TSS, Inc. Q4 FY2025 earnings call

• Strong fourth quarter caps transformational 2025 for TSS, with year-over-year growth in revenue and profitability and sequential improvement over third quarter.
• RAC integration volumes in Georgetown, Texas facility came online and grew late in 2025, setting up 2026. Adjusted EBITDA for full year reached $18.6 million, ahead of guidance range.
• AI demand is not slowing, hyperscalers and large enterprises continue to invest in AI infrastructure. Customer adoption of AI is broadening into mainstream enterprise.
• Extended and expanded relationship with primary customer under multi-year contract, with amendment addressing certain circumstances and resetting agreement term.
• 2025 was a year of transformation for TSS, scaling facility, upgrading systems, and refining processes for higher AI-related rack integration volumes.

In 2025, consolidated total revenue increased by 66% to $245.7 million. Procurement services revenue totaled $197.5 million, up 68% from 2024, with gross profit margins on procurement expanding from 6.7% in 2024 to 7.7% in 2025. Facilities management revenue was $7.9 million, down 1% from 2024, with maintenance revenues down 12% for the full year but discrete project revenues in Q4 up 263% and full-year up 12%. Systems integration segment revenue increased 78% year-over-year to $40.3 million, with Q4 revenues up from $7.9 million last year to $14.2 million this year.

Forecasting rack integration volumes is difficult due to market dynamics. Expect to double 2025 business in 2026. Adjusted EBIT expected in the 20 to 22 million range for 2026, conservative estimate reflecting supply chain volatility, deal closing timing, and robust demand forecast. Strategic planning includes evaluating multiple routes to market like deepened partnerships, selective acquisitions, and JVs.

Market environment and supply chain can be challenging, such as memory shortages driving price increases and delays in data center deployment timelines. Also, the complexity of AI server racks and associated power and cooling infrastructure poses risks to forecasting and operational execution.

Q: Can you give more color on the amended agreement with your largest customer?

A: It's a combination of adjustments including term length extension, investment in infrastructure being rewarded financially, and covering fixed power costs.

Q: How does rack order volume this quarter compare with internal expectations?

A: Q4 rack volume almost exceeded Q1 - Q3, and 2026 expectation is to double 2025 business.

Q: Any bogeys to look out for regarding memory chip shortage?

A: Some variances considered in model, but business somewhat insulated from complexity.

Q: How do economics change as server racks get bigger?

A: Modeled to certain configuration size, future to be determined but working on it with partner.

Q: Restricted cash gone and debt reduction?

A: Restricted cash gone as bank applied restricted funds as paid annual principal, resulting in debt pay down.

Q: Color on facilities management operational side?

A: Facilities management has recurring maintenance agreements and discrete projects, with Q4 discrete projects up significantly but less predictable.