TSS Inc. Faces Q3 Operational Headwinds, But 2026 Outlook Signals Recovery Ahead

TSS Inc. (TSSI) recently disclosed its third-quarter 2025 results, revealing a mixed picture of near-term challenges alongside longer-term optimism. While operational execution issues pressured recent quarterly performance, management signaled confidence in a meaningful rebound supported by robust customer demand and expanded manufacturing capacity.

Operational Bottlenecks Weigh on Q3 Results

The September quarter exposed significant execution challenges at TSS Inc.'s new Georgetown, Texas integration facility. CEO Darryll Dewan attributed the shortfall to unforeseen operational requirements, including additional power upgrades, ERP system integration work, and expanded staffing demands. These execution hurdles directly impacted the company’s ability to fulfill rack integration orders during the period, a critical constraint given the rising demand for AI-enabled infrastructure solutions.

The ripple effects manifested across TSS Inc.'s financial metrics. Total revenues contracted 40% year-over-year to $41.9 million, with procurement revenues—the company’s largest segment—declining 49% to $31.1 million. Systems Integration revenues, despite being the higher-margin business, rose only 20% to $9.2 million, constrained by the operational bottlenecks mentioned above. Facilities Management dipped 19% to $1.6 million.

Profitability Under Pressure From Multiple Headwinds

Gross profit erosion reflected both volume declines and cost pressures specific to the expanded Georgetown facility. Gross profit fell 41% year-over-year to $4.6 million. The company began absorbing approximately $1 million in new facility-related depreciation into cost of goods sold, and electrical expenses—totaling over $900,000 in the quarter, with roughly $800,000 representing fixed charges—created additional margin compression. Because rack volumes fell short of expectations, TSS Inc. recovered only about 20% of these power costs from customers.

On the bottom line, TSS Inc. recorded a net loss of $1.5 million versus net income of $2.6 million in the prior-year quarter. Diluted earnings per share turned negative at 6 cents, down from 10 cents a year earlier. Adjusted EBITDA declined 66% to $1.5 million.

Year-to-Date Performance Tells a Different Story

Despite Q3’s challenges, year-to-date results through September reveal underlying business momentum. Revenues rose 88% to $184.8 million, and adjusted EBITDA increased 59%, even as net income declined 27%. This divergence underscores how the third quarter represented a temporary pause rather than a fundamental business deterioration.

Balance Sheet Strength and Strategic Investments

TSS Inc. demonstrated solid financial positioning heading into the remainder of 2025. Cash and equivalents surged to $70.7 million as of September 30, 2025, compared with $23.2 million at year-end 2024, bolstered by $18.5 million in operating cash flow and proceeds from a secondary equity offering. Working capital strengthened substantially to $34.3 million from $1.3 million.

The company has deployed $32.2 million year-to-date toward its Georgetown expansion, which will increase power capacity to 15 MW and more than double operational space. This infrastructure investment positions TSS Inc. for meaningful scale-up as hyperscaler and enterprise demand for AI infrastructure continues accelerating.

Margin Profile and Segment Dynamics

The revenue mix reveals an interesting opportunity within TSS Inc.'s portfolio. While procurement accounts for 84% of year-to-date revenues, it contributes only 58% of gross profit. By contrast, Systems Integration and Facilities Management together generate just 16% of revenues but represent 42% of gross profit—demonstrating the value inherent in higher-margin service offerings.

Facilities Management, though representing roughly 4% of total revenues, achieved 55% gross margins in Q3, up significantly from 37% a year prior, signaling improved operational efficiency and pricing power in this segment.

Management Confidence in 4Q and Beyond

Management emphasized that Q3’s shortfall reflects timing and execution challenges rather than demand weakness. Dewan noted that corrective measures have already driven “dramatically higher rack volumes” in the fourth quarter, and the company now expects full-year 2025 adjusted EBITDA growth of 50% to 75% compared with 2024—implying a substantial Q4 rebound.

For 2026, TSS Inc. initiated guidance projecting 40% to 50% organic EBITDA growth, supported by increased visibility into customer demand and the continued ramp of the Georgetown facility.

Procurement activity faced temporary disruption from a U.S. government shutdown, which paused federal deal processing. Management expects these orders to normalize but has adopted a cautious fourth-quarter forecast until visibility improves.

Board Evolution and Strategic Direction

During the quarter, TSS Inc. appointed Vivek Mohindra, currently Special Advisor to the Vice Chair and COO of Dell Technologies, to its board. Mohindra brings extensive experience in AI, strategy, and enterprise transformation—an addition management views as critical to accelerating TSS Inc.'s strategic expansion in AI, edge computing, and modular data-center solutions.