Q1 2021 One Stop Systems Inc Earnings Call
Please standby.
Good afternoon, and thank you for joining us today to discuss one stop systems financial results for the first quarter ended March 31 2021.
With us today of the company's President and Chief Executive Officer, David Raun, and Chief Financial Officer, John Morris and also joining today is the company's chief sales and marketing officer, Jim Ice and <unk>.
All of the remarks, we will open the call to your questions.
Before we conclude today's call I'll provide some important cautions regarding the forward looking statements made by management during the call.
And I'd also like to remind everyone that today's call will be recorded and will be made available for replay via the instructions in today's press release and the investors section of the company's website now.
And now I'd like to turn the call over the Oss's President and CEO David Ron. Please go ahead Sir.
Thank you James and good afternoon, everyone.
Thank you for joining us today, it's been encouraging to see the state of the California and the country finally opening up over the last couple of months and.
And life starting to return to normal likewise.
Likewise, it's also great to have our business returning to normal and we have some excellent results for the first quarter of 2021 to share with you today.
First we drove $2 million, a $2 million improvement and adjusted EBITDA over the first quarter of 2020 on similar revenues.
This result was the combination of increased gross margins of seven 9% percentage points and decreased expenses of $749000, which generated positive adjusted EBITDA of $1 1 million.
A record for Oss and the first quarter.
We also produced first quarter GAAP net income another first for the company.
In addition, we exceeded our top line revenue expectations for the first quarter by more than $300000 nearly matching last year's first quarter, which was a record first quarter for the O for Oss on.
Hindered by the pandemic at the time the.
This was a direct result of continued improvement with some of our largest customers as well as progress on the diversification front.
The strong performance was tied to the transformative steps we took last year. The late a new foundation for better bottom line execution and growth.
These steps include a new senior leadership, and corporate reorganization and reduced spending focus on margins and enhanced value proposition. While also adding three new independent board members.
As shared with you during our previous earnings call. We are also executing on our new long term strategic vision and product roadmap designed to create greater shareholder value.
This multiyear plan will strengthen our market position and value proposition and a fast growing segment of the edge computing market with the intent of clear leadership and.
What we call AI Trans portables.
AIG transportable is our mobile and high performance computing systems, delivering the latest and data acquisition and storage and accelerated computing for AI applications.
Particularly where actionable intelligence is required at the very edge.
These tend to be applications that are challenging our in challenging our harsh environments, which plays to our strength.
AI transportable solutions are currently the fastest growing highest margin segment of our business and it contributed over 25 per cent of the revenue in Q1.
A perfect example is our recent win of a long haul trucking program for our new AI Transportable E. B 4400 solution.
This marks our second significant program wins for autonomous vehicles and is an excellent example of the additional products. We are developing to address this quickly expanding market.
Earlier today, we posted a 15 minute video presentation to our website, where I share more I share more on AI transportable strategy and the market opportunities ahead. After todays call you can find it on the Investor Relations section of our website at one stop systems Dot com.
Tom.
Jim <unk>, our chief sales and marketing officer will be giving you more insight about our AI transportable strategy and related customer activity later in the call.
Before I get into the outlook for the rest of the year I'd like to turn the call over to our CFO, John Morrison, who will take you through the financial details for the first quarter John.
Thank you David and good afternoon, everyone. I appreciate you joining us today.
Earlier today, we issued a press release with our results for the first quarter ended March 31 2021.
The release is available in the Investor Relations section of our website at one stop systems Dotcom.
And as David mentioned, we generated strong revenue and improve profitability. We achieved this by realizing improved gross margins on sales of key products, while reducing operating expenses through cost containment and efficiencies.
All of this resulted in greater profitability and positive cash flow overall, it was the quarter, where the entire company executed on our Cfos and Ceos and I'd like to take credit for and I guess, the Ceos of focused vision.
Now for the details looking at our statement of operations, we achieved revenue and the first quarter of $13 3 million similar to the record first quarter of last year, which was not impacted by the pandemic as mentioned by David.
There was a notable change in customer and product mix that contributed to better overall margins and the current year.
For the revenue breakout for our business segments and Q1, our core Oss business increased to $8 6 million as compared to eight 4 million and the same year ago period Brashier, Our European subsidiary contributed $4 7 million.
And the first quarter as compared to $4 9 million in the same year ago period.
Our gross profit in the first quarter of 2021 was for $4 million as compared to the $3 4 million and in the first quarter of 2020 and increase of $1 million.
We had strong gross margins of 33, 3% and increase of 7.9 percentage points versus the same year ago period.
And the significant improvement and quarterly margins were attributable to a higher mix of government business of $2 million generated by three of our 2020 and design wins.
These products include is the data center and the Sky data storage units and for your pro.
Gross margins for our core Oss business increased 10, four percentage points over the same year ago quarter to 37, 9%. Likewise braziers gross margin increase of 24, 9% and the first quarter as compared to 21 nine and.
The same year ago period and.
And both cases this was attributable to the predominance of customers purchasing a product mix that has higher gross margins and as and increased focus through the organization on improving margins.
Our overall operating expenses decreased 15, 3% to $4 2 million in the first quarter of 2021.
Our operating expenses as a percentage of that of revenue decreased to 31, 2% and the first first quarter compared to 36, 7% and the same year ago quarter.
These improvements were primarily due to the cost reduction initiative that we implemented in April 'twenty, and 'twenty, including streamlining and reorganizing the company and importantly, new cost containment programs.
Income from operations grew to $275000 compared to loss from operations of $1 5 million and the same year ago quarter and.
Net income on a GAAP basis totaled $21000 and Q1 2021.
This compares to net loss of $1 1 million or seven cents per share and the same year ago period.
On a non-GAAP basis net income improved to 643000 or <unk> <unk> per diluted share in Q1 2021. This is in comparison to our non-GAAP net loss of 714000 or four cents per diluted share in the same.
A year ago period.
Adjusted EBITDA, which is another non-GAAP metric increased $1 $1 million and Q1 as compared to negative adjusted EBITDA of 957000 in the same year ago quarter.
Now turning to our balance sheet.
Our team worked hard to improve our accounts receivable collections and timed our accounts payable and more closely to the day sales outstanding and.
As a result, $3 2 million and working capital was freed up and the quarter.
And the largest in March of this year and you may recall, we completed the registered direct equity offering that further and further fortified our cash position. We also realized significant cash cash gains through a combination of lower expenses, Inc.
Chris the efficiencies and improvement and working capital.
All of this has resulted in the cash and cash equivalents, increasing $13 3 million as compared to December 31 and 2020.
And at the end of the quarter of the company had a cash balance of $19 6 million the highest in company's history.
Recently, we also learned that our $1 5 million dollar P. P. P loan that we received last year has been forgiven.
Our strong cash position is enabling us to execute on our plan.
That's the wisely and strategic initiatives to fuel growth, including a research and development of new products and technologies.
This completes our financial review I would now like to turn the call over to our chief sales and marketing officer, Jim and.
Kim.
Thank you John and good afternoon, everyone.
And Q1, we saw both near record revenue and strong bookings along with three new major account wins major program wins are those expected to yield $1 million or more of revenue within for years.
These three new wins include the mobile command center of Virtualized, GPU compute platform and of rugged tablet point of sales system two of the three wins are with new customers.
As David mentioned earlier, our main sales focus of 2021 is AI transportable solutions for rugged edge applications.
Over one half of the 2020 one major accounts, we are pursuing are and the AI transportable market.
We see this market is directly tied to our customer value proposition and key strength for us AI transportable are typically higher margin business, where we enjoy and unmatched competitive advantage.
And we're uniquely capable of providing high performance AI platforms, and the most harsh and challenging environments on the very edge.
Our AI transportable solution delivered datacenter like performance using the very latest and high performance computing and nvme storage technology, leading edge applications with no compromise on.
Our systems provide AI data capture and training of deep neural networks and large scale AI inference for some of the world's most demanding edge AI applications.
Our marketing engine is re energizing as we resume in person events later this year, even as we continue to expand our virtual events, which have been very effective targeting AI transportable customers.
In fact, we recently co hosted a well received webinar called turning large dataset IP into AI gold with the guest speaker from Chiacchia, our flash memory partner.
The recording is available on our website.
Chiacchia was formerly a division of Toshiba and is well aligned with our AI transportable strategy as they provide the highest performance pcie Gen for nvme storage, which meets the certified encryption and security requirements at the edge.
In August we plan to participate and live demo exhibits at sea Aerospace defense and security equipment International AI Summit and supercomputing.
Looking ahead, we continue to have our sights set on driving high margin strategic sales further diversifying our customer base and executing on our new AI transportable market initiatives. We expect this focus to drive revenue growth and industry expansion opportunities for Oss.
With that I'd like to turn the call back over to David for our Q2 outlook.
Thank you John and Jim.
During the challenging 2020, we focused on making the company stronger and better positioned for growth.
We have made excellent progress in this regard and we expect to continue to see improvement and overall market conditions.
And all of it was a robust first quarter, where our revenues were restored to pre COVID-19 levels, while producing much better bottom line results.
And setting multiple new Oss records for the first quarter of the year.
This includes the positive swing of over $2 million and adjusted EBITDA and delivering our first positive net income for first quarter.
Even our largest customer and the media and entertainment space has started to rebound nicely for the second quarter and a row with increased sales of the new virtual product line.
Our cash position has grown from about $3 million a year ago to over 19 million today, providing us the strength and opportunity to invest and our future.
Looking ahead, we will continue to use our expertise and industry leading capabilities to bring the performance of the data center to the very edge without compromise.
As I mentioned earlier on the call I encourage you to listen to my video presentation posted earlier today, which outlines how we can how we plan to aggressively capitalize on this growing market and further carve out of leadership position and AIG transportable.
And I look forward to updating you with our progress and this exciting fast growing fast growing space that leverages our greatest strengths.
Now that we're halfway through the quarter, we can provide the revenue expectation of about $14 4 million for the second quarter. This represents 24% growth over the second quarter of last year.
We also expect fundamental improvements we've made throughout the organization to continue to drive positive bottom line results and generate greater shareholder value.
Assuming continued industry restoration, we see our progress gaining momentum on all fronts, including revenue growth.
With that I'd like to open it up to the call for questions James.
James.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off July of Snow true chart equipment.
And press Star one to ask the question.
And we'll go first to Scott Searle with Roth capital.
Hey, good afternoon, and thanks for taking my questions nice job guys on a very difficult operating environment.
Thank you.
And maybe maybe for starters could you just calibrate us in terms of your largest customer how big they were in the quarter, maybe give us some updated thoughts as well on component availability, particularly memory and Gpus, how you're positioned going into the second quarter and second half of this year and it sounds like disguise has stabilized and started to recover.
I think last year. It was about an 8 million dollar headwinds I Wonder if you could give us some thoughts in terms of.
And what that's looking like for 2020 one.
Yeah.
So first of all of you know our largest accounts we have the one on the military space and then disguise and disguise, let's talk about that first.
They have the for the second quarter of row of produce greater with produce greater revenue with them and this is coming through their virtual product line, which is doing really well and we recently talked to them and theyre expecting this product line to be bigger than their they're large gathering product line. So that's what we're seeing and we.
And that the continue to grow through the year and sometime in the second half for the large gathering part of the business to kick in which is not part of this number but he's got numbers are growing and significantly different than what we saw at the bottom during last year.
The Kona the cut.
Ponant supply matter for.
Fortunately the team has done an excellent job of you know one way or another finding components. So it has not had a revenue.
And any significant way one of the comments as one of the biggest shortages and the market our Gpus.
And this tends to be more of the mid and tied to Gpus, we're playing at the very high and so it doesn't impact us as much of that.
That goes with that doesn't go without saying the fact, we've got a plan ahead, we may take a little bit more inventory in place, but we seem to be making the right decision so far.
Great and and Dave how big was your largest customer on the quarter.
Okay.
Okay is that some of them one of mature.
Yeah, we did $3 3 million with them, Okay, great. Thank you and and maybe Jim It sounds like you continue to get wins, particularly in new era of AI transportable I.
And I'm wondering if you could talk a little bit about the pipeline I think in the past you've given a number I want to say on the fourth quarter. There were 24 of various rfps out there and different stages kind of.
And how that's looking and how that shaping up.
Yes so.
Those come and go we generally are pretty conservative with those are ones that we think we have the 60% of better chance to close.
So we're in the right now and the 24 range. We've closed three of those and the first quarter and have already closed two and the second quarter and we'll report on that on the details later on.
The next quarter, so the Windsor continuing to add up.
They are layering on.
And.
That's where we're seeing some of the successes.
Like we said about half of those a little more than half actually are and the AI transportable space, where we tend to have a better chance of winning at a better margin.
I would add to that Scott the one.
One of the trends is because of the focus on focus on margins and the focus on AI transportable and just the general culture of the company shifting the quality of these wins is increasing.
And so that's going to continue to pay dividends for us.
And and lastly, if I could from a high level of Dave you know as Youre looking at some of these newer opportunities and regardless of the strategic review of AI transportable.
You've been running things very tightly over the last 12 months do you have to spend a little bit more now or there's some different channels that you need to go after <unk> technologies.
Debt are not currently part of the portfolio and then maybe as part of that as well to wrap it up what is the financial model looking for like for you guys. Now you did a great job from a gross margin perspective, and the first quarter should we be expecting the long term targets in terms of gross margins and operating margins to be somewhat higher than we've seen historically.
Yeah.
The the definitely our intent is to increase our overall gross margins.
Year over year.
As well as our operating margins.
On the spending we're watching very closely we continue to be in a mode that we're willing to make investments.
But I sit down with the exec staff and I want to see what the contribution of the <unk>.
Adding this additional person we're currently in and the search for.
A senior sales person to focus more on the military and we're currently because of new programs coming and looking for some additional engineering talent, we're going to run it tight, but we will not do it in a way where puts at risk revenue. So I'm willing to make those investments as long as the ties and people can justify it and that's.
How we're going to move forward and saying that I believe we can grow nice and the future years and continue to be profitable on the process.
Great. Thank you.
Next we'll hear from Joe Gomes with noble capital.
Yeah.
Good afternoon, and thanks for taking the questions.
Good afternoon, Joe Hey, Joe.
So one.
One of the things I think debt.
Everyone kind of would like to get of.
The arms around a little bit better and we see all of the the 1 billion dollar plus revenue opportunity.
Wins.
But we're trying to get a little better handle on what they could all mean.
Going forward, so if I if I just look at your defense.
You know you got the the five year of $36 million contract for the Poseidon and then you've mentioned and number of other military type of contracts that you've won and the awards I mean can you kind of size and the ultimate potential of those are they.
And the same range as the the Poseidon win.
And anything you could give on that would be great and also you had mentioned and the fourth quarter on the military side that about $1 million of revenue had slipped from the fourth quarter into the first quarter of this year.
Excluding that million dollars where were you.
Did the military come in where you expected or hopefully better than expected. If you can answer those would be great.
Yes, So let me let me take a stab out of first and then I'll, let Jim and the wins are a mix and we definitely have other very large ones like you just talked about or you asked about the military portion of the business and we believe goes from being in the 30% area to 40 or 50% over.
Over the next few years, because we're focused there and that's where a lot of activity is.
And the margins are stronger and that area.
The also on the.
Just kind of the general revenue what our objective as we've stated before I believe is that we want to bring this get this year out and the double digits, but strength in that in future years to be more on the 20% kind of growth rate.
The pipeline that we're putting together allows us to do that.
And there was another part of your question I dropped that one what was the other one.
Joe.
Go ahead.
And I think you were just trying to size the the military business piece.
Piece of it just as of Q1.
The point of reference it was about 25% of our overall revenue.
And about 30%, 37% of Oss is revenue was with military and Q1, which is higher than it's been in the past.
So that that can give you some indications there.
As far as the the size of each when they they do vary.
Just as the word contract as we get a lot of purchase orders single type purchase orders from some of these programs and then when you're locked into a multi year win is when you get the contracts when it's a price and contract. So we're still working towards some of these arent even hitting production yet.
<unk> has a large potential when we do announce those of larger contracts.
Let me add to that the thanks for catching on what I missed.
But.
Part of your question was about the $1 million moving into the quarter. So based on what Jim Just said, we had other military business show up in Q1.
Think of what Youre going to see is we'll still be the strongest and the second half, but because we have more accounts and a bigger percentage of that and growing it'll it'll smooth out a little bit more and we're enjoying some of that now.
Okay, great thanks for that and.
So you mentioned about all of the the.
Cash on the balance sheet and the forgiveness of the the PPE loan.
<unk>.
Okay.
And you still have some other.
Debt on the balance sheet any thoughts of using some of that cash to clean that up or are you comfortable with the other debt that's on the balance sheet at this point.
So there are two pieces of debt. The first part that is domestic debt is the $2 $5 million on our senior secured debt as you know that converts at a price of $2 50 of share as disclosed on the financial statements. So it is unlikely that will ever be the most likely.
Likely scenario is that will be converted to equity.
Upon maturity with respect to any other GAAP that is foreign debt associated with <unk>. It is purely working capital to finance inventory and we received those loans the government subsidized.
And they had a very minimal interest rate.
For the total jewelry.
Okay.
The $2 five domestic and then the differences is for it okay alright.
Thanks for taking the question guys again nice quarter. Thank you.
Thank you.
We have no more questions I'd like to turn the conference back to our speakers for closing remarks.
Thank you James and thank you everyone for joining us today I'd like to express appreciation to all of our team members for their dedication to success of Oss and the commitment to quality and productivity, especially during the challenges of assesses faced over the past year.
And I'd also like to thank all of our stockholders for their support and joining us on this journey of growth and innovation. We believe the best is yet to come and we look forward to talking to you again in the near future and reporting our progress as we pursue the many great opportunities ahead. Meanwhile, feel free to reach out to John.
Jim or me at any time.
James go ahead and wrap up the call.
Thank you.
Now before we conclude today's call and I would like to provide the company's safe Harbor statement that includes important cautions regarding forward looking statements made during today's call.
One stop systems cautions you that statements and the presentation are not a description of historical facts are forward looking statements the.
Savings are based on the company's current beliefs and expectations such forward looking statements include those regarding the company's expectations for revenue growth generated by new products design wins or M&A activity inclusion of such forward looking statements and others should not be regarded as a representation by Oss for any of its plans will be achieved.
Actual results may differ from those set forth in the presentation due to the risks and uncertainties inherent in our business, including without limitation that the market for our products and developing and may not develop as we expect global pandemics or other disasters or public health concerns, including COVID-19, and regions of the world, where we have operations customers our source material.
Or sell products may affect such market.
Operating results may fluctuate significantly, which would make our future operating results difficult to predict and could cause operating results to fall below expectations of guidance.
And our ability to successfully integrate the operation systems technologies and product offerings and personnel with the acquired companies may prove difficult and adversely affect our financial results on.
Our products are subject to the competition, including competition from the customers to whom we may sell and competitive pressure from new and existing companies may harm our business sales growth rates and market share our future success depends on our abilities to develop and successfully introduce new and enhanced products and meet the needs of our customers.
And the likelihood of our design proposals, becoming design wins is uncertain and revenue may never be realized.
Our products fulfill our parts of fill of specialized needs and functions within the technology industry and such needs or functions may become unnecessary or the characteristics of such needs and functions may shift in such a way as the cause of our products to no longer fulfill such needs or functions and new entrants into our Mark and me harm our competitive position and.
We rely on the limited number of suppliers to support a manufacturer of design process and we cannot protect our proprietary design rights and intellectual property rights, our competitive position could be harmed until we could incur significant expenses to enforce our rights of international sales and operations subject us to additional risks that can adversely affect our operating results.
And our financial condition, and we fail to remedy material weaknesses, and our internal controls or financial reporting and may not be able to accurately report our financial results and the other.
And the risks described in our prior press release and in our filings with the Securities and Exchange Commission of C C, including under the risk heading risk factors and our annual report on form 10-K, and any subsequent filings with the SEC.
You are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date of the conference call and we undertake no obligation to revise or update this information to reflect events or circumstances. After the date hereof all forward looking.
Statements are qualified in their entirety by this cautionary statement, which is made under the safe Harbor provision of the private Securities Litigation Reform Act of 1995.
Before we end today's conference I would like to remind everyone that this call will be available for replay. Starting later this evening through May 27, please refer to today's press release for dial in and replay instructions available.
Via the company's website at IR Dot one stop systems Dot com. Thank you for joining US today. This concludes our conference you may now disconnect.
And for taking credit for the.
[music].
Okay.
Okay.