Q4 2022 One Stop Systems Inc Earnings Call
Speaker 1: Thank you.
Speaker 2: Ladies and gentlemen, please be on standby. The call will begin in one minute.
Speaker 2: Again, ladies and gentlemen, please be on standby. The call will begin in one minute. Thank you.
Speaker 1: Thanks for watching!
Speaker 2: Good afternoon and thank you for joining us today to discuss One-Stop Systems Financial Results for the fourth quarter and year ended December 31, 2022.
Speaker 2: With us today are the company's President and Chief Executive Officer David Rohn and Chief Financial Officer John Morrison, as well as the company's newly appointed Chief Product Officer Jim Eisen.
Speaker 2: Following the remarks, we will open the call to your questions.
Speaker 2: Then before we conclude this call, I will provide some important questions 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 investor section of the company's website. Now I would like to turn the conference over to the OSS President and CEO ,
Speaker 2: David Wang. Please go ahead, sir.
Speaker 3: Thank you, Lara. And good afternoon, everyone. It's good to be here with you.
Speaker 3: I'm pleased to report the revenue for OSS in the fourth quarter was up 2.7% over the previous year to 18.2 million and up 16.8% for the year to a record 72.4 million.
Speaker 3: Our adjusted EBITDA for the year was also a record at $5.2 million, driven by increased sales and our continued controls on spending.
Speaker 3: Overall, gross margin for the year was 28.2 due to strong sales of lower margin products and a mid-year temporary reduction in sales to our largest military customer during a successful requalification effort.
Speaker 3: Having completed this re-certification process, these higher margin shipments have now returned to normal.
Speaker 3: In 2023, we expect a reduction in low margin media entertainment business to be replaced with higher margin military product sales.
Speaker 3: If you've been following along with us, you're aware of the AI transportable strategies that we put in place in 2021.
Speaker 3: For those less familiar, OSS designs and manufactures innovative edge computing modules and systems for AI transportable applications, including on-location AI data capture, storage, training, and large-scale inference.
Speaker 3: These products include ruggedized servers, compute accelerators, flash storage arrays, and data recording software.
Speaker 3: We take the latest high performance, commercially available products normally only used in the state of the art environmentally controlled data centers and bring them into these challenging, traditionally embedded edge markets.
Speaker 3: We are pleased with the progress this past year executing on the strategy, which leverages our unique strengths to enable AI and autonomous capabilities in anything that moves.
Speaker 3: delivering absolute highest performance without compromise in rugged, compact form factors.
Speaker 3: to these harsh environments.
Speaker 3: Earlier in the year, we announced that we partnered with three key autonomous truck companies utilizing our Sentari and SDS product line.
Speaker 3: This resulted in two of these truck companies rising into the top 10 list for the year.
Speaker 3: Later in 2022, we announced additional wins, including the deployment of our storage products in vehicles of one of the nation's largest cellular carriers.
Speaker 3: In parallel to these quicker to market industrial applications, our primary pursuit is that of AI transportable opportunities within the military theater.
Speaker 3: The Army, Navy, Marines, and the Air Force are all deploying autonomous and or AI capabilities.
Speaker 3: Although budgets might hold off on funding another $10 billion aircraft carrier.
Speaker 3: We have been advised that demand for the absolute highest performance and compute systems and computes to highest performance storage and compute systems to assure technical and analytical superiority is a top priority for the Pentagon creating new opportunities and tailwinds for OSES.
Speaker 3: Having started 2022 with just a few significant military customers, we are now engaged at various levels with eight of the top ten largest military prime contractors in the U.S.
Speaker 3: Several of these expanded engagements have led to multiple bids by the primes to the DoD using our products.
Speaker 3: During this process, we also work directly with several branches of the military.
Speaker 3: providing us more visibility into programs, developing relationships with decision makers, and in several cases we are now in the enviable position of having influence on product specifications for RFQs.
Speaker 3: Driving this process is our innovative product called RIGEL.
Speaker 3: our new well-positioned sales representatives,
Speaker 3: our military advisory board added in 2022, and the strengthening of our internal team.
Speaker 3: When we initially introduced our flagship product, Rigel, the most compact supercomputer in the world, we received pushback from the DoD as it did not conform to the entrenched, slower, VPS standard that the military had embraced for years.
Speaker 3: Recognized for our innovation and market disruptive solutions, we eventually gained traction as decision makers realized they could not achieve elevated performance levels, staying with the old standard.
Speaker 3: Although most would have followed the VPX crowd, we stuck to our strategy and it is now paying off.
Speaker 3: Armed with the validation of our military AI transportable strategy, we elected to make some strategic changes to accelerate growth and increase shareholder value.
Speaker 3: In February of this year, we announced a reorganization.
Speaker 3: relocating resources to higher margin opportunities which previously supported low margin business. We also made some changes in senior management. For example, I asked Jim who's on the call today to assume the role of Chief Product Officer. Jim is extremely talented and innovative. –
Speaker 3: in this regard and he's responsible to make sure we continue to design and develop market-leading products for our target customers and drive clear market leadership.
Speaker 3: Additionally, we have initiated a search for new VP of sales as well as two additional salespeople for our military markets. Consistent with our military product strategy and to accelerate company growth around these expanding opportunities, the board and I decided it was time to begin the search for my successor.
Speaker 3: For this end, we hired a well-known national search firm, and we have some very talented candidates with solid experience and deep connections throughout the DoD and the ecosystems that support them. Have a wonderful stateyear.
Speaker 3: As a member of the board and a significant shareholder myself, I plan to stay fully engaged, driving our exciting vision with a team, and facilitating a smooth transition.
Speaker 3: As a board, we are taking the necessary time to make sure we hire the best candidate and we currently expect that this transition will be complete by mid-year. I have told the board I will be flexible on the timing and they have my full support while I am in the CEO role and on the board.
Speaker 3: I am proud of what we've accomplished over the past three years, particularly in financial stability, product leadership, and customer development.
Speaker 3: Prior to my role as CEO , I was an independent director on the board of OSS.
Speaker 3: In February of 2020, based on my public technology company CEO background, and just prior to COVID outbreak, I accepted the CEO job on an interim basis upon release of the founder CEO .
Speaker 3: Although it was not my initial intent to seek the full-time CEO role, after seeing a great opportunity taking shape and working with a team, I put my hat in the ring to take OSS to the next level. While
Speaker 3: In June of 2020, we removed interim part of my CEO title.
Speaker 3: I believe the company is positioned well to improve shareholder value.
Speaker 3: The company's future is bright and the company is poised to accelerate growth and valuation under the right leadership.
Speaker 3: I look forward to supporting the team and my successor as a member of the OSS board.
Speaker 3: I've asked John to comment on the financials and Jim to remark on customer wins and opportunities after which I will provide additional color and thoughts about 2023 and the future of the company. John . Yeah.
Speaker 4: Thank you, David, and good afternoon everyone. Thank you for joining us today.
Speaker 4: Today, we issued a press release with our results for the fourth quarter and the year ended December 31, 2022. The release is available in the investor relations section of our website at onestopsystems.com.
Speaker 4: The following results are for the fourth quarter and are compared to the same year ago quarter.
Speaker 4: As David mentioned, our consolidated revenue in Q4 was up 2.7% to $18.2 million.
Speaker 4: During the quarter, we saw each entertainment customer fall short of their projections, resulting in approximately $1 million less revenue than anticipated.
Speaker 4: This customer is projected to account for less than 10% of our consolidated revenue in 2023.
Speaker 4: Our core OSS revenue decreased 1.8% to $11.3 million representing 62% of our total quarterly revenue. Conversely, revenue from OSS Europe increased 10.8% to $6.9 million which represents 38% of our total quarterly revenue.
Speaker 4: of total quarterly revenue. However, excluding our lower margin media and entertainment business, our core OSS revenue increased 16.8% for the quarter.
Speaker 4: Overall, gross profit decreased $58,000 to $5 million.
Speaker 4: Despite the company realizing improved margins over 30%, we have, as a result, starting to ship a greater mix of AI transportable products.
Speaker 4: However, a fourth quarter increase in our allowance for realization of inventory associated with the customers, associated with the company's trend, excuse me.
Speaker 4: Allowance for realization of inventory associated with the company's transition to higher-margin, edge AI transportable military products resulted in an overall gross margin of 27.3% compared to 28.3% in the same year-ago quarter.
Speaker 4: The gross margins for the core OSS business decrease 1.8 percentage points to 31.4 due to the recognition of additional houses for inventory legalization.
Speaker 4: OSS Europe's gross margin percentage improves 1.1 percentage points to 20.5 percent compared to 19.4 percent.
Speaker 4: Overall, quarterly operating expenses decreased 9.4% to $4.6 million with operating expenses as the percentage of revenue decreasing to 25.3% compared to 28.7%.
Speaker 4: This decrease in operating expense was primarily due to decreases of $138,000 in general and administrative expenses, $239,000 in marketing and selling expenses, and $105,000 in R&D expense. Time from operations increased $424,000.
Speaker 4: to $353,000 compared to a loss from operations of $71,000 in the fourth quarter of 2021.
Speaker 4: Net loss on a GAAP basis was $3.3 million or $0.16 per share, increasing from a net loss of $386,000 or a loss of $0.02 per share in the same year ago period.
Speaker 4: The loss in the fourth quarter of 2022 included a write-down of the net deferred tax assets of $3.9 million, which was attributable to allowances for the company's ability to benefit from cumulative tax losses and R&D tax credits.
Speaker 4: On a non-GAAP basis, inclusive of the aforementioned write-down, the net loss was $2.7 million or $0.14 per share for the quarter, down from non-GAAP net income of $71,000 or $0.00 per share. For more information, visit www.GAAP.gov
Speaker 4: Adjusted EBITDA, a non-GAAP metric, was $1.6 million or 8.9% of quarterly revenue, an increase from $996,000.
Speaker 4: The following results are for the 12 month period ended December 31, 2022 as compared to the results for the year 2021.
Speaker 4: Revenue increased 16.8% to a record 72.4 million. This increase was primarily due to the growth of the Edge AI transportable and autonomous applications, as well as our media and entertainment business.
Speaker 4: Core OSS business increased 12.5%, contributing $43.3 million of revenue, with OSS Europe increasing 24%, contributing $29.1 million of revenue.
Speaker 4: OSS aggregate gross profit improved $758,000 to $20.4 million. Overall gross margin was 28.2% of revenue in 2022 compared to $31.7 in 2021. The reduction in margin was primarily attributable to four factors.
Speaker 4: Those factors are a higher proportion of sales to our low margin media entertainment customer, with a ferment of approximately 3.3 million of higher margin sales of data and storage equipment.
Speaker 4: Third, an increase in our allowance for realization of inventory.
Speaker 4: And fourth, an increase in the proportion of revenue derived from OSS Europe , which generally operates at a margin of approximately 22%.
Speaker 4: Gross margin for the core OSS business decreased 32.7% as compared to 36.9% in 2021.
Speaker 4: OSS Europe's gross margin decreased to 21.5% due to higher transportation and material costs as compared to 23.1% in 2021. Million expenses increased 5.2% to $18.8 million.
Speaker 4: This increase is primarily due to an increase of $605,000 in marketing and selling expenses, resulting from additional marketing, trade shows, and travel.
Speaker 4: There was also an increase in R&D expenses of $711,000 for the development of new standard products for the AI transportable market.
Speaker 4: These two increases were partially offset by a decrease of $379,000 in general and administrative expenses.
Speaker 4: Operating expense at the percentage of revenue improved to 26% compared to 28.9% in 2021.
Speaker 4: Income from operations decreased $179,000 to $1.6 million due to reduced gross margins
Speaker 4: with income before taxes decreasing 744,000 compared to the prior year.
Speaker 4: However, after giving effect to the prior year, one-time PPP loan and interest forgiveness, on a pro forma basis there was a year-over-year increase of $770,000 in income before taxes.
Speaker 4: Net loss on a GAAP basis was $2.2 million, where a loss of $0.11 per basic and diluted share. This was inclusive of the write-down of the net deferred assets of $3.9 million, which as I explained earlier, was attributed both to allowances for the company's ability to
Speaker 4: to benefit from the cumulative tax losses and R&D tax credit. This was compared to 2021 when there was net income of $2.3 million or 12 cents per diluted share, which included the one-time benefit of $1.5 million or 8 cents per diluted share due to the forgiveness of the company's PPP loan.
Speaker 4: and related interest. non-GAAP net loss totaled $175,000 or a loss of $0.01 per basic and diluted share, which included the write-down for the deferred taxes, deferred tax assets as compared to non-GAAP net income of $3.1 million or $0.16 per diluted share in 2021.
Speaker 4: Adjust at EBITDA, a non-GAAP measure totaled $5.2 million or 7.1% of revenue compared to $4.9 million or 7.9% of revenue in 2021.
Speaker 4: For 2021, both Long Gap Net Income and Adjusted EBITDA excluded the PPP loan and interest forgiveness.
Speaker 4: Now, let's turn to our balance sheet.
Speaker 4: On December 31, 2022, cash and cash equivalents totaled $3.1 million with a short-term investment of $10.1 million for a combined total of $13.2 million.
Speaker 4: This represents an increase of approximately half a million dollars compared to our balances as of September 30, 2022.
Speaker 4: We believe the current financial resources available to OSS provides us with the stability and flexibility to be responsive to changes in business demands and particularly those that require investment and working capital to be successful.
Speaker 4: This completes our financial review for the quarter and the year. I would now like to turn the call over to our Chief Product Officer, and congratulations Jim, to Jim Eysen.
Speaker 5: Thank you, John , and good afternoon, everyone.
Speaker 5: In Q4, we added three new major program wins across three market segments, military, commercial aerospace and autonomous commercial vehicles.
Speaker 5: The military win is for a new compact airborne storage server for the Navy that quickly and easily transports mission data to ground stations and to the cloud.
Speaker 5: The commercial aerospace win involves an upgrade to aircraft network systems used in satellite communications and in-flight entertainment. The autonomous vehicle win, with a Tier 1 OEM in Germany, continues to highlight OSS's strengths in commercial data logging and storage applications in the US and Europe .
Speaker 5: These wins brought our total new major program wins for the year to 19, which tops our 14 wins from 2021.
Speaker 5: Of the 19 winds, 13 were in the AI transportable space, including seven autonomous vehicles, four vehicle storage systems, and two military AI programs.
Speaker 5: We expect these new winds to generate approximately $10 million in 2023 and more in the following years.
Speaker 5: We added three new pending major programs during the fourth quarter.
Speaker 5: Two of the three opportunities are AI transportable programs that include an agriculture AI solution and an autonomous vehicle data logging system.
Speaker 5: The third opportunity is for our latest Gen 5 acceleration systems.
Speaker 5: Our current pipeline of pending major programs totals 31.
Speaker 5: with 14 of these involving AI transportable applications and 8 of those in military applications.
Speaker 5: Turning to products and certifications, our Rigel Edge Supercomputer recently attained NVIDIA Certified Systems endorsement, simplifying our sales process.
Speaker 5: It is the only EDGE certified AI system using four of the most powerful PCI Express Gen4 HDX A100 GPUs.
Speaker 5: NVIDIA certified systems are tested and evaluated by NVIDIA engineers for peak performance, functionality, scalability, and security, providing extra confidence in our AI workflow performance.
Speaker 5: In addition, last year we received AS9100 certification for our Aerospace Level Quality System.
Speaker 5: as well as Cybersecurity Maturity Model Certification, otherwise known as CMMC 2.0, allowing us to qualify for a larger number of military AI programs and preparing us to potentially participate as a prime contractor to the US government in the future.
Speaker 5: We anticipate additional wins with the DoD coming soon due to our unique high performance product mix and corporate and product certification.
Speaker 5: As many of you know, military contracts often move more slowly and cautiously, but the diligence and expertise of our teams are starting to pay off.
Speaker 5: So far in Q1 of this year, we have already won two of these military applications.
Speaker 5: This includes an anti-electronic warfare system for fighter jets and the recently announced $1.3 million Army contract to deliver a rugged visualization solution.
Speaker 5: The visualization solution will be based on NVIDIA GPUs that are interconnected with an OSS designed PCI Express fabric with this enabling in-vehicle 360-degree situational awareness. On the marketing front, in Q4, we exhibited at the Association of the United States Army...
Speaker 3: this year.
Speaker 5: At both SC22 and WEST, we teamed up with our partner, TMG Core, to demonstrate a technologically disruptive two-phase liquid immersion cooled version of our Rigel-Ed supercomputer.
Speaker 5: As the world's first two-phase liquid immersion-cooled supercomputer for AI transportables, Rigel can now offer breakthrough levels of operating efficiency, compactness, and ruggedness in the TMG core edge box. And as we like to say, it delivers performance without compromise. The DoD has expressed interest in this technology as it will...
Speaker 5: Chief Product Officer, I look forward to leading the strategic direction of our technology, products, and customer adoption.
Speaker 3: Now with that, I'd like to turn the call back over to Dave. Thank you, Jim. 2023 will be a transitional year for OSS on many fronts.
Speaker 3: ranging from bringing our inventory levels down, reducing the low margin business.
Speaker 3: while increasing the high margin AI transportable business, delivering more military proof points, and the addition of new talent.
Speaker 3: With current visibility, I anticipate that the revenue will likely be consistent with the prior year, but we expect to see a multiple point improvement in margins driving higher margin dollars due to the stronger mix.
Speaker 3: We are projecting growth from our industrial portion of the business, including autonomous trucks, cellular carrier trucks, agricultural equipment, and autonomous baggage equipment.
Speaker 3: But we expect the military AI transportables to lead the growth and are targeting a 40% increase in 2023.
Speaker 3: This portion of the growth will be driven by the return of our largest military customer after the certification delays we experienced last year as well as new business layering in. Over the past several months, you'll see an OSS announce several accomplishments in the defense market. Another story that you may read separates an industry from the government
Speaker 3: including a $3 million defense order, the extension of our storage contract with the Navy, and the breakthrough announcement where we won the program working directly with the Army. OSS has been contracted to design and deliver a much-needed capability for Army ground vehicles, which may get deployed in thousands of strikers, rats, and even in the military.
Speaker 3: to us and informed us that they had also bid on this Army program and are interested in working with us on some other opportunities leveraging our technology and expertise.
Speaker 3: For years, OSS has provided storage product shipments to the Navy for the P-8 aircraft. To date, we've shipped product totaling more than $30 million.
Speaker 3: Based on the deployments, we believe the contract extensions and the future business will yield a similar value.
Speaker 3: Our extended exclusive supplier agreement highlights our technology leadership and long history of delivering rugged storage solutions.
Speaker 3: including all the software for transportable applications in small, lightweight, and portable form factors, particularly those involving secure high-speed data recording.
Speaker 3: This program led to several other opportunities within the same prime contractor. Unfortunately, for the most part, until recently, we have not been able to duplicate this widespread engagement at another top 10 prime contractor.
Speaker 3: As shared in my opening remarks based on several factors related to our strategy implemented in 2021, we have made significant progress on a broader scale with the defence industry and expect to share more proof points with investors throughout 2023.
Speaker 3: OSS is proud that we are now working with multiple military organizations to modernize our country's defenses by deploying strategic AI and autonomous capabilities.
Speaker 3: As recent as a year ago, we had no position at one of the other top ten prime contractors.
Speaker 3: Since that time, we have had multiple meetings, including as many as 80 people in attendance from the contractor and the DoD. I have personally attended three of these meetings and have been pleased with the sincere interest in our capabilities and products.
Speaker 3: Although we've not formally won a contract at this prospect yet, they are proposing to use RIGEL, R-SDS servers, and our storage platforms spanning multiple Air Force aircraft.
Speaker 3: If we close just the current opportunities, they could generate more revenue than our current largest military customer.
Speaker 3: They have lauded the performance and compactness of Rigel, as well as our disruptive roadmap that leverages next generation products from partners like NVIDIA, as well as a path to toothpaste immersion technology.
Speaker 3: In another case, after overcoming the BPX military standard requirement, as I mentioned earlier in the call.
Speaker 3: The prospect included Rigel, included Rigel as the compute system being proposed to the Marines in a major program upgrade.
Speaker 3: Again, this is another top prime contractor. Later, senior management from this customer visited us here in Escondido and said they are looking to leverage Rigel and the Roadmap as potentially a scalable solution to use on all their aircraft proposals.
Speaker 3: where they will be retrofitting current aircraft as well as for use in next generation aircraft.
Speaker 3: We believe our products, technology, expertise, and skills are lined well with AI and autonomous applications throughout the DoD.
Speaker 3: Programs we are working on that have not been announced span many applications, including different types of aircraft, including surveillance, tankers, fighter jets, drones, and helicopters.
Speaker 3: On the land, it includes manned and unmanned vehicles, detection systems, battlefield communications, command centers, and low-signature remote supercomputers.
Speaker 3: At sea, we've seen opportunities for autonomous ships, submarines, and amphibious ships.
Speaker 3: Although most of these laboratories that I've mentioned have not been awarded, we believe we're in an excellent position to close a number of them while also securing new programs in the process. I often get asked, what makes OSS different from others in the market? What prevents others from entering?
Speaker 3: Unlike many in this fragmented space, it all starts with performance without compromise. Rather than bringing lower performance embedded solutions to this market, we bring the latest technology normally used only in the most advanced data centers. Our engineering development and manufacturing expertise provides the company the flexibility and flexibility to manage the data.
Speaker 3: and then videos like some MV link protocols.
Speaker 3: We layer on top of that software in many of these products and take pride in building solid relationships with our customers.
Speaker 3: Now looking ahead, for the first quarter of 2023, we expect revenue of approximately 16.6 million, with a higher mix of AI transportable products as revenue from our lower margin media entertainment customer continues to decline.
Speaker 3: We expect revenues to increase throughout the year as additional programs layer in, especially with the military business increasing margins.
Speaker 3: Our modeling of our pipeline and opportunities suggests that OSS may see revenue growth in the 25-30% range starting in 2024.
Speaker 3: We appreciate your continued support and the contributions from all our teams.
Speaker 2: With that, I'd now like to open it up to call to questions. Farah? Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star, followed by the number 1 on your touchstone phone....
Speaker 2: If you would like to withdraw your request, please press star followed by the number 2. One moment please for your first question. Your first question comes from the line of Scott Surley from Ross Capital. Please go ahead.
Speaker 5: Hey, good afternoon. Thanks for taking the questions. Guys, I appreciate all the color, a lot of color in there, so I'll cut through to a couple of things quickly. But first on the mundane front, just from a gross margin standpoint, Jon, I want to go back and clarify a couple of things in the fourth quarter. With the decline in disguise contribution.
Speaker 5: It sounds like we didn't have a lot of the higher end military product revenue that was going through recertification. Is that correct? And can you quantify the allowances? And then as we look into the first quarter here, how much of a recovery in gross margin do we see or because of seasonality and absorption issues, it's still a little bit of headwinds until we ramp up through the course of this year.
Speaker 4: We saw a little over 2.5% on margin erosion as a result of the additional allowances that we recorded.
Speaker 4: It basically tied directly to more of our business that we are leaving, which is our lower margin business as we move into the more profitable military business. We did a detailed analysis of our inventory.
Speaker 4: a look at the realization of that and based upon that we book the additional adjustments for slow moving or obsolete inventory.
Speaker 3: I think it also, Scott, I'll just add that during the fourth quarter, although we had the seed in the military start to rebound, it has not rebounded as far as it will as far as like the current quarter. In addition to that, although our media and entertainment customer was down and lower than expected, it was still a significant number.
Speaker 3: and you'll see quite a bit further drop moving forward, which is built into the 16-6 number. We should continue to see margin improvement.
Speaker 5: Gotcha, so sequential margin improvement into the March quarter. Correct. Okay, and then Dave, it sounds like disguise is rolling off pretty quickly. I think the number that you said was less than 10% of revenue contribution in 2023. Just want to clarify that, and then also I think you talked about the military AI transportables growing.
Speaker 3: 40% this year. I was wondering if you could calibrate us what it was in 22. I guess you're including some of the Raytheon into that as well or it's not clear to me. I just want to know what numbers I'm working off of. Yeah Raytheon is part of that and basically the military portion of the business you know is going from an overall company. It's going from about 20% to 30% year to year.
Speaker 3: If you look at just the OSS classic, it's going from something like in the 30s to over half, about 55% of the business during that period of time. On the media and entertainment customer front, yeah, it's falling off faster than we projected when we were visiting back in November ..
Speaker 3: And so we're just moving forward and fortunately the hard work we've been doing on the military front is starting to pay off for us. Gotcha. And then to dive in on the outlook, the pipeline is really building on the military front in a very short period of time. It seems like it's accelerating.
Speaker 3: I'm surprised to see that you're so comfortable talking about 25 to 30 percent growth in 2024. I just want to confirm that in terms of total revenues because it implies you're basically back talking about 90 million in sales. And then if I was to strip out Bresner, if I was to strip out Disguise, it looks like you're growing into 2024 60 to 70 percent on the core OSS business. Am I doing that?
Speaker 3: flattish, let's call it, but we are replacing the low margin media business with military AI transportable business. So I mean that, and we're seeing growth out of Reshner. So did I answer your question? If not, please. No, I'm sorry. I'm sorry, Dave. I was talking about 24 and you said one of the things. So 23 revenue is comparable to 22 or is it comparable to 21?
Speaker 3: If we do what we think we're going to do in addition to things we've already closed, that's our expectation. We'll update you more on that as the year progresses. Big numbers. Two more questions and I'll get back in the queue. Looking at that growth into 2024, obviously there's a tremendous amount of growth in the Des Moines one point five dollars per month.
Speaker 3: far along design activity and discussions. You talked a little bit about the pipelines, you talked about some contracts, but I was wondering if there's some sort of number or otherwise that you could quantify to help us understand the magnitude of some of this opportunity as we look at two or three years. And then also on the Rigel side, I was wondering who you're bidding against. Who's on the short list in terms of the competition?
Speaker 3: that you're coming up against with Rigel. Thanks. Well, I know we've been replacing people in some designs. So far in the designs that customers I've been involved, we're not hearing competitors coming up because we're being told we're the only guy to have something at this level of performance. Jim, do you have any additional comments on that? So typically what we're doing is the military comes out from people who are men.
Speaker 5: instead of a bladed architecture, they use Rigel, and it's...
Speaker 5: 10 to 40 times more powerful than what they were considering before. Their eyes light up and they get the forward body lean, as Dave likes to say, and the customers are like, okay, we want to change our spec to be like what you have. That's really the momentum that we're building in these.
Speaker 5: So we're not really, we take ourselves away from bidding head to head with VPX when we bring these in.
Speaker 2: I'll get back in the queue. Thanks and really excited to hear what's going on as we look out into 2024. Thanks. Thank you. Your next question comes from the line of Eric and Martin from Lake Street. Please go ahead.
Speaker 3: Just a clarification, Dave, when you said the military, the 30% to 55%, was that 2022 to 2023 just OSS classic excluding Bresner? Yeah, I gave you two sets of numbers when you have
Speaker 3: Appreciate the clarification. The medium entertainment customer, what was that customer in 2022 as a percent of total revenue? The average customer, what was that customer in 2022 as a percent of total revenue?
Speaker 6: Let me look it up here.
Speaker 4: Let me look it up here. There was one of our top ten.
Speaker 3: Over 20 percent, it's in the, he's looking, I'm just seeing the number that I have, it's in the 22, 23 percent area.
Speaker 5: 25% you're saying that becomes less than 10% in 2023.
Speaker 5: That's 25%. Yeah, it's not 25%. Yeah. So I think we're in the same place. What's 25%? 25. Okay. And that 25%, you're saying that becomes less than 10% in 2023? That is correct. Correct. Okay.
Speaker 3: As I look out, you have given us a couple of numbers for 2023. The revenue comp for Q1, you are talking about at 16.6, that would be a minus 3% revenue comp. Roughly 0% for the year.
Speaker 3: How do we think about the outquarters? They're roughly 0-2% in the outquarters, or is the front half of the year we're expecting a contraction and growth in the back half a better way to think about it? I just kind of visualize a steady...
Speaker 3: step forward upward to get to approximately flat. And to give you a little more color on Q1 for example, if we were still doing the same kind of business levels, the higher business levels, the median owners, payment, customer, we would have set a new record, all-time record for revenue for a quarter and it would have been for Q1 would be, and we've never ever had a big Q1.
Speaker 3: So I think it kind of tells you that the rest of the business is pretty strong.
Speaker 3: because the number is pretty small for them. In Q1 the number is much lower than it was in Q4 and Q4 was lower than Q3.
Speaker 7: That's what I asked about the first question, or I guess it was my second question, where you're kind of fighting at least a 15 percent headwind and still coming up flat is how I would.
Speaker 7: That's another way to frame that, 25% to 22%. You know, assuming those things materialize, we're seeing additional margin points, so margin dollars should be up for the year. Yeah, and then I don't know if you're willing to comment on it, but growth margin dollars up for the year. What about adjusted EBITDA? We finished out 2022 with a...
Speaker 4: It's going to be flat right around 5 million.
Speaker 7: Gotcha. All right. And then, Dave, you said the CEO search is underway, got some good candidates, and we should think about kind of a mid-year hire. Is that correct?
Speaker 3: Yeah, it may happen sooner because we've got really good candidates we're talking to right now, but that's what internally we're targeting. And I'm just staying flexible. So if it's quicker, fine. If it takes longer, I'm here. Okay. Thank you. Great. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
Speaker 2: Okay, that's all the questions I have. Thanks. Thank you. Your next question comes from the line of Joe Gomez from Noble Capital. Please go ahead.
Speaker 7: Good afternoon and thanks for taking the questions.
Speaker 7: Wanted to start, maybe you could just kind of walk us through a little bit more. I understand the military opportunity.
Speaker 7: But a year ago, Dave, we were all about autonomous trucks and how that market was the real one that we were going after. And we've kind of made the big switch here now to the military, just trying to get a better handle as to what caused that and what...
Speaker 7: What is now the plan on the autonomous truck side? You know, where do you see that business growing? I know you talked about, you know, two of the clients were the top ten in revenues for 2022. You know, how do you see that going into 2023? Yeah, so Joe, thanks for this question. It's a great question.
Speaker 3: and I understand why you're asking it. What I don't think is apparent to some people because of that great contrast is that when we launched AI transportables in 2021, we said we were going after the military and the industrial market. I could even share with you the fact that originally we thought of only doing the military market, we thought it was the biggest opportunity.
Speaker 3: But then we said, you know, anything industrial is going to be quicker, so let's put the heaviest focus on military, but we're just not going to be able to talk about it much for a while until things start to develop, because it just takes longer. So that's really what happened, and we pitched AI transportables, we were making some progress, the truck guys came alive, we shared that.
Speaker 3: with the marketplace as proof points. Now that we feel good about what's going on in the military, we feel like we can talk more about that. Then that brings, okay, where are the trucks? We still believe the trucks are the same place as the last couple calls. How I communicate that, it's a good business. It ends up being in our top 10 customers. We expect growth out of it.
Speaker 3: It is something that at some point in time could be a very strong inflection point on revenue as things go into production. And our intent is to stay in that market and be a production solution. But at the same time, as we've said before, we did not want to bet the farm on it because of the higher risk reward aspect of it. So it would be great if it happens. We're going to try to make it happen. I think we will.
Speaker 3: But I think the building blocks of the company as we layer in just dependable businesses that are going to build year after year, high margin, rack and stack is going to be on the military side. And I believe that will drive a lot of the value of the company in my opinion. I think that will drive a lot of the value of the company in my opinion. I think that will drive a lot of the value of the company in my opinion.
Speaker 7: Okay, great. Thank you for that. And then just wanted to clarify, you talked that you're now engaged with eight of the top ten largest prime contractors in the military side. You mentioned something about if one of these programs...
Speaker 3: hit it could be equivalent to the P-8 program which is you know let's call it 30 million over a five-year period. Did I hear that correct and is it you're still talking about that same type of time frame for the revenue? Yeah, I really was saying you know that just one of those primes of some of the stuff because it's so broad.
Speaker 3: If we just closed what we had it would be a larger account. So for example, I think the one I made that comment on, we have more activity today in this short period of time on more programs than we had at our biggest customer. So it's just a broader, we're hitting on more cylinders there than we do in our....
Speaker 3: and growth during the year in addition to the signs we already have.
Speaker 7: Okay. And then one last one for me. You know, you guys have always stated that the long-term margin objective was in that 35 to 40 percent range.
Speaker 3: Given kind of your disguise now falling off and
Speaker 7: hope for significant growth on the military side which carries, you know Mars is up to that 60% level. You're still targeting that 35 to 40% level, is that something that maybe you'll see creep up over time here? We definitely believe it's very doable and part of the reason is the OSS classic business today when you remove the median entertainment.
Speaker 8: is in that kind of range.
Speaker 3: Yeah, the OSS Classic business fluctuates when you pull out the median entertainment somewhere between 35 and 45% on average. We have contributors from customers, anything from as high as 70% and we have other ones that are lower. We can offer customers a low load rooms for PPE in idea
Speaker 9: Thank you. Thank you. Your next question comes from the line of Brian Kanslinger from Alliance Global Partners. Please go ahead. Good afternoon. This is Shervin on for Brian . Thanks for your questions. Get going. God bless.
Speaker 3: Could you I also have a question about autonomous trucking last quarter you mentioned about multiple clients in the prototype phase. I wonder if over the last quarter have any more entered the prototype. And.
Speaker 3: When, or what does the next phase look like? When do you see, if you have any sort of visibility of when these customers will move into it and the impact it will have on your business from a revenue point of view? Yeah, the prototype phase is, you know, it's a long period of time. Fortunately, the ASPs are high. We may be introducing another.
Speaker 3: count in this quarter we're in right now. So there's more opportunities there. As far as a production part, depending on who you talk to, it could range anywhere from people's belief it's 24 to people's belief it's 20, 30 depending on how they look at it.
Speaker 3: But what I believe will happen is that they buy, say 25 of them at a time, they do all their work. I believe what's going to happen next is the FedExes, the Amazons, all these companies that are planning to use autonomous trucks will want to start to work on the logistics of this. and so they'll say hey
Speaker 3: the size of these accounts over time. It wouldn't be that inflection point type revenue but it would be nice growth for us.
Speaker 3: All right. Thank you. Next question. In regards to RIGEL, I remember last quarter you mentioned that you were in the talks with the DOD to integrate RIGEL into large airframe drones and land vehicles for combat. What has – has there been any progress in those specific instances? And in RIGEL in general, when can we start to see meaningful revenue start to ramp? Do you guys have visibility there?
Speaker 7: Well, we continue to get more activity on RYJL at new opportunities and the ones you mentioned are progressing. As far as revenue, we'll ship revenue in 2023.
Speaker 3: But, you know, it's, you know, even the numbers I'm talking about, Stephanie, you've got our current customer and other ones layering in, it's not tens of millions of dollars of ride to learn anything for this year. But it's likely single digits of millions this year. All right, thank you.
Speaker 5: fuel that kind of growth rate in 2024 we're talking about. And it's also, if you take what Rigel has brought us into several of these opportunities that we've actually closed with other programs. So the autonomous trucks, a lot of people saw Rigel first out and said, that's what we want, and we gave them that capability maybe with something like the SDS server. And even the Army opportunity that we had announced last year.
Speaker 5: I guess it was this quarter, was something that started off because of the capabilities inside Rigel that they wanted slightly different. And we are doing the design based on that. So Rigel is opening a lot of doors even if it's not producing its own revenue in those ranges that Dave was talking about yet as we close these deals. That's really good to hear.
Speaker 3: One last question in regards to your guidance for Q1. Close to down 3% year over year is what I'm seeing. Is this just due to the faster drop off from disguise or is there also a slower ramp of military demand that are working together to cause this drop off?
Speaker 3: then moving on from there if there's a steeper drop-off now from disguise which will mean a less steep drop-off later on the year, shouldn't we expect revenue to be down for the first couple quarters, maybe flatten the second and then...
Speaker 3: Moving on from there, if there's a steeper drop off now from disguise, which will mean a less steep drop off later on in the year, shouldn't we expect revenue to be down for the first couple quarters, maybe flat in the second and then gross in the back half?
Speaker 7: So first of all, if you, what I tried to communicate earlier, if you looked at first quarter of 2022 and first quarter of 2023 and you pulled out the median entertainment business, you would see very solid growth of our other core business. So because the median entertainment numbers dropped so much and So first quarter of 2023, you would see very solid growth of our other core business. So
Speaker 7: It's not a big part of our number anymore.
Speaker 7: So what we said is we think this quarter is where it's at and we think the next, you know, several quarters step up quarter after quarter.
Speaker 3: Am I answering your question? Yes, but so I just just to confirm in terms of military demand ramping back up, is it going back up as you expected or you still seem longer like delays? Is and I know you said that it's typically a cautionary business, but the past.
Speaker 3: three quarters and even the fourth quarter now have been relatively weaker and I know there's going to be more strength but you don't see that strength.
Speaker 3: We're having a good Q1 in military. Great, awesome. Thank you so much. That's all I have.
Speaker 9: Thank you. There are no further questions at this time. I'd now like to turn the call over back to Mr. David Vaughan for closing remarks. Thank you everybody for joining us today. We've enjoyed sharing the latest progress at OSS with you today and believe the company's strategy is solid.
Speaker 7: and its future is bright. We look forward to speaking with you again in May, if not sooner. In the meantime, as always, feel free to reach out to John or myself at any time. And with that, let's go ahead and wrap up the call.
Speaker 2: Thank you, sir. Now, before we conclude today's call, I would like to provide a company's safe harbor statement that includes important questions regarding forward-looking statements made during today's call. One-stop systems cautions you that statements in the presentation that are not a description of historical facts are forward-looking statements. These statements are based on company's current beliefs and expectations.
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Speaker 2: which is made under the Safe Harbor provision of the Private Security 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 April 6, 2023. Please refer to today's press release for dial-in and replay instructions available via the company's website at ir.onestopsystems.com. Thank you for joining us today. This concludes our conference. You may now disconnect.