TSSI

Good afternoon, and welcome to the TSS, Inc. first quarter 2026 earnings results conference call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Carbonara, Investor Relations at Hayden IR. James, the floor is yours.

Thank you, operator, and good afternoon, everyone. Once again, thank you for joining us for TSS's conference call to discuss the company's first quarter 2026 financial results. Joining me today on this call are Darryll Dewan, President and CEO of TSS, and Danny Chism, the company's CFO. As we begin the call, I would like to remind everyone to take note of the cautionary language regarding forward-looking statements contained in the press release we issued today. That same language applies to comments and statements made on today's conference call. This call will contain time-sensitive information as well as forward-looking statements, which are accurate only as of today, May 7th, 2026.

TSS expressly disclaims any obligations to update, amend, supplement, or otherwise review any information or forward-looking statements made on this conference call or the replay to reflect events or circumstances that may change or arise after the date indicated, except as otherwise required by applicable law. For a list of the risks and uncertainties that may affect the company's future performance, please refer to the company's periodic filings with the SEC. In addition, we will be referring to non-GAAP financial measures. A reconciliation of the difference between those measures and the most directly comparable financial measures calculated in accordance with GAAP is included in today's press release. With that, Darryll, I will turn the call over to you.

Thank you, James, and welcome everyone. We are off to a fast, strong start in 2026. Our first quarter results reinforce continued execution of our growth plan and accelerating momentum in our Systems Integration business. Our performance continues to benefit from strong demand for AI-related infrastructure, where customers are scaling deployments to address demand for AI services and servers. We're executing effectively against our customers' demand with expanded capacity to create sustainable long-term value and making strategic investments to set the stage for future growth. Revenue of $55.3 million in the first quarter was driven by the strength in our higher margin Systems Integration business. It increased 88% year-over-year and represents a larger portion of total revenue at 25% compared to 8% in the prior year period when we had an outsized contribution from procurement.

Adjusted EBITDA was $5.3 million, up 1% year-over-year, reflecting a more favorable sales mix and the impact of growth investments related to our new facility. Systems integration remains the primary driver of growth and margin expansion in our business. Our ability to execute consistently in an increasingly complex operating environment is a key differentiator. Demand for AI infrastructure remains at an all-time high and is showing no signs of abating. Based on reports from many participants in the AI supply chain, from frontier model companies and hyperscalers to the equipment OEMs and down to the chip providers, it is clear demand is far outstripping supply. There are strong indications that frontier model companies' revenues are limited by the amount of compute they have access to. The deals between large companies to secure data center capacity continue to make weekly headlines.

We've been working to reconsider our definition of the markets we serve. Currently, we have three primary offerings: systems integration, facilities management, which includes our modular data center services business, and procurement. In systems integration, we're experiencing very rapid growth in the higher margin offerings. Our primary customers in the past have been computer equipment OEMs. These have been and continue to be wonderful customers who themselves are experiencing very rapid growth. However, there's a large part of the market the OEMs currently do not serve. We are working to understand the potential for us to serve the rack integration requirements of the rest of the overall market. Further, the complexity of data centers being built today is far greater than those built just a few short years ago.

The amount of power required to serve more dense compute environments and the systems to cool dense compute are changing data center designs. Beyond that, the networking requirements within the data center are rapidly evolving. In AI training data centers, all the GPUs are connected, and the amount of data flow is pushing the industry towards optical networking. NVIDIA announced substantial investments in this area in recent months. All of this is done to achieve greater efficiency as frontier model companies rushing to IPOs are measured on cost per token basis. There are two meaningful consequences for our company. One, first, the technical burden is being disseminated out from primary technology providers like NVIDIA to the supplier community. Rack design, server configuration, networking solutions still have reference designs from OEMs, but the details of the solutions for deployment are done by suppliers like TSS.

Second, we believe the pace of change lends itself to opportunities to both expand how we perform AI rack integration and to consider offering additional services beyond AI rack integration. For these two reasons, we have made important additions to our leadership team that I'm proud to expand on in just a few minutes. Importantly, we are scaling our operations along this demand. Let's recall our Georgetown, Texas facility opened its doors less than a year ago and really began flowing orders six to seven months ago. We have expanded our capacity and execution capabilities, including scaling AI rack integration throughput, optimizing our facility footprint, and increasing operational readiness to support higher volume. As a result, within this month, we will have completed more AI rack integrations in 2026 than we delivered all of last year. `` Importantly, we have remaining capacity within our existing footprint to support additional growth as demand requires.

In other words, we are executing in line with our expectations and remain on track with our internal plan for the year. In addition, we're continuing to optimize our operational footprint. Since we moved rack integration operations nine miles north from Round Rock to Georgetown, our Round Rock facility has been idle. In line with our 2026 operating plan, we have now dedicated the entire Round Rock facility to warehousing AI rack material for our largest OEM customer. We began providing this service May 1st of this year, and the contribution from this activity is included in our Adjusted EBITDA guidance for the year. Last week, we announced a significant strengthening of our leadership team to support our next phase of growth.

I'm pleased to announce and proud to have Matt Wallace appointed to the Chief Strategy Officer and as well David Hull appointed to the Chief Technology Officer. Matt brings deep experience in corporate strategy, business transformation, and strategic partnerships with a track record of driving growth initiatives across the infrastructure technology sector. David brings extensive engineering and infrastructure leadership experience, including scaling technical organizations and developing integration capabilities for large-scale deployments. Both of these executives bring established industry relationships to TSS that enhance our ability to engage across customers and partners. Most importantly, these additions are aligned with our focus on disciplined growth, both organic and strategic. These roles are intended to strengthen execution, expand our partnerships, and support long-term scaling of the business. As we look ahead, we are well positioned for another record year.

Our outlook for Adjusted EBITDA in the range of $20 million-$22 million for the full year is supported by a multiyear agreement that provides both revenue visibility, downside protection, expanding capacity and capabilities, and a strengthening leadership team. We expect our full year results to be at the high end of the previously set range. Importantly, we operate in an addressable market that is massive and growing rapidly, and we remain focused on disciplined execution across the business. We are working on strategies to position the company in 2026 to address a wider market of customers with expanded set of services. So, with that, let me turn the call to Danny for more detailed discussion of our financial results. Danny?

Thanks, Darryll. Consolidated total revenue in the first quarter was $55.3 million, down from $99 million in the year-ago quarter. The decrease was driven primarily by the lower level of procurement services activities, with systems integration revenues up 88% and facilities management revenues in line with the prior year. It was encouraging to see strong year-over-year growth this quarter in our systems integration business, which carries richer margins than the procurement business. As you may recall, procurement service revenue is a meaningful yet inherently variable component of our business with the narrowest margins of all our business lines, with volume variances driven primarily by the timing and scale of customer infrastructure purchasing.

While periods of elevated procurement activity, like we experienced in the first quarter of last year, can occur in response to large-scale deployment cycles, the revenue stream is not linear and can fluctuate significantly from quarter to quarter, depending on customer ordering patterns and program timing. Revenue from procurement services totaled $40 million, down 56% year-over-year from $90.2 million. This represented a return to a more typical level of procurement activity compared to the extraordinarily high record level seen in the first quarter of last year. Revenue from our Systems Integration segment increased 88% year-over-year from seven and a half million dollars in the first quarter of 2025 to $14.1 million in Q1 of this year, reflecting continued strong demand and execution across large-scale infrastructure deployments.

This also reflects the positive impact of the renegotiation of our long-term AI rack integration agreement in Q4 2025, taking into account our full CapEx investment and increased electrical power availability. We've also continued to see an increase in the number of AI racks coming to us for integration. Systems integration is a core growth and value driver for our business. As customers continue to move towards increasingly complex and higher volume infrastructure deployments, we continue to see a corresponding and sustained shift in demand and revenue mix towards integration services, which are higher value, more scalable, and more directly linked to the long-term growth and margin expansion.

Sequentially, the current quarter systems integration revenues look relatively flat at $14.1 million compared to $14.2 million in the fourth quarter of 2025. If you recall my comments from last quarter, the fourth quarter systems integration revenues included approximately $1 million related to costs that we had incurred and recorded in periods prior to Q4, before which we could not invoice or recognize revenue until the amendment was signed to our long-term agreement. It also included approximately $800,000 of accelerated recognition of enablement costs reimbursed to us by one of our customers, which we originally anticipated amortizing into revenues mostly in 2026. Excluding those two amounts from the Q4 systems integration revenues, the current quarter's $14.1 million represents a $1.7 million or 14% increase compared to Q4 2025.

Revenue from facilities management totaled $1.3 million, in line with the prior year quarter. Maintenance revenue in this segment decreased by $166,000 or 19% as certain customers opted not to renew maintenance agreements on some older MDCs, offset by $158,000 or 37% increase in discrete project work in the quarter. Consolidated gross margin was 15.9% in the current quarter, up from 9.3% in the first quarter of last year. The improvement was primarily due to a measurable shift in our revenue mix compared to the prior year, with less reliance on lower-yielding services. As Darryll mentioned, at 25%, systems integration revenues represented a much larger percentage of our total revenue in the current quarter compared to only 8% in the prior year quarter.

Systems integration is the key growth driver for the company and represents a structurally higher margin business relative to procurement. As this segment continues to scale and represent a larger share of our total revenue, we expect it to remain a primary contributor to both margin expansion and overall profitability. This mix shift reflects not only strong demand for integration services, but also the increasing complexity and value of the work we're performing for customers as they deploy larger and more sophisticated infrastructure environments. Blended margins will continue to fluctuate a bit from quarter to quarter, depending on the level of procurement activity in any individual quarter. It makes the most sense to evaluate the margins of each business line individually. Procurement gross margin was 6.7% in the current quarter, down 110 basis points from the prior year quarter.

When viewed using the non-GAAP gross value of all transactions, which we see as more of an apples to apples comparison, gross margin likewise decreased 110 basis points from 6.6% in the prior year quarter to 5.5% in the current quarter. The prior year quarter included a large sale with a larger margin than is normal in the business, whereas the current quarter is more in line with normal expectations. Sequentially, the 5.5% margin in the current quarter compares favorably to the 5.2% in the fourth quarter of last year and 5.4% for the full year 2025, all when viewed on a gross basis. At 64.7%, the gross margin in facilities management represents a substantial improvement from 40.9% in the prior year quarter.

This reflects a greater use of internal resources rather than subcontractors, particularly on the discrete projects in the period. As a result, gross profit from the FM business was $835,000 compared to $531,000 in the first year, first quarter of last year, even on slightly lower total revenues. Systems integration gross margins increased more than 1,500 basis points from 22.1% in the first quarter of last year to 37.5% in the current quarter. As mentioned in our last earnings announcement, we renegotiated our agreement in December 2025 covering most of our AI rack integration services, increasing the rate we now charge to recapture incremental investments we made last year in CapEx and additional power availability.

We also earn a higher margin with increased volume of AI racks built, as we saw this quarter compared to Q1 of last year. We anticipate the higher volumes and wider margins to continue into future periods. SG&A expenses in the first quarter of 2026 were five and a half million dollars, an increase of $635,000 or 13% over the prior year period. Approximately $130,000 of the increase relates to non-cash stock-based compensation, with the remainder related primarily to higher headcount and related compensation costs to support our growth. Depreciation and amortization expenses not allocated to COGS were $306,000 compared to $210,000 in the prior year. This increase is related to depreciation of assets added over the last year to support the overall growth of the business.

Bank factoring fees decreased from one and a half million dollars in the first quarter of 2025 to $704,000 in the first quarter of 2026 due to favorable shifts in interest rates compounded by a lower volume of receivables factored. As a percentage of GAAP revenues, these fees improved 20 basis points from 1.5% in the prior year quarter to 1.3% in the current quarter. As these fees are charged on a non-GAAP gross value of all transactions, we find reviewing these fees as a percentage of those gross sales values as more meaningful.

On that basis, factoring fees improved from 1.3% of gross transaction value in Q1 of last year to 1.1% in the first quarter of this year. As a net result of these factors, operating income decreased 14% from $2.6 million in the prior year quarter to $2.3 million in the first quarter of 2026. Interest on our bank debt was all capitalized in Q1 2025 during the construction period of our Georgetown facility, so we recorded no interest expense on our income statement in that period. This compares to $333,000 in the current quarter, reflecting primarily the interest cost on our fully amortizing bank loan.

Reflecting the higher average cash balance on hand this quarter compared to Q1 last year, interest income increased from $383,000 this quarter last year to $725,000 in the current quarter. Following the Q4 2025 reversal of the valuation allowance on our deferred tax asset, our tax expense now reflects federal and state income taxes net of discrete items where prior periods taxes represented almost exclusively the Texas franchise tax. The income tax expense in the current quarter was $391,000, or 14.7% of pre-tax income, compared to $49,000, or 1.6% of pre-tax income in the prior year quarter.

The current quarter effective tax rate is comprised of federal and state income taxes of 28.2% of pre-tax income, net of a large discrete tax benefit in the period related to the vesting of employee stock. We expect the effective tax rate in the second through fourth quarters to be approximately 26%, yielding a full year effective tax rate of approximately 22.7%. This could be affected by large discrete items in future periods. The net result of these key items is a net income for the first quarter of $2.3 million, down 24% from $3 million in the year ago quarter, driven primarily by the more normalized level of procurement activity in the current quarter and higher recorded income tax expense. Our diluted EPS was $0.08 per share compared to $0.12 per share last year.

Adjusted EBITDA was $5.3 million, a 1% increase compared to $5.2 million in the prior year quarter. Now taking a quick look at a few things from our balance sheet. Our net working capital improved by over $2 million in the current quarter, ending at $48.1 million, primarily due to the $2.3 million net income in the current period. We used roughly $20 million of cash to pay off accounts payable and accrued expenses in the period, while reductions in inventories and costs in excess of billings on work in process at year-end roughly offset the reduction in deferred revenues.

Also reflected in the ending cash balance is the use of $1 million to repay long-term debt and $1.4 million to repurchase stock from employees upon the vesting of their restricted stock as a means for them to meet their tax obligations upon vesting. In summary, our results for the quarter reflect the impact of a meaningful shift in revenue mix in line with our long-term strategy. While total revenue was affected by a challenging comparison to record level procurement revenues in Q1 last year, the increasing contribution from systems integration and facilities management all but offset that dynamic from a profitability standpoint. As systems integration represented a larger share of total revenue in the quarter, there was a corresponding expansion in both gross margin and Adjusted EBITDA.

This highlights the underlying strength of the business and reinforces the importance of systems integration as the primary driver of both growth and profitability going forward. Lastly, I'll mention that our primary customer recently requested that we invest roughly another $17 million into CapEx to support the next generation of AI racks. We've just started that process and expect to add those assets between now and the third quarter. Once that investment is complete and the assets are put in use, we expect the revenues we earn from our primary AI systems integration customer to once again increase over the next several years, reflecting our recapture of these investments, the related cost of capital and related profit. With that, I'll turn the call back over to Darryll for some closing comments.

Great. Thank you, Danny. Well done. I'd like to summarize our call by reinforcing three key points. First, the quarter reflects continued execution and a business that is evolving in the right direction. Systems integration continues to scale, and as it becomes a larger part of our business, it is driving both margin expansion and overall profitability. Second, our demand remains strong. We are operating in an environment where customers are deploying increasingly complex infrastructure at greater scale, and we are well positioned to support that demand, and we're working hard to do that. Just as importantly, we have built the operational capacity and capabilities to continue scaling alongside our customers. Third, we are being very deliberate in how we position a business for the next phase of growth. We've expanded capacity, optimized our footprint, strengthened our leadership team with additions that bring both experience and industry connectivity.

These investments are directly aligned with our focus on disciplined execution and long-term growth. So, Operator, I'll hand the call back to you for questions.

Thank you. The floor is now open for questions. If you would like to join the queue to ask a question at this time, please press star one on your telephone keypad. We do ask if listening on speaker phone today that you pick up your handset while asking your question to provide optimal sound quality. Once again, please press star one on your telephone keypad now if you wish to join the queue to ask a question. Please hold a moment while we poll for questions. The first question today is coming from Matt Calitri from Needham & Company. Matt, your line is live. Please go ahead.

Hey, guys. Matt Calitri from Needham here. Thanks for taking the questions. Danny, you kind of buried the lead there on us, but awesome to hear on the increased CapEx investment. Can you give a little more color there? Like, is that going to be a new facility or expansion of existing? What did you say the timeline was there?

No, not a new facility. It's really in recognition of technology moving to Vera Rubin. Higher power, more cooling requirement. It's gonna require an investment. Like I said, we're expecting about $17 million. That may move a little bit up or down as we go through that process, but we anticipate that being completed at some point in the third quarter, and starting to put that into use relatively quickly at that point. Generally the way we structure that with our customers, we spend that money up front. It's, you know, part of why we raised the money last year was to be able to make strategic investments like this, both organic and inorganic. We anticipate that returning a pretty healthy return on that investment over the next several years as we recapture that through higher pricing.

Awesome. Awesome. Yeah and plenty of cash on the balance sheet, like you said. Like you said, it's related to Vera Rubin, some new technology. Will you get increased capacity out of this too? It's the same amount of capacity, but it requires a higher load to support?

Hey, Matt. Darryll. Good question. I think it'll be a TBD. See how it plays out. Increased capacity potential above and beyond what we have today with the technology that's coming through the doors today. It's a very powerful solution, as you know. We're positioning ourselves to make sure that we continue to compete for that increased technology advancement. I think that, you know, it'll be determined whether or not it eats into the existing business line. I don't think it will. I think it'll be net incremental in some degree. We'll see. I know there's a lot of demand for it, and I know that we wouldn't be chasing it if we didn't make these investments. We're all in.

Got it. No, that's great. I guess, like in the meantime, with the capacity you do have, you had noted that you still have excess capacity in Georgetown. Is there any way to think about, like, how much capacity that is and, like, what that could translate to in revenue?

I don't think we're gonna go on the revenue side at the moment. I, you know, we've said before, Matt, that we can scale in this facility, given the current mix of technology, the current validation test times, which we're working on re-reducing the time that it takes to validate a rack. We reduce the time, we get more throughput. We can grow multiples over where we're at today in this facility.

Oh, great.

Matt, one to remember there too, as you think about the financial impact of that, remember, we've got an agreement that gives us some pretty good downside protection when volumes fall off a bit. Until we hit kinda guaranteed minimums, you don't see a huge uplift in the revenue. There is some, but that gets really much more dramatic as we get over those minimums. That's where that starts getting pretty exciting.

To be clear, you have not cleared those minimums yet?

Matt, yeah, Matt, there are opportunity. The answer is, without going into a whole lot of detail, we have on occasion, it's measured on a weekly basis. And we are prepared, and we're doing everything we can to drive more business volume. That means making sure we have the right people in the factory, making sure we have the right process from receiving all the way to shipment, making sure we're doing the right thing in QA, making sure that we're optimizing the validation test time, making sure we've got the right, as I mentioned earlier, the right team. I think we've come a long way. So, that, you know, if that helps any. I just want to make sure you heard that.

Yeah. No, absolutely. Thanks so much, guys.

You bet.

Thank you. Your next question is coming from Alex Fuhrman from Lucid Capital Markets. Alex, your line is live. Please go ahead.

Hey, guys. Thanks very much for taking my question. Congratulations on a strong start to the year. Something you guys mentioned in your prepared remarks, that integration demand is continuing to exceed the volume that's incorporated into your outlook. Can you help us understand that a little bit more? Is the takeaway here just that the guidance is more likely conservative? Or, you know, is there demand out there that you're not able to meet because of availability of components or labor or some other constraint out there?

Hey, Alex, this is Darryll. I'm gonna let Danny handle that one. You know, I'm just a sales guy. You know, he's the numbers guy. I put him on a wall.

Yeah, it's not so much a capacity limitation really. It's, you know, trying to be conservative in the forecasting. The last thing I wanna do is get out over our skis and create disappointments. So, you know, we try to remain conservative and provide opportunity to exceed that guidance. Some of that, you know, is not getting the market ahead of itself in productivity as well. So it's really more reflective probably of just the conservative nature of, you know, trying not to stick the neck out too much on guidance and always set it up to where we can not disappoint.

Okay. That's really helpful. And then, I think you guys had talked about taking a prudent view on the availability of some components. Is there anything in particular that, you know, is either pressuring margins or just, you know, any components that you wanna make sure to get ahead of any potential shortages of?

Alex, our key customer handles that better than anybody, and they are constantly moving amongst their supply chain to go capitalize on product availability, the best price. You know, we're the recipients of that good work, so we're not really out there negotiating or trying to influence that. We just do the best we can that when all of that gets to our facility, we put it together as fast as with as much quality as we can to get it out the door. There's a lot of stuff that's a challenge in the market. You know, everybody knows that there's supply and there's an incredible amount of demand, but our customers do a really good job of managing that.

Okay. That's really helpful. Darryll, just curious, you said something towards the end there that, you know, if you could get the testing of your racks done faster, it sounds like you could get pretty substantial increase in output. I think you even mentioned maybe doubling in some areas. Can you help unpack that a little bit more? Is that just because power is a bottleneck here and how much power it takes to test the racks? Just can you help me understand that a little bit more?

Yeah. You know, I try to come up with an analogy, and I'm not sure it's a good one, but if you've had a V8 engine, you're testing the engine to make sure all the cylinders are working at the right time and in concert with one another. So, the validation testing that goes on is similar to that. When you have a rack all put together with all the GPUs and all the servers and everything cabled and labeled, we run, you know, our customer is responsible for providing the test sequence to validate that everything's working as advertised and as planned. That sometimes can take longer than we'd like and they would like.

If we could, you know, arguably cut that in half, think about it, we could push more volume through the business and get to maybe even 2x volume with current load. It's just, it's really that simple. And we're working hard with that, by the way. We're engaging a lot of latest and greatest AI technology to find ways to make that accelerate that evaluation test time.

Great. That's really helpful, Darryll. Appreciate that.

You bet. Good to talk to you, Alex.

Thank you. Your next question is coming from Mac Furst from Singular Research. Mac, your line is live. Please go ahead.

Hi. This is Mac Furst with Singular Research. Congratulations on the quarter.

Thanks, Mac.

Yeah. My background is more IT than accounting, but I do have an accounting question for Danny. You said that the federal taxes increased 8-fold. Can you give us a little bit of a background and color on why they increased 8-fold, please?

Yeah. Absolutely. We previously had a full valuation allowance on our deferred tax asset. Our DTA is close to $8 million. And up until the fourth quarter of last year, we kept a full valuation allowance on it. Any, other than Texas franchise tax, which runs around 2%, effective tax rate, other than that, any federal income taxes that we would have had or other state income taxes were largely offset by utilization of that deferred tax asset. But because we had a full valuation allowance on it, we would just relieve a piece of that valuation allowance every period. What actually hit our income statement was really just the Texas franchise tax.

In the fourth quarter of last year, we made the determination that we now have a long enough earnings trend, taxable income trend, and expected taxable income in the future that we remove that full valuation allowance. That's why you saw net income spike. Almost half of our net income last fiscal year was recorded in the fourth quarter as a reversal of that valuation allowance. Now every period going forward, we no longer have that valuation allowance to absorb the federal income tax. Now we're actually recording that in the income statement. Not really a change in the cash taxes that we're paying, it's just a change in what gets recognized on the income statement now. Does that make sense?

Understand. Thank you very much. Yeah. Thank you very much.

Thank you. There are no further questions in queue at this time, so this does conclude our question and answer session. Now like to pass the floor back to Darryll Dewan for closing remarks.

Okay. Thank you for that. Thanks everybody for being on the call. We really appreciate your continued interest and your support. We're expanding the margins in our growing business, especially in our Systems Integration business, we're continuing to shift a greater proportion of our total revenues to that segment. Combined with a continued increase in rack volumes, we're gonna carry a strong momentum into Q2 and beyond. While we're excited about all this and your organic growth, we're also excited to get to work with our new executives to explore how to further diversify our revenues and opportunities to take the company to the next level. As I've said in the past, I'm very proud of the team. I thank our board, appreciate the investor community that's following us, know that we're very committed to continued execution and profitable growth.

With that, I thank you, and I guess we're done for today, right?

Thank you. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you once again for your participation.

Greetings, ladies and gentlemen, and welcome to the TSS, Inc. fourth quarter 2025 earnings results conference call. At this time, all participants are placed on a listen-only mode, and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. James Carbonara of Hayden IR. Sir, you may begin.

Thank you, operator, and good day, everyone. Thank you for joining us for TSS's conference call to discuss the company's fourth quarter and full year 2025 financial results. Joining me today on this call are Darryll Dewan, President and CEO of TSS, Danny Chism, the company's CFO. As we begin the call, I would like to remind everyone to take note of the cautionary language regarding forward-looking statements contained in the press release we issued today. That same language applies to comments and statements made on today's conference call. This call will contain time-sensitive information as well as forward-looking statements, which are accurate only as of today, March 11, 2026.

TSS expressly disclaims any obligation to update, amend, supplement, or otherwise review any information or forward-looking statements made on this conference call or the replay to reflect events or circumstances that may change or arise after the date indicated, except as otherwise required by applicable law. For a list of the risks and uncertainties that may affect the company's future performance, please refer to the company's periodic filings with the SEC. In addition, we'll be referring to non-GAAP financial measures. A reconciliation to the difference between these measures and the most directly comparable financial measures calculated in accordance with U.S. GAAP is included in today's press release. With that, Darryll, I will turn the call over to you.

Thank you, James. I appreciate it. Thanks, everyone, for joining us today. I'm pleased to report a very strong fourth quarter that caps a transformational 2025 for TSS. During the year, rack integration volumes in our new Georgetown, Texas facility came online and grew late in the year, setting us up for an exciting 2026 as industry demand continues to grow. In the fourth quarter, we delivered year-over-year growth in both revenue and profitability, with sequential improvement over our third quarter. Adjusted EBITDA for the full year reached approximately $18.6 million, ahead of our guidance range of 50%-75% from a foundation of $15 million-$17 million, and up from $10.2 million last year. That represents rapid growth resulting from both higher AI volumes and continued operating discipline across our entire business.

As we exited the year, the run rate of our business improved meaningfully from mid-year levels. Higher rack integration output better absorbed fixed costs in our facility. The step-up in Q4 gives us confidence that the structural investments we've made in capacity, systems and talent can scale and meet increased demand for our AI infrastructure. The market environment and customer momentum. The environment in which we operate is dynamic, but one thing is clear: AI demand is not slowing. Hyperscalers and large enterprises continue to invest in accelerated computing, next-generation servers, and the associated power and cooling infrastructure. Recent results and outlooks from OEMs in the AI infrastructure market underscore this trend, with strong growth in servers and networking driven by AI and traditional server demand, and an expectation of continued revenue and EPS growth in the fiscal 2026 or fiscal 2027.

Customer adoption of AI is broadening beyond early adopters into mainstream enterprise. Multiple independent studies now indicate that a substantial majority of medium and large enterprises are actively piloting or planning to implement AI in production workflows for inferencing, with adoption rates commonly cited in the 70%-80% range or higher across larger revenue tiers. As these initiatives move from experimentation into scaled deployment, customers are seeking trusted partners who can deliver even more complex, power-dense technology at speed with high quality, and that is exactly where we, TSS, are positioned. We were pleased to extend and expand our relationship with our primary customer under a multi-year contract. We view this modification and extension as both validation of our execution and a key pillar of our growth strategy.

The agreement was amended to address certain circumstances that were not expected in the original version, such as additional fixed costs associated with power infrastructure required on-site and a few other items. Our partner agreed this amendment provided an opportunity to reset the agreement's term, a very positive signal as to the strength and durability of the relationship. Fiscal 2025 was truly a year of transformation for TSS. We scaled our new Georgetown facility, upgraded the IT systems, and refined processes to support much higher volumes of AI-related rack integration. We worked through the operational challenges of bringing a new facility online, and by Q4, we made substantial progress improving speed, quality, and time to market for our customers. 2026 will be about the next chapter of growth for TSS. We are constantly improving the operations of our facility. That job is never done.

2026 is about seizing market share in AI rack integration, extending our modular data center capabilities into the AI world, and strategically expanding our service offering to capture broader opportunity in AI data centers. The progress of the AI chip market plays directly to our capabilities. Racks are larger, heavier, more complicated, require more power and more cooling. Our Georgetown facility is purpose-built to integrate racks of this nature. Paired with rapid delivery timelines, growing rack complexity should drive more market share for TSS. This market is extremely dynamic. Deal sizes can be enormous, the supply chain can be challenging, and the latest and primary example being the memory shortages are rapidly driving price increases for memory and delays in overall data center deployment timelines. This all makes forecasting rack integration volumes more difficult to predict with precision.

We began 2026 with an internal forecast based on near-term visible deals in our pipeline, driven by our customers' pipelines, and already we are seeing volume forecasts surpassing our plan. In fact, we've begun discussions about potentially expanding our capacity even further. That is how quickly this market is moving. With that, let me turn the call over to Danny for a much more detailed discussion of our financial results. Danny?

Thanks, Darryll. Appreciate it. This is another record quarter and full year for TSS as we continue to raise the bar of our financial and operational performance. We also have a few unique items affecting this quarter's results, so let's jump into the details. I'll focus my comments primarily on the full year with some specific highlights from Q4. If you look towards the bottom of the income statement, you'll see that we recorded an income tax benefit this period of $7.6 million, comprising about half of the net income for the full year. By the way, that's half of a net income figure that's up 153% over the prior year's net income. Still a strong double-digit growth in pre-tax income even without that. Why the big income tax benefit?

Several years ago, we established a full valuation allowance on our DTA, or deferred tax asset, due to our history of net operating losses in past years. With a significant improvement in pre-tax income over the last two years, punctuated by the amendment to our long-term AI rack integration agreement that Darryll mentioned just a second ago, signed in December, management now has a high degree of confidence in utilizing the DTA in future periods. Accordingly, we removed the valuation allowance on almost all the DTA, essentially coming in as a one-time gain this period. Future income statements will show an income tax expense more in line with what you'd typically expect. This will vary some, but currently, we expect our 2026 effective tax rate to be approximately 21%-22%.

As part of reversing the valuation allowance on the DTA, you'll also see a $7.9 million DTA on our balance sheet, representing the future reduction in cash taxes we expect to realize as we utilize our accumulated net operating losses to offset future taxable income. Excluding the large income tax benefit, this quarter was still quite strong. In fact, the $7.9 million adjusted EBITDA this quarter was 50% higher than the prior record adjusted EBITDA we posted in the first quarter of 2025. Full year adjusted EBITDA of $18.6 million is 83% higher than last year's $10.2 million, topping the high end of our prior guidance, as Darryll mentioned. Let's jump into the details of what drove the strong performance.

Consolidated total revenue increased by 66% in 2025 to $245.7 million, up from just over $148 million last year. That increase was driven by significant year-over-year growth in our two largest service lines, procurement and systems integration, with facilities management revenues very near the prior year level for the full year. Full year revenue from procurement services totaled $197.5 million, up 68% from the $117.5 million in 2024. With gross profit margins on procurement expanding 100 basis points from 6.7% in the prior year to 7.7% in the current year, gross profit growth from procurement grew at a faster pace than revenues, up 94%.

Even when viewed on a non-GAAP gross basis, regardless of whether procurement deals were accounted for as gross or net, total transaction values increased 65% to almost $280 million. Gross profit margins increased from 4.6% to 5.4%. To be clear, those margins and gross value transactions are non-GAAP, but we find them useful internally as they allow us to analyze the underlying economics of the procurement business, ignoring the U.S. GAAP requirement to record only our agent fee on net deals. Revenue from facilities management, comprised of typically annual maintenance contracts and some discrete or one-time project work, totaled $7.9 million, down 1% from $8 million last year. Our maintenance revenues in the segment were down 12% for the full year, driven primarily by year-over-year decreases in the first two quarters.

Maintenance revenues in Q3 and Q4 were up 9% and 8% respectively over the prior year. In addition to the maintenance revenues, the facilities management segment also earns revenues from discrete or non-recurring project work. I mentioned last quarter that through the first three quarters of the year, discrete project work was a bit behind the prior year, and that we expected a reversal of that trend in Q4. That's exactly what we experienced. Revenues from discrete projects in the fourth quarter were $2.5 million, up 263% from $700,000 in the fourth quarter of last year. Including those strong Q4 results, the full year discrete project revenues increased 12% from $3.6 million to $4 million.

For the full year, revenue from the systems integration segment increased 78% year-over-year to $40.3 million. In the fourth quarter, revenues in this segment increased from $7.9 million last year to $14.2 million in the fourth quarter of this year. While a good portion of that increase relates to strong organic growth in rack integration volumes in the current year, in more recent quarter, there are a couple items included in that uptick that I want to point out for more thorough understanding of the drivers of the lift.

First, if you recall, I mentioned last quarter that in response to our customers' increasing needs, the Q3 results reflected incremental costs related primarily to depreciation of additional fixed assets we added beyond our initial plans and investments in securing and maintaining additional electrical power at the building, now at 15 MW, but that our revenue stream would not likely reflect the benefit of those incremental investments until Q4. In December 2025, we signed an amendment to our long-term AI rack integration agreement with our largest customer, taking into account these incremental investments we've made, as well as updating pricing for current rack configurations. As a result, Q4 results include approximately $1 million of additional revenue related to activities and expenses we incurred in Q2 to Q3 2025.

The contract amendment also extended the agreement for an additional two years beyond the initial multiyear term, giving us enhanced visibility of expected revenue growth. Second, when we first began ramping our AI rack integration volumes in 2024, we received a reimbursement from one of our customers to enable our former integration facility in Round Rock, Texas, to integrate AI racks. We were recognizing related revenues over a 36-month estimated useful life of those assets, with roughly half of that recognized to date. With our integration operations now fully moved to our Georgetown facility, we determine it's no longer likely we'll use those assets to perform AI rack integration activities in our Round Rock facility. As a result, we accelerated recognition of the remaining $800,000 of the reimbursement in the fourth quarter of 2025, pulling forward most of the revenue we expected to be recorded in 2026.

This has no impact on cash flows as the cash was all received in 2024. Related directly to this, you'll also see on the income statement a charge of $658,000 for a loss on disposal of assets in 2025. Just like the reimbursement from our customer was being amortized into revenues over a 36-month period, the related fixed assets we added with those funds in 2024 to enable us to integrate AI racks in our Round Rock facility were also being depreciated over that same 36-month period. Commensurate with the determination that we needed to accelerate recognition on the reimbursement, this loss on disposal represents the acceleration of depreciation we would have otherwise recognized mostly in 2026.

As part of the amendment to our long-term rack integration agreement signed in December, we extended the agreement for an additional two years beyond the initial multiyear term, giving us enhanced revenue visibility even further into the future. Consolidated gross margin was 18.6% in the current quarter, up from 14.4% in the fourth quarter of last year, heavily influenced by the impact of signing the amendment to our long-term AI rack integration agreement. For the full year, consolidated gross margins were 13.2% compared to 15.1% in 2024. In 2025, we first started allocating the operations-related depreciation of our Georgetown facility to cost of revenues, accounting for more than half of the difference in gross margin.

With procurement revenues bearing a smaller gross margin than our other revenue streams, the outsized growth in our procurement business in 2025 drove much of the remaining year-over-year consolidated blended margin decrease. Breaking our gross margin down by segment. Based on recorded GAAP revenues, procurement gross margins improved to 7.7% in the current year, up 100 basis points from the prior year. When viewed using non-GAAP gross values of the transaction, which we see as more apples to apples comparison, gross margins improved 80 basis points to 5.4% in the current year. Facilities management gross margins were down slightly at 60% compared to 62% in the prior year, reflecting a slight decrease in higher margin maintenance revenues seen in the first and second quarters of the year.

As a result, gross profit from the FM business was $4.8 million compared to $4.9 million in 2024. Systems integration gross margins decreased from 42% in 2024 to 31% in the current year. As I mentioned a moment ago, we first started allocating operations-related depreciation to this segment in 2025, accounting for 7 percentage points or more than half of the overall decrease in SI margins. If you recall, I also mentioned last quarter that we spent more than we originally planned on capital expenditures in our new Georgetown facility and significantly increased the available power at the new building, both in response to changing needs from our customer. The higher cost per power included not only capital investments in equipment, but also higher period costs related to charges from the local power company.

The revenues to which we were entitled under our long-term AI rack integration agreement we had in place did not yet reflect those additional investments and costs. The amendment to the agreement signed in December not only amended future pricing to incorporate those additional costs and those incurred in the December quarter, it also allowed us to recapture roughly $1 million of costs incurred earlier in the year. Lastly, as mentioned earlier, the current quarter and full year revenues for the systems integration segment reflect the accelerated recognition of approximately $800,000 of revenue. This represents revenue contemplated in our prior 2026 EBITDA guidance. Importantly, though, we are not lowering 2026 EBITDA guidance. The bar against 2025 EBITDA was just raised on impacts to 2025 results from the amended agreement.

SG&A expenses of $20.7 million in 2025 increased 56% or $7.4 million over last year. Over a third, or $2.7 million of the increase relates to non-cash stock compensation, with the remainder related to higher headcount and related compensation costs to strategically support the growing scale of the organization, combined with higher accruals for incentive compensation tied directly to the year's improvement in sales and earnings. Also included in the current year are incremental costs for the 2025 annual audit and SOX control work. Depreciation and amortization expenses not allocated to COGS were $1.1 million compared to $608,000 last year. That increase is related to amortization of our ERP implementation costs and depreciation of other assets related to the overall growth of the business.

To provide greater transparency and ability to forecast future results, we've now broken out separately in our income statement bank factoring fees, which were previously grouped with our interest expense. Bank factoring fees increased from $2.7 million in the prior year to $3.7 million in 2025, reflective of a higher level of billings on which those fees are charged. As a percentage of recorded revenues, those fees are 1.5% in the current year, down from 1.8% in the prior year. As a net result of the above factors for the full year, operating income increased 10% from $5.8 million in the prior year to $6.3 million.

The change driven primarily by $10 million increase in gross profit, net of the $7.4 million increase in SG&A expenses and other items discussed. Now that we've broken out separately the bank factoring fees, the $651,000 of interest expense represents exclusively interest on our outstanding bank loan, net of amounts capitalized earlier this year while we were building out our Georgetown integration facility through around May. Interest income this year increased from $562,000 last year to $1.7 million this year, primarily due to the higher average cash balance held this year. The net result of these items is a net income for the year of $15.1 million, up 153% from 2024's net income of $6 million.

Our diluted EPS improved 133% from $0.24 per share to $0.56 per share. Adjusted EBITDA was $18.6 million, an increase of 83% compared to $10.2 million in the prior year. Excluding the $800,000 accelerated recognition of the customer's reimbursement, which we previously expected to recognize in 2026, adjusted EBITDA would've been $17.8 million, up 75% over the 2024 adjusted EBITDA. Now taking just a quick look at a couple things from our balance sheet. We ended 2025 with $85.5 million of unrestricted cash and cash equivalents, a $62.3 million increase from year-end 2024. In August, we raised $55.3 million of net proceeds in a secondary offering to fund future strategic growth opportunities.

Cash flow from operations increased significantly from $15.3 million in 2024 to over $30 million in 2025. This, together with $9.8 million of net borrowings and $6.8 million received from our landlord in Q4 for tenant improvements, funded $32.7 million of CapEx and the repurchase of $4.9 million of Treasury stock as employees net settled upon vesting in restricted stock and option exercises. Net working capital also improved from $1.3 million at year-end 2024 to $46.1 million at the end of 2025. In the fourth quarter alone, net working capital improved by $11.7 million. As you can see, there was a lot going on throughout 2025, in the fourth quarter in particular.

After normalizing for the non-recurring benefits and costs and the impact of the DTA valuation allowance reversal, this remains our strongest EBITDA quarter ever, and net income and EPS showed a nice increase. This, combined with significant increases in demand publicly announced by our largest customer, sets a great foundation for continued growth in 2026 and beyond. With that, I'll turn the call back over to Darryll for some closing comments.

Okay. Thanks, Danny, for the financial detail and update. Folks, we love these market dynamics. We're very highly optimistic about our business outlook for 2026. Our Q4 results demonstrate that we can handle record systems integration volumes, and given the excitement of recently reported record demand projections, we are ready to deliver more. The added visibility provided by our long-term customer agreement gives us an additional optimism about the future of our business. We are forecasting continued growth in earnings in 2026, with adjusted EBIT expected in the $20-$22 million range. We believe this to be a conservative estimate reflecting supply chain volatility, the timing of deal closing, and a robust demand forecast from industry leaders. Over time, we see this potential to grow well beyond the guidance.

Our strategic planning process is well underway, with a clear mandate to evaluate multiple routes to market, including deepened partnerships, selective acquisitions, and potential JVs, joint ventures that can expand our capabilities, diversify our revenue base, and enhance our position in the AI infrastructure ecosystem. We're focused on both organic growth and strategic growth that is complementary to our existing business relationships. This is important to us. We expect to share more about this plan soon and how the capital we raise will support the long-term value creation. To summarize, we're proud we delivered solid results in the fourth quarter and for the full year. We exceeded our EBITDA guidance and exited 2025 with strong momentum in a market where AI demand continues to accelerate.

It has been a great year of transformation for the company, marked by improved operational excellence, deeper strategic alignment with key customers, and a sharper focus on speed, quality, and time to value as our key differentiators. I'd also like to recognize the good work performed by our factory team. They are in the trenches making all this happen. We are very excited and optimistic about the future. Customers' modernization journeys are occurring at historic rates, and the adoption of AI is expanding rapidly, and enterprises increasingly recognize the need for trusted partnerships to help them implement these complex, power-intensive infrastructure solutions. TSS is well positioned to deliver. Thank you all for joining us on this journey. Operator, I'll turn it back to you for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting our question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue, and you may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. Our first question is coming from Matthew Calitri with Needham & Company. Your line is live.

Hey, guys. This is Matthew Calitri over at Needham. Thanks for taking the questions. Can you give any more color on the amended agreement with your largest customer? Was there any change in the minimum order volume attached with that, or is it more focused on recouping those fixed investments like you talked about? Anything there would be helpful.

Hey, Matthew. Darryll. Thanks for the question. Really, it's a combination of adjustments. One is the term length, which is encouraging. That's always a good sign. Two is, you know, we're investing in infrastructure, power, water, so to speak, direct liquid cooling capabilities or thermal management, and the opportunity to scale volume. So from a foundation standpoint, the base structure of the, if you will, volume commitments is the same. The term is extended. The investments that we're making are being rewarded, so to speak, financially in the agreement, so we're getting more support that way, which is always a good thing. What that ultimately means is that we're working more closely together on how do we scale and do more.

We're very optimistic about our systems integration business and the rack volume demand increase, and we're uniquely positioned because of these investments to have more power, to have more liquid capability, and frankly, the weight of the future technologies coming down the pike is gonna get a lot heavier, and that speaks to some of the things that we've done here locally. Hopefully that answers your question.

Yeah. Matt-

Yeah.

This is Danny Chism. I'd add just a little bit to Darryll Dewan's point, right? A lot of that was recognition of the capital expenditures that we put in and, you know, needing to recapture that cost over time. The other piece of that is also that we are incurring or have been incurring throughout a good portion of this year some fixed power costs as well that weren't originally contemplated in the agreement. That has now been contemplated in the agreement so that we've got much better comfort that those costs are covered as we move forward, to not just recapture past costs, but, you know, being able to cover the recurring costs moving forward.

Awesome. Very helpful and great to see the growth in systems integration or clearly these investments are coming through.

Thanks, Matt. One other thought too. You know, our key customer has recently gone public and talked about their increase in pipeline and outlook. It's a massive increase year over year. We're well positioned to do everything we can to get our fair share of that growth. We wanna get as much of that as we can.

Absolutely. I guess, like, on that same thread, can you help us contextualize how the rack order volume this quarter compared with internal expectations? Like, how should we be thinking about the amount of catch-up volume you saw this quarter compared to what you think the steady-state growth rate is there?

Well, I'm gonna grin when you say steady state. We wish it was steady state. It's a crazy state, is what it is. Our Q4 rack volume almost exceeded what we did for Q1 through Q3. Our expectation for 2026, calendar year 2026, is that we will double the business that we did in 2025. In fact, we've got a first half outlook. Our short-term forecasts are actually exceeding our plan. We're very optimistic about where we're gonna go with the volume, okay, of the racks that go through the factory.

Okay, awesome there. I guess, like, is there any sort of rule of thumb for how we should be thinking about modeling, like volume increases and how that translates to revenue?

That's a great question. Given the fact that we've got the minimum commitments, until we get over that minimum, building more racks does benefit. Once we get over that minimum commitment, the improvement in revenue contribution is roughly four times what it is below that. There is incremental benefit as we build more racks, but until we get over those minimums, in any given period, the positive impact is muted a little bit. Frankly, I'd say it's not even that the positive side is muted, more that we've got some really good downside protection in periods when there's less volume. We've not put out specific guidance around the division between those two, and frankly, from a competitive standpoint, probably don't wanna go into too much detail on that.

That makes sense.

Matt, I hope I'm not putting my foot in my mouth, but you know, when we talk individually, we can share what we think about the opportunity, and then you can do your math and figure out how to go model it, and we'll help as much as we can.

Awesome. Yeah, no, it makes a ton of sense. Maybe just one more on the procurement side, which also grew during the quarter despite the supply chain volatility you mentioned. I'm wondering what you're seeing in the U.S. federal business with the government shutdown and continuing resolution being resolved? Is there any sort of catch-up in deals getting done, or do you kind of expect to see everything slide based on those earlier delays?

Well, we commented that in previous quarter, that we thought that was gonna be disruptive, and it was to a degree. I'm not that concerned right at the moment. We, you know, the procurement business is a really good business for us. We're really proud to have that business. Yes, it's largely fed, you know, a major percentage. We are involved in opportunities that we think can play out in this year. The unique part of the procurement business is that it can happen literally overnight. It might not be in the pipeline today, but it could be next week. Right now we're optimistic about it.

We're just being conservative in our outlook because we had such a great year, and you know, we're rebuilding pipelines, and we're trying to be a little bit more cautious for the reasons you talked about. We'll see what happens. I mean, we're well positioned either way, but we're involved in some really good things, and I'm more optimistic about the procurement than we're probably showing on paper.

Awesome. Thanks guys so much for the time.

Thanks, Matt.

Thank you. Our next question is coming from Alex Foreman with KKR. Your line is open.

Thanks for taking my question, guys, and congratulations on, you know, what was really a big breakout year last year. Darryll, I wanted to ask you about what you alluded to in your prepared remarks the memory chip shortage, that we've all been reading about and how a lot of data center projects has been delayed as a result of that? It sounds like your integration business, you know, year to date has been going, you know, as good or better than you thought it would at the beginning of the year. Can you just talk more about why you haven't been impacted too by the memory chip shortage, and are there any bogeys that we should potentially be looking out for the rest of the year?

Sure, Alex. Thanks for the question. You know, on one hand, we're somewhat isolated from that because our key partner is masterful at managing a global supply chain. I mean, they're really good and effective with it. While we pay attention to it, and we've considered some of that variances in our model, especially in, you know, how we forecast the future. It's one of the reasons why we've been more conservative. Given the announcements and the pipeline outlook that people have publicly stated, I'm not so concerned about that at the moment. You know, downstream could be different, but our business is somewhat insulated from that level of complexity.

That's really helpful. Thanks, Darryll. And then one other thing I just wanted to ask about here is, I mean, it seems like definitely one of the biggest themes going on in your business is that these AI server racks are getting bigger, heavier. You know, they consume more power. I imagine that trend is gonna continue, you know, throughout the year and into next year. How do your economics change as these server racks keep getting bigger? I mean, is it ultimately a similar markup to labor and things like that, or does the model start to change, you know, as these racks get, you know, two, three, four times the size?

Good question. We've modeled to a certain configuration size, which draws a certain amount of power requirement, which draws a certain amount of direct liquid cooling capability and testing capability. We're in the conversations now of anticipating where it's gonna go next. From an economic standpoint, it's all about getting the product out the door as fast as we can, and the model that we have, financial model, pays us well to go do that. The future is to be determined. You know, when you start talking about 300 KW to 600 KW to 1 MW rack, you're talking about a different complexity, and we're working together on that. I'm sure that if it involves an opportunity for us to make more money as it gets more complex, we'll have a good conversation with our partner.

Right now, we're not at that point where we have to change things, but we're all open about how we do the best we can to get things done, if you will. Renegotiating is always an opportunity.

Okay. That's really helpful. Thanks, Darryll.

Thank you. Our next question is coming from David Marsh with Singular Research. Your line is live.

Hey, guys.

Good morning, David.

Thanks so much for taking the questions. Good morning. Good morning. Congrats on the quarter. It's really a great result, great outcome. Good job. I wanted to start, if I could, with just a couple of housekeeping questions? I noticed on the balance sheet, it looks like restricted cash is gone. Is that, is there something behind that? Am I reading that correctly?

Yeah, you are. In fact, in the fourth quarter, we had the right under our credit agreement to ask the bank to apply those restricted funds as a pay down of principal. You'll see also, the 10-K should get filed next week. You'll see on there, on the statement of cash flows, a pay down of almost $7 million of debt this year. We had the bank apply that restricted cash as basically a $5 million pay down on the debt. The restricted cash is gone and the debt is down.

Got it. Yeah, that was gonna be my next balance sheet question, was on the debt reduction. That's great. Good job there. That's good progress. Just turning to the kind of more the operational side, I mean, I guess, you know, one of the things that really jumped off the page to me was the increase on the facilities management, especially sequentially. Can you just give us a little bit more color there? Is that a sustainable run rate going forward? I mean, I know that's a core area of focus with the kind of recurring nature of that business.

Yeah. That business, to your point, has one piece that's very predictable and recurring, which is the kind of manual maintenance agreements. Those, you know, are highly predictable. There is another part that is discrete projects. If you think about, you know, major rework of containers that were previously deployed, you know, the batteries and those things for backup are pretty expensive. A complete battery replacement or filter media replacement, those can be what I call discrete projects or kinda one-time projects. I think I had even mentioned in our Q3 call that Q1 through Q3, we saw less of those in the first three quarters of the year, but we expected a spike in that in Q4. That's exactly what drove the difference.

We had about $2.5 million of those discrete projects in Q4, compared to about $700,000 this quarter last year. That is an unusually large amount for one particular quarter, but I would expect, you know, periodic spikes like that as we have more discrete projects.

Yeah. That's really helpful. Appreciate that.

Yeah. Unfortunately, those are a little less predictable.

Yeah. Understood. Just following up on that, you know, earlier question about the amendment. I think the previous caller asked about kinda guaranteed minimum volumes. If I may have missed your response to that part of that question, but is there a change to your guaranteed minimum volumes in the new agreement?

No.

Okay. All right.

No, we did update the pricing to take into account the current complexity of racks. Again, right, most of what we get paid for is the work that we put into it and the power that we consume in doing that and in the cost of the fixed facility. The actual minimum commitment didn't change. We just updated the pricing and the length of the agreement.

Got it. Appreciate that color. All right. Thanks, guys. Appreciate you taking the questions.

Thanks, David.

Thank you. As we have no further questions in queue at this time, I would like to turn it back over to Mr. Dewan for any closing remarks.

Okay. Thank you so much. Folks, thanks for joining us. As stated in previous calls, we're again pleased after reporting another quarter, a strong quarter and a great year, but we're not satisfied. All I can say is at this point on your behalf, you can count on us to do our part to help customers modernize and transform using advanced technologies. We're in this to win, and we thank you for your time.

Thank you. Ladies and gentlemen, this concludes today's conference, and you may disconnect your lines at this time, and we thank you for your participation.