On August 13, TSS Inc. (NASDAQ:TSSI) reported second-quarter results that look worse on the top line and better underneath it. Revenue fell 20% year over year to $35.1 million, yet gross profit rose 11% and adjusted EBITDA climbed 12%. The company is deliberately walking away from lower-margin procurement work and leaning into systems integration for AI and HPC infrastructure, a business that grew 46% in the quarter. That trade-off is the whole story right now, and it cuts both ways.
Betting Big On AI Infrastructure
Systems integration revenue reached $13.9 million in the quarter, up 46% from a year earlier, and now makes up 39% of revenue, versus just 22% in last year’s second quarter. Facilities management grew even faster, up 84% to $2.7 million. CEO Darryll Dewan said systems integration is expected to keep outpacing the rest of the business given strong demand and the company’s track record on complex technology projects.
TSS has started deploying capital toward a planned $17 million investment aimed at the next wave of AI data center technology, a buildout the company expects to start converting into higher systems integration revenue in the third quarter. The company has also put an idle asset back to work: its former Round Rock integration facility began warehouse operations on May 1, generating $0.3 million in operating lease income during the quarter.
Management is also pointing to stronger months ahead. TSS expects the second half of 2026 to outperform the first half, with accelerated systems integration growth, and it maintained guidance for full-year adjusted EBITDA to land between $20 million and $22 million, at the high end of that band.
The Shrinking Core Business
The revenue decline is not small. Procurement revenue, still TSS’s largest segment by dollars, fell 45% to $18.2 million in the quarter and is down 53% to $58.2 million for the first six months of the year. That drop pulled total revenue down 20% in the quarter and 37% for the year to date, to $90.5 million, even as the higher-margin segments expanded.
Profitability also slipped on a per-share basis. Second quarter net income was $1.4 million, or $0.05 per diluted share, compared with $1.5 million and $0.06 per diluted share a year earlier, after the company began recording a full tax provision following the removal of a deferred tax asset valuation allowance in the fourth quarter of 2025. For the first six months of 2026, net income fell to $3.7 million and diluted EPS to $0.13, down from $4.5 million and $0.17 in the prior year period.
Gross profit for the first half grew just 2%, held back by $1.9 million in depreciation allocated to cost of goods sold, more than triple the $0.6 million allocated in the same period last year.
Skeptics Still Outnumber Believers
Hedge fund ownership of TSS ticked up from 14 funds to 15 in the most recent quarter, a modest sign of accumulating interest. Short sellers tell a very different story, with 15.63% of the float sold short, a level that points to heavy organized skepticism. That combination suggests that the market is split on whether the systems integration shift will show up in results fast enough. A stock with short interest this high can also move sharply if sentiment flips.
Two Stories, One Stock
TSS is remaking itself, trading a shrinking procurement business for a smaller but faster-growing systems integration and facilities management operation, and the margin and EBITDA gains suggest that trade is working even as the top line shrinks. For the bullish case to hold up, the $17 million AI data center investment needs to convert into revenue starting in the third quarter as management expects. For the skeptics, the sharp procurement decline and the drop in per-share profit are reasons to wait and see whether that promised second-half acceleration actually shows up in the numbers.
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