Executive Summary / Key Takeaways

• TSS, Inc. is undergoing a significant transformation, capitalizing on the surging demand for AI and high-performance computing infrastructure through strategic investments and operational excellence.
• The company delivered exceptional Q1 2025 results, with total revenue soaring 523% year-over-year to $99 million, driven primarily by robust growth in its Procurement (+676%) and Systems Integration (+253%) segments, particularly AI rack integration.
• Profitability saw exponential improvement, with Q1 2025 net income reaching $3 million (up from $15k) and Adjusted EBITDA hitting $5.2 million (up over 10x), demonstrating effective operational leverage despite lower blended margins due to business mix.
• A key strategic move is the relocation to a new 213,000 sq ft facility in Georgetown, Texas, designed specifically for high-power AI rack integration with significantly increased power (up to 40MW+) and advanced cooling capabilities, funded by a $20 million construction loan and customer/landlord contributions.
• While facing risks like customer concentration, supply chain volatility, and rapid technological evolution, TSSI's strong OEM partnership (including a multi-year agreement with minimum volume/staffing commitments), operational agility (reduced rack cycle time to <1 day), and strategic capacity expansion position it for continued growth, targeting at least 50% higher Adjusted EBITDA in 2025 compared to 2024.

The Foundation of Growth: From Data Centers to AI Powerhouses

TSS, Inc. has carved a niche in the critical, often unseen, infrastructure that powers the digital world. For years, the company has provided a comprehensive suite of services for end-user and enterprise systems, spanning planning, design, deployment, maintenance, and IT procurement for data centers, server rooms, and communication facilities. This foundational business, historically focused on facilities management and systems integration, has provided a stable base, albeit with modest growth and profitability in earlier periods (e.g., 2023 net income of $74k on $54.4M revenue).

However, the landscape is undergoing a seismic shift. The explosion of Artificial Intelligence and accelerated computing has fundamentally altered the demands placed on IT infrastructure. Enterprises and data center operators are under immense pressure to rapidly deploy the latest AI equipment, particularly high-density server racks powered by GPUs. This requires not just hardware, but specialized services for integration, power management, and cooling – areas where TSSI is now strategically positioned.

Under the leadership of Darryll Dewan, who joined in late 2022, TSS embarked on a turnaround strategy. This began with an operational cleanup and investment in people, systems, and the existing facility, culminating in ISO certification and a dramatic improvement in operational efficiency. Notably, the cycle time for completing server racks was reduced from weeks to less than one day, a critical operational achievement demonstrating scalability within existing constraints. This laid the groundwork for the next phase: accelerated growth driven by the burgeoning AI market.

Technological Edge: Powering the Next Generation of AI Racks

At the heart of TSSI's strategic response to the AI boom is its evolving technological capability, particularly in handling the extreme power density and thermal management requirements of modern AI server racks. Historically, a standard rack might consume 10-15 kilowatts (kW) of power. Today, AI racks are pushing 80 kW, with projections rapidly climbing to 120-150 kW in the near term and over 200 kW, potentially even reaching 300 kW or more, within a couple of years. This exponential increase in power density presents a formidable challenge, primarily due to the heat generated.

TSSI's core technological differentiation lies in its ability to integrate and validate these power-hungry systems, including those requiring advanced cooling methodologies like Direct Liquid Cooling (DLC). The company has significantly enhanced its systems integration services to include AI-enabled rack integration. While specific, quantifiable performance metrics for TSSI's integration process (beyond cycle time) are not detailed, the strategic intent is clear: to provide the expertise and infrastructure necessary to handle increasingly complex and power-dense configurations.

The strategic move to the new 213,000 square foot facility in Georgetown, Texas, is a direct response to these technological demands. The existing Round Rock facility has a power capacity of 2.7 megawatts (MW), insufficient for future AI rack generations. The new facility, in contrast, is designed to accommodate significantly greater power, starting at 6 MW, with plans to augment to 15 MW by early summer 2025, and a commitment to reach over 40 MW over time. This represents a massive increase in available power, crucial for simultaneously testing high-density racks.

Furthermore, the new facility dramatically expands TSSI's cooling capabilities. It will triple the capacity to test and validate DLC racks, increasing chiller capacity from 150 tons to 1,650 tons and quadrupling the number of DLC validation lines. This flexibility to handle both air-cooled and direct liquid-cooled systems is highlighted as a critical differentiator, positioning TSSI to support the accelerating shift towards DLC necessitated by higher power densities. The investment in this facility ($25-30 million total) is largely allocated to these power and cooling enhancements, underscoring their importance to TSSI's future capabilities and competitive standing.

Competitive Landscape: Agility in the Face of Giants

TSSI operates in a competitive market for IT infrastructure services, facing larger players with extensive resources. Key publicly traded competitors include Super Micro Computer (SMCI), Dell Technologies (DELL), and Hewlett Packard Enterprise (HPE), all of whom offer overlapping services in servers, systems integration, and data center solutions. Indirect competition comes from cloud providers like Amazon Web Services (AMZN) and specialized data storage companies like Iron Mountain (IRM).

Compared to these larger rivals, TSSI's competitive advantages lie primarily in its operational agility and specialized focus on complex integration, particularly for emerging AI requirements. While SMCI excels in rapidly developing AI-optimized hardware and HPE offers advanced hybrid solutions, TSSI differentiates through its flexible service delivery and ability to quickly adapt production lines to meet custom and new requirements. Its dramatically reduced rack integration cycle time (<1 day) is a tangible operational advantage over traditional multi-week processes, potentially enabling faster deployment for customers.

Financially, TSSI's recent growth trajectory significantly outpaces that of its larger competitors. In Q4 2024, TSSI's revenue grew 105% year-over-year, contributing to a full-year 2024 growth of 172%. This compares favorably to SMCI's LTM growth of 109.9%, DELL's recent 8-10% growth, and HPE's 5-7% growth. While TSSI's TTM net profit margin of 3.87% lags behind SMCI (8%), DELL (5%), and HPE (9%), its superior revenue growth and strong cash flow generation (Q1 2025 operating cash flow of $20.6M) demonstrate effective execution and scaling in a high-demand environment.

TSSI's competitive positioning is further bolstered by its deep relationship with a large US-based IT OEM, which accounted for 100% of revenue in Q1 2025. This concentration is a significant risk but also a strategic asset, leading to a multi-year agreement that provides revenue visibility and supports the new facility investment. This partnership allows TSSI to focus on being a primary production partner for this OEM's AI-related roadmap, leveraging its agility and specialized capabilities rather than competing head-to-head across the entire market spectrum. While competitors like SMCI may face regulatory scrutiny or supply chain issues, TSSI's strategy is to adapt and potentially capture incremental demand while prioritizing its core trusted relationships. The company is also exploring expanding its service capabilities incrementally, potentially through acquisitions or partnerships, to diversify without disrupting existing key relationships.

Financial Performance and Liquidity: Fueling Expansion

TSSI's recent financial performance reflects the impact of its strategic turnaround and the surging AI-driven demand. Q1 2025 marked a period of explosive growth, with total revenue reaching $98.96 million, a 523% increase from $15.89 million in Q1 2024. This was primarily fueled by the Procurement segment ($90.18M vs $11.62M, +676%) and Systems Integration ($7.48M vs $2.12M, +253%), driven by AI rack integration and large procurement deals.

While the significant increase in lower-margin procurement revenue resulted in a lower blended gross margin (9.3% in Q1 2025 vs 17.1% in Q1 2024), the underlying profitability of the core services improved. Excluding the impact of non-cash rent at the new facility, Systems Integration gross margins improved from 28% to 32%. More importantly, the increased volume led to substantial operating leverage. SG&A expenses, while increasing in dollar terms to support growth (higher headcount, incentive compensation), improved significantly as a percentage of gross profit (53% in Q1 2025 vs 88% in Q1 2024). This translated into operating income of $4.11 million in Q1 2025, a dramatic increase from $253k in Q1 2024. Net income followed suit, jumping to $2.98 million ($0.12 per diluted share) from $15k ($0.00 per diluted share). Adjusted EBITDA reached $5.2 million, a more than tenfold increase year-over-year.

Liquidity is critical to funding the company's expansion. As of March 31, 2025, TSSI held $27.34 million in cash and cash equivalents. The company secured a $20 million construction loan from Susser Bank (expandable to $25 million) to finance the new Georgetown facility build-out. By March 31, 2025, $8.7 million was drawn, with $5 million held as collateral. Post-quarter end, the remaining $11.3 million was drawn in May 2025, bringing the total borrowed to $20 million. This debt, along with a $6.8 million landlord contribution and cash on hand, funds the estimated $25-30 million facility investment. Operating cash flow generation has been strong, particularly in Q1 2025, which saw $20.64 million provided by operations (vs $2.65M in Q1 2024). This was significantly influenced by the timing of cash flows from procurement activities, where the company utilizes a factoring arrangement for its primary customer's receivables (80-day terms) to receive payment within 2-3 days at an estimated effective rate of ~6%.

This efficient working capital management, combined with increased profitability, supports the investment in the new facility, which incurred $14.87 million in capital expenditures in Q1 2025 alone.

While the company identified a material weakness in internal controls over financial reporting during the 2024 audit, remediation efforts are underway, a necessary step for a rapidly scaling public company.

Outlook and Risks: Building for the Future

Management's outlook for 2025 is optimistic, projecting continued strong performance fueled by the AI infrastructure build-out. They anticipate total revenue in the first half of 2025 will exceed revenue in the second half of 2024. More concretely, TSSI expects full year 2025 Adjusted EBITDA to be at least 50% higher than the $10.2 million achieved in 2024. This guidance is based on expected higher volumes, improved operational leverage as the new facility ramps up, and the strategic investments made.

The new Georgetown facility, which began initial production in early May 2025 and is expected to reach full capacity by June 2025, is central to this outlook. The multi-year agreement with the primary OEM customer provides a base level of expected volume and revenue, structured to cover the majority of costs for the new facility and related debt service. Management anticipates improved gross margins in the Systems Integration segment in the latter half of 2025 as the fixed fee from this contract increases to offset incremental occupancy costs.

However, several risks could impact this outlook. The significant dependence on a single OEM customer remains a key vulnerability; a material reduction in orders or termination of the multi-year agreement could severely impact revenue and leave the company with substantial financial obligations related to the new facility. Supply chain issues, potentially exacerbated by tariffs, could cause delays in component availability, affecting integration volumes. The rapid evolution of AI technology could lead to uncertainty in customer buying patterns or require faster-than-anticipated adaptations to infrastructure. Carrying costs associated with the existing Round Rock facility, should it not be subleased or utilized for new business, could pressure profitability. Finally, the ongoing remediation of the material weakness in internal controls is critical for financial reporting reliability and operational efficiency.

Despite these challenges, TSSI's strategic response – investing heavily in specialized capacity for AI, securing a foundational multi-year agreement, focusing on operational efficiency, and leveraging its agility – positions it to capture a meaningful share of the rapidly expanding AI infrastructure market. The expected ramp-up at the new facility, coupled with management's guidance, signals confidence in translating market opportunity into profitable growth.

Conclusion

TSS, Inc. is in the midst of a profound transformation, successfully pivoting its core capabilities to meet the explosive demands of the AI infrastructure market. The company's recent financial performance, particularly the dramatic top-line growth and exponential improvement in profitability demonstrated in Q1 2025, underscores the early success of its strategic initiatives. By investing in a state-of-the-art facility designed for the high power and cooling requirements of next-generation AI racks and securing a foundational multi-year agreement with a key OEM partner, TSSI is building a durable platform for growth.

While challenges such as customer concentration and the inherent volatility of a rapidly evolving market persist, TSSI's operational agility, specialized technological capabilities in AI integration, and disciplined approach to capital deployment provide a compelling investment narrative. The expected ramp-up of the new facility and management's guidance for significantly higher Adjusted EBITDA in 2025 highlight the potential for continued value creation. For investors seeking exposure to the critical infrastructure enabling the AI revolution, TSSI presents a case built on proven execution and strategic foresight in a high-growth niche.