A Quick update on TSS Inc. Q3/24
A few initial observations on TSS Inc. (TSSI) Q3/24:
The general backdrop is huge and even accelerating AI server demand and Dell winning market share, the reasons for our bullishness, and that hasn't changed. (Also witness the pretty dramatic expansion in capacity that the company is undertaking while the present facility wasn't even at full capacity).
The $0.10 in EPS (fully diluted) was certainly less than we expected
Before one can figure out what was the cause of that (we still haven't) as revenues were actually better than expected, the stock was down two bucks and then before we can issue a sell alert the stock was down another two bucks, so that's not worthwhile.
The stock is not a sell at $8.
Guidance is also disappointing, at least for the coming quarters, which suggests to us their rack integration business is more project-based and they have poor visibility near term and guide only what they can see.
These problems should ease over time and they're expanding capacity pretty dramatically for a reason.
We think they are simply unsure of the timing of a big project resuming, are smoothed over by Dell (per their recent agreement with them), and are expanding capacity for the coming ramp, whenever that comes.
When their MDC/enterprise and facilities management businesses become more prominent these visibility problems will decline as facilities management especially produces recurring revenues (on significantly higher margins to boot).
The upshot: Long-term the situation hasn't changed, short-term we're less bullish although positive surprises are quite possible. We change our rating to hold.
Nvidia (NASDAQ:NVDA) was in focus on Friday as Morgan Stanley raised its estimates for 2026 on the Jensen Huang-led company as the idea of being in a digestion phase of artificial intelligence is “laughable.”
“In the last four weeks as investor sentiment is worsening based on macro and supply chain risks, core demand for GPUs has shot higher amid a shortage of inference chips across most of the relevant [large language models], in all geographies,” analyst Joseph Moore wrote in a note to clients. “While Wall Street is wringing its hands over a laundry list of very real concerns, Silicon Valley focus has shifted to a very different challenge—growth in tokens generated of (by some accounts) more than 5x since the beginning of the year is very much straining the ecosystem, and is driving a surge in investment to handle those workloads.”
Delving deeper, Moore said the trend has become evident that demand for AI inferencing is increasing based on the API company Open Router, as well as a “wide variety” of proprietary checks. And while sentiment has been impacted by tariffs, trade wars and other issues, that is not showing up in the hard data, Moore added.
Additionally, there have been a number of recent tweets from the tech community that there has been a “sharp demand acceleration” for AI, including comments from OpenAI CEO Sam Altman, Alphabet (GOOG) (GOOGL) CEO Sundar Pichai, the Elon Musk-led Grok and others.
Adding to that, the commentary around demand has “intensified” in the last few days, as inference demand continues to get stronger. And with Blackwell supply still constrained (and some improvement in Hopper demand), it is indicative of further proof that models are being used to drive revenue, Moore said. https://seekingalpha.com/news/4435530-nvidia-in-focus-as-morgan-stanley-ups-estimates-says-inference-demand-is-explosive
Couple things caused miss: system integration was lower than most investors thought. Mgmt calls this full qtr a baseline. Full qtr as last qtr for AI data systems integration was only one month. So naturally investors were thinking 3x. But mixed in the prior qtr was a one time non AI contract. So that is one and this is at higher margin vs procurement.
Procurement is an in and out business where margin is 4.4% on gross. Go to the call if you need to as CFO discusses when they record at net or when it is full revs. Secondly procurement receivables are factored to get cash. This interest expense was $1.1M vs less than $300k last qtr.
Last is facilities mgmt. They essentially had a warranty claim and thus margins were lower than normal. May happen from time to time but not often.
By the way Breakout Investors did zoom call on Friday with CFO. This is posted on YouTube. Everyone should go watch this.