TSS Q3 Earnings & Revenues Fall Y/Y Even As 2026 Outlook Improves

Core Insights - TSS, Inc. (TSSI) shares have experienced a significant decline of 20.8% following the release of its fiscal third-quarter 2025 results, compared to a 3.1% drop in the S&P 500 during the same period [1] - Over the past month, TSSI shares have decreased by 52.9%, while the S&P 500 has only slipped by 1.2% [1] Earnings & Revenue Performance - In the September-end quarter, TSSI's revenues fell by 40% year over year to $41.9 million, primarily due to a sharp decline in procurement activity [2] - Procurement revenues decreased by 49% to $31.1 million, while Systems Integration revenues increased by 20% to $9.2 million, and Facilities Management revenues dipped by 19% to $1.6 million [2] - Gross profit fell by 41% year over year to $4.6 million, reflecting lower volumes and new operations-related depreciation in the cost of goods sold [2] Net Income and Adjusted EBITDA - The company reported a net loss of $1.5 million compared to a net income of $2.6 million a year earlier, with diluted EPS swinging to a loss of 6 cents from earnings of 10 cents in the prior-year quarter [3] - Adjusted EBITDA declined by 66% to $1.5 million [3] - For the first nine months of 2025, revenues rose by 88% to $184.8 million, and adjusted EBITDA increased by 59%, despite a 27% decline in net income [3] Business Metrics - TSSI's revenue mix is heavily skewed towards procurement, which accounted for 84% of year-to-date 2025 revenues but only 58% of gross profit [4] - Systems Integration and Facilities Management together represented 42% of gross profit while generating only 16% of revenues [4] - Systems Integration remains a critical growth driver, supported by rising demand for AI-enabled rack integration, although third-quarter volumes fell below expectations due to operational bottlenecks [4] Balance Sheet Strength - Cash and equivalents increased to $70.7 million as of September 30, 2025, from $23.2 million at year-end 2024, aided by operating cash flow of $18.5 million and proceeds from a secondary offering [5] - Working capital improved to $34.3 million from $1.3 million over the same period [5] - The company invested $32.2 million year to date in building its new Georgetown, TX integration facility, which will expand power availability to 15 MW and more than double operating space [5] Management Commentary - Management indicated that the third-quarter shortfall was due to execution challenges rather than weakening demand, citing "unforeseen operational requirements" at the new Georgetown facility [6] - CEO Darryll Dewan noted that corrective measures have already led to "dramatically higher rack volumes" expected in the fourth quarter [6] - The company anticipates strong demand from hyperscalers and enterprise customers investing in AI infrastructure, although procurement activity was temporarily disrupted by a U.S. government shutdown [6] Factors Influencing Q3 Results - The most significant drag on third-quarter performance was procurement variability, which can fluctuate based on deal timing and revenue recognition methods [7] - Lower procurement volume reduced scale efficiencies that typically benefit margins [7] Margin Compression - Within Systems Integration, margins compressed sharply to 13% from 45% a year ago due to the allocation of new facility-related depreciation to the cost of goods sold [8] - Power costs at the expanded site also impacted profitability, with TSS incurring over $900,000 in electrical costs in the third quarter, recovering only about 20% of these costs from customers [8] Guidance - Despite the third-quarter miss, TSSI reaffirmed a bullish near-term outlook, expecting full-year 2025 adjusted EBITDA growth of 50% to 75% over 2024 [9] - For 2026, the company initiated guidance for 40% to 50% organic EBITDA growth, supported by increased visibility into customer demand and the ramp-up of the Georgetown facility [9] Other Developments - TSSI appointed Vivek Mohindra, a technology industry veteran, to its board of directors, viewing his addition as a significant step in accelerating strategic expansion across AI, edge computing, and modular data-center offerings [10]