expenses increased modestly year over year.
Speaker Change: But do not yet reflect the increase expected once we begin depreciating the build out costs at our new facility.
Speaker Change: Just on the $25 million to $30 million total estimated capex of that facility. Once we do begin depreciating those assets I expect that incremental noncash depreciation to be between 420000 and 500000.
Danny Chism: Once we do begin depreciating those assets, I expect that incremental non-cash depreciation to be between $420,000 and $500,000 per month, depending on whether we're closer to the $25 million or $30 million total income. Consolidated operating income and margin in the first quarter of 2025 was $4.1 million and 44.7% of gross profit, respectively, up from $253,000 and 9.3% in the prior year. Calculated as a percentage of total revenue, our operating income margin almost tripled to 4.2% in the current quarter compared to 1.6% in the prior year. Interest expense increased from $328,000 in the prior year quarter to $1.5 million in the current quarter, comprised of $1.3 million of factoring costs and $167,000 from our new bank loan.
Speaker Change: Her month, depending on whether we're closer to the $25 million or $30 million total investments.
Speaker Change: Consolidated operating income and margin in the first quarter of 2025 was $4 1 million and 44, 7% of gross profit respectively.
Speaker Change: From $253000 and nine 3% in the prior year quarter.
Speaker Change: Calculated as a percentage of total revenue our operating income margin almost tripled to four 2% in the current quarter compared to one 6% in the prior year quarter.
Speaker Change: Interest expense increased from $328000 in the prior year quarter to $1 $5 million in the current quarter comprised of $1 $3 million of factoring costs and $167000 from our new bank loan.
Danny Chism: Partially offsetting that interest expense was $383,000 of interest income earned from cash on hand compared to $100,000 of interest income this quarter last year. As a result of the factors mentioned, net income for the first quarter of 2025 was $3 million, exponentially greater than the $15,000 of net income in Q1 of last year. Diluted earnings per share were $0.12 for the first quarter of 2025 up from nil or just above break-even in the prior year quarter. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and stock-based compensation, was $5.2 million, more than tenfold from $475,000 in the year-ago quarter.
Speaker Change: Partially offsetting that interest expense was $383000 of interest income earned from cash on hand compared to $100000 of interest income this quarter last year.
Speaker Change: As a result of the factors mentioned net income for the first quarter of 2025 was $3 million exponentially greater than the $15000 of net income in Q1 of last year.
Speaker Change: Diluted earnings per share were <unk> 12 for the first quarter of 2025.
Speaker Change: From nil or just above breakeven in the prior year quarter.
Speaker Change: Adjusted EBITDA, which excludes interest taxes, depreciation amortization and stock based compensation was $5 2 million more than tenfold from $475000 in the year ago quarter.
Danny Chism: Turning now to take a quick look at the balance sheet, as of March 31st this year, we had cash and cash equivalents and short term deposits totaling $27.3 million. This compares favorably to $23.2 million as of December 31st, 2024, or the end of last year. The increase in cash was due primarily to cash generated from operations, which was partially offset by cash used for capital expenditures related to the build-out in the Georgetown facility. Networking capital decreased from $1.3 million at the end of 2024 to a negative $11.1 million at the end of the first quarter of 2025.
Speaker Change: Turning now to take a quick look at the balance sheet.
Speaker Change: As of March 31, this year, we had cash and cash equivalents and short term deposits totaling $27 3 million. This compares favorably to $23 2 million as of December 31, 2024, or the end of last year.
Speaker Change: The increase in cash was due primarily to cash generated from operations, which was partially offset by cash used for capital expenditures related to the build out in the Georgetown facility.
Speaker Change: Net working capital decreased from $1 3 million at the end of 2024 to a negative $11 1 million at the end of the first quarter of 2025.
Danny Chism: To minimize interest expense in the period, we intentionally used excess cash on hand to fund the $14.9 million of capital expenditures in the current quarter. This temporary use of working capital was replenished shortly after the quarter end when we drew down the remaining $11.3 million on our construction loan last week. The increases in inventory and accounts payable at the end of the period are related to an elevated level of procurement activity ongoing at that point in time, adding to the temporary movement in working capital. For the first three months of 2025, we generated cash flow from operations of $20.6 million, which compares favorably to $2.6 million in the first three months of 2024.
Speaker Change: To minimize interest expense in the period, we intentionally used excess cash on hand to fund the $14 9 million of capital expenditures in the current quarter.
Speaker Change: This temporary use of working capital was replenished shortly after the quarter end when we drew down the remaining $11 $3 million on a construction loan last week.
The increases in inventory and accounts payable at the end of the period are related to an elevated level of procurement activity ongoing at that point in time, adding to the temporary movement in working capital.
Speaker Change: For the first three months of 2025, we generated cash flow from operations of $20 6 million, which compares favorably to $2 6 million in the first three months of 2024.
Danny Chism: The increase was driven by much stronger earnings combined with the timing of cash flow in our procurement activities.
Speaker Change: The increase was driven by much stronger earnings combined with the timing of cash flow and our procurement activities.
Danny Chism: All in all, it was another great quarter operationally and financially.
Speaker Change: All in all it was another great quarter operationally and financially with that I will turn it back over to Darryl.
Darryll Dewan: With that, I'll turn it back over to Darryll. Thank you, Danny. I really appreciate that.
Darryl Doing: Thank you Danny I really appreciate that I'm incredibly proud of our team's ability to execute on both our operational commitments and our long term vision.
Darryll Dewan: I'm incredibly proud of our team's ability to execute on both our operational commitments and our long-term vision. We operate in a very exciting market shaped by rapid advances in AI and high-performance computing. And our position at the center of this transformation is both unique and compelling.
Darryl Doing: We operated a very exciting market shaped by rapid advances in AI and high performance computing and our position at the center of this transformation is both unique and compelling before we look ahead I wanted to address in more detail, what we're seeing in the market and how we view the future given some of the uncertainty caused by trade and tariffs as well as technological advantages.
Darryll Dewan: Before we look ahead, I want to address in more detail what we are seeing in a market. and how we view the future given some of the uncertainty caused by trade and tariffs, as well as technological advantages. We believe we're in a very secular growth segment of the market, but it does not mean we're immune to macroeconomic changes. The tariff situation is anticipated to increase IT hardware costs and to stretch and complicate buying patterns and supply chains. Orders we are processing in coming months were placed months ago, but lead times are lengthening a bit. If the tariff situation does not stabilize, we and all others in the IT hardware supply chain will possibly see orders taking longer to process.
Darryl Doing: <unk>.
Darryl Doing: We believe we're in a very secular growth segment of the market.
Darryl Doing: But it does not mean, we're immune to macroeconomic changes the tariff situations anticipated to increase it hardware costs, and a stretch and complicate buying patterns and supply change.
Darryl Doing: Orders, we are processing in coming months replaced months ago, when lead times are lengthening a bit.
Darryl Doing: Tariff situation does not stabilize we and all others in the hardware supply chain will possibly see orders taking longer to process. When you add the fluidity of this international trade situations with the rapid advancement of technology Q1 was like no. Other in recent history. It is.
Darryll Dewan: When you add the fluidity of this international trade situation to the rapid advancement of technology, Q1 was like no other in recent history. It is precisely why we focus so intensely on our relationships with key partners and working closely with them on the roadmaps for their vendor partners. and to work to ensure that operations are even more prepared to deliver even the most complex solutions and systems. The rapid pace of evolution of data center technologies, from chip to power to cooling, continues to impact buying patterns. As an example, the transparency of NVIDIA's product roadmap and the magnitude of processing advancement causes customers to debate the timing of purchase.
Darryl Doing: Precisely why we focus so intensely on our relationships with key partners and working closely with them on our roadmaps for their vendor partners.
Darryl Doing: And to work to ensure that operations are even more prepared to deliver even the most complex solutions and systems.
The rapid pace of evolution of datacenter technologies from chip to power to cooling continues to impact buying patterns. As an example, the transparency of Nvidia as product roadmap and the magnitude of processing advancement causes customers to debate the timing of purchases.
Darryll Dewan: couple this with the political and macroeconomic environment. It's a recipe for uncertainty.
Speaker Change: A list with the political and macroeconomic environment.
Darryl Doing: It's the recipe for uncertainty.
Darryll Dewan: That said, the order pipeline of our OEM customers remains extremely robust. and we're seeing orders closing, kicking off lead time.
Darryl Doing: That said the order pipeline of our OEM customers remains extremely robust and we're seeing orders closing kicking off lead times in summary, this historic investment in AI capacity continues.
Darryll Dewan: In summary, this historic investment in AI capacity continues. Our success. The last two years has been due to our ability to look ahead and to be in the best position to support our partners' need for capacity with the expertise and infrastructure to support growing levels of complexity. That focus has us exceptionally well positioned for the future no matter what the trade and tariff world looks like.
Darryl Doing: Our success.
Darryl Doing: The last two years has been due to our ability to look ahead and to be in a position the best position to support our partners need for capacity with the expertise and infrastructure to support growing levels of complexity.
Darryl Doing: That focus has us exceptionally well positioned for the future no matter, what the trade and tariff will it looks like so looking ahead.
Darryll Dewan: So looking ahead, we can expect continued strong performance for the year in 2025. Specifically, we anticipate total revenue in the first half of this year will exceed revenue in the second half of last year, reflecting sustained customer demand and ongoing execution across our business lines. Additionally, as stated in an earlier call, we expect and maintain a full year 2025 adjusted EBITDA to be at least 50% higher than all of last year, driven by higher volume, improved operational leverage, and strategic investments made over the past year. While we may experience quarter to quarter fluctuations, we remain confident in the overall growth trajectory and long-term value creation for our shareholders.
Darryl Doing: <unk> continued strong performance for the year in 2025.
Darryl Doing: Specifically, we anticipate total revenue in the first half of this year will exceed revenue in the second half of last year, reflecting sustained customer demand and ongoing execution across our business lines.
Darryl Doing: Additionally, as stated in earlier call, we expect and maintain a full year 2025, adjusted EBITDA to be at least 50% higher than all of last year, driven by higher volume improved operational leverage.
Darryl Doing: Strategic investments made over the past year.
Darryl Doing: While we may experience quarter to quarter fluctuations, we remain confident in the overall growth trajectory and long term value creation for our shareholders.
Darryll Dewan: So thank you.
Darryl Doing: So thank you.
Operator: Can we open this up now to Q&A? Thank you. The floor is now open for questions. If you wish to join the queue to ask a question at this time, please press star one on your telephone keypad. We do ask if listening on speaker phone today that you pick up your handset while asking your question to provide optimal sound quality. Once again, please press star one on your telephone keypad at this time.
Darryl Doing: And we opened us up now to Q&A.
Thank you the floor is now open for questions. If you wish to join the queue to ask a question at this time. Please press star one on your telephone keypad, we do ask if listening on speaker phone today that you pick up your handset while asking your question to provide optimal sound.
Darryl Doing: Quality once again, please press star one on your telephone keypad at this time, if you wish to join the queue to ask a question. Please hold a moment, while we poll for questions.
Operator: If you wish to join queue to ask a question, please hold a moment while we poll for questions.
Kris Tuttle: And we have a question from Kris Tuttle from Blue Caterpillar. Kris, your line is live. Please go ahead. Hi, thanks very much for taking my question. Well, first of all, I think it has to be said that to pull this quarter off in the midst of a major historic infrastructure move to a totally new facility, all knowing how many moving parts are involved in that is, I mean, it has to be for what it is, which is very impressive. And, you know, just terrific job.
Speaker Change: And we have a question from Kris Tuttle from Blue Caterpillar, Chris Your line is live. Please go ahead.
Kris Tuttle: Hi, Thanks, very much for taking my question.
Speaker Change: Well first of all I think.
Speaker Change: It has to be said that too Paul this quarter off in the midst of.
Speaker Change: A major historic.
Speaker Change: Infrastructure moves to a totally new facility.
Speaker Change: All knowing how many moving parts are involved in that is.
Speaker Change: I mean, it's.
Speaker Change: It has to be acknowledged for what it is which is very impressive and.
Darryll Dewan: I know that a big team was involved there, but that's a lot of people would have blamed the move, but you guys really Hey, Kris, thanks on behalf of the team. We appreciate your comments. It's not easy. A lot of commitment, a lot of focus, a lot of good work by this team, the leadership team, and the team we have in the company. It's rare that in our role we get anybody saying anything nice, so thank you for saying something nice.
Speaker Change: Just terrific job I know that a big team was involved there.
Speaker Change: Yes.
Speaker Change: A lot of people would have blamed the moves but you guys really executed.
Speaker Change: Hey, Chris Thanks on behalf of the team we appreciate.
Speaker Change: Your comments.
Speaker Change: It's not easy.
Speaker Change: A lot of commitment and a lot of focus a lot of good work by the team the leadership team and the team we have in the company.
Speaker Change: It's rare that our role we get anybody saying anything nice so thank you.
Speaker Change: Yes.
Darryll Dewan: I'll buy the beer whenever it's needed. We'll get there.
Speaker Change: Outside of that I have ever had.
Speaker Change: And we'll get there.
Kris Tuttle: So, you know, I wanted a couple of questions that I get a lot from people when I talk to them about the company and the stock is, other than being concerned about the transition, which I think you proved you're going to navigate, you know, they read a lot about AI, integrated racks, and, you know, what NVIDIA is doing and what Dell is doing. And of course, you and I, you know, have spoken to those people, we know, what that's all about.
So I wanted a couple of questions that I get a lot from people when I talk to them about the company and the stock is.
Speaker Change: Other than being concerned about the transition, let's say, thank you crude youre going to navigate.
Speaker Change: They read a lot about AI integrated racks, and what Nvidia is doing and what Delta is doing and of course, you and I have spoken to those people we know.
Kris Tuttle: But I think the people that I talk to and field questions from are, could use some color around how, as Dell and NVIDIA and other people work to make the integration easier, they worry that, well, maybe it will obviate, you know, the need for some of the integration services and value add that TSS provides. And I think that, It'd be helpful to give them some color and maybe some case studies around. uh why that you know might not be true and and how that you have a durable role in in the industry as an integrator.
Speaker Change: What that's all about but I think the people that I talk to field questions from our good could you some color around how as Dell and Nvidia and other people works you'd make.
Speaker Change: The integration easier.
Speaker Change: They worry that well maybe it will obviate the need for some of the integration services the value add that TSS provides and I think that.
Speaker Change: It would be helpful to give us some color maybe some case studies around.
Speaker Change: Why that might not be true and how that you have a durable role in the industry as an integrator.
Darryll Dewan: Good question, and it's something that we think about 24 by 7. We do operate, we use an internal phrase called, operate with your high beams on. We are very focused on anticipating and trying to anticipate what's going to happen in the industry so we don't become obsolete. As you know, we have multiple lines of business. We have the integration business. We have the modular data center business, procurement business. And they all kind of interact.
Speaker Change: Good question and it's something that we think about 24 by seven.
Speaker Change: We do operate we use an internal phrase co operate with your high beams on.
Speaker Change: We are very focused on anticipating and trying to anticipate what's going to happen in the industry. So we don't become obsolete as.
Speaker Change: As you know we have multiple lines of business, we have the integration business, we have a modular data center business procurement business.
Speaker Change: And they all kind of inter react.
Darryll Dewan: And on the RAC integration business, especially around AI, let me take that on. NVIDIA produces a reference architecture that OEMs like Dell will build a solution off of. That's NVIDIA's game. You know, I've been asked a little bit about what's NVIDIA going to do, are they going to get in our business? I was kind of joking about how NVIDIA is coming after TSS, you know, that'll be an interesting play. I don't think that's what the game plan is. As we see the technology transition, I remember two and a half years ago, joining the company, we were building racks that had like 55 kilowatts of power, now they're well over 100, they're forecast to go over 300 to a megawatt of rack.
Speaker Change: And on the rack integration business, especially around AI, let me take that on Nvidia.
Speaker Change: Produces a reference architecture that Oems like Dell will build a solution that's in video game.
Speaker Change: I've been asked a little bit about whats in visit you're going to do they're going to get in our business that was kind of joking about our videos coming after TSS.
Speaker Change: That'll be an interesting play I don't think Thats whats the game plan is.
Speaker Change: As we see the technology transition I remember two five years ago, joining the company. We are building <unk> like 55 kilowatts of power now well over 100 are forecast to go over 302 megawatt Iraq, we have the latest and greatest in the factory right now being integrated.
Darryll Dewan: We have the latest and greatest in the factory right now being integrated, and it's a sight to be seen. And it's an amazing architecture and a transition from even a couple of years ago, and how it's all put together, the size of the servers, the weight of the servers, the power, the direct liquid cooling, the complexity. And what do we do? We're trying to do the best we can to add value, to integrate those solutions faster and with more value and quality than anybody else in the market. So where we see it going, it's going to get more complex, we're told, because we have a very strong relationship with our key customer that it's going to get more complex, the technology is going to continue to evolve.
Speaker Change: And it's a sight to be seen it is amazing architecture and a transition from even a couple of years ago and how it's all put together the size of the servers the weight of the servers the power the direct liquid cooling the complexity and what.
Speaker Change: Or do we do we try to do best we can add value to integrate those solutions faster and with more value and quality than anybody else in the market.
Speaker Change: So.
Speaker Change: Where we see it going it's going to get more complex.
Speaker Change: Both because we have a very strong relationship with our key customer that is going to get more complex. The technology is going to continue to evolve we're out in front of that and on a rapid integration of business. We expect continued growth.
Darryll Dewan: We're out in front of that. And on our rack integration business, we expect continued growth. Could this ever change? Anything could change, but we don't see it anytime soon, and we're full speed ahead. So reference point, the direct liquid capability is increasing. The percentage of our business is moving to DLC. It's bigger than it's ever been, and we expect it to continue. The power needed, as we've talked about, has increased exponentially.
Speaker Change: Could this ever changed anything could change, but we don't see it anytime soon and we're full speed ahead.
Speaker Change: So the reference point.
Speaker Change: The direct liquid capabilities, increasing the percentage of our business is moving the DLC is bigger than it's ever been and we expect it to continue.
Speaker Change: <unk> needed as we've talked about has increased exponentially.
Speaker Change: The I saw I'm trying to put things into perspective of $25 $30 35 years ago in technology I can't do it.
Danny Chism: I'm trying to put things in the perspective of 25, 30, 35 years ago in technology. I can't do it. The mainframe today is standing in front of you. So we're out in front of it. We're doing the best we can to stay relevant and to become a continued partner to our customers. I would add, Darryll, you know, to your point about the DLC becoming more and more important or more prevalent, is as we built up the new factory, we knew that was where the technology was heading, and we've built out multiple times the capacity to do DLC, as well as doing air-cooled in that facility, so we've really set ourselves up for success.
Speaker Change: Mainframe today is standing in front of you.
Speaker Change: No.
Speaker Change: We're out in front of it we're doing the best we can to stay relevant and to become.
Speaker Change: Continued.
Speaker Change: Partner to our customer.
Speaker Change: I would add to your point about the DLC, becoming more and more important or more prevalent.
Speaker Change: As we built up the new factory, we knew that was where the technology was heading and we built out multiple times the capacity to do DLC as well as doing the air cooled in that facility. So we've really set ourselves up for.
Darryll Dewan: continued future growth. And Kris, let me add one more thing.
Speaker Change: Continued future growth.
Speaker Change: And Chris Let me add one more thing when you think about AI AI is.
Darryll Dewan: When you think about AI, AI is, is I don't even describe it, I don't even know what the word is, but it's going to change everything that we do. This is not a new phenomenon, you know, chat accelerated things, the power of technology and the price points accelerating, the technology is powerful. When you think about the impact of going from what's happening today, if you will, from modeling to inferencing and how the enterprise is going to adopt and how other companies are going to adopt, I think the future is pretty darn exciting. And you think about the application capability of AI in healthcare and defense and government and in commercial applications, entertainment, you pick it, it's amazing what's happening.
Speaker Change: Is.
Speaker Change: How do you even describe it I don't know what the word is but.
Speaker Change: This is going to change everything that we do this is not a new phenomenon chat accelerated things with power technology and our price points accelerating the technology is powerful when you think about the impact of going from what's happening today, if you will for modeling to it.
Speaker Change: Inferencing in how the enterprise is going to adopt and how other companies are going to adopt I think the future is pretty exciting and you think about the application capability of AI in health care and.
Speaker Change: Defense and government and commercial applications.
Speaker Change: Entertainment you pick it.
Speaker Change: Beijing or what's happening in fact, we use it here internally for certain things and we're able to do things a lot faster to help us get to where we wanted to do so.
Kris Tuttle: In fact, we use it here internally for certain things and we're able to do things a lot faster to help us get to where we want to go. So we're optimistic, bud, and I appreciate the question. All right, well, hey, thanks a lot, guys. I will drop all these numbers in, refresh the model, and then I'll circle back with you guys on the minutia. Great. Thanks, Kris.
Speaker Change: We are optimistic but I appreciate the question.
Speaker Change: Alright, well, hey, thanks, a lot guys I will.
Speaker Change: Drop all of these numbers and refresh the model and then I'll I'll circle back with you guys on that.
Speaker Change: Diminution.
Speaker Change: Great. Thanks.
Speaker Change: Thanks, Chris.
Operator: Thank you, and as a reminder, the floor remains open for questions, and if you wish to join the queue at this time, please press star 1 on your telephone keypad. Once again, please press star 1 on your keypad at this time if you wish to join queue to ask a question. Please hold a moment while we re-poll for questions.
Speaker Change: Thank you and as a reminder.
Speaker Change: The floor remains open for questions and if you wish to join the queue. At this time. Please press star one on your telephone keypad.
Speaker Change: Once again, please press star one on your keypad at this time, if you wish to join the queue to ask a question. Please hold a moment, while we repo for questions.
Dave Stern: And our next question is coming from Dave Stern Dave, your line is live.
Speaker Change: And our next question is coming from.
Dave Sheridan: Dave Sheridan.
Dave Stern: Please go ahead. Gentlemen, great quarter. I appreciate, okay, you holding the conference call for us as well.
Speaker Change: Your line is live please go ahead.
Speaker Change: Gentlemen, great quarter appreciate.
Speaker Change: You're holding the conference call for Us as well my.
Darryll Dewan: My question is regarding the old facility. Are you continuing carrying costs for that old facility? Are you continuing to look for opportunities to lease that facility out? Or will you be using that first facility for your own demand, okay, in the future? all the above. So first and foremost, we are planning and we built it into our business model, the cost of carrying this facility where we're at right now in Round Rock. A very good question, by the way. So that's number one. Number two is we have a couple of options on what we can do in this facility.
Speaker Change: My question is regarding the old facility or you can.
Speaker Change: <unk> carrying costs for that old facility or are you continuing to look for.
Speaker Change: Opportunities to lease that facility out or will you be using that first facility for your own.
Speaker Change: Demand okay in the future.
Speaker Change: All of the above.
Speaker Change: So first and foremost.
Speaker Change: We are planning and we built it into our business model the cost of carrying.
Speaker Change: This facility, where we're at right now in round rock.
Speaker Change: Very good question by the way. So that's number one number two is we have a couple of options on what we can do in this facility now there's ways that we could expand our business here.
Darryll Dewan: There's ways that we could expand our business here. specifically in configuration services or in rack integration if we so elect to go down a certain path. But right now we're planning for that and we also have the ability to sublease This facility, we renegotiated the lease. couple of years ago, and we've got very favorable rates compared to what the market holds today. So the downside, if you will, we always look at what's the downside in some cases. The downside is we're good to sublease, but we'd like to turn it into a revenue opportunity versus just the cost cover.
Speaker Change: Specifically in our configuration services or in rack integration, if we so elect to go down a certain path, but right now.
Speaker Change: We're planning for that.
Speaker Change: And we also have the ability to sublease.
Speaker Change: This facility, we renegotiated the lease a couple of years ago, and we've got very favorable favorable rates compared to what the market holds today. So the downside. If you will we always look at what's the downside in some cases to downside as we're good to sublease, but wed like to turn it into a revenue opportunity versus just the cost.
Speaker Change: Coverage.
Dave Stern: All right, perfect.
Speaker Change: Alright perfect.
Dave Stern: And my second question, because I tuned in late, did you guys touch upon, okay, what your revenues could be at full capacity at the new facility at all? That's a nice way of asking a good question. I have to give you credit for asking it that way like you came in late.
Speaker Change: And then my second question because I tuned in late.
Speaker Change: Did you guys touch upon okay. What's your revenues could be at full capacity at the new facility at all.
Speaker Change: That's a nice way of asking a good question.
Speaker Change: Hi.
Speaker Change: To give you credit for asking that way like you came in late.
Darryll Dewan: The answer is no. Now the guidance we did put out was more around bottom line that we expect next year's adjusted EBITDA to be at least 50% up from what we saw last year. So more looking at it from a bottom line standpoint. We do know we built out the capacity in the new Georgetown facility that would be beyond what the current demand is, so we definitely think there's some upside potential, but we did not put a number on it.
Speaker Change: The answer is no.
Speaker Change: No. The guidance, we did put out was more around bottom line that we expect next year's adjusted EBITDA to be at least 50% up from what we saw.
Speaker Change: Last year.
Speaker Change: So more looking at it from a bottom line standpoint.
Speaker Change: We do know we built out the capacity in the new Georgetown facility.
Speaker Change: That would be beyond what the current demand is so.
Speaker Change: So we definitely think there's some upside potential, but we did not put a number on it.
Darryll Dewan: Let me give you another cheeky answer.
Speaker Change: Hey, Shlomo.
Speaker Change: Let me give you another cheeky answer Dave David I'm sorry.
Darryll Dewan: Dave, Dave, Dave, I'm sorry. Dave, I am less than 24 hours away from an elective eye surgery, so I can't see too well about anything down the street right now, but we're very focused on profitable growth and appreciate your question. Obviously there's things we can say and there's things we can't say. We're trying to give you as much guidance as we can for the year, so hopefully that gives you some insight into what's going on.
Speaker Change: Okay.
Speaker Change: Dave I am.
Speaker Change: I am less than 24 hours away from elective surgeries, so I can't see too.
Speaker Change: Right.
Speaker Change: [laughter].
Speaker Change: But we're very focused on profitable growth.
Speaker Change: And I. Appreciate your question, obviously, there's things we can say there are things, we can't say, but.
Speaker Change: We're trying to give you as much guidance as we can.
Speaker Change: For the year. So hopefully that gives you some insight to what's going on.
Darryll Dewan: Don't worry, we're not letting him walk anywhere near the racks right now while he can't see well.
Speaker Change: Don't worry, we're not let them walk anywhere near the racks right now what we can see.
Speaker Change: Okay.
Dave Stern: Well, thank you very much, guys, and I appreciate it.
Speaker Change: Well. Thank you very much guys I appreciate it.
Darryll Dewan: Thank you.
Bradley Stevenson: Your next question is coming from Bradley Stevenson. Bradley, your line is live. Please go ahead.
Speaker Change: Thank you. Your next question is coming from Bradley Stevenson Bradley. Your line is live. Please go ahead.
Bradley Stevenson: Hi guys, Darryll, this quarter was just not good enough, I just wanted to tell you. No, I'm just kidding. Hey Brad, it's really nice talking to you, I see it. Let me get back to the drawing board.
Speaker Change: Hi, guys. Darryl this quarter was just not good enough. So I just wanted to tell you.
Darryl Doing: Hey, Brad it's really nice talking to you, but I see it.
Darryl Doing: Let me get back to the.
Speaker Change: Back to the drawing board.
Bradley Stevenson: I just had a, most of my questions were actually already asked, but I did a couple of questions. One is, I know there's a little bit of a concern out there with some, not saying myself, but asking for a friend, that margin pressures, there might be some margin pressure on you as volumes start to go up. However, Danny, I heard you say really what I think was just the opposite of that. Is that... over the next two to three quarters seeing integration margins. go up? Do you see that even looking further out as volumes go up?
Speaker Change: No really good so I just had most of my questions were actually already asked.
Speaker Change: But I did a couple of questions one as.
Speaker Change: I know theres, a little bit of a concern out there with some.
Speaker Change: Say, it myself, but asking for a friend.
Speaker Change: Net margin pressures there might be some margin pressure on you as volumes start to go up however, Danny I heard you say really what I think was just the opposite of that.
Speaker Change: Matt.
Speaker Change: Over the next two to three quarters seen immigration margins.
Speaker Change: Go up do you see that even looking further out.
Volumes go up.
Danny Chism: I do. Yeah, some of what I was trying to point out in this call, you know, not to try to go down too much of a accounting geek rabbit hole. But unfortunately, that's kind of where I am. Accounting rules stipulate that we had to start recognizing rent expense on the new facility, even though we're not paying rent. Basically, you take all your rent payments over the entire period and start straightlining it. So, we were expensing about $253,000 per month starting in December. and we have been continuing to expense that. So it was about $760,000 of expense that hit the SI department.
Speaker Change: I do.
Speaker Change: Similar to I was trying to point out in this call.
Speaker Change: Not to try to go down too much of our accounting Geek rabbit hole, but unfortunately, it's kind of where I am.
Speaker Change: Accounting rules stipulate that we had to start recognizing rent expense on the new facility, even though we're not paying rent.
Speaker Change: Basically you take all your rent payments over the entire period and start straight lining. It. So we were expensing about $253000 per month starting in December.
Speaker Change: And we have been continuing to expense that so it was about $760000 of expense that hit the ESI Department.
Danny Chism: this quarter that's non-cash. Our arrangement with our partner, they're cognizant of the fact that we're going to incur additional costs as we move to that factory. And we've structured our agreement with them such that, you know, essentially we're more than made a hole for that incremental cost that we will incur as we're doing that to enable the ability to serve them better. So, yes, I anticipate those margins will go up. The other that I pointed out was even though if you look at the gap recorded margins in that SI department, it shows it was down this quarter.
Speaker Change: This quarter that's noncash.
Speaker Change: Our <unk>.
Speaker Change: Arrangement with our partner they are cognizant of the fact that we're going to incur additional costs as we move to that factory.
Speaker Change: And we've structured our agreement with them such that.
Speaker Change: Essentially we are more than made whole for that incremental cost that we will incur.
Speaker Change: As we're doing that to enable the ability to serve them better. So yes, I anticipate those margins will go up the other that I pointed out was even though if you look at the GAAP reported margins in that.
Speaker Change: Sigh Department. It shows it was down this quarter when you strip out that noncash rent were actually up about 400 basis points from 28% to 32%.
Danny Chism: When you strip out that non-cash rent, we're actually up about 400 basis points from 28% to 32%. So I do anticipate margins going up in the remainder of the year. The one caveat I would give there, because the margins are lower in the procurement business, to the extent that the growth in procurement may outsize. the the growth in other segments. When you look year over year, the overall blended margin may come down. But even looking at that, if you recall, looking at it on a gross basis, regardless of whether we record those procurement deals at net or gross, we actually improved those margins also on the non-gap gross basis from, what, 460 basis points to 660 basis points this quarter.
Speaker Change: So I do anticipate margins going up in the remainder of the year. The one caveat I would give there because the margins are lower in the procurement business to the extent that the growth in procurement may outsize.
Speaker Change: The growth in other segments. When you look year over year. The overall blended margin may come down.
Speaker Change: But even looking at that if you recall looking at it on a gross basis, regardless of whether we record those procurement deals at net or gross we actually improved those margins also on.
Speaker Change: The non-GAAP gross basis from four.
Speaker Change: 460 basis points to 660 basis points this quarter.
Bradley Stevenson: So all those signs are pointing in the right direction. Sorry, long answer from my accounting geek world to a very short question. I love the accounting geek stuff so feel free to do that, that's actually where I live. Integrate our procurement services. I mean, is this the new norm?
Speaker Change: So all of those signs are pointing in the right direction.
Speaker Change: Sorry long answer for my accounting Geek World.
Speaker Change: Very short question.
I love the accounting stuff so.
Speaker Change: Feel free to do that Thats actually where I live.
Speaker Change: Yes.
Speaker Change: And our.
Speaker Change: Procurement services I mean is this the new norm.
Danny Chism: Your last three quarters 60 million 40 million 90 million or is this a temporary situation. We. We're optimistic about the procurement business. We've made some investments in resources. to further penetrate the opportunity, go find additional opportunity. And it's a little difficult sometimes to predict. but we're optimistic on the top line growth. questions just when is it going to fall. The trick in our opinion is to go find multi-year large situations that we can earn the right to win the second tranche or the third tranche of a deal and continue to deliver. That's the challenge that we have and frankly we're building out the team a little bit to scale and we're optimistic about this year.
Speaker Change: The last three quarters $60 million $40 million $90 million or is this a temporary.
Situations.
Speaker Change: We.
Speaker Change: We're optimistic about the procurement business, we've made some investments in resources.
Speaker Change: To further penetrate.
Speaker Change: The opportunity.
Speaker Change: Additional opportunity.
Speaker Change: It's a little.
Speaker Change: Difficult sometimes to predict.
But we're optimistic on the topline growth.
Speaker Change: My question is just when is it going to fall.
Speaker Change: The trick in our opinion is to go find multiyear large situations that we can earn the right to win the second tranche of the third tranche of the deal.
Speaker Change: And continue to deliver that's the challenge that we have.
Speaker Change: And frankly, we're building out the team a little bit to scale.
Danny Chism: The question is when is it going to pop? So as we just reported we had a very strong Q1. I think we're optimistic about the next quarter and we're working on the back half of the year to make it equally. Yeah, we've been relatively clear in the past, I would still stand by this too, but that's going to go up and down a bit from quarter to quarter. Some of those are discrete projects, right, where you may have a 10 or 20 or 30 million dollar project in one quarter that may not repeat the next.
Speaker Change: And we're optimistic about this year. The question is when is it going to pop. So as we just reported we had a very strong Q1.
Speaker Change: I think we're optimistic about the next quarter and we're working on in the back half of the year to make it equally excited.
Speaker Change: Yes, we've been relatively clear in the past and I would still standby this too, but that's going to go up and down a bit from quarter to quarter. Some of those are discrete projects right, where you may have a 10 or 20 or $30 million project in one quarter that may not repeat the next.
Danny Chism: Frankly, I was Pleasantly surprised with the volume that we saw in Q1. Initially, I expected a little bit more seasonality around the federal buying season, with the federal government ending September 30th. I expected at the end of Q3, we probably would have, that would have been some of the lift we saw there. And then again, when departments got their new budget in Q1. I was pleasantly surprised to see that that did not fall off in Q1, but I wouldn't necessarily expect every quarter to be at a $90 million. We're going to put Danny in a sales job.
Speaker Change: Frankly, I was plus.
Speaker Change: Pleasantly surprised with the volume that we saw in Q1.
Speaker Change: Initially I expect a little bit more seasonality around the federal buying <unk>.
Season, with the federal government ending September 30th I expected at the end of Q3, we probably would have that would've been some of the lift we saw there and then again when departments got their new budget in Q1.
Speaker Change: I was pleasantly surprised to see that that did not fall off in Q1.
I wouldn't necessarily expect every quarter to be at $90 million level.
Speaker Change: We're going to put Dan unit sales job.
Bradley Stevenson: Facilities management, where is it? I don't know how to say it.
Speaker Change: Okay.
Speaker Change: Facilities management has it.
Speaker Change: I don't know how to say that it's down.
Darryll Dewan: It's down sequentially and year over year. You talked a little bit about that in your comments, but could you add a little more color to what's going on there? Yes. We remain optimistic about that segment. primarily because It's a vehicle that I think is transitioning from the old to the new. The old was data center expansion, power in a remote location closer to the need, hydroelectric capability, closeness. It's transitioning to become more of an alternative. if you will, modules for AI. And the long pole in that tent is getting the components, getting the power units, getting the container built, and frankly selling it to a executive in an enterprise or a business as to why they should do this versus go to a colo, go to a hyperscaler, or extend their existing data center and make sure that they've got the ability to capture direct liquid capability and take advantage of the latest and greatest technology.
Speaker Change: Sequentially and year over year.
Speaker Change: You talked a little bit about that in your comments, but could you add a little more color to whats going on there.
Speaker Change: Yes.
Speaker Change: We remain optimistic about that segment.
Speaker Change: Primarily because.
Speaker Change: Its a vehicle that I think is transitioning from the old to the new the new the old was data center expansion.
Speaker Change: Our and.
Speaker Change: The remote location closer to.
Speaker Change: The need hydro electric capability closeness admits transitioning to become more of an alternative.
Speaker Change: Compute.
Speaker Change: If you will module for AI.
Speaker Change: <unk>.
Speaker Change: The long pole in that 10 is getting the components getting the power units getting the container build and frankly selling it to a executive and an enterprise or.
Speaker Change: Business as to why they should do this versus go to a colo go to hyper scaler or extend their existing data center and make sure that they've got the ability to capture direct liquid capability and take advantage of the latest and greatest technology.
Darryll Dewan: It's a. time the value equation and we're working very closely Within that ecosystem of people who deliver pieces of that solution who actually are trying to sell it as well our partnership with our key customers on point doing that we're assisting There are people in the ecosystem of... suppliers, so to speak, like Schneider, Avertive, Motiver, who are all in that game that we're working closely with to try and provide a IT solution in a modular unit. We also believe there's a play with a different kind of technology approach that we really can't talk about here, but that's a possibility in how we deliver a container and what does it look like, especially even at the edge.
Speaker Change: Hey.
Speaker Change: Time to value equation, and we're working very closely within that ecosystem of people, who deliver pieces of that solution, who actually are trying to sell it as well.
Speaker Change: Our partnership with our key customers on point in doing that we are assisting.
Speaker Change: There are people in the ecosystem of suppliers, so to speak like Schneider of Virtu.
Speaker Change: Motor there who are all in that game that we are working closely with to try and <unk>.
Speaker Change: Provide a solution and a modular unit. We also believe there is a play with a different kind of technology approach.
Speaker Change: We really can't talk about here, but thats, a possibility and how we deliver a container and what does it look like especially even at the edge.
Danny Chism: We don't have to have a 40-foot container every time we show up. So we're working on it. We have resized our existing team to take advantage of the existing contracts we have to maintain the profit margin without getting out in front of our headlights on... growing resources without the demand signal. We're very focused on making sure we add and we contract as needed. TBD on how it all plays out, but we remain optimistic that there's a play. I'm sorry, the other color I would add there, Bradley, is that about half of the decrease that you saw year over year this quarter was really discrete projects that were in the first quarter of last year.
Speaker Change: We don't have to have a 40 foot container every time, we show up so we're working on it.
Speaker Change: Re sized our existing team to take advantage of the exists.
Speaker Change: Existing contracts, we have to maintain the profit margin.
Speaker Change: Without getting out in front of our headlights on.
Speaker Change: Growing resources without the demand signal, we're very focused on making sure we add and we contract as needed. So.
Speaker Change: TBD on how it all plays out.
Speaker Change: But we remain optimistic that there is a play.
Speaker Change: Yes.
Speaker Change: I'm sorry, the other color I would add there Bradley is that about half of the decrease that you saw year over year. This quarter was really discrete projects that were in the first quarter of last year.
Danny Chism: Those pop up from time to time, I'd expect some later in this year and in later quarters as well. So those are not necessarily comparable year over year. Think about battery replacements or media filter changes, renovations of MDCs. So that's one that I wouldn't necessarily expect to be there.
Speaker Change: Those pop up from time to time I would expect some later on this year in later quarters as well so those are not necessarily comparable year over year.
Speaker Change: Think about <unk>.
Ren: <unk> replacements or media filter changes Ren.
Ren: Renovations of of Mdc's. So those are that's one that I wouldn't necessarily expect to be there every quarter.
Danny Chism: Do you have any... or can you comment on what kind of potential you see in that segment? and maybe a timeline on that. You know, it can move significantly with a couple of new deals. We've got a couple insights. and if we can get to a volume... business a little bit higher volume. It makes a big difference in our That's all I think I could say right at the moment without giving up any competitive Then, uh...
Ren: Do you have any.
Ren: Or can you comment on what kind of potential you see in that segment.
Ren: And maybe a timeline on that.
Ren: It can move significantly with a couple of new deals.
Ren: And we've got a couple of insight.
Ren: And if we can get to a volume.
Ren: Business, a little bit higher volume it makes a big difference in our bottom line.
Ren: Because of the margin involved.
Ren: That's all I think I can say right at the moment without giving up any competitive advantage that we think we have.
Okay.
Ren: No.
Darryll Dewan: are you the last one I had was about around enterprise AI Infrastructure, CoreWeave talked a little bit in their earnings call, I think it was earlier this week about seeing that demand increase. Are you seeing any of that yet? It's so, yes. I'm talking from a sales experience when I tell you this. Pipeline is all relative. I like to see dollars and cents on deals closed. You don't get paid on pipeline, you get paid on producing results, but you need a pipeline. We're told that, and we're working very closely with people, they're telling us the pipeline's never been as big.
Ren: Yes.
Ren: Our.
Ren: One last one I had was around the enterprise.
Ren: AI infrastructure.
Speaker Change: <unk> core we talked a little bit in their earnings call. I think it was earlier this week about seeing that demand increase are you seeing any of that yet.
Ren: It's.
Ren: So yes.
Ren: So I'm talking from a sales experienced what I would tell you. This.
Speaker Change: Pipeline is all relative I'd like to see dollars and cents when deals close you.
Speaker Change: You don't get paid on pipeline to get paid on producing results, but you need a pipeline.
Speaker Change: We're told that and we're working very closely with people that are telling us the pipeline has never been as big.
Darryll Dewan: Okay, great, let's move it to revenue, and we're starting to see that. Our relationship with our key customer is very healthy. We're very optimistic that the pipeline will convert, and we're still working on larger deals. But if you look at Meta, OpenAI, AWS, Microsoft, Oracle, Google, everybody's talking about what their investments are in AI infrastructure, and we're talking in billions. We're not talking rounding a couple hundred thousand dollars. This is a big time deal. So that's translating to people who are scrambling to get their hands on the technology. And we're glad to be right in the middle of it with, you know, the kind of skills that we have and we expect it to continue.
Speaker Change: Great, let's move it to revenue and we're starting to see that our relationship with our key customer is very healthy we're very optimistic that the pipeline will convert.
Speaker Change: Still working on larger deals, but if you look at meta open AI.
Speaker Change: WNS, Microsoft Oracle, Google everybody is talking about what's what the investments are.
Speaker Change: AI infrastructure and we're talking in billions, we're not talking rounding a couple hundred thousand dollars is a big time deal.
Speaker Change: So that's translating to people who are scrambling to get their hands on the technology.
Speaker Change: And we're glad to be right in the middle of it with.
Speaker Change: The kind of skills that we have and we expect to.
Speaker Change: To continue.
Bradley Stevenson: All right, guys. Well, thank you so much and great quarter. I was just kidding you when I said it wasn't. Well, you know, actually, it's kind of like, we're happy, but we're not satisfied. We look to avoid any situation that makes us... will We don't deliver based on what we say we're going to do. So we want to make sure we deliver when we say we're going to deliver. So thank you for that. Appreciate it. Thank you.
Speaker Change: Alright, well. Thank you so much and great quarter I was just kidding when I said it wasn't getting.
Speaker Change: Well actually it's kind of.
Speaker Change: We're happy, but we're not satisfied so.
Speaker Change: We look to avoid any situation that.
Speaker Change: Makes us if you will.
Speaker Change: We don't deliver based on what we're saying we're going to do so we want to make sure we deliver when we said we're going to deliver so thank you for that I appreciate it.
Speaker Change: Thanks.
Jordan Marcus: Your next question is coming from Jordan Marcus. Jordan, your line is live. Please go ahead. Hey guys, can you hear me? Yeah, we got you, Jordan. Darryll, Dan, Jordan Marcus, longtime investor and supporter.
Speaker Change: Thank you. Your next question is coming from Jordan Marcus Jordan. Your line is live. Please go ahead.
Hey, guys can you hear me yes.
Speaker Change: Yes, we got you Jordan.
Speaker Change: Daryl Dan joined Marcus longtime Investor and quarter.
Jordan Marcus: I'm going to start this call by using a very technical Harvard Business School term to describe the operational efficiency in which you guys have performed over the past quarter, and that is, let's fucking go. Incredible. And so I just want to compliment you like everybody else. It is easy to talk the talk, it is hard to walk the walk, and you guys continue to excel in that capacity. So thank you for you and everyone on your team in continuing to perform.
Speaker Change: I'm going to start this call by using a very technical Harvard business School term to describe the operational efficiency in which you guys have.
Speaker Change: Performed over the past quarter and that has led fucking go.
Speaker Change: Incredible and so I just wanted to complement you like everybody else. It is easy to talk the talk and it's hard to walk the walk and you guys continue to excel in that capacity. So thank you for you and everyone on your team and continuing to perform.
Speaker Change: Barry you made like Facebook.
Jordan Marcus: Darryll, man, I love you, dude. I know we got to be formal on these calls, but, you know, I got to get in touch with Maj.
Speaker Change: Oh Man I Love you did I know, we got to be far more on these calls, but I'm going to get to the margin getting a call on the books.
Jordan Marcus: We got to get a call in the books, but you are my favorite company by far, and that's just not because of the earnings, and I think you guys got a long way to go, and you're just getting started. Thank you.
Speaker Change: You are my favorite company by far and that's just not because of the earnings and I think you guys got a long way to go and Youre just getting started so.
Speaker Change:
Speaker Change: Thank you.
Wayne Van Orden: The next question is coming from Wayne Van Orden. Wayne, your line is live. Please go ahead. Hey, good afternoon, gentlemen. I'm just a small retail investor, but I found you because I've been in the IT industry since 1970. 8088chips, if you remember them, anybody there, which I took to the nerd conversation. History in the industry, I've found frequently when new technologies appeared, there was always a difficulty in getting the pipeline for the team. And I'm wondering how you're addressing recruiting and stabilizing your needs based on the different levels of engagement you have with your clients.
Speaker Change: Next question is coming from Wayne Wayne Vanorden.
Speaker Change: Wayne Your line is live please go ahead.
Speaker Change: Hey, good afternoon gentlemen.
Speaker Change: Just a small retail investor, but I found you because I've been in the industry since 1972.
Speaker Change: I remember the AAV chips, if you remember them anybody there if we chose to.
Speaker Change: <unk> narrowed conversation.
Speaker Change: My.
Speaker Change: And three in the industry of Sam frequently when new technologies appeared there was always a difficulty in getting the pipeline for the team and I am wondering how youre addressing recruiting and stabilizing your needs based on the different levels of engagement you have with your clients.
Wayne Van Orden: Is that proving to be more difficult or is that something you're learning how to master? That's the whole question I have, just on creating the team.
Speaker Change: Is that is that proving to be more difficult or is that something thats you are learning how to master.
Speaker Change: And Thats. The question I have just on this creating the team.
Darryll Dewan: Yeah, Wayne, thanks. You and I are probably in the same age level, and I'm sure I'm older, but when you talk about technology change since 72, we can go toe-to-toe. To answer your question, we fundamentally believe... that people are the center of everything we do. We have an amazing chief people officer who has done a phenomenal job of automating. a lot of what we do today so that we can take advantage of promoting open opportunities online, working through ADP as an example, and sourcing and finding people, number one. Number two is I'm proud to be a part of a team that has exceptional leaders.
Wayne: Wayne Thanks to you and I are probably in the same.
Speaker Change: Age level and I'm sure I'm older.
When you talk about technology changed since 72, we can go toe to toe in Ireland.
Speaker Change: To answer your question, we fundamentally believe.
Speaker Change: That people are the center of everything we do.
We have a amazing chief people officer, who has done a phenomenal job of automating.
Speaker Change: Lot of what we do today, so that we can take advantage of promoting open opportunities online working through ADP as an example.
Speaker Change: <unk>.
Danny Chism: Sourcing and finding people number one number two is I am proud to be a part of the team that has exceptional leaders who are listening to Danny here.
Darryll Dewan: You're listening to Danny here alongside... And we've got Chief Operating Officer Todd Merritt, who basically is 24 by seven. And Todd does an incredible job of running this operation and getting us ready for Georgetown. We're blessed. And we're also blessed, number three, in a market that is pro-business. that has a talent pool that wants to work, that wants to come and do something, and we've done, I think, a great job, and we continue to work on trying to make this worthwhile to our people. Todd has implemented an incentive system to make sure that we don't have any bad quality.
Speaker Change: Alongside.
Speaker Change: We've got a chief operating officer, Todd Merritt, who basically has 24 by seven.
Speaker Change: And Todd It does an incredible job of running this operation in getting us ready for Georgetown.
Speaker Change: We're blessed and we're also blessed number three in a market that is pro business.
Speaker Change: That has a talent pool that wants to work that wants to come and do something and we've done I think a great job and we continue to work on trying to make this worthwhile to our people.
Speaker Change: Todd is implemented.
Speaker Change: Incentive system to make sure that we don't have any bad quality.
Darryll Dewan: turns bolts, which is a customer dissatisfaction. And people are recognized for their good work. We always have a way to improve in that area. But we didn't go from 80 to a couple hundred people overnight without making some mistakes and learning from those mistakes. But when we used to spend $600,000 and $700,000 a year for temporary employment agency fees, and we've knocked that almost out, that's a result of the good work that both Janet and Todd have done to make sure that we've got the right foundation to continue to grow. We're anticipating growth again, and we're out in front of it.
Speaker Change: Turns bolt.
Speaker Change: As a customer dissatisfaction and people are recognized for their good work.
Speaker Change: We always have a way to improve in that area, but we didn't go from 80 to couple of hundred people overnight without making some mistakes and learning from those mistakes.
Speaker Change: But when we used to spend 6% and $700000 a year for temporary employment agency fees and we've knocked at almost out.
Speaker Change: As a result of the good work that both China and Todd have done to make sure that we've got the right foundation to continue to grow.
Speaker Change: We're anticipating growth again, and we're out in front of it and while things workout right, we'll do it properly and more smartly than we did in the last quarter.
Darryll Dewan: And if all things work out right, we'll do it properly and more smartly than we did the last run around. We learned from that.
Darryll Dewan: So thank you for that. And glad you're a small investor. We love you for that. So thanks for your investment.
Speaker Change: We learned from that so thank you for that and glad you're a small investor We love you for that so thanks for your investment.
Wayne Van Orden: Well, I love Texas, so can you tell me when the company picnic is arranged? I might come over from Daytona to visit. Not over anytime. We'd love to have you. Thanks a lot. Bye-bye. Appreciate it, Wayne. Thank you.
Speaker Change: Love, Texas. So can I tell you can you tell me when the company picnic is arranged.
Speaker Change: Yes.
Speaker Change: I might come over from Daytona visit.
Speaker Change: But over time, we look at it okay. Thanks, a lot bye bye.
Speaker Change: I appreciate it.
John Weinberg: Your next question is coming from John Weinberg. John, your line is live. Please go ahead. Hi, good afternoon. Can you guys hear me? We're good. Great.
Speaker Change: Thank you. Your next question is coming from John Weinberg John Your line is live. Please go ahead.
John Weinberg: Hi, Good afternoon can you guys hear me.
Speaker Change: We got it.
John Weinberg: Another small investor, but not too small, pretty decent sized retail investor, and been with you for a long time and really appreciate all the hard work. Hearing you talking about the team is a fantastic testament to the results that you showed today and hopefully keep continuing to show. A couple questions.
Speaker Change: Alright.
Speaker Change: First of all an investor, but not too small, but a decent sized retail investor.
Speaker Change: For a long time.
Speaker Change: I really appreciate all the hard work is nearing.
Speaker Change: Hearing you were talking about the team is fantastic.
Speaker Change: These estimates of the results that you showed today and hopefully continuing to show.
John Weinberg: One is about capacity and AI demand durability. Now that production has started at the new facility, what level of committed demand or visibility do you have from AI clients to support full utilization? And what assumptions are you making about the durability of AI infrastructure spend into 2026? Thanks. Okay, I want to make sure I understand your question. Right. So you're asking on our capacity. explain it just a little bit further. Yeah, I'm just saying what level of committed demand or visibility do you have from AI clients to support your full utilization for the new plant and what assumptions are you making about the durability of AI infrastructure spend into 2026?
Speaker Change: Couple of questions one is about capacity on demand durability.
Speaker Change: Now that production has thought of that new facility, what's the level of <unk>.
Speaker Change: Committed demand or visibility do you have from clients to support full utilization.
Speaker Change: And what assumptions are you, making about the durability of our infrastructure spend into 2026.
Speaker Change: Okay I want to make sure I understand your question right. So you are asking on our capacity.
Speaker Change: Explain it just a little bit further.
Speaker Change: I'm, just wondering what level of committed demands or visibility you have from clients to support your fleet utilization for the new plants and what assumptions are you, making about the durability of infrastructure spend into 2026.
Darryll Dewan: Okay, so our demand invisibility with our key customer around rack integration It fluctuates, but basically we've over the last couple of years have worked very closely together to build a better, if you will, window or portal into that demand. And I'd say we're pretty good on 90 days to, you know, five months, and it ebbs and flows depending on what happens in the market. So it's a fluctuating situation, but I think we're pretty tied off on, you know, what's coming our way and what we're going to need to do on people resources to meet the demand.
Speaker Change: Okay, so our demand and visibility with our key customer around <unk> integration.
Speaker Change: It fluctuates, but basically we've over the last couple of years have worked very closely together to build a better.
Speaker Change: If you will a window or a portal into that demand and I'd.
Speaker Change: I'd say, we're we're pretty good on 90 days too.
Speaker Change: Five months.
Speaker Change: And it ebbs and flows depending on what happens in the market.
Speaker Change: So.
Speaker Change: Its a fluctuating situation, but I think we're pretty we're pretty tight off on whats, what's coming our way and what we're going to need to do on people resources to meet the demand and it fluctuates a little bit but we're good at.
Darryll Dewan: And it fluctuates a little bit, but we're good.
Darryll Dewan: Another way to look at it is our capability. to scale year over year on our rack integration business at our new facility is. significant. We will do a lot better this year than we did last year. and we have more to go. So the growth capability is... I would hate to give you a number, but it's exciting in terms of what we can do.
Speaker Change: Another way to look at it as our capability.
Speaker Change: To scale year over year on a rack integration business at our new facility.
Speaker Change: Is.
Speaker Change: Significant.
Speaker Change: Yes, we will do a lot better this year, we did last year.
Speaker Change: And we have more to go so the growth capabilities.
Speaker Change: I would hate to give you a number but it's exciting in terms of what we can do.
Danny Chism: Now, on your cost question about AI, I'm not sure I really understood that. Would you maybe Danny, you took it in? Yeah, he was asking about durability of the AI infrastructure spend in the 2026. I guess my question there, Brian, are you asking more about how long our investment in the new facility will service or how long you think before customers need to start replacing the technology they're buying today? It's, it's, it's the latter, actually. Yeah, I, you know, this is not scientific. This is me reading tea leaves. But as I see it, Enterprise, medium and large enterprises, they're probably going to make these investments for five to six year time horizon.
Danny Chism: On your cost question about AI I'm not sure I really understood that would maybe Danny you took it in.
Speaker Change: He was asking about the durability of the AI infrastructure spend in the 2026. So I guess my question. There Brian are you asking more about how long our investment in the new facility will service or how long you think before customers need to start replacing them.
Danny Chism: Technology Theyre buying today.
Speaker Change: Yes. Thank you just the latter actually.
Danny Chism: Yes.
Danny Chism: This is not scientific this is me reading tea leaves.
Danny Chism: As I see it.
Danny Chism: Enterprise medium and large enterprises, they are probably going to make these investments for five to six year time Horizon. My guess is hyperscale orders will likely need to replace it more quickly because if they don't there'll be obsolete it pretty quickly. So a lot of the dollars being spent today.
Danny Chism: My guess is hyperscalers will likely need to replace it more quickly, because if they don't, they'll be obsoleted pretty quickly. So a lot of the dollars being spent today. Again, this is me seeing this, not necessarily a scientific study, but I think a lot of that is probably going to have to be replaced within the next three to four years, maybe as short as two. just to remain competitive and remain up to speed with the advancements in technology.
Danny Chism: Again. This is me seeing is not necessarily a scientific study, but I think a lot of that is probably going to have to be replaced within the next three to four years may be a shortage too.
Danny Chism:
Danny Chism: Just to remain competitive and remain up to speed with the advancements in technology.
Danny Chism: Another way we look at it is we work closely with a couple of of research companies. and we monitor the data center integration spend. total adjustable market. And, you know, you can always tweak that depending on what result you're looking for. The numbers are stagnant. and who knows for how long and what's going to be in a couple of years from now. I think anybody on this call could tell me or us what this industry is going to look like two, three years from now. I'll bring it on.
Danny Chism: Try it another way.
Speaker Change: Another way, we look at it as we work closely with a couple of.
Speaker Change: Research companies and we monitor the data center integration spend.
Speaker Change: Total addressable market.
Speaker Change: You can always tweak that depending what result, youre looking for but.
Speaker Change: The numbers are staggering.
Speaker Change: And.
Speaker Change: Who knows for how long and what's going to be in a couple of years from now if anybody on this call. We could tell me or us what this industry is going to look like two three years from now.
Speaker Change: <unk>.
Darryll Dewan: When Wayne was talking earlier about being a small investor, and since 1972, he's been watching the industry. It wasn't too long ago that, well it was long ago, that I remember going from an 80 column card to a 96 column card and that was a massive shift. So when you think about what we're doing today and what you have in your hand on a cell phone versus what a mainframe used to look like, it's incredible. So, you know, we're in a a great industry, it's ever-changing, we're embracing it, and we're doing everything we can to stay out in front of it.
Speaker Change: Leslie.
Speaker Change: When Wayne was talking earlier about being a small investor since $19 72 has been watching the industry.
Speaker Change: When do long ago that was long ago that I remember going from an 80 column card to 96 compound and that was a massive shift.
Speaker Change: So when you think about what we're doing today and what you have in your hand on a cell phone versus what a mainframe needs to look like it's incredible so we're in a.
Speaker Change: A great industry, it's ever changing we're embracing it and we're doing it and we cannot stay out in front of us.
John Weinberg: Thank you, that's very helpful.
Speaker Change: Well thank you.
Darryll Dewan: My last question is, if you can speak to how your customer base is evolving, particularly in terms of the concentration, and to what extent is the growth in AI RAC integration, expanding your exposure beyond legacy customers like Dell? And of course, it's great to have Dell, but I wanted to just ask that question. I've been public in my comments about growing. and looking for sources of revenue that would not. or violate any trusted relationship we have with our existing country. So that's foremost. That doesn't mean that we couldn't find some ways that would maybe be seen as competitive, but we want to make sure we do this in a very appropriate way.
Speaker Change: That's very helpful. My last question is.
Speaker Change: You can speak to how your customer base is evolving, particularly in terms of that concentration and.
Speaker Change: To what extent is the growth in Iraq integration.
Speaker Change: Pending your exposure beyond legacy customers.
Speaker Change: And of course, it's great to have Dell, but I wanted to just ask that question.
Speaker Change: I've been public and my comments about growing.
And looking for sources of revenue.
Speaker Change: That would not betray or.
Speaker Change: <unk> any trusted relationship we have with our existing customer.
Speaker Change: So thats foremost.
Speaker Change: That doesn't mean that we couldnt find some ways.
It would may be.
Speaker Change: Be seen as competitive, but we want to make sure. We do this in a very appropriate way at <unk>.
Darryll Dewan: And the last thing we want to do is violate any of our trusted connections. So there's a big market out there. We've looked at how rack integration is performed by competitors in the industry, you go down the list, you know, HPE, Supermicro, Lenovo, UPIC. And there's opportunities to do some of our work in a customer facility, and there's opportunities to do it in a way that would disrupt what we're doing with our current customer. We don't want to do that. So we're looking at opportunity to expand our service capabilities that's. if you will, net incremental.
Speaker Change: Last thing we want to do is violate any of our trusted connections. So there's a big market out there.
Speaker Change: We've looked at how rack integration is performed by.
Speaker Change: Competitors in the industry go down the list you HPE Supermicro, Lenovo you pick and.
Speaker Change: There's opportunities to do some of our work and a customer facility.
Speaker Change: And there is opportunities to do it.
Speaker Change: In a way that would disrupt what we're doing with our current customer we don't want to do that.
Speaker Change: So we're looking at opportunity to expand our service capabilities.
Speaker Change: If you will net incremental.
Darryll Dewan: And that could be by acquisition. It could be by partnering. There's a way to do that in a channel. And there's a way to do that in the software world to build appliances, so to speak. and we're looking at all of that in a way that even complements our existing relationship, but doesn't Show up on our books as quote-unquote Dell or our existing strategic customer revenue if that makes any sense It makes a lot of sense, and I appreciate that answer in your candle.
Speaker Change: And that could be by acquisition it could be.
Speaker Change: By partnering there as a way to do that in the channel.
And there is a way to do that in the software royal to build appliances so to speak.
Speaker Change: And we're looking at all of that in a way that even complements our existing relationship but doesn't.
Speaker Change: Show up on our books as quote unquote, Dell or our existing strategic customer revenue if that makes any sense.
Speaker Change: Yes, it makes a lot of sense and I appreciate that.
Speaker Change: I am sorry in Uganda.
John Weinberg: Well, you made a lot of shorts very unhappy today, and the alums, us, very, very happy, so I appreciate that, and hopefully we'll continue. Have a great afternoon. Thank you. Appreciate it, John. Thank you.
Speaker Change: While we made a lot of shorts very unhappy today in the lungs us very very happy so I appreciate it that hopefully will continue.
Speaker Change: Great.
Speaker Change: Uh huh.
Speaker Change: Thank you I appreciate it John.
Speaker Change: Yes.
James Carbonara: I'd now like to pass the floor to James Carbonara for another question.
Speaker Change: Thank you.
Speaker Change: Like to pass the floor to James Carbonara for another question.
James Carbonara: Hey guys, we had a question come in from the airport, the investor. It's a little noisy in the background, so I just want to read what he texted in. He said, back to NVIDIA, I want to take the glass half full approach. Given that they have a manufacturing presence in Texas near you, can we envision them as a customer at some point? They do outsource direct to companies like Foxconn for integration. As a U.S. company, could that be an advantage? All the facts are friendly, possibly. Okay, no follow-up from that investor on text. Thank you, Darryll.
James Carbonara: Hey, guys.
Speaker Change: We had a question come in from the airport the Investor a little noise in the background. So I just want to read what he texted in.
Speaker Change: He sent back to video I want to take that.
Speaker Change: Glass half full approach.
Speaker Change: Given that they have a manufacturing presence in Texas near you can we envision them as a customer at some point they do outsource direct to companies like Fox, calling for integration as a U S company could that be an advantage.
Speaker Change: All of the facts are friendly.
Speaker Change: Possibly.
Speaker Change: Okay, no follow up from from that Investor on tax Thank you Daryl.
Operator: Operator, back to you.
Speaker Change: Operator back to you.
Operator: Thank you, and this does now conclude the question and answer session.
Speaker Change: Alright. Thank you and this does now conclude the question and answer session.
Darryll Dewan: I would now like to pass the floor back to Darryll Dewan for closing remarks. Thank you. I'm reminded of a phrase, success breeds complacency. We appreciate the kind words. It's been a lot of work. We're not done. The last thing we want to do is become complacent and stop looking at the little things that separated us to get here. So we're very focused, and I'm very pleased to have a heck of a team leading this company that I get to work with. And I'm optimistic about what's going on. It's an exciting time for us. We're in a dynamic part of the industry.
Darryl Doing: I'd now like to pass the floor back to Darrell do it for closing remarks.
Darryl Doing: Thank you.
Darryl Doing: I'm reminded of the phrase success breeds complacency.
Darryl Doing: We appreciate the kind words, it's been a lot of work we're not done.
Darryl Doing: The last thing we wanted to do is become complacent and start looking at the little things that separated us to get here.
Darryl Doing: So we're very focused and I'm very pleased to have a heck of a team leading this company that I get to work with and I'm optimistic about what's going on is an exciting time for us. We're in a dynamic part of the industry, we're going to do everything we can to remain relevant and step ahead.
Darryll Dewan: We're going to do everything we can to remain relevant and step ahead. And for all of you that have been on this call, I want to say thank you for putting up with us and being an investor. We value your time and your money. And all I can say is wish us luck. Thank you.
Darryl Doing: And for all of you that have been on this call I want to say thank you.
Darryl Doing: For putting up with us and being an investor we value your time and your money and all I can say is wishes luck.
Darryl Doing: Thank you.
Operator: This does conclude today's conference call. You may disconnect at this time and have a wonderful day. Thank you once again for your participation.
Speaker Change: Thank you. This does conclude today's conference call. You may disconnect at this time and have a wonderful day. Thank you once again for your participation.