Q3 2022 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 third quarter ended September 30th 2022.
With us today are the company's President and Chief Executive Officer, David Raun, and Chief Financial Officer, John Morrison.
Following their remarks, we will open the call to your questions and before we conclude this call I will provide some important cautions regarding the forward looking statements made by management during the call.
I would like to remind everyone that the call will be recorded and made available for replay in the investors section of the company's website.
Now I'd like to turn the conference over to Oss, President and CEO , David Ryan. Please go ahead Sir.
Thank you James and good afternoon, everyone Q3 was another solid quarter at $18 8 million in revenue setting a record.
Any quarter in company history.
Growth was 18% over the same year ago quarter.
And our year to date revenue.
With $54 2 million was also a record for the first nine months within a year.
With growth over the same period of last year up 23%.
Our strong performance in Q3 was primarily attributable to the continued strength of our European unit Freshener incur.
Increased business and the media and entertainment space as well as solid growth on the commercial side of our AI transportable business.
Shipments to customers in the autonomous trucking space, a strategic target of ours was a key contributor for the AI trends portable growth in Q3.
In fact, two of our autonomous trucking customers now rank in our top 10 customer list.
While the autonomous truck market has continued to progress.
<unk> hundreds of thousands of miles driven to date using our products.
Still must deliver a driverless solution to realize the full potential of the strong economics of this disruptive technology.
We believe the market leaders in the best position to get to market first.
Those intent at utilized as much compute storage performance as possible capital challenge.
During the past quarter, we invested considerable time focused on the compute storage needs of the autonomous trucks in production.
Although there is some commonality between the various market leaders on the roadmap to production to continue to search for the ideal solution.
To this end, we have been developing and sharing our proposed production roadmap that we believe provides a superior cost effective path.
We believe we are uniquely well positioned to deliver solutions that can leverage our innovative pcie and the link.
<unk> and cooling technologies for use in this space.
In addition to the potential for the great growth in the autonomous truck market. We believe the products. The skills proficiency. We are building will also open up other AI transportable critical to us.
Now before I provide additional insight into our program wins sales pipeline as well as an outlook for the remainder of the year I'd like to turn the call over to our CFO , John Morrison, who will take you through the financial details of the quarter John Thank.
Thank you David and good afternoon, everyone. Thank you for joining us today.
Dave We issued a press release with our results for the third quarter and nine months ended September 32022 of the release is available in the Investor Relations section of our website at one stop systems Dot com.
The following results are our results for the third quarter ended September 32022, as compared to the same year ago quarter.
During the third quarter Oss recognized revenue of $18 8 million, which was up 18% over the prior year quarter.
Core all SaaS revenue was up 15% contributing $10 7 million. This was largely due to the growth of our AI transportable business, including autonomous trucks as well as our media and entertainment business.
Revenue from our European subsidiary, <unk> increased 21% contributing a record $8 1 million, which was marginalized by a quarterly year over year devaluation of the euro up 14%. This exceptional growth for <unk> was attributable.
To increase market share there was made possible by strong sales efforts customer expansion and strategic inventory buys.
Gross profit decreased 439000 to $5 1 million overall, our aggregate gross margin was 27% for the third quarter, a decrease of seven five percentage points.
This was due to strong lower margin revenue from pressure and our immediate our media and entertainment business as well as a temporary decrease in our high margin military business, we experienced a deferral of military customer shipment due to due to a transition.
Two new storage product version. However, these products are now being shipped.
Gross margin for our core Oss business decreased 10, three percentage points from the same year ago quarter to 37%.
This decrease was attributed attributable to the concentration of lower margin product sales to our media and entertainment customer and the delayed shipment of military storage products.
For the fourth quarter of 2022, we expect a return to a higher more higher mix of military storage business to improve our overall gross margin both sequentially and as compared to the fourth quarter of 2021.
<unk> gross margin percentage decreased three four percentage points to 22, 2% in the third quarter. This decrease was primarily due to increased material and transportation costs as well as increased sales of our lower margin product lines.
Overall quarterly operating expenses increased by 424 to.
To $4 9 million.
While operating expenses as a percentage of revenue decreased to 26, 1% compared to 28, 1% in the same year ago quarter.
The dollar increase in operating expense was primarily due to our expenditures in marketing and selling activities and investments in the technology for the AI transportable market.
Income from operations decreased to 163000 <unk>.
Compared to $1 million in the third quarter of 2021.
Net income on a GAAP basis was 133000 or <unk> <unk> per diluted share a decrease from net income of 981 or.
<unk> <unk> per diluted share in the prior year quarter.
On a non-GAAP basis net income was 691000 or three per diluted share for the quarter down from $1 5 million or <unk> <unk> per diluted share.
Adjusted EBITDA, a non-GAAP metric was 955000.
Or five 1% of quarterly revenue as compared to $1 8 million or 11, 3% of quarterly revenue.
The final results for the nine month period ended September 32022, and are compared to the same year ago period.
Revenue for the nine months totaled $54 2 million, a new company record, which was up 23%.
<unk> core revenue increased 18, 5% contributing 32 million freshener contributed $22 2 million of revenue an increase of 29%.
Gross profit improved 817000.
An incremental revenue of $10 million.
$215 4 million or 28, 5% of revenue.
This compares to $14 6 million or 33% of revenue in the prior year period.
Gross margin for our core Oss business decreased to 33, 1% as compared to 38, 5% in the prior year period. This is largely due to a temporary decrease in military revenue and revenue increases from our lower margin.
<unk>.
<unk> gross margin decreased 21, 8% due to higher transportation and material cost as well as increased sales of our lower margin product lines.
As compared to 24, 4% a year ago.
Operating expenses increased 11% to $14 2 million deaths in.
The increase is again, primarily due to investments we have made in marketing and sales activity and the development of new standard products for the AI transportable market. The increase in expenses was partially offset by a decrease in general and administrative expenses.
Spencer.
Operating expenses as a percentage of revenue decreased to 20 to 26, 2% compared to 28, 9% a year ago.
Income from operations was $1 2 million compared to $1 8 million from a year ago.
Net income on a GAAP basis was 1 million or <unk> <unk> per diluted share compared to $2 7 million or <unk> 14 per diluted share, which included a onetime benefit of $1 5 million or <unk> <unk> per share due to the due to the forgiveness of our.
PPP loan and related interest apps.
After giving effect to this onetime benefit.
On a pro forma basis, there was a year over year decrease of $170000 of net income.
GAAP non-GAAP net income totaled $2 5 million or <unk> 12 per diluted share as compared to $3 million for core <unk> per diluted share adjust.
Adjusted EBITDA, a non-GAAP measure totaled $3 5 million or six 5% of revenue compared to $4 3 million or nine 6% of revenue.
non-GAAP net income and adjusted EBITDA, both excludes the $1 5 million.
While our PPP loan and interest forgiveness.
Now turning to our balance sheet.
On September 32022, cash and cash equivalents totaled $3 2 million and short term investments totaled $9 5 million totaling $12 7 million in capital resources.
This represents a decrease of $1 7 million compared to our balances on June 32022, primarily due to increases in working capital requirements.
We believe the current financial resources available to Oss provides us provides us with stability and flexibility to be responsive to changes in business demand and particularly those which require investment and working capital to be successful.
This completes our financial review now I would like to turn the call back over to David.
Thank you John as we have stated previously sales to our largest media and entertainment customer of challenging margins under 20%.
And this is not aligned with our long term objectives of 35% to 40% overall.
Price pressure within the media and entertainment market is accelerating investment by our customer and to cloud technology and a drive towards less intelligent compute capability at the edge to reduce the cost of their system.
This is particularly true of the virtual products, which tend to be fixed to install and do not require the same level of organization for the live event systems, which typically operate in harsh environments.
These less intelligent computers will have a higher reliance on our customers' IP software, which is in development and is expected to eventually and naval This real time cloud solution.
We anticipate this technology transition may start to impact our revenues as soon as the second half of 2023.
As our customer transition to lower cost commodity type equipment.
Cloud based cloud software solution.
We do anticipate we do not anticipate any financial exposure with inventory on hand.
Based upon the strategies integral to our business plan and projected revenue from our sales pipeline and new programs. We are pursuing we foresee being able to backfill potential declining revenue from this customer.
Based on our strategic and sales planning over time.
You will see the mix of our product sales move upward from the lower margin products towards higher margin products on which we are focused and expect that our our aggregate margin will improve as a result.
To this end we have added six new program wins in the third quarter.
With five one AI transportable space.
The wins include to an autonomous truck to medical designs and to mobile <unk> AI applications.
The first medical wins in the quarter was for an industrial dental manufacturing equipment in Europe .
The second is for at GPU accelerated genome sequencing solution for a very large Oems.
The mobile <unk> AI applications deployed Oss.
<unk> rugged server trucks and vans for a cellular network market leader. These vehicles can gather and characterize data real time in the field and transport the data back to the hub, whereas uploaded to the cloud and combined with larger data set.
This major program is expected to roll out to over 100 cities nationwide.
Our pipeline of sales activity continues to grow including in the autonomous truck space, where we have two new wins with Embarq trucks announced last month.
These two wins include one for our swim Terry rugged pcie storage expansion system, which has now been adopted by two autonomous truck customers and another for our latest autonomous truck Sds rugged server.
The new deployments involve equipping trucks from embarked latest test fleet with the latest.
<unk> rugged compute and transportation transportable storage capabilities.
Embark became one of our top accounts this quarter.
As our strategic efforts continued to yield results. We ended the first nine months of 2022 with 16, New program wins 11 of them are core AI transpire portable applications.
In addition.
Our pipeline of potential major programs or pending ones has now expanded to 30.
With 18 of these evolving AI transportable applications.
We believe the combination of building our sales pipeline strong activity with higher margin military market and other opportunities. We're currently pursuing which are higher margin businesses should backfill with potential revenue downside in the media and entertainment business with quality long term high margin equivalents.
I am pleased to share with you that our engagements on the military front have progressed over the past 90 days.
For many years forecast is mostly has been mostly dependent upon one prime contractor for most of its high margin military revenue.
However, we are building relationships with several new prime contractors and in parallel are working more closely with the department of defense.
We expect this to generate more of access revenue.
Seasonality and significantly improve our margins and profitability over time.
Our progress within the military is attributable to several factors.
<unk> intense focus on defining and bruna markets superior roadmap of products.
Contracting with well positioned sales representatives, and adding strategic personnel to our advisory board.
Our advisory Board is comprised of retired high ranking military officials.
And corporate executives with decades of experience in AI unmanned vehicles technology high performance computing cooling technology and M&A.
Key to the strategy was the introduction of our flagship platform for the military that we call Rigel.
As acknowledged by multiple key customers and partners Rigel is currently the fastest most compact supercomputer available.
The growing interest in Rigel and the related design activity confirms that this powerful system can transform the use of real time artificial intelligence for the most demanding vehicle maritime and aerospace edge applications throughout the military.
We will provide additional information as we advance or when these programs, but for now I'd like to give you a sense of the magnitude of our customer interactions in the space with some current examples.
First we are working directly with the army to fund and Oss solution targeted for land vehicles as.
As one of my advisers commented if Oss can get into land vehicles for the army. This would be a huge win for the company as the volumes are very high.
Second we are working with multiple primes and the Dod directly on a major compute upgrade that would add significant capability capabilities for a well known large airframe frame journal.
Third yet another prime we are being proposed and multiple aircraft programs, including one similar to a multimillion dollar contract. We have enjoyed with the navy and the P. But this was with a different branch of the service.
I was in a meeting with this customer earlier this week, but we have over 40 attendees.
When we presented in conjunction with Nvidia These solutions to a wider audience within their organization.
For four years, we have been selling our storage systems via large multi year contract to a prime and the Navy.
Parallel to those shipments we've been working with them to deploy a supercomputer to process the vast data in flight rather than back at the Navy base.
We recently heard that test flight accomplished its objectives and was considered a big success by the high ranking officials involved.
Last month, we showcased our latest products that you are.
<unk> and military Tradeshow in Washington, DC, where we identified several new opportunities in major programs for Rigel.
We look forward to attending supercomputer 22 conference being held in Dallas next week.
It is the world's largest international conference for high performance computing, we will be showcasing our AI transportable products, including a demonstration of a disruptive additional capability of rigel we.
We expect more information to follow in our press release next week.
Looking ahead, we believe we are well on track for a strong final quarter of the year.
Our revenue outlook for the fourth quarter was approximately $19 2 million, which of which if achieved would be another record revenue quarter.
Also as John mentioned, we expect significant margin improvement with a resumption of our military product shipments.
And assuming $19 two in revenue for Q4, we expect to close the year up more than 18% to a record $73 $4 million in revenue.
Now with that I'd like to open up the call to address your questions. Thank you.
Thank you.
To ask a question at this time. Please press star followed by the number one on your telephone keypad, if youre, calling from a speaker phone. Please make sure. Your mute function is to ensure signal to reach our equipment again press star one to ask a question.
And our first question comes from Brian Kinsinger with Alliance Global partners.
Good evening. Thank you for taking my question. This is <unk> on for Brian .
Can you talk about how the testing is going with autonomous trucking companies as it relates to your technology has it been a smooth process, where trucks are being tested or are there. Some challenges that are under control.
For the most part the software that's involved with this is all a bear the hardware, we're providing and the they.
They continue to progress these trucks had been on the road, they're driving with somebody in the seat, but the person for the most part is not toxin a steering wheel or pedals, and they're successfully traveling hundreds of thousands of miles on these trucks.
Now the Big thing, which I mentioned is to be able to eventually get that guy out of the trough, because thats, where the economics kick in.
And I think the company has a little ways away from that but I would anticipate that will take place sometime next year or the following year.
Great.
One more question you were talking a lot about.
The government pipeline it seems like from the catalyst for future revenue growth, but do you know what the timeline might be like.
For this revenue.
For revenue from the military I'm expecting the impact.
Yes, I mean, so first of all Fortunately, we're involved with some of the.
Vegas premiered seat after programs. So that's good but like any military program. They take some time.
So.
The big revenue from X multiple years out.
What we're seeing in parallel is people working on funding to get it going with us and those can be fairly sizable some of them might be a half a million dollars, a $1 million or $1 $5 at a time at least that gets it going where they are bringing in <unk> into the lab and doing work on it so that will help our revenue.
But the big part of it will be more probably in the last part of 'twenty three into 'twenty four.
And beyond.
Thank you that's all I have.
Thank you. Thank you.
Our next question comes from Joe Gomes with noble capital.
Good evening, thanks for taking the questions.
Yeah.
Hi, Joe.
And just kind of wanted to follow up on <unk>.
The last question you were talking about the autonomous trucks.
The big revenue opportunity there.
Once the drivers out of the truck and that probably won't happen to 25 or later when you were talking about the revenue impact on the military side and you said that's years out.
And then we've got the skies that appears sounds like.
That revenue stream is at least a significant part of it is going to be coming to an end I'm just trying to figure out you know maybe you can walk us through how you're going to be bridging the gap on the revenue side.
Well I think overall in AI transportable space and some of the other ones, we have that don't fit that category.
They will help a lot.
So we have we're expecting a nice strong rebound with our current military business.
Next year, that's already starting to take place as John mentioned.
So and then on top of that we are aggressively working on closing some other deals on top of all of that.
<unk> some conversations between me and other Ceos on where we could bring in some additional revenue in the short term.
We have a lot of funds that we're working on and address that.
And I would say that the tournament.
Thomas truck thing, let's put that in perspective first of all we have two guys now in the prototyping phase or whatever you want to call. It and they are in our top 10 list.
They will be they will get larger next year there'll be an inflection point at some point it wont be 25, it will be before that and so you're going to see quite a bit of revenue from these guys and then these military guys can also add up.
Okay. Thanks for that.
On the gross margin.
<unk>.
Pardon me in the first half of the year.
You had you know.
Little in the way above the high margin military.
Revenue.
First quarter gross margin was 31% second quarter was $28 six this quarter it's 27.
I'm, just trying to get a better handle on whats going on there.
And the disguise in the <unk> business.
That is driving those margins even down.
Further sequentially.
Well I mean, I'll, let John add to this but bottom line is military discipline disappeared for those two quarters.
For the most part.
And now it's coming back strong primarily the biggest program because of the.
<unk> changed that got put on hold for now again, we're getting the orders plus other.
Programs are starting to layer then also.
So that's the biggest contributor on.
On the margins what else would you like to add John I would agree that with on the government side on our own.
Our data storage units were down about $5 million year over year and that was shifts as a result, those we are transitioning gone a revision change and we are now shipping that new revision starting in the fourth quarter. So that is our strongest revenue driver.
Contributed to margin. So that's really what contributed to the difference there layered on with the improvement.
A significant increase from pressure in their revenue and the predominance.
Predominance.
Revenue from our media and entertainment space.
Okay.
And one last words with me.
Number two not goes down further were expecting a reversal of that starting in the fourth quarter. Okay.
Thank you for that.
Okay.
Do you have mentioned.
Some of the previous calls about you know.
On the supply chain some of it going out 52 weeks for parts inflation, just wondering how that environment is looking today.
For for parts.
And passing along.
Costs from inflation increases.
Yes, so in general and the supply thing I think.
What I'm hearing from a lot of peoples seems to beginning a somewhat better we haven't seen it get a whole lot better frankly, but.
We continue to buy what we need our intent is to bring down the inventory levels over time.
The vast majority of the inventory we have is secured by <unk>.
And.
So we think it will slowly improve over the coming year.
Okay, great. Thanks for taking the questions and I'll get back in queue.
Thank you Joe.
As a reminder press star one if you have a question, we'll hear from David Williams with benchmark.
Thanks for taking the question certainly appreciate it.
I guess quickly I wanted to ask about the.
The mobile opportunity.
Very interesting and I think you said, it's expected to rollout to 100. Other cities can you tell us if you have the design there for those other 100 cities and what you. What you think this opportunity could mean for the business overall.
Yes, basically so we figured on only one via call per city, which is not necessarily the case that would require at least 100 of our systems.
They are expensive systems. So this is a multiyear multi million dollar opportunities for the company probably will yield.
Okay.
Several years $10 million or more.
Okay. It is still an opportunity.
Worse.
So in other words, we don't have to go win those other 100, that's what they're doing they're planning to do.
These in these vehicles and trucks to cover those 100 cities.
With our product.
Okay. Thanks.
And then maybe just kind of thinking about it on the gross margin side, you've got a lot of moving pieces here and there is still a headwind, but you've got some tailwind from the military.
And then also the.
The media and entertainment falling off what should we think about in terms of margin next year can you snap back to where you were previously or should we still expect it to kind of stay around this range with a steady plotting kind of improvement next year.
Yes, we expect that to snap back to what <unk> seen in the past and we'll build off of that.
Any thoughts on cadence.
That.
Okay.
So the first quarter, we're looking at pretty good well look good as we ship more military product, but I think I've been pretty consistent with what our 2020 look like.
Okay. All right very good that's helpful. And then one just last one for me real quick is I know theres a lot of activity in China on the autonomous trucking side and use some high end components in your products, but just kind of curious if youre seeing or thinking about anything from the China restrictions.
Just kind of on the fringe around the edges with the subsidiaries located they are you seeing any pushback I guess.
Or is there any ties or any relationship that we should be thinking about here in terms of the restrictions going into China.
So first of all definitely you know theres worldwide activity on this primarily in the U S and China, but.
All our three customers that we're engaged with today are U S based companies so no issue there.
And we're talking to other companies of which is a mixture international.
For the most part we don't see the China situation impacting us on that path.
Thanks, Mike I appreciate the time and the help guys.
Thank you. Thank you.
Once again press Star one if you have a question, we'll hear from Max Michael Lewis with Lake Street capital markets. Okay great.
Hey, guys congrats on the quarter and thanks for taking my question. So just given the solid opportunities you guys are seeing in the military space as well as the advisory board or some of these opportunities maybe some new wins have gotten in the past with LTE advisory quarter of the impacted some of these opportunities.
Great question, they've been very helpful.
It's really the combination of three things we've done Rigel is just a great product up and like it and that is out there it's doing extremely well, but they've made introductions for us at places, especially directly with the Dod that we did not have before.
And so that's helped us and they've been great team to work with.
Alright, Thank you and then just.
Can you quantify the amount.
Military shipments that were deferred to Q4.
Could you repeat that we broke up a little.
Sorry about that the amount of shipments that you guys deferred to Q4 that ended up being shipped I was wondering if you could quantify that.
Well John .
John made the comment that we're off about $5 million on military year to date, we're not implying that that's all going to catch up in the fourth quarter Q2.
2022, overall will be a down year for the military but it starts to progress in the fourth quarter and we expect this solid 2023.
Yeah.
So well thanks. Thanks.
Thanks, Scott double or Triple Bud Light for example will double or triple what we're shipping this past quarter.
Okay.
So just again step ups.
Alright, thanks, guys congrats on the quarter.
Good morning, gentlemen.
We have no more questions I'd like to turn the conference back to our speakers for closing remarks.
Thank you and thank you everyone for joining us today.
We continue to believe the best is yet to come and we look forward to meeting with you again in March.
Reporting our progress as we pursue the many opportunities ahead.
While as always please continue to stay safe healthy and feel free to reach out to John and myself anytime.
And.
Let's go ahead and wrap up the call.
Thank you.
Now before we conclude today's call I'd like to provide the Companys Safe Harbor statement that includes important cautions regarding forward looking statements made during today's call.
One stop systems cautions you that statements in this presentation are not a description of historical facts are forward looking statements. These statements are based on company's current beliefs and expectations.
Such forward looking statements include for example, those regarding the company's expectations for revenue growth generated by new products future changes to its business objectives design wins and M&A activity amongst other things.
Such forward looking statements and others should not be regarded as a representation by Oss, Danny which 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 is developing and may not develop as we expect military conflicts global pandemics or other disasters or public health concerns, including COVID-19 in regions of the world, where we have operation.
<unk> customers or source material or sell products may affect such market.
Operating results could be negatively impacted by inflationary pressures supply chain constraints increased interest rates or other economic conditions operating results may fluctuate significantly, which would make our future operating results differ to predict.
To predict and could cause operating results to fall below expectations or guidance.
Unable to offset anticipated anticipated future <unk>.
Greece's and revenue in our media and entertainment space.
With other business are.
Operating financial results may adversely maybe adversely affected.
Our ability to successfully integrate the operation systems technologies product offerings and personnel with acquired companies.
If any may prove difficult and adversely affect our financial results our products are subject to 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.
Success depends on our abilities to develop and successfully introduce new and enhanced products that meet the needs of our customers.
The likelihood of our design proposals, becoming design wins is uncertain and revenue may never be realized.
Our products fulfill specialized needs and functions within the technology industry and such needs or functions may come.
Unnecessary or the characteristics of such needs and functions may shift in such a way as it.
Most of our products to no longer fulfill such needs or functions.
Entrants into our market may harm our competitive position we have.
Rely on the limited number of suppliers to support a manufacturer design process and if we cannot protect our proprietary design rights and intellectual property rights, our competitive position could be harmed or we could incur significant expenses to enforce our rights.
National sales and operations suggest that subject us to additional risks that can adversely affect our operating results and financial condition.
Ill be able to accurately report our financial results.
Other risks described in our prior press release and in our filings with the Securities and Exchange Commission.
Including under the heading risk factors in our annual report on Form 10-K, and any subsequent filings with the SEC.
And 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 this 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 1095.
Before we enter today's conference I would like to remind everyone that this call will be available for replay. Starting later this evening through November 24th 2022. Please.
Please refer to today's press release for Donlin and replay instructions available via the company's web site at IR Dot one stop systems Dot com. Thank you for joining US today. This concludes our conference you may now disconnect.
Yes.
Okay.
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