TSS, Inc. Common Stock 2026 Q2 Earnings Call

You may begin. Thank you, operator, and good afternoon, everyone.

Joining me today on this call are the company's President and CEO, Darryll Dewan, and its CFO, Daniel Chism. 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, August 13, 2026. TSS expressly disclaims any obligation to update, amend, supplement, or otherwise review any information or forward-looking statements made on this conference call or the 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 affect the company's future performance, 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 the 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.

James, thank you, and good afternoon, everyone. Our second quarter results reflect how our company is growing its higher margin business lines while relying less on lower margin procurement. Demand for our system integration capabilities remains strong, and our revenue mix continues to shift in that direction. This shift improves the quality of our earnings. This is by design. The market for AI and high-performance computing infrastructure continues to expand dramatically. Customers are deploying increasingly sophisticated computer environments and are looking for partners who are flexible and capable and who can integrate, deploy, and manage that infrastructure efficiently. That's where TSS has built a strong position. That's where we continue to see healthy demand and volume growth ahead. Continued growth in our higher margin system integration and facilities management business drove a favorable shift in our revenue mix during the second quarter.

The shift towards our higher margin offerings is an underlying trend we continue to emphasize in the business, and it's one that gives us confidence in our long-term direction. Our higher margin systems integration business delivered strong growth during the quarter, increasing 46% year-over-year and representing 39% of total revenue compared with just 22% of the total in the second quarter of last year. This is the important story behind the quarter. Our highest margin facilities management business also had an excellent quarter, growing 84%. Historically, procurement revenue has been our most variable, generating at times high volume revenue on relatively few large customer orders. Customer purchasing patterns and the timing of infrastructure deployments can create significant swings from quarter to quarter. We saw that again this quarter with procurement revenue of $18.2 million compared to $33 million a year ago.

We are forecasting procurement revenues in the third quarter to return to our historical range of $30 million-$40 million, though that also can vary with last-minute order adjustments. With our higher margin systems integration and facilities management revenue streams representing a larger portion of our revenue and other income mix, profitability improved during the quarter with consolidated gross profit up 11% and Adjusted EBITDA up 12%, even as total revenue declined 20% due to the expected pullback in procurement. This is the kind of progression we'd expect to see as our business continues to shift towards higher margin offerings. We opened our newest integration facility here in Georgetown, Texas in mid-2025. Improving the efficiency of our integration processes and procedures is a primary focus for our operations team in order to deliver better value to our customers.

We speak regularly about the constant and rapid evolution of data center and rack design driven by new chip releases. Compute density in each individual rack has increased in a short time, driving significant changes in power and cooling. The rack integration process is similarly evolving along with rack densities. We plan the site for increased power needs, and we work diligently with the local power utility authorities to have ample current power available plus the capacity to grow. That said, there are numerous choke points in the integration process. NVIDIA currently drives the process with rollout of new chip families, each driving more compute power than the last. We have been integrating H100, 200, and the Blackwell families. Currently, we're seeing significant GB300 volume. We are in the midst of investing approximately $17 million to build the capacity to support NVIDIA's new Vera Rubin platform.

We began this latest round of investment in Q2, and we should be completed mid-September. As we discussed, such investments drive meaningful increases in recurring, high margin revenue over the time period the assets are used to complete rack integrations. It's an important step because it strengthens our recurring revenue earnings base while expanding our relationship with our marquee customer. We are very encouraged by these accelerating trends. Customer engagement remains high. The pipeline for higher margin systems integration continues to grow. The demand for our integration capabilities remains healthy and robust. Effective May 1st, we also began providing warehousing and logistics services to our largest customer at their request, fully utilizing our integration facility in Round Rock, Texas, which has been vacant. We expect the second half of 2026 to be stronger than the first half.

And for the time being, we are maintaining our full year Adjusted EBITDA outlook towards the upper end of the previously announced $20 million-$22 million range. So in summary, the higher margin segments of our business continue to grow. Recurring revenue continues to expand, and we are executing well for our customers in a market that continues to present significant long-term opportunity. We are excited about these results and the direction of our business. With that, let me turn the call over to Danny to review the financial results.

Thanks, Darryl. Good afternoon, everyone. Before reviewing the financial performance, I want to highlight a change in the presentation and the results beginning in the second quarter. In May, we began using our previous integration facility in Round Rock, Texas, to provide warehousing and logistics services to our largest customer, as Darryl mentioned. We consider this an operating lease for GAAP purposes, and the lease operations are reported within our systems integration segment. Details of the accounting treatment are included in the 10-Q, which was filed just a few minutes ago. With that, let's go into the results. Total revenues for the second quarter were $35.1 million, compared with $44 million in the second quarter of 2025. We saw dramatic year-over-year growth in our higher margin business lines while reducing the dependence on lower margin procurement activities. Systems integration revenues increased 46% year-over-year, while facilities management revenue increased 84%.

As we have mentioned on prior calls, procurement services remains an important part of our business. It carries the lowest margin among the three operating segments, but can produce wonderful incremental income and carries very little fixed costs in periods with lower volumes. Activity in this business is largely driven by the timing and scale of customer infrastructure purchases and deployment schedules. As a result, procurement revenue can fluctuate meaningfully from quarter to quarter, depending on customer ordering patterns and the supply chain. Taking a closer look at each segment. Revenue from procurement services was $18.2 million, a decrease of 45% compared to the prior year quarter. As Darryl mentioned, orders received for Q3 already exceed procurement revenues in Q2, likely returning to more of our typical $30 million-$40 million range per quarter.

Revenue from our systems integration segment increased 46% from $9.5 million in the second quarter of 2025 to $13.9 million in Q2 of this year, reflecting continued customer demand for our integration capabilities supporting AI and high performance computing infrastructure deployments. As we discussed previously, systems integration continues to be the primary driver of growth for TSS and represents a structurally higher margin business compared to procurement services. During the second quarter, that dynamic played out with systems integration representing 39% of total revenues, compared to 22% in the prior year period. As this business continues to scale and leverage its relatively fixed cost base, we expect it to be an increasingly important contributor to gross profit growth and overall profitability.

Revenue from facilities management increased 84% to $2.7 million, reflecting the continuation of ongoing maintenance agreements, combined with a spike in discrete project work in the period, similar to the increase we saw in Q1. Maintenance revenues in this segment decreased from $1 million in the prior year quarter to $746,000 in the current quarter, as certain customers opted not to renew maintenance agreements on some of the older MDCs. That was more than offset by discrete project work increasing from just under a half million dollars this quarter last year to almost $2 million this quarter. Our facilities management team has done a great job helping end customers extend the useful lives of their MDCs by refreshing the infrastructure in them. The refresh of these units provides enhanced confidence in those customers' continued use of our preventative maintenance services. Moving down the income statement a bit.