Q1 2023 One Stop Systems Inc Earnings Call
Speaker 2: I.
Speaker 1: Officer, David Rahn, and Chief Financial Officer, John Morrison, as well as the company's Chief Product Officer, Jim Eisen. Following their remarks, we will open the call to your questions. Then before we conclude this call, I will provide some important information 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 call.
Speaker 3: year ago. OSS Europe also had strong revenue growth increasing 26%. That includes 1.2 million of OSS core product sales as we engage with more industrial and military AI transportable European customers.
Speaker 3: In croft in contrast, we sold approximately 180,000 of OSS products in Europe in the first quarter of 2022.
Speaker 3: Our overall gross margin was 30.2 in the first quarter, up from 27.3 last quarter, and a slight increase from the year ago period.
Speaker 3: reduction of low margin sales to our legacy media customer.
Speaker 3: As you may recall that in February we announced the execution of a $1.3 million contract directly with the U.S. Army for the design, development, and prototypes for a rugged 360-degree visualization compute system for land vehicles including the Stryker, Bradley, and Abrams.
Speaker 3: We expect to start to realize revenue from this contract in Q2.
Speaker 3: The program represents a significant revenue opportunity while also potentially opening other applications within the Army. We are engaged with several Air Force opportunities both directly and through top 10 prime contractors.
Speaker 3: Early proof points with the Air Force include yesterday's announcement. Plus we recently learned from another prime if they want a contract that includes our flagship, compact, super computer, fragile.
Speaker 3: We expect to announce more about this win and ship product later this year. In both cases, these were new prime contractors for OSS providing additional exposure and visibility to other key programs.
Speaker 3: Additionally, in Q1, we continued advancing in multiple industrial markets, including autonomous trucks, and agriculture, and several other defense-related opportunities throughout the DOD in the US and Europe .
Speaker 3: Before I comment further on our growth strategy and outlook, I've asked John to comment on the financials and Jim to expand on these customer wins and opportunities. John Rodway available on Amazon. gd Yawn with inside contact correction and practical analysisofulate legal weapons and softly I believe we can close our spoilers at this time, considering that we will do some market
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 first quarter ended March 31, 2023. The release is available in the investor relations section of our website at OneStopSystems.com. The following results are for the first quarter of 2023 as compared to the same period in 2022. Limited revenue declined $271,000 to $16.8 million. This included an expected $3 million to $16.8 million in revenue.
Speaker 4: dollar reduction in revenue from our low-margin media customer, which was mostly offset by 21.8% growth increase in sales to other OSS customers.
Speaker 4: As clarification, OSS Classic is defined as all shipments from U.S. operations delivered throughout the world. For more information, visit www.usda.gov
Speaker 4: Similarly, OSS Europe is defined as all shipments originated from European operations.
Speaker 4: References to OSS core products are those products that are designed in the US and sold through both operations and they tend to yield higher margins.
Speaker 4: OSS classic revenue decreased 18.4% to $8.6 million for the quarter representing 51% of total revenue. OSS classic revenue decreased 18.4% to $8.6 million for the quarter representing 51% to
Speaker 4: excluding lower margin media.
Speaker 4: Customer revenue, OSS classic revenue increased 17.2%.
Speaker 4: Revenue from OSS Europe increased 26% to $8.2 million, including an incremental $1 million of higher margin OSS core products.
Speaker 4: OSS Europe represented 49% of total quarterly revenue. Our overall gross profit in the first quarter was 5.1 million. Our margins increased 10 basis points in sequentially.
Speaker 4: sequentially by 290 basis points to 30.2% attributable to a greater mix of AI transportable products.
Speaker 4: The gross margin for our OSS classic business increased 60 basis points to 36.3, attributable to greater mix of AI transportable products.
Speaker 4: Overall, quarterly operating expenses increased 17.3% to $5.3 million, with operating expenses as the percentage of revenue increasing to 31.4% compared to 26.3%. This increase in operating expenses was primarily due to increases of $510,000 in general and administrative expenses, with $249,000 being attributable to CEO transition costs.
Speaker 4: The increase in operating expenses was partially offset by a decrease of 49,000 in R&D and SPAC expense. Loss from operations was 196,000 compared to income from operations of 650,000 in the same period in 2022. This difference was predominantly attributable to higher operating expenses. The increase in operating expenses was partially offset by a decrease of 49,000 in R&D and SPAC expense.
Speaker 4: Net loss on a GAAP basis was $401,000 or negative a loss of 2 cents per share as compared to net income of $579,000 or 3 cents per share. On a wrong GAAP basis, the net income was $90,000 or 0 cents per share.
Speaker 4: down from non-GAAP net income of $978,005 per share.
Speaker 4: Adjusted EBITDA, a non-GAAP metric, was $530,000 or 3.2% of quarterly revenue, a decrease from $1.4 million.
Speaker 4: Turning to our balance sheet, as of March 31, 2023, cash and cash equivalents totaled $3.5 million with short-term investments of $9.2 million for a combined total of $12.7 million. This represents a decrease of $547,000 compared to cash equivalents.
Speaker 4: and short-term investment as of December 31, 2022.
Speaker 4: Our cash decrease was attributable to strategic inventory purchases and working capital requirements.
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 in working capital in order for us to be successful.
Speaker 4: This completes our financial review for the quarter. I would like to now turn the call over to our Chief Product Officer, Jim Eisen. Jim?
Speaker 4: This completes our financial review for the quarter. I would like to now turn the call over to our Chief Product Officer, Jim Eisen. Jim? Thank you, John , and good afternoon, everyone.
Speaker 4: In Q1, we added seven new major program wins. We expect these wins to yield about $5 million in revenue this year.
Speaker 4: Three of these winds were in AI transportables, including the ruggedized compute visualization system for the US Army, a US Air Force anti-electronic warfare system, and a new autonomous truck server wind. The remaining winds were in medical, finance, and industrial manufacturing applications.
Speaker 4: providing a very low latency solution. Yesterday, we also announced the $3.5 million US Air Force Program win, procured through a new prime contractor for SDS storage servers. We see this design win leading to other AI transportable applications inside this prime contractor, including similarly configured SDS servers for compute acceleration and data acquisition. In addition to the two DoD wins, the other AI transportable win, including servers for a current autonomous truck customer, where we are actively deploying Sentari storage solutions.
Speaker 4: Our ability to win multiple designs within an account is key to our strategy as we build a leadership position in AI transportable applications. We also added three new pending major programs during the quarter.
Speaker 4: We expect such pending major programs to each generate a million dollars or more in revenue over four years, with a 60% or greater likelihood of closing. Our pipeline of pending major programs at the end of Q1 totaled 34, with 18 of these involving AI transportable applications in the US, Asia Pacific, and Europe . On the product front,
Speaker 4: Our innovative flagship product, Rigel, recently obtained full NVIDIA certification and stands as the only certified rugged edge supercomputer based on NVIDIA's HTX-A100 GPU.
Speaker 4: OSS and NVIDIA announced the certification together at the AUVSI show earlier this week, where OSS sales engineers engaged with autonomous vehicle customers for trucks, drones, and ships.
Speaker 4: Both RIGEL and RGEN5 4U Pro Accelerator System include the OSS proprietary unified Baseboard Management Controller or UBMC. The UBMC software manages, monitors and controls the telemetry of these OSS products using OSS developed software.
Speaker 4: to provide customers with advanced features that set our systems apart.
Speaker 4: Our plan is to include the basic software in our products, but provide additional capabilities and solutions via a recurring software revenue model. This strategy creates additional value, product stickiness, and may eventually lead to a higher margin software revenue stream. More OSS products will contain the UBMC functionality and software moving forward. Now with that, I'd like to turn the call back over to Dave. Dave? Thank you, Jim. As communicated on our last call, 2023 is a transitional year for OSS on many fronts, ranging from reducing low margin business to increasing low margin business.
Speaker 3: increasing high margin the air transportable business.
Speaker 3: bringing down inventory levels, delivering more military proof points, and the addition of new talent.
Speaker 3: We are projecting growth from our industrial portion of the business, including autonomous trucks, cellular carrier trucks, and agricultural equipment, as well as multiple segments within the military.
Speaker 3: Our 2023 objective remains the same.
Speaker 3: to offset the reduction of our lower margin media business.
Speaker 3: with AI transportable growth and move back into an overall growth mode in 2024 as we did in 2021 and 2020.
Speaker 3: As we have outlined in our investor presentation, we believe the AI transportable market has solid tailwinds with a push to add AI and autonomous capabilities in several industrial verticals and throughout the military market.
Speaker 3: As with many companies, we identify opportunities and maintain a pipeline database.
Speaker 3: In our case, we include identified target opportunities that should need our products which we are pursuing.
Speaker 3: opportunities in which we are engaged with the customer.
Speaker 3: engaged with the customer. Tending wins.
Speaker 3: and confirmed program wins. Many of which we project will generate revenue.
Speaker 3: The current total identifiable value of these opportunities over the three years, including 2024 through 2026, is approximately $850 million and growing.
Speaker 3: After we apply weighted and judged probabilities to these opportunities, the outcomes support solid growth projections for 2024 and beyond, with estimated growth rates in the range of 20 to 30 percent.
Speaker 3: These opportunities represent a combination of industrial and military applications, with a percentage of military applications growing each year. Last year, we announced a partnership with key autonomous truck companies utilizing our storage and service product line. Two of these truck companies rose to our top 10 customer list for last year.
Speaker 3: The Jim outline we had another program win at one of the two press rooms this past quarter
Speaker 3: We believe the segment of the market will continue to grow. Upon reaching a production state, the segment could produce a significant inflection point in upward revenues for OSS. As we look forward, we see additional verticals leveraging similar OSS capabilities developing over time. For example, we have a pending win that is expected to close and provide Q2 reps.
Speaker 3: core and air force are all deploying autonomous and or AI capabilities.
Speaker 3: Great new opportunities and tailwinds for all sets.
Speaker 3: We believe these divisions of the military with a broad base of opportunities that drive higher margins and revenue, combined with the innovation of the OSS team, will be the primary building blocks for value for our shareholders over the coming years.
Speaker 3: Looking ahead to the second quarter of 2023, we expect revenue of approximately 17.5 million. On Wednesday, May 17th, we'll be holding our virtual annual stockholder meeting at 11 a.m. Pacific Time.
Speaker 3: We've been running a rigorous search and selection process to identify a successor CEO and a DPS sales with extensive military experience and contacts to accelerate the company's advancement to the next level.
Speaker 3: The board and I are pleased with the quality of the candidate. They are sincere interest in OXS and it dissipates the finalists will win the support of you, our investors, as well as our employees and customers. We expect to remain on schedule to have a successor in place by the end of June . The board and I are pleased with the finalists will win the support of you, our investors, as well as our employees and customers.
I look forward to working with the new CEO as a member of the board of directors on a smooth and productive transition.
It has been an honor to be the CEO of OSS over the past three years and I get to and get to know the great employees, investors, and customers in the process.
I appreciate your support and look forward to staying in contact through this transition and as a director.
Now with that, I'd like to open the call up to questions.
I'd like to open the call up to questions. Chris?
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touch tone phone. You will hear a three tone prompt acknowledging your request and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by two.
If you are using a speakerphone, please lift a handset before pressing any keys.
One moment please for your first question. Your first question comes from Eric Martinuzzi, Lake Street. Eric, please go ahead.
I will get to the expense side of the equation in one of my subsequent questions. I wanted to start out with the outlook for the first half of 2023. Given the print in Q1 and the outlook for 2023, what is the overall impact of the 2023
for the first half. That is assuming you come in at the 17.5 for Q2. I wanted to know what your expectation is for the back half. You have laid out the plan as of last quarter to offset the M&E decline in revenue with other program wins.
Is the expectation that we're going to be roughly flat for the year, or if the back half is the front half, we could be down low single digits? Thanks, good question. Eric, it looks like the first half, we're a little off as far as the second half.
You know, we don't have as much visibility as we do the first, of course. Our objective is the same, to replace that.
It's a big challenge, there's no doubt about it, but that's objective and we're driving towards that. We do have programs in the pipeline that allows us to do that as long as they come in with some judgment. And.
So, again, our objective is to be as close as possible to last year's number. Okay. And then I did appreciate the kind of further lookout, the slide that you put up about the growth in 2024 and beyond.
that pipeline that 850 million that you that you're
talking about over the next three years. Can we, do we have a frame of reference for that? What was that?
talking about over the next three years. Do we have a frame of reference for that? What was that? If we were.
If we jump back a year ago, what was that pipeline looking like? How much has it grown or maintained? Sorry, I don't have an exact number. It's definitely grown. I will just add a little color to that. I want to make sure, but you know, so I mean, that's a mixture of everything from solid design ones to identified.
TARDIS and everything in between and we've applied judgments anywhere from a 2% probability and waiting coming out the other side to 90% depending on it But it has that lead growth. I would guess Eric it's somewhere in the area of 25 to 30% larger than it was a year ago
I like the sound of 20 to 30% organic growth. I know you are not guiding to that. It is more of a. Because you canWhich is sanitary not
analysis that you've given us, but certainly...
It sounds like the media customer will be behind us as of FY24, is that correct?
Yeah, I think all assumptions should be that.
You talked about the three different puts and takes, two to the negative and one slight offset. What should we be thinking about for operating expense for the second quarter? The second quarter with the current plan right now is that we will be accruing all severance related with the departure of David as of June 30.
As previously disclosed in the 8K, his 7th package includes approximately one year of income. So we will be accruing that as of June 30. We also have additional costs for legal expenses and search costs. That cost...
about $600,000 to $800,000.
Then, normalize post the... Maybe I should have asked what Q3 looked like. I'm just trying to figure out where do we normalize on the outback.
Q3 we're going to be right around 5.7 million.
One of the things I'll add to that is that the dynamics with the increased spending is not something where we've opened floodgates of hiring people. We've hired very few.
And we do have some hiring in the number that John just mentioned for Q3. We'll keep an eye on that depending on how we progress on multiple fronts.
Just a final comment, it's good to see those wins with the new.
I have to believe there is more behind that as far as other programs in the pipeline. Maybe we have broken the log jam with some primes we have not worked with before. Is that a fair assessment?
Yeah, absolutely. I mean we're very bullish on this front. It's just the frustration is just the long process in the military. I mean the activity is just as I shared last time.
is very strong in the military.
Thanks for taking my question. Thank you, Ericc. Thank you. Your next question comes from Brian Kinzlinger, Alliance Global Partners. Brian , please go ahead.
Hi, Brian . Hi there. This is this is Shervin on for Brian .
Thanks for taking the question. It's great to see the growing pipeline of opportunities for the company's 25 to 30% larger is great to hear. I see that that figure is made up of targets opportunities, pending wins and wins. Could you. A quantify the pipeline of just pending wins and wins.
And then be a little bit more near term focus, quantify the pipeline of bids, submitted and planned opportunities you expect to generate revenue within the next 18 months.
Thanks. Yeah, I would say the pending and wins are about half the number as far as the left side of the funnel. I'm and then
It's about two-thirds of the number on the right side of the funnel. Meaning that, you know, two-thirds of what we see to drive 20 to 30 percent growth, two-thirds of that's already either in a pending or win category. And the balance would be between opportunities that we're engaged in and target.
between targets and opportunities.
The other third would be that to be on the right side of the funnel.
Prox, that's approximate number. I'm just looking at numbers real quick. Yeah, yeah, just generally and keep in mind, depending when for us means that we think the probability is 60% or higher. Yeah. Yes. I saw that. You really think we're going to close it. It's just that some don't.
Okay. And then about the quantify, could you quantify the pipeline of bids?
bid submitted or planned opportunities you expect will generate revenue within the next 18 months.
I don't have a specific number to quantify it that way. I would just say that.
You know the numbers as we rack and stack these things that produce the type of growth that we mentioned already.
I don't have any further clarification on that. I'm sorry. All right, thank you. Next question. It's been great to see the info program with the start of this year.
We've closed a lot of great opportunities. Could we expect this race to continue or pick up? I know you mentioned that these military contracts have long cycles, but have you seen any of the government turmoil recently spill into delay decision-making, even further from the long-scale cycles that we've seen for your military clients, which could slow down awards and revenue generation? I think it's impacted some because that's...
Great, thank you. And last question over the past few quarters, your company has had around 13 to 14Million dollars of cash on hand.
Where is M&A on your priority list? Is it high or low? And what are your plans in general for capital deployment, if any?
I think in the short term we're focused on the organic opportunity and although we have some cash, that cash is not, wouldn't go that far in an acquisition and we also believe that when we do M&A we better make sure it's really obvious to investors why we're doing it, number one. And number two, it's sizable and worthwhile doing.
We don't want to be doing five million dollar deals to buy on the team and move away from organic growth. So, for the most part, we're very laser focused on organic opportunity.
to be doing $5 million deals to buy on the team and move away from organic growth. So for the most part, we're very laser focused on the organic opportunity. Great. Thank you so much. That's all I have.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star one on your touchtone phone. Your next question comes from Joe Gomez, Noble Capital. Joe, please go ahead. Hey, David, John and Jim. Thanks for taking my questions.
Ladies and gentlemen, as a reminder, should you have a question, please press star 1 on your touchtone phone. Your next question comes from Joe Gomez, Noble Capital. Joe, please go ahead. Hey, David, John , and Jim. Thanks for taking my questions. Hi. Hi, Joe. Hi, David. Hi, John . Hi, David. Hi, David. Hi, David. Hi, David. Hi, David. Hi, David. Hi, David. Hi, David.
So David, you talked about the CEO search in mid-June. You didn't mention really much anything more on the VP sales search. I just wondered if you could give us a little update on that.
Yeah, absolutely. So a couple things. What we've been doing is interviewing BCS sales candidates. And what I'm really trying to do is have a handful of them that are qualified by not just myself but some other individuals that we think.
clear that we should hire them under any circumstance. That's what we're doing. Let's get the CEO in here, let him get involved and be a key part of the decision-making process. We've also with some of these candidates, they've indicated that they have some very strong VP's of sale candidates that they could bring along.
That's the situation there. Hopefully, to answer that, hopefully we get the CO in place and we get our BPSLs in place in July . Okay, great. You mentioned in your commentary, one of the goals was to bring inventory levels down. I think John mentioned that you increased inventory and were out there...
to OSS Europe and then the portion that's attributable to OSS Classic.
With the respect to OSF pressure, they had a shipment from Taiwan go on the water about one week earlier than anticipated and that is done at FOB shipping point. So basically the ship left a week earlier than anticipated. It was to be done in April .
it left port in March. So that was all associated with product for Q2. It's been identified and it will be sold in the Q2 period. So that was a timing issue. And that was approximately $1.2 million of inventory that was on the water.
With respect to OSS Classic, it represents about $1.6 million. It is as a result of some Gen 5 Broadcom chips being delivered in advance of the originally planned delivery date. We were required to take them, otherwise we would have had to get back in line.
with a 52 week lead time and an increase of 6 to 13 percent increase in price. So we went ahead and took those chips in advance of when they were originally planned to come in.
So I'd just add to that. So our intent is to bring down the inventory as we said. This caught us off the little guard. Fortunately these are products we need. In the case of the Europe stuff it will be burned off pretty quickly. In the case of the switches it will take us a longer period of time.
They're key to our products. They go into almost everything. They're key to our products.
Long term by year end we hope to bring inventory down to around $16 million. And in general, just if you're wondering about our concerns about the inventory, we analyze this every quarter internally and with our auditors and appropriately.
write off things as needed and we do not believe we have a big exposure out there.
Okay, thank you for that. On OSS Europe and the selling, significant increase in core OSS products being sold there, how did that kind of come about and how do you see that playing out here going forward? How do you see?
significant growth opportunity of selling some of the core OSS products through the European channel. Do you want to take it, John ? Sure. So kind of look at the
Yeah, it's been in the works for several years where we've put a team in place in the European operation. We've been in the works for several years where we've put a team in place in the European operation.
focused on the OSS and AI transportable product. So they're a key part of the strategy of AI transportables in general. The growth is starting to show now, which is what the goal was. I see it continuing down this path.
as they continue to bring on and you'll see some design wins coming out of AI transportables from the European operation.
Yeah, this is good news. This is something we thought we would have in place a lot earlier.
This is good news. It's something we thought we would have in place a lot earlier. But anyway, it should be a trend that continues.
Great, I'm getting back in queue. Thanks guys, appreciate it.
Good talking to you, Joe. Thanks, Joe. Thank you. There are no further questions at this time. I will now turn it back to our speakers for closing remarks. Thank you everybody for joining us today. We have enjoyed sharing our latest progress at OSS with you today and believe the company's strategy is solid and its future is bright.
In the meantime, as always, feel free to reach out to John and myself at any time. With that, let's go ahead and wrap up the call. Thank you. Now before we conclude today's call, I would like to provide the company Safe Harbor statement that includes important cautions regarding forward-looking statements.
made during today's call. One-stop system is cautionary that statements in the presentation that are not a description of historical facts are forward-looking statements.
These statements are based on companies' 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, and members of management.
looking statements and others should not be regarded as a representation by OSS that 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 is developing and may not develop as we expect, military conflicts, global pandemics or other disasters or public health concerns, and economic instability in regions of the world where we have operations.
Customers or source material or sell products may affect such market.
Our operating results could be negatively impacted by inflationary pressures, supply chain constraints, increased interest rates, or other economic conditions.
Our operating results may fluctuate significantly, which would make our future operating results difficult to predict and could cause operating results to fall below expectations or guidance.
If we are unable to offset anticipated future decreases in revenue in our media and entertainment space with other business, our operating financial results may be adversely affected.
Our ability to successfully integrate 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 sell products.
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 that meet the needs of our customers. The likelihood of our design proposals becoming design wins in uncertain and revenue may never be realized.
Our products fulfill 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 to cause our products to no longer fulfill such needs or functions.
New entrance into our market may harm our competitive position. We rely on the limited numbers 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 couldn't cure significant expenses to enforce our rights.
Our international sales and operations subject us to additional risks that can adversely affect our operating results and financial condition. We may not be able to accurately report our financial results and other risks described in our prior press releases and in our filings with the Securities and Exchange Commission?
SEC, including under the heading Risk Factors in our Annual Report on Form 10K 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 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 1995. Before we end today's conference, I would like to remind everyone that this call will be available for a replay starting later this evening through May 25, 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 your conference. You may now disconnect.