TSS Q1 Earnings Call Highlights

TSS NASDAQ: TSSI reported a sharp year-over-year decline in first-quarter revenue as procurement activity normalized from unusually high levels a year earlier, but executives said growth in the company’s higher-margin systems integration business helped support profitability and reinforced its 2026 outlook.

The company reported first-quarter 2026 revenue of $55.3 million, down from $99 million in the prior-year period. Chief Financial Officer Danny Chism said the decrease was driven primarily by lower procurement services revenue, which fell 56% to $40 million from $90.2 million a year earlier.

Procurement revenue is “a meaningful yet inherently variable component” of the business, Chism said, adding that last year’s first quarter benefited from “extraordinarily high” procurement activity tied to customer infrastructure purchasing cycles.

Systems integration revenue rose 88% year over year to $14.1 million from $7.5 million, reflecting demand for large-scale infrastructure deployments and the impact of a renegotiated long-term AI rack integration agreement signed in the fourth quarter of 2025. Facilities management revenue was $1.3 million, in line with the prior-year quarter.

Systems integration drives margin expansion

President and Chief Executive Officer Darryll Dewan said the company’s first-quarter results reflected “continued execution” of its growth plan and accelerating momentum in systems integration, particularly tied to demand for AI-related infrastructure.

“Demand for AI infrastructure remains at an all-time high and is showing no signs of abating,” Dewan said. He said customers are scaling deployments to meet demand for AI services and servers, and that the company has expanded capacity to support that growth.

Systems integration represented 25% of total revenue in the first quarter, up from 8% in the prior-year period, when procurement made up a larger portion of revenue. Chism said the shift in mix helped lift consolidated gross margin to 15.9% from 9.3% a year earlier.

Systems integration gross margin increased to 37.5% from 22.1% in the first quarter of 2025. Chism attributed the improvement to higher AI rack volumes and the renegotiated agreement, which increased rates to recapture capital investments and additional power availability.

Facilities management gross margin also improved, rising to 64.7% from 40.9%, which Chism said reflected greater use of internal resources instead of subcontractors on discrete projects. Procurement gross margin was 6.7%, down from 7.8% a year earlier, with the prior-year period benefiting from a large sale with a higher-than-normal margin.

Profit declines, adjusted EBITDA edges higher

Operating income fell 14% to $2.3 million from $2.6 million in the prior-year quarter. Net income was $2.3 million, down 24% from $3 million, and diluted earnings per share were $0.08 compared with $0.12 a year earlier.

Chism said the decrease in net income was driven primarily by the more normalized level of procurement activity and higher recorded income tax expense. The company recorded income tax expense of $391,000, or 14.7% of pretax income, compared with $49,000, or 1.6%, in the prior-year quarter. Chism said the change followed the fourth-quarter 2025 reversal of a valuation allowance on the company’s deferred tax asset.

Adjusted EBITDA was $5.3 million, up 1% from $5.2 million a year earlier. Dewan said the result reflected a more favorable sales mix as well as investments related to the company’s new facility.

SG&A expenses increased 13% to $5.5 million, with Chism citing stock-based compensation and higher headcount and compensation costs to support growth. Bank factoring fees declined to $704,000 from $1.5 million, reflecting lower receivables factored and favorable interest-rate shifts.

Company highlights AI rack demand and capacity

Dewan said TSS has expanded its ability to handle AI rack integration at its Georgetown, Texas, facility, which opened less than a year ago and began flowing orders about six to seven months ago. He said that within May, the company expected to have completed more AI rack integrations in 2026 than it delivered in all of 2025.

“Importantly, we have remaining capacity within our existing footprint to support additional growth as demand requires,” Dewan said.

The company has also dedicated its previously idle Round Rock facility to warehousing AI rack material for its largest OEM customer. Dewan said the service began May 1 and is included in the company’s adjusted EBITDA guidance for the year.

During the question-and-answer session, Dewan said TSS can grow “multiples” over current levels in the Georgetown facility, depending on the technology mix and validation test times. He said reducing rack validation testing times could allow the company to push more volume through the business, potentially increasing output significantly with the current load.

Capex planned for next-generation AI racks

Chism said the company’s primary customer recently requested that TSS invest about $17 million in capital expenditures to support the next generation of AI racks. He said the investment is expected to be made between now and the third quarter, with assets put into use relatively quickly after completion.

In response to an analyst question, Chism said the investment is not tied to a new facility, but rather to technology moving to “Vera Rubin,” which requires higher power and more cooling. He said TSS expects to earn a “healthy return” over several years through higher pricing that recaptures the investment.

Dewan said the company is positioning itself to compete for work tied to the next-generation technology and said the opportunity could be incremental, though the exact capacity impact remains to be determined.

Guidance and leadership additions

TSS maintained its full-year adjusted EBITDA outlook of $20 million to $22 million, with Dewan saying the company expects results to be at the high end of the previously set range. He said the outlook is supported by a multiyear agreement, revenue visibility, downside protection, expanded capacity and a strengthened leadership team.

The company also highlighted the recent appointments of Matt Wallace as chief strategy officer and David Hull as chief technology officer. Dewan said Wallace brings experience in corporate strategy, business transformation and strategic partnerships, while Hull brings engineering and infrastructure leadership experience related to large-scale deployments.

Dewan said TSS is reassessing the markets it serves, including the potential to address rack integration requirements beyond its historical OEM customer base and to offer services beyond AI rack integration. He cited increasingly complex data center designs, higher power density, cooling requirements and evolving networking needs as factors that could create additional opportunities.

“We are being very deliberate in how we position a business for the next phase of growth,” Dewan said. “We’ve expanded capacity, optimized our footprint, strengthened our leadership team with additions that bring both experience and industry connectivity.”

About TSS NASDAQ: TSSI

TSS, Inc offers planning, design, engineering, construction management, commissioning and maintenance services. It provides these services primarily for specialized facilities such as data centers, communications rooms, call centers, laboratories, trading floors, network operations centers, medical facilities and similar environments. TSS Inc, formerly known as Fortress International Group, Inc, is based in Columbia, United States.

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