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TI

TSS, Inc. (TSSI)·Q3 2025 Earnings Summary

Executive Summary

  • Q3 2025 was a reset quarter: revenue fell 40% YoY to $41.9M on procurement variability and operational ramp issues at the new SI facility; net loss was $(1.5)M (diluted EPS $(0.06)); adjusted EBITDA declined to $1.5M as fixed power/depreciation were not yet offset by throughput .
  • Systems Integration (SI) revenue grew 20% YoY to $9.2M but gross margin compressed to 13% (from 45%) due to newly allocated operations-related depreciation (~11 pts) and under-absorbed fixed power costs; Facilities Management (FM) margin expanded to 55% despite lower revenue .
  • Management expects a “strong rebound” in Q4 driven by materially higher SI rack volumes; FY25 adjusted EBITDA guidance updated to a range of +50% to +75% vs 2024 (down from “at least 75%” after Q2); initial FY26 organic EBITDA growth guide introduced at +40% to +50% .
  • Catalysts into year-end/2026: SI volume ramp at Georgetown (now at 15MW), improving operating cadence, FM project timing, and potential M&A/partnerships to broaden routes-to-market; procurement outlook cautious near term given federal shutdown paperwork delays .

What Went Well and What Went Wrong

What Went Well

  • Non-procurement resilience and mix quality: SI up 20% YoY to $9.2M; FM gross margin rose to 55% with gross profit up to $0.88M despite a 19% revenue decline, reflecting strong unit economics .
  • Facility/scale positioning: Power headroom lifted to 15MW (from 12MW in Q3 and 6MW at move-in), enabling next-gen AI racks and future throughput; Q4 rack volumes “significantly greater” than Q3 .
  • Liquidity strengthened: Cash rose to $70.7M with working capital improvement; year-to-date revenue +88% to $184.8M and adjusted EBITDA +59% to $10.7M, validating secular demand and execution YTD .

What Went Wrong

  • Top line volatility: Total revenue down 40% YoY to $41.9M on procurement variability (DoD timing; gross vs net recognition) and a tough prior-year comp; management cited federal shutdown paperwork delays .
  • Under-absorption in SI: Newly allocated operations-related depreciation (~$1.0M in COGS) and largely fixed power charges drove SI gross margin down to 13% (from 45%), with only ~20% of power costs recouped in Q3 .
  • SG&A inflation and audit readiness: SG&A increased 35% YoY to $5.2M, with higher stock comp, scaling headcount, incentives, and SOX 404B costs, contributing to a $(0.9)M operating loss .

Financial Results

Consolidated results (sequential trend)

MetricQ1 2025Q2 2025Q3 2025
Revenue ($M)$99.0 $44.0 $41.9
Diluted EPS ($)$0.12 $0.06 $(0.06)
Gross Margin (%)9.3% 17.8% 11.1%
Adjusted EBITDA ($M)$5.24 $4.01 $1.46

Q3 segment revenue and margins (YoY)

SegmentQ3 2024Q3 2025
Procurement revenue ($M)$60.48 $31.10
Systems Integration revenue ($M)$7.63 $9.19
Facilities Management revenue ($M)$1.95 $1.59
Procurement GM (%)6.1% 8.3%
Systems Integration GM (%)45% 13%
Facilities Management GM (%)37% 55%

Additional KPIs

KPIQ1 2025Q2 2025Q3 2025
Operating Income ($M)$4.11 $2.24 $(0.93)
Net Income ($M)$2.98 $1.48 $(1.50)
SG&A ($M)$4.89 $4.74 $5.24
Cash & Equivalents ($M, period-end)$27.34 $36.84 $70.70

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted EBITDA growth vs 2024FY 2025At least +75% +50% to +75% Lowered/Range introduced
Adjusted EBITDA growth (organic)FY 2026—+40% to +50% New
SI rack volumesQ4 2025—“Significantly greater than Q3” Qualitative up
Fixed power charge (Georgetown)Q4 2025 onward—~$0.866M/quarter fixed + variable New cost disclosure
Procurement outlookQ4 2025—More cautious due to shutdown paperwork timing Cautioned
FM outlookQ4 2025—YoY increase in FM revenue and gross profit expected (discrete projects) Improved

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1–Q2 2025)Current Period (Q3 2025)Trend
AI/HPC demand & SI expansionFacility became operational; SI revenue up 253% YoY in Q1 and 91% in Q2; built for DLC and rising rack densities SI +20% YoY; ramp delay from process/ERP/power; volumes rebounding in Q4; 15MW power installed Positive LT; near-term catch-up
Procurement variability$90.2M in Q1, $33.0M in Q2; lumpy by design (gross vs net; federal seasonality) $31.1M; affected by government shutdown paperwork timing; cautious Q4 tone Volatile near term
Supply chain/tariffs/macroTariffs and tech roadmap elongating decisions (Q1) One FM delivery slipped; federal shutdown paused processing Mixed headwinds
Cost structure & audit readinessDepreciation to rise with Georgetown; SG&A to include SOX 404B Power fixed charges ~$0.8–0.87M/qtr; SG&A +35% YoY; SOX 404B costs ongoing Fixed cost step-up, controls build
Capacity & powerPlanning from 6MW to 15MW by summer (Q1) 12MW during Q3; now 15MW; ready for next-gen racks Capacity secured
Customer concentration & expansionExploring channel/on-site SI and routes beyond Dell (Q1–Q2) Added industry veteran to board; reiterates expansion plans incl. M&A/JVs Broadening routes

Management Commentary

  • “Our rack volume processed in Q3 was well below what we had expected... This is not the result of a lack of customer demand, but rather more of a timing issue... we are seeing Q4 rack volumes significantly greater than we saw in Q3.” — CEO .
  • “Systems integration gross margins decreased from 45%... to 13%... we first started allocating operations-related depreciation... accounting for 11 percentage points... We also significantly ramped up the available electrical power... power costs were just over $900,000, with almost $800,000... fixed.” — CFO .
  • “We... now expect full year 2025 adjusted EBITDA outlook of 50–75% growth compared to 2024... initial guidance of 40–50% organic [EBITDA] growth in 2026.” — CEO .

Q&A Highlights

  • End-market mix and AI trajectory: Management sees continued CSP strength with growing enterprise interest and a shift toward inference; view remains that the AI market is still early and broadening .
  • Operational fixes: Q3 shortfall traced to power availability, ERP/inventory controls, staffing/communications; new ops leadership and cadence instituted; Q4 SI racks to exceed any prior quarter .
  • Capacity and EBITDA run-rate: Discussion suggested EBITDA run-rate of ~$5–$7M/quarter at the facility over time, with significant headroom remaining; not near full capacity .
  • Customer concentration and disclosure: Company reiterated confidentiality and intention to expand routes-to-market without jeopardizing key relationships; no immediate capital raise planned .
  • Capital strategy/M&A: Pursuing complementary M&A/JVs and expansion into adjacent offerings; expect to communicate actions “sooner than later” .

Estimates Context

  • Wall Street consensus (S&P Global) for Q3 2025 EPS and revenue was unavailable; consequently, no formal beat/miss is reported from S&P consensus. Values retrieved from S&P Global.
    | Metric | Q3 2025 Actual | Q3 2025 Consensus | Q4 2025 Consensus | |---|---|---|---| | Revenue ($M) | $41.9 | N/A — unavailable via S&P Global | N/A — unavailable via S&P Global | | EPS ($) | $(0.06) | N/A — unavailable via S&P Global | N/A — unavailable via S&P Global |

Key Takeaways for Investors

  • SI is the core 2025–2026 earnings driver; the Q3 shortfall is primarily timing/under-absorption, with Q4 racks already tracking “significantly” higher and 15MW in place to support next-gen builds .
  • Guidance reset matters: FY25 adjusted EBITDA range (+50% to +75% vs 2024) is lower than the prior “≥75%” but pairs with a robust initial FY26 organic EBITDA growth guide (+40% to +50%)—the trajectory is still strong, just staggered .
  • Watch the fixed-cost lever: Power charges (~$0.87M/qtr fixed) and ops-related depreciation are now in the run-rate; throughput normalization is essential for margin repair and EBITDA scaling .
  • Procurement is a swing factor: DoD-heavy pipeline and gross vs net accounting create volatility; shutdown paperwork delays inject near-term uncertainty into Q4 close rates .
  • FM can surprise to the upside: Margin-rich projects and expected Q4 pick-up support incremental profitability despite small revenue base .
  • Strategic optionality: New board expertise, strong cash, and stated appetite for M&A/partnerships expand routes beyond the primary OEM, a medium-term multiple/cash flow catalyst if executed well .
  • Near-term focus: Evidence of Q4 SI volume rebound, SI margin inflection as absorption improves, procurement closing cadence post-shutdown, and cost discipline (SOX 404B and scaling SG&A) .