TSS, Inc. Q1 FY2025 Earnings Call

Good afternoon, and welcome to the TSS Inc. First Quarter 2025 Financial Results Conference Call. 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. Joining me on this call are Darryll Dewan, President and CEO of TSS, Inc.; 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. 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 replay 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. 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 included in today's press release. With that, Darryll, I'll turn the call over to you.

Thanks, James. Hello, everyone. It's great to see you all, and thank you for joining our first quarter 2025 earnings conference call. We're starting the year on a high note. The demand for our AI rack integration and procurement services remains strong, contributing to our impressive financial results. Our solid operational execution and commitment to customer service continue to drive substantial growth in revenue, earnings, and cash flow, enabling us to position the company for significant opportunities in the rapidly expanding AI infrastructure market. We are also increasing our capacity for systems integration services and have reached an important milestone, which I will discuss shortly. To highlight some key points from the quarter, we achieved total revenue growth of 523% year-over-year. Remarkably, I have received messages suggesting that this isn’t good enough. This growth demonstrates the increasing demand for our solutions, the strength of our customer relationships, and favorable market conditions. Our diluted earnings per share increased to $0.12, a substantial improvement from just over break-even a year ago. We also generated positive cash flow from operations for the first three months of the year, enhancing our financial stability. This strong performance was primarily driven by growth in our two largest service offerings. First, in procurement services, where we source third-party hardware, software, and services, revenues surged by over 600% to exceed $90 million this quarter, as our clients increased infrastructure investments for AI workloads. This illustrates our value as a strategic sourcing partner and showcases the effective execution by our operations team in a rapidly expanding market. While we expect fluctuations in this business from quarter to quarter, the overall outlook remains promising. Next, in our systems integration segment, particularly in AI rack integration, we experienced a significant revenue increase of over 250% due to heightened demand for AI-enabled infrastructure. We are still in the early stages of building out AI infrastructure, and we anticipate continued high growth as customers increase their investments to meet evolving compute demands. In our facilities management segment, which mainly includes our modular data center business, we saw a revenue decline of 40%. This area has traditionally provided stable, high-margin revenue, despite making up just over 1% of our total revenue in the first quarter. The modular market is evolving; modular data centers are shifting from being used solely to enhance traditional data centers to delivering solutions for extremely dense computing more efficiently. Moreover, with the rise of AI, we expect modular data centers to become increasingly important to 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 for a 213,000 square foot facility in Georgetown, Texas. The build-out is on track, and this space is twice the size of our current facility in Round Rock, Texas. I am pleased to announce that we have begun production at this new facility in early May, with various programs being launched. We expect to achieve full production capacity by June. This is a remarkable accomplishment given our progress from the beginning of this initiative to where we are today. I extend my congratulations to our team. Let me explain the strategic advantage of this new facility. As many of you know, electricity is a key concern in the data center market. The demand for power becomes critical when we commission rack builds, as we integrate AI equipment and other components into racks. This may seem straightforward, but today’s servers are heavier, and cabling is more complex, demanding effective communication between GPUs and the new cooling systems required. Once everything is set up, we need to power and test the racks, and our largest OEM customers have requested that we be ready to test multiple racks at once, which drives significant power requirements. We've opened our new facility with 6 megawatts of power and are collaborating with local authorities to increase that to 15 megawatts by summer. This is six times the power available at our legacy facility. We are also having discussions to secure even more power, and the municipality is very supportive. Beyond securing power, we must ensure efficient distribution of power and water within the building. Overall, this facility has been designed from the ground up for AI rack integration, giving us a significant competitive edge. From a financial standpoint, our total planned investment in this facility is between $25 million and $30 million, which will scale as the complexity and volume of rack integration grow. We are focused on profitable growth, reinforced by our strong partnerships with OEMs, anticipating a payback period of around two years for this investment, marking a very attractive return. The AI infrastructure market is rapidly changing, with substantial capital being invested in developing high-performance computing environments. While hyperscalers have led the charge in early adoption, we foresee a broader wave of AI deployment across medium and large enterprises, supporting applications beyond just language models. We are closely collaborating with key customers and partners to understand the implementation of hyper-dense AI compute across various data center environments, which will remain a focal point for us in the upcoming quarters. After Danny provides more details on our financial performance for the quarter, I will return to discuss our outlook on the market, tariffs, and our positive vision for the company’s future.

Thank you, Darryll. It was another record quarter for TSS. Let's review the financial results. Consolidated revenue increased by more than 520% in the first quarter of 2025 to $99 million, compared to $15.9 million in the first quarter of 2024. This growth was primarily driven by significant increases in our two largest service lines, including nearly 700% growth in procurement revenues and 253% in our higher-margin systems integration business. Total revenue from systems integration rose from $2.1 million last year to $7.5 million this quarter, mainly due to higher demand for AI-enabled rack integration. The demand for this business is still strong. Revenue from facilities management was $1.3 million, which is a 40% decline from $2.1 million in the same quarter last year. Although this segment is currently the smallest part of our business, it holds promising strategic potential. We are working hard to optimize it and focus on high-growth opportunities. Given the relatively stable visibility into this revenue stream, we expect better growth over the next 12 to 18 months, especially as medium and large enterprises increasingly adopt modular data centers as a cost-effective solution for leveraging AI technologies. When we install new modular data centers, we also typically secure multiyear maintenance contracts, which further enhance our earnings with healthy margins. Revenue from procurement services was $90.2 million, a 676% increase from $11.6 million in the same quarter last year. In just the first quarter, this segment accounted for 77% of the total procurement revenues for all of 2024, demonstrating significant growth compared to previous years. To clarify, revenue in this segment includes a mix of gross and net deals, and its recognition varies based on contract terms and whether we modify the product or act merely as an agent in the transaction. The gross value of all procurement transactions surged 431% from the previous year to $106 million. Gross profit was up 674% to $7 million. According to recorded GAAP values, procurement gross margins were 7.8% in both the current and prior year quarters. When analyzed using non-GAAP values, which offer a clearer comparison regardless of deal type, gross margins improved from 4.6% in the prior year to 6.6% in the current quarter. As we continue to scale, the mix of our revenues and proportion of gross versus net procurement deals will likely lead to variations in our blended gross margins each quarter. Procurement revenues have seen significant growth in recent quarters, and we anticipate this trend will persist, though volume may fluctuate from quarter to quarter. A significant portion of our procurement business relates to federal government purchasing, which can vary. We are pleased to be securing more of this business from our OEM customers and believe we have a robust pipeline that will keep revenues higher than historical levels in the near term. We are selectively enhancing our team to support this offering. Our consolidated gross margin this quarter was 9.3%, which is down from 17.1% in the first quarter of 2024. This decline results mainly from the increase in lower-margin procurement services making up a larger share of total revenue this quarter compared to the previous year. I previously mentioned the gross margins in the procurement segment, and now I want to give you some insight on the gross margins in our second-largest segment, systems integration, which has been a key driver of our overall earnings improvement. Gross margins in the systems integration department were 22% this quarter, down from 28% in the same quarter last year. However, this quarter is somewhat unique. Although we have not yet started paying cash rent at our new production facility, the current results include approximately $760,000 in rent expense for our new Georgetown location recognized on a straight-line basis, while we still cover most occupancy costs at our Round Rock facility, as we have in the past. Excluding the non-cash rent from the new facility, systems integration gross margins improved from 28% in the prior year to 32% in the current quarter, and gross profits rose from $0.6 million to $2.4 million. Since we began production in the new facility last week, we will also start incurring rent costs there this month, and the fixed fee from our multiyear AI rack integration contract will increase enough to cover these additional costs. Therefore, we expect systems integration gross margins to improve in the last three fiscal quarters of 2025 compared to the first quarter, even before considering organic growth. SG&A expenses fell to 53% of gross profit in the first quarter of 2025, down from 88% in the previous year and 59% in the fourth quarter. In dollar terms, SG&A expenses rose to $4.9 million in the first quarter of 2025, up from $2.4 million in the same quarter last year as we continue to invest in talent, capacity, and process improvements. Depreciation and amortization expenses increased slightly year-over-year, but they do not yet account for the anticipated rise once we begin depreciating the build-out costs at our new facility. With a total estimated CapEx of $25 million to $30 million at that facility, we expect the additional non-cash depreciation to be between $420,000 and $500,000 per month, depending on whether we are closer to the $25 million or $30 million total investment. Consolidated operating income and margin for 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% this quarter, compared to 1.6% in the same quarter last year. Interest expense rose from $328,000 in the previous year to $1.5 million this quarter, which includes $1.3 million in factoring costs and $167,000 from our new bank loan. This interest expense was partially offset by $383,000 of interest income earned from our cash reserves compared to $100,000 in the same quarter last year. As a result of these factors, net income for the first quarter of 2025 reached $3 million, a significant increase from the $15,000 net income in Q1 of last year. Diluted earnings per share were $0.12 for the first quarter of 2025, up from just above break-even in the prior year. Adjusted EBITDA, excluding interest, taxes, depreciation, amortization, and stock-based compensation, was $5.2 million, more than tenfold the $475,000 in the same quarter last year. Now, looking at the balance sheet, as of March 31 this year, we had $27.3 million in cash and cash equivalents and short-term deposits, up from $23.2 million on December 31, 2024. The increase in cash was primarily due to cash generated from operations, partially offset by capital expenditures for the Georgetown facility. Net working capital dropped from $1.3 million at the end of 2024 to a negative $11.1 million at the end of the first quarter of 2025. To minimize interest expense during this period, we intentionally used our excess cash to fund $14.9 million of capital expenditures this quarter. This temporary reduction in working capital was quickly resolved after the quarter ended 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 were related to a heightened level of procurement activities at that time, contributing to the temporary working capital shift. For the first three months of 2025, we generated $20.6 million in cash flow from operations, a significant rise from $2.6 million in the same period of 2024. This increase was driven by much stronger earnings and the timing of cash flows in our procurement activities. Overall, it was another excellent quarter both operationally and financially. Now I'll hand it back to Darryll.

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. 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. Before we look ahead, I wanted to address in more detail what we are 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. 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. 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 road maps 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 road map and the magnitude of processing advancement causes customers to debate the timing of purchases. Couple this with the political and macroeconomic environment, it's a recipe for uncertainty. 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. Our success the last 2 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. So looking ahead, we 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 earlier calls, 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. So thank you. Can we open this up now to Q&A?

And we have a question from Kris Tuttle from Blue Caterpillar.

First of all, it should be noted that successfully navigating this quarter during a significant historic infrastructure transition to a completely new facility, considering all the complexities involved, is truly commendable. It’s a fantastic achievement. I recognize that a large team contributed to this success, and while many might have attributed challenges to the move, you all executed exceptionally well.

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. And it's rare that in our role, we get anybody saying anything nice. So thank you for saying something nice. I'll try to do whatever is needed.

We'll get there. I wanted to address a couple of common questions I receive when discussing the company and the stock. Aside from concerns about the transition, which I believe we have demonstrated we can navigate, people often mention AI integrated racks and the initiatives from NVIDIA and Dell. We have had conversations about this, so we understand the topic well. However, those I speak with are curious about how the integration efforts by Dell, NVIDIA, and others might potentially reduce the necessity for some of the integration services and added value that TSS offers. It would be beneficial to provide some insights and perhaps case studies to help illustrate why this concern might not hold true and to emphasize our lasting role in the industry as an integrator.

Good question, and it's something we consider constantly. We have an internal phrase we use: operate with your eye beams on. We focus intently on anticipating industry trends to avoid becoming obsolete. Our business includes multiple lines: integration, modular data centers, and procurement, all of which interact with one another. Regarding rack integration, particularly in AI, NVIDIA creates a reference architecture that OEMs like Dell build solutions from. There's curiosity about what NVIDIA's future plans are, and while I've made some jokes about their intentions, I don't believe they aim to encroach on our territory. As technology transitions, I remember when I joined the company 2.5 years ago; we were building racks at around 55 kilowatts of power. Now, we're exceeding 100 and forecasting to go beyond 300 to 1 megawatt. Our factory is currently integrating cutting-edge technology, which is impressive to see. The transformation has been significant in all aspects, from server size and weight to power requirements, direct liquid cooling, and complexity. Our goal is to add value by integrating these solutions effectively and with superior quality compared to competitors. The complexity will only increase, and our strong relationship with key customers indicates this. Although anything can change, we expect continued growth in our rack integration business. The proportion of our business focused on direct liquid cooling is larger than ever, and we anticipate this trend will persist. The power demands have skyrocketed. Reflecting on the past 25 to 35 years, I find it hard to comprehend the evolution of technology. We're ahead of the curve, doing everything possible to remain relevant and be a strong partner for our customers.

I would add, Darryll, to your point about the DLC becoming more and more important and 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 continued future growth.

And Kris, let me add one more thing. When you think about AI, it's challenging to find the right words to describe its significance. It's going to transform everything we do. This isn't a new trend; the emergence of chat technology has accelerated progress, and the power and cost-effectiveness of AI are speeding things up even more. The technology itself is powerful. Looking at the transition from modeling to inferencing and how enterprises and other companies will adopt this technology, the future is quite promising. The application capabilities of AI in sectors like healthcare, defense, government, commercial applications, and entertainment are impressive. In fact, we utilize it internally for certain tasks, enabling us to accomplish our goals more quickly. We're optimistic about what lies ahead, and I appreciate the question.

I will drop all these numbers and refresh the model, and then I'll circle back with you guys on the minutia.

And our next question is coming from Dave Sheridan.

Gentlemen, great quarter. I appreciate you holding the conference call for us as well. 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've 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. 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 a 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 coverage.

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 that way like you came in late. The answer is no.

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 last year. So more looking at it from a bottom-line standpoint. We do know we've 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.

Let me give you another cheeky answer. Dave, I'm less than 24 hours away from an elective eye surgery, so I can't see too well about anything down the street right at the moment. But we're very focused on profitable growth. And I appreciate your question. Obviously, there's things we can say and there's things we can't say. But we're trying to give you as much guidance as we can for the year. So hopefully, that gives you some insight to what's going on.

Don't worry. We're not letting them walk anywhere near the racks right now while they can't see well.

Your next question is coming from Bradley Stevenson. Darryll, this quarter was just not good enough. I just want to tell you. No, I'm just kidding.

Bradley, it's been really nice talking to you. Glad to see you.

Back to the drawing board.

No. Really good talk. Most of my questions were already asked, but I do have a couple of questions. There's a bit of concern out there, not from me but for a friend, regarding possible margin pressures as volumes increase. However, Danny, I heard you mention the opposite. Over the next two to three quarters, you expect integration margins to improve. Do you anticipate this trend continuing as volumes rise in the future?

I do. Yes, some of what I was trying to point out in this call, not to try to go down too much of an accounting geek rabbit hole. But unfortunately, it'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 straight-lining 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 this quarter that's noncash. 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 essentially, we're more than made whole 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 GAAP recorded margins in that SI department, it shows it was down this quarter. When you strip out that noncash 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 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-GAAP gross basis from, what, 460 basis points to 660 basis points this quarter. 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. So procurement services, I mean, is this the new norm last 3 quarters, $60 million, $40 million, $90 million? Or is this a temporary situation?

We're optimistic about the procurement business. We've made some investments in resources to further penetrate opportunity, go find additional opportunity. It's a little difficult sometimes to predict, but we're optimistic on the top-line growth. And the question is just when is it going to fall. The trick in our opinion, is to go find multiyear 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. 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 exciting.

Yes. We've been clear in the past, and I still believe this, but there will be some fluctuation from quarter to quarter. Some of those are one-time projects where you might see a $10 million, $20 million, or $30 million project in one quarter that may not occur again. I was pleasantly surprised with the volume in Q1. Initially, I anticipated a bit more seasonality due to the federal buying season ending on September 30. I thought that the end of Q3 would provide some of the lift we saw. However, when departments received their new budgets in Q1, I was pleased to see that the volume did not drop off, but I wouldn't expect every quarter to reach a $90 million level.

We're going to put Danny in the sales job.

Facilities management has decreased both sequentially and year-over-year. You mentioned it briefly in your comments, but can you provide more details about what’s happening?

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 compute, if you will, module 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 an 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. It's a 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. Our partnership with our key customers is on point doing that. We're assisting. There are people in the ecosystem of suppliers, so to speak, like Schneider, Vertiv, Motivair, who are all in that game that we're working closely with to try and provide an 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. 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. So TBD on how it all plays out, but we remain optimistic that there's a play.

I'm sorry, Bradley, but I would like to point out that about half of the year-over-year decrease you noticed this quarter was due to specific projects that occurred in the first quarter of last year. These kinds of projects come up occasionally, and I anticipate there will be some later in this year as well. Therefore, they aren't necessarily comparable on a year-over-year basis. Consider aspects like battery replacements, media filter changes, and renovations of MDCs. So, I wouldn't expect those to be present every quarter.

Do you have any or can you comment on what kind of potential you see in that segment and maybe a time line on that?

It can move significantly with a couple of new deals. And we've got a couple in sight. And if we can get to a volume business, a little bit higher volume, it makes a big difference in our bottom-line because of the margin involved. That's all I think I could say right at the moment without giving up any competitive advantage that we think we have.

Okay. And then the last one I had was 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 important to consider that pipeline is relative. I prefer to see actual revenue from closed deals rather than just pipeline figures. While pipeline is essential, it's results that count. We're in close communication with partners who indicate our pipeline has never been larger. That's encouraging, and we are beginning to see this translate into revenue. Our relationship with our key customer remains strong, and we are optimistic about converting the pipeline, while also pursuing larger deals. Major companies like Meta, OpenAI, AWS, Microsoft, Oracle, and Google are heavily investing in AI infrastructure, with expenditures in the billions rather than just a few hundred thousand dollars. This represents a significant opportunity, and many are eager to adopt the technology. We are pleased to be centrally involved with our expertise, and we anticipate this trend will persist.

A great quarter. I was just kidding you when I said it wasn't good enough.

We're happy, but we're not satisfied. We aim to avoid any situation where we don't deliver on our commitments. We want to ensure we meet our delivery promises. Thank you for that, we appreciate it.

Your next question is coming from Jordan Marcus.

Darryll, Dan, Jordan Marcus, a long-time investor and supporter. 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 to 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.

Jordan you made my day. Thanks man.

Darryll, man I love you, Dude. I know we got to be formal on these calls, but I got to get in touch with Maj. We got to get call on 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, so.

The next question is coming from Wayne Van Orden.

I'm a small retail investor, but I've been in the IT industry since 1972. I remember the 8088 chips, if anyone is familiar with them. Throughout my career, I often noticed that when new technologies emerged, it was challenging to secure the right talent for the team. I'm curious about how you're handling recruitment and stabilizing your staffing needs given the varying levels of engagement with your clients. Is this becoming more challenging, or are you getting better at managing it? That's my main question regarding team building.

Yes, 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 in '72, we can go toe to toe on that one. To answer your question, we fundamentally believe that people are the center of what 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. You're listening to Danny here alongside. And we've got a Chief Operating Officer, Todd Marrott, who basically is 24/7, 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. We turned bolts, which is 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 of 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. And all things work out right, we'll do it properly and more smartly than we did the last turnaround. 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.

Well, I love Texas. Can you tell me when the company picnic is scheduled? I might come over from Daytona to visit.

Come over any time. We'd love to have you.

Your next question is coming from John Weinberg.

Great. Another small investor, but not too small, pretty decent sized retail investor and I've 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 of questions. 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?

Okay. I want to ensure I fully understand your question. You're asking about our capacity, so please elaborate a bit more.

Yes. 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 plants? And what assumptions are you making about the durability of AI infrastructure spend into 2026?

Our demand and visibility with our key customer regarding rack integration varies. Over the past couple of years, we have collaborated closely to create a clearer view of that demand. I would say we have a solid understanding for the next 90 days to 5 months, although it can change depending on market conditions. While the situation fluctuates, we are confident about our upcoming needs and the resources required to meet demand. Additionally, our ability to scale our rack integration business at the new facility is significant, and we anticipate doing much better this year compared to last. While I don’t want to provide a specific number, it is an exciting growth opportunity for us. As for your question about AI costs, I'm not sure I fully grasped it. Could you clarify?

He was asking about durability of the AI infrastructure spend into 2026. I guess my question there, John, are you asking more about how long our investment in the new facility will serve us? Or how long you think before customers need to start replacing the technology they're buying today?

Yes. It's actually the latter.

Yes, 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 a 5 to 6-year time horizon. My guess is hyperscalers will likely need to replace it more quickly because if they don't, they'll be obsolete pretty quickly. So a lot of the dollars being spent today, again, this is right, 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 3 to 4 years, maybe as short as 2 just to remain competitive and remain up to speed with the advancements in technology.

John, we collaborate with several research firms to keep an eye on the spending related to data center integration and the overall market potential. The figures are impressive, and it's uncertain what the industry will look like in a couple of years. If anyone on this call can predict the industry's future in the next 2 to 3 years, I'd be interested to hear it. Earlier, Wayne mentioned his experience as a small investor since 1972 and his observations of the industry's evolution. I recall when we transitioned from 80-column cards to 96-column cards, which was a significant change. When you compare today's smartphones to older mainframes, the transformation is remarkable. We are in a dynamic industry that is continuously evolving. We are fully committed to adapting to these changes and striving to maintain our leadership in the field.

That's very helpful. 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 rack 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 betray or violate any trusted relationship we have with our existing customer. 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. 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, 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. And that could be by acquisition. It could be by partnering. There's a way to do that in the 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 'Dell' or our existing strategic customer revenue, if that makes any sense.

It makes lot of sense, and I appreciate that answer in your candor. Well, you made a lot of shorts very unhappy today and the longs us very, very happy. So I appreciate that and hopefully, we'll continue.

I'd now like to pass the floor to James Carbonara for another question.

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. And operator, back to you.

And this does now conclude the question-and-answer session. I would now like to pass the floor back to Darryll Dewan for closing remarks.

Thank you. I'm reminded of the phrase success breeds complacency. We appreciate the kind words. There'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 have 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. 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.

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.