TSS, Inc. (TSSI) Earnings

Management highlights

- Strategic Direction and Revenue Mix Shift * Management is intentionally shifting the business mix away from lower-margin, highly variable procurement towards higher-margin, more stable systems integration and facilities management, which improves overall earnings quality. * The company holds a strong market position supporting the fast-expanding AI and high-performance computing (HPC) infrastructure market, where customers seek capable integration and deployment partners for increasingly complex environments. - Operational Investments and Capabilities * The Georgetown, Texas integration facility (opened mid-2025) is the company's primary integration hub, with planned power and capacity expansion to support growing rack densities driven by new NVIDIA chip generations. * The company is investing $17 million to upgrade capacity for NVIDIA's new Vera Rubin platform; construction began in Q2 2026 and is on track for completion mid-September 2026. This investment will expand recurring high-margin revenue and strengthen relationships with key marquee customers. * Starting May 1, 2026, the company began offering new warehousing and logistics services to its largest customer, utilizing the previously vacant Round Rock, Texas integration facility. * The sales organization has been reorganized to pursue broader customer and capability expansion, while maintaining top priority on delivering high-quality service to existing customers. * The company is exploring growth opportunities in modular data centers to meet rising customer demand for edge-latent, fast-to-deploy infrastructure.

Guidance

- Management reaffirms its full-year 2026 adjusted EBITDA guidance, maintaining the outlook at the upper end of the previously announced $20 million to $22 million range. - Procurement revenue is expected to return to the historical typical range of $30 million to $40 million in Q3 2026, after the lower Q2 2026 result. - Management expects the second half of 2026 to be stronger than the first half of 2026, driven by accelerating demand for systems integration and incremental revenue from the completed Vera Rubin capacity upgrade (with most incremental contribution expected in Q4 2026). - Long-term, management expects systems integration to become an increasingly large driver of gross profit and overall profitability as it scales and leverages its relatively fixed cost base.

Segment performance

Total Q2 2026 revenue was $35.1 million, a 20% year-over-year (YoY) decline from $44 million in Q2 2025, driven by lower procurement revenue. 1. Procurement Services: Revenue was $18.2 million, a 45% YoY decrease, contributing 52% of total Q2 2026 revenue. Gross margin was 11% (6% on a non-GAAP basis, up from 3.9% YoY). 2. Systems Integration: Revenue increased 46% YoY from $9.5 million to $13.9 million, contributing 39% of total revenue (up from 22% in Q2 2025). Gross margin was 31.6% (down from 37.5% YoY due to new depreciation for the Georgetown facility). This segment also includes new warehousing and logistics services for the company's largest customer, added in May 2026. 3. Facilities Management: Revenue increased 84% YoY to $2.7 million, contributing 8% of total revenue. Gross profit grew from $1.1 million to $1.6 million YoY, while gross margin was 57.1% (a return to normal levels after an unusually high 74.3% in the prior year quarter driven by one-time lower costs on expiring maintenance contracts). Overall consolidated gross profit increased 11% YoY to $8 million, with blended gross margin improving 640 basis points to 22.8% due to the favorable mix shift to higher margin segments. Adjusted EBITDA increased 12% YoY to $4.5 million, and operating income improved 16% YoY to $1.6 million.

Risks & headwinds

- Procurement revenue is inherently highly variable, driven by customer purchasing patterns, timing of large infrastructure deployments, and supply chain conditions, leading to significant quarter-to-quarter swings that can impact total revenue. - Supply chain constraints for the many components required for rack integration act as a gating factor for growth, with specific component shortages (e.g., memory, cables) creating intermittent delays that limit how much volume the company can accept. - Evolving AI chip and rack design requirements require continuous, capital-intensive upgrades to power, cooling, and facility capacity, creating execution risk if upgrades are delayed or do not meet technical requirements.

Analyst Q&A

• Q: Why was there a small sequential downtick in systems integration revenue, and is the $17 million Vera Rubin investment related to longer lead times for GB300 racks? /

  A: The small sequential dip is just normal variation within the $13.9 million to $14.2 million quarterly range that has held for three quarters, and does not reflect broader slowing demand. The downtick came from a Q2 pullback in the company's mainstream (non-AI) rack integration segment, which was offset by sequential growth in AI rack integration. The $17 million investment is purely for upgraded power and cooling infrastructure required for the Vera Rubin platform, not related to GB300 testing timelines, and will drive incremental future revenue.

• Q: How much of the Vera Rubin build-out is complete, and when will it start contributing revenue? What revenue upside can be expected? /

  A: Approximately $7 million to $8 million of the $17 million investment was completed by the end of Q2, with full completion on track for mid-September 2026. Incremental revenue will begin in small amounts in Q3 2026, with most contribution starting in Q4 2026, and will be recognized evenly over the term of the rack integration agreement.

• Q: What is the longer-term growth potential for systems integration, and what are the main constraints on that growth? /

  A: The main constraints are not demand, but operational efficiency, staying ahead of the rapid technology curve, facility power and space capacity, and supply chain component availability. The Georgetown facility has significant headroom to grow, with an estimated 2x to 3x capacity above the contract minimum, as long as the company executes well. The company is also exploring additional growth through modular data center offerings, which have seen rising customer interest.

• Q: What is the current status of the weekly minimum commitment for the company's key Dell customer relationship? /

  A: Management cannot share granular details of the contract pipeline due to confidentiality obligations. Public outlooks from the key customer show strong, increasing AI server demand for fiscal 2027, and TSS is working to capture as much of this growth as possible. The company has exceeded the weekly minimum only once or twice year-to-date, and is fully focused on growing volume to exceed the minimum on an ongoing basis.