TSS Stock Drops 13.2% Despite Record Q4 Earnings & AI Growth

Shares of TSS, Inc. TSSI have lost 13.2% since reporting fourth-quarter 2024 results. This decline significantly outpaces the S&P 500 index’s 1.6% fall over the same period. Over the past month, the TSSI stock has dropped 19.8%, underperforming the S&P 500’s 4.1% dip. The stock's performance suggests a strong reaction from investors despite robust earnings, likely influenced by forward-looking factors, such as margin variability and capital expenditure.

Revenue & EPS Surge Y/Y on AI Demand

TSS posted a substantial 105% revenue upsurge in the fourth quarter of 2024 to $50 million from $24.4 million in the prior-year period. Top-line growth was fueled by strength across all three business segments. Systems integration, a higher-margin segment that includes AI rack solutions, led the charge with a 264% rally to $7.9 million. Procurement revenues jumped 95% to $40.5 million, while facilities management increased 11% to $1.6 million.

Net income for the quarter skyrocketed 471% year over year to $1.9 million from $335,000. Diluted earnings per share (EPS) surged 300% to 8 cents from 2 cents in the year-ago quarter. Gross profit soared 121% to $7.2 million, whereas adjusted EBITDA climbed 267% to $3.4 million.

TSS Inc. Price, Consensus and EPS Surprise

TSS Inc. price-consensus-eps-surprise-chart | TSS Inc. Quote

Segment Highlights & Business Metrics

Systems Integration & AI Rack Momentum: The systems integration segment has become a central growth engine for TSS. In 2024, revenues for this unit surged 157% to $22.6 million, reflecting heightened demand for AI-enabled infrastructure. This business grew from $2.2 million in the fourth quarter of 2023 to $7.9 million. The multi-year agreement with the company’s largest customer contributed to this momentum, enhancing revenue visibility and supporting capital investments for expanded integration capacity.

Procurement Services’ Expansion: Procurement services represented the bulk of revenues, skyrocketing 205% to $117.5 million for the year. Fourth-quarter revenues in this segment nearly doubled to $40.5 million. Though lower in margin, procurement remains pivotal to top-line growth. TSS noted that a large portion of these transactions are linked to federal government demand, introducing seasonal fluctuations.

Facilities Management: The facilities management segment, primarily related to modular data centers (MDCs), reported $1.6 million in fourth-quarter revenues, up 11% year over year. Though comprising just 5% of total revenues, this unit boasts a robust gross margin, averaging 62% for the year, up from 57% in 2023. Management sees MDCs as a strategic long-term growth lever, especially as enterprises adopt AI infrastructures requiring flexible deployment models.

Management Commentary

CEO Darryll Dewan characterized 2024 as a "transformative" year, citing not only revenue and EPS records but also operational milestones. He emphasized the rapid evolution of AI technology and its implications for rack integration, power and cooling infrastructure.

The Georgetown, TX-based facility, expected to be fully operational by June 2025, was highlighted as a cornerstone for future growth. The new facility more than doubles operating space and increases power capacity dramatically from an initially planned 4.5 megawatts to an eventual 40 megawatts, reflecting the company’s adaptation to emerging AI chip demands.

CFO Danny Chism pointed to improved operational efficiency, with SG&A expenses as a percentage of gross profit dropping year over year to 59% from 76%. He also noted that adjusted EBITDA for 2024 soared 283% to $10.2 million, while the cash flow from operations swung from a negative $8.3 million in 2023 to a positive $15.3 million in 2024.

Key Drivers

TSS's financial results were driven by the increasing demand for AI-driven data infrastructure. The multi-year customer agreement insulated the company from some of the volatility in supply and demand while justifying significant capital investment. Pricing for rack integration services is expected to evolve alongside the complexity and value of deployments.

Seasonality in procurement revenues, along with the company's large exposure to a single customer, may have contributed to investor caution despite otherwise strong results. Additionally, one-time severance costs in the fourth quarter slightly dampened net income.

Outlook

Management expects first-quarter 2025 revenues to exceed the fourth-quarter 2024 actuals. The integration segment is projected to outpace the prior-quarter performance. For the year, adjusted EBITDA is forecast to be at least 50% higher than that reported in 2024. However, GAAP net income may face temporary pressure from depreciation and interest costs associated with the new facility.

The company remains focused on long-term profitability, with expectations for improved pricing in rack integration and higher utilization rates at the new facility, contributing to elevated returns on invested capital.

Other Developments

TSS made notable strides in infrastructure investment in the fourth quarter of 2024, securing a $20-million term loan from Susser Bank (with an optional $5-million increase) to fund its new Georgetown facility. The build-out, including advanced power and cooling capabilities, is central to supporting the company's long-term growth ambitions. Additionally, TSSI received ISO certification and completed uplisting to the Nasdaq, underscoring its operational maturity.

Research Chief Names "Single Best Pick to Double"

From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.

This company targets millennial and Gen Z audiences, generating nearly $1 billion in revenue last quarter alone. A recent pullback makes now an ideal time to jump aboard. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research