TSS Q2 Earnings Call Highlights

Key Points

• Revenue fell 20% year over year to $35.1 million, driven by a 45% decline in lower-margin procurement services. However, systems integration revenue rose 46% to $13.9 million and facilities management revenue increased 84% to $2.7 million.
• The stronger business mix lifted gross margin to 22.8% from 16.4%, while adjusted EBITDA rose 12% to $4.5 million. Management maintained its full-year adjusted EBITDA outlook toward the upper end of the $20 million–$22 million range and expects a stronger second half.
• TSS is investing approximately $17 million to expand power and cooling capacity for NVIDIA’s Vera Rubin platform, with incremental revenue expected to begin in the third quarter and have its main impact in the fourth quarter. The company ended the quarter with $67.7 million in cash and $16.1 million in debt.

TSS NASDAQ: TSSI reported second-quarter 2026 results marked by growth in its higher-margin systems integration and facilities management businesses, even as total revenue declined because of lower procurement activity. Management said the company expects a stronger second half and maintained its full-year adjusted EBITDA outlook toward the upper end of its previously stated $20 million to $22 million range.

Total second-quarter revenue was $35.1 million, down from $44 million in the prior-year quarter. The decline reflected a 45% decrease in procurement-services revenue to $18.2 million, compared with $33 million a year earlier. President and CEO Darryll Dewan said procurement revenue is the company’s most variable business line because it depends on the timing and scale of customer infrastructure purchases.

“Our second quarter results reflect how our company is growing its higher margin business lines while relying less on lower margin procurement,” Dewan said. He added that the company expects procurement revenue in the third quarter to return to its historical range of $30 million to $40 million, although results can vary because of last-minute order adjustments.

Higher-Margin Segments Gain Mix

Systems integration revenue increased 46% year over year to $13.9 million from $9.5 million. The segment represented 39% of total revenue in the quarter, up from 22% in the second quarter of 2025. Facilities management revenue rose 84% to $2.7 million.

CFO Danny Chism said systems integration continued to be the company’s primary growth driver, supported by demand for AI and high-performance computing infrastructure deployments. Dewan said customers are deploying more sophisticated computing environments and need partners capable of integrating, deploying and managing those systems efficiently.

The company’s changing revenue mix contributed to higher profitability. Gross profit increased 11% to $8 million, while blended gross margin improved 640 basis points to 22.8% from 16.4% a year earlier. Adjusted EBITDA rose 12% to $4.5 million, and year-to-date adjusted EBITDA increased 5% to $9.8 million.

Operating income rose 16% to $1.6 million from $1.4 million, as gross-profit growth outpaced the increase in selling, general and administrative costs. SG&A expense rose to $5.6 million from $4.7 million, primarily due to higher non-cash equity compensation, additional headcount and related compensation expenses.

Net income was $1.4 million, or $0.05 per diluted share, compared with $1.5 million, or $0.06 per diluted share, in the prior-year period. Chism said the comparison was affected by higher income tax expense following the removal of a valuation allowance on deferred tax assets during the fourth quarter of 2025. Second-quarter income tax expense was $413,000, compared with $69,000 a year earlier.

Investment in Vera Rubin Readiness

TSS is investing approximately $17 million to expand its capacity to support NVIDIA’s Vera Rubin platform. Dewan said the investment, which began in the second quarter and is expected to be completed by mid-September, is primarily focused on power infrastructure and cooling capacity.

The company has integrated NVIDIA H100, H200 and Blackwell chip families and is currently seeing significant GB300 volume, Dewan said. Chism said approximately $7 million to $8 million of the Vera Rubin-related buildout had been completed as of the end of the second quarter. He expects the investment to begin contributing incremental revenue during the third quarter, with the primary impact expected in the fourth quarter.

During the question-and-answer session, Dewan said AI rack integration revenue increased sequentially, while a downturn in the company’s mainstream business affected systems integration revenue. He said that mainstream decline is not expected to remain an issue, while Chism cited increased demand for network racks as compute deployments expand.

Management identified operational efficiency, technology readiness, available power and space, and supply-chain availability as factors influencing the pace at which systems integration can grow. Dewan said the Georgetown facility has capacity significantly above the minimum level in the company’s contract, estimating potential capability of two to three times that minimum if TSS executes efficiently.

Facilities, Logistics and Balance Sheet

Facilities management growth included a rise in discrete project work to almost $2 million, compared with just under $500,000 in the prior-year quarter. Maintenance revenue declined to $746,000 from $1 million, as some customers did not renew agreements for older modular data centers. Chism said discrete refresh projects can help customers extend the useful lives of those units and support continued preventative-maintenance services.

Facilities management gross profit rose to $1.6 million from $1.1 million, though gross margin declined to 57.1% from 74.3%. Chism said margins in the business are typically near 50% and that the prior-year quarter had an unusually high margin because certain maintenance agreements expired with lower associated costs.

Effective May 1, TSS also began providing warehousing and logistics services to its largest customer, using its formerly vacant Round Rock, Texas, integration facility. The company accounts for the arrangement as an operating lease for GAAP purposes and reports it within the systems integration segment.

TSS ended the quarter with $67.7 million in cash and cash equivalents and $16.1 million in total debt. Management said the balance sheet provides flexibility to continue investing in integration capabilities and support customer growth.

Dewan also said TSS expects to install one new modular data center in September or October and another in mid-2027. The company has reorganized its sales team as it evaluates ways to broaden its customer base, capabilities and capacity while continuing to prioritize service for existing customers.

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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