Q2 2023 One Stop Systems Inc Earnings Call
Ladies and gentlemen, thanks for standing by we will be starting in just about a minute and once again, thanks for standing by.
In about a minute.
[music].
Good afternoon, and thank you for joining us today to discuss one stop Systems' financial results for the second quarter ended June 30th 2023 with US today are the company's President and Chief Executive Officer, Mike Knowles, and its Chief Financial Officer, John Morrison.
They are joined by the company's Chief product Officer, Jim icing. Following their remarks, we will open the call to your questions. Then before we conclude the 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 them.
Bailable for replay in the investors section of the company's website now I would like to turn the call over to Oss President and CEO , Mike knows Sir. Please go ahead.
Thank you Darren and good afternoon, everyone.
In the first half of 2023, Oh assess implemented strategic organizational changes designed to accelerate our growth, particularly focused on ramping up our defense business and our.
Transportable product sale to.
To support this strategy in June the company appointed me, President and CEO , allowing me to leverage my experience and expertise in the global defense and commercial markets to accelerate the implementation of our strategy and grow revenue.
As an update to the board of director re profiling that was previously disclosed.
Like to announce that Jack Harrison, who had been serving as chair of the nomination and governance Committee and feed alone who had been serving as chair of the compensation Committee every dying from the Oss Board of directors effective as of the end of Q3 I want to thank Jackie Cedar for their numerous contributions.
In their place I'm pleased to announce that effective as of the end of Q3, Michael Dumont and I will be joining the <unk> board of directors. Mr. Demand is a retired three star Admiral whose career includes having served as a deputy commander of U S. Northern command and Vice Commander of North American Aerospace Defense command, otherwise known as normal.
Both demand currently served as interim president of the California State University Maritime Academy. He is also a licensed attorney with both defense and commercial experience and currently serves on the board of directors of the Marines Memorial Association Board of advisors of data miner, the National Security Advisory Council of the U S Global leadership coalition as well as the Oss Advisory Board.
Sure.
We are actively pursuing additional re profiling activities for Q4.
I'd also like to note briefly announced the addition of Robert <unk> team as Vice President of sales reporting to me Robert brings over 30 years of defense business development in demand experienced in defense and commercial markets.
I've had the privilege to work with Robert for a decade, and I'm confident that we will be able to leverage our experiences to enhance and improve our sales and marketing efforts to accelerate our strategy.
Robert has taken leadership of our sales and marketing organization is already active with customers driving the team and updating tools and processes to create added efficiency drove pipeline and drive near term and long term bookings.
Jim I can retain the position of Chief product Officer, and now has the opportunity to focus his full attention and effort within the product organization to ensure we continue to bring a roadmap what leadership product to the market I. Appreciate his efforts over the past six months, having led both the sales marketing and product organization.
Since assuming the position of CEO two months ago, I've had the opportunity to meet engage with customers and companies in the defense and commercial markets.
These engagements have been able to build my confidence and reaffirm the current company strategy and the opportunities in the AI transportable space.
Having done so I don't need to see the need for a major adjustment to this strategy I am confident the strategy and product focus remain valid because the market continues to be backed by strong demand for AI sensor fusion and autonomy at the edge.
Reserve power products work across both defense and commercial application and can serve as the underpinning for building a balanced defense and committed commercial business portfolio.
I believe that our current business model will strategically serve our company investors as well.
What I am focused on is leveraging my experience to further drive and accelerate the strategy and build greater momentum and pipeline.
During these past few months have explored opportunities to create broader partnerships within our core markets and with artificial intelligence software providers. We believe that these partnerships will unlock our ability to deliver fully integrated higher value solutions for our customers. So they can more successfully leverage artificial intelligence and machine learning operation for their direct mission our business objectives.
Or does it established a good foundation for operations in the defense market and as I've familiarize myself with the business and its operation will be implementing further improvements towards executing on our strategy for.
For example, AI intensive fusion applications within defense market are consistently moving more into the classified space where additional opportunities.
Just to participate in this environment and capture these opportunities we will need to have a security cleared facility and create the cleared workforce. In this regard have already implemented actions on these efforts and we expect to receive our facility clearance from the U S government by the end of the year. In addition, we have already trained to facility Security officer we.
We have also initiated discussions with our customers based on classified opportunities and we'll leverage. These added secured classified information facility referred to as the skip and further broadening to enhance our opportunities in the classified space.
From a business and organizational perspective, we will work to strengthen our operations to better execute the defense market in the defense market.
At the appropriate time, we will look to enhance our team by adding a contract specialists to deal with the complexities of defense contracting auditing and negotiate it.
We will move to certify our costs and accounting systems and further mature our international traffic in arms regulations or ISR process.
And we have the opportunity to leverage the defense motor Mencher produce a program to assist and guide us in these areas through defense Prime contractors. We are actively engaged in discussions with multiple primes at this time.
I don't anticipate further developing our opportunity pipeline identification and forecast modeling process over the second half of this year I've seen a need for improvement in the existing model that approach. This is consistent with the stage of maturation of Oss in the defense market improvement in these areas will allow for a better assessment of forecast and opportunity timing.
Additional observations over the past few months indicate that we have a talented motivated employee base their strong technical and product expertise in an innovation driven environment that can deliver on products that will meet existing and future market requirements for rugged data center class edge processing.
This will ensure we remain on the forefront of introducing the newest and highest level of performance for which Oss's made a reputation.
I'm also excited that we have an experienced operations team in facilities with capacity to meet projected growth in demand.
Overall, the company is an energetic culture with a sense of urgency to succeed reminiscent of environments Ive worked in where I have seen the greatest success and growth.
I am pleased that my engagement with our customers have validated the capability and scale of the solutions, we can bring to both defense and commercial markets. The scale from our high end <unk> product to our mid tier fts product and lower end certainties and do Naughty product gives us the flexibility to deliver scalable performance at varying price points, which aligned to our customers' requirements.
Additionally, our PCI express and storage products provide an added dimension of performance and value to our customers and attaining not only the highest levels of compute but also the lowest latency and most flexible storage solution.
As I look at the company's forecasted performance will be met with revenue challenges due to opportunity to delayed. Unfortunately, these delays, especially in the defense market are not be consistent with my experience and are not a reflection of the strategy product offerings and our value of opportunity in this market. We're also seeing a softening in the timing of the commercial market, including consolidation and delays.
In autonomous trucking and a conservative approach to increasing hardware spending.
Having said that I have confidence in our strategy, our product offerings and our ability to build a robust pipeline.
As we execute Q3 and Q4, our focus will be to build upon what I have discussed here today to grow and accelerate sales and revenue.
Now before coming further I'd like to ask John to provide the financial details for the quarter and Jim to expand further on customer wins and product.
Hi.
Thank you, Mike and good afternoon to everyone. Thank you for joining us today today, we issued a press press release with our results for the second quarter ended June 32023. The releases are available in the Investor Relations section of our website at one stop systems Dot com.
Our consolidated revenue in Q2 totaled $17 2 million up two 3% sequentially, but declined 6% from the same year ago period as anticipated. The decline was due to decreased shipments to our legacy media and entertainment customer and a reduction in product shipments into the autonomous truck.
In the industry, which is going through consolidation and financial hardships.
We also experienced delays in defense orders.
We have suspended substantially fulfilled the remaining orders associated with our media customer we do not expect further measurable business from them.
As covered in our previous calls this drop in Indiana.
The entertainment business resulted from an acceleration in our customers' investment in cloud technology, and a drive towards flex intelligent compute capability at the edge. This is particularly true of the virtual products, which do not require the same level of recommendation has the system is not typically opera.
And harsh environment.
Approximately $3 3 million of our quarterly decline in revenue was from this low margin legacy media business, which was partially offset in the quarter by our AI transportable revenue.
While we've experienced some delays in orders during the second quarter. It is important to note that our win rate has remained at previous levels.
As you know our customers are companies business is comprised of two segments Oss classic and Oss Europe .
Fifth classic is involved in the design and manufacturer of high performance Ruggedized computers flash arrays and connectivity.
Europe , primarily operates as a value added reseller with minimum product customization and an increased focus on selling our core products into the European community.
In the second quarter Oss Classic revenue declined 22, 8% to $8 3 million due to the factors previously mentioned, while Oss Europe revenue increased 17, 7% to $8 9 million.
Oss.
Europe increased was due to additional project based business, including $1 2 million of Oss core products and an increase in the number of small account as well as having more available inventory to ship as compared to the same year ago quarter.
Overall gross profit in the second quarter was $4 8 million. The overall gross margin percentage was $27 nine as compared to $28 four in the same period in 2022.
Gross margin for our Oss classic business decreased three eight percentage points to $29, two which was also which was attributable to the predominance of lower margin sales to the company's immediate customer and higher mix of third party components.
Oss Europe's gross margin percentage improved four eight percentage points to 26, 7% as compared to 21 nine.
<unk>, 9% in the same period in 2022 due to product mix.
Self higher margin Oss core products and having sought after products regularly sold at a premium.
Overall quarterly operating expenses increased 71, 1% to $8 2 million with operating expenses as a percentage of revenue increasing to 47, 7% compared to 26, 2% in the same period in 2022 the most.
Significant ponant component of this increase was a $2 $7 million write down attributed attributable to an impairment of goodwill, resulting from the overall financial performance of Oss classic as compared to plan the transition of our focus to AI.
Portables in the defense industry, and lastly, the deferment of certain orders.
Another significant component was an increase of $1 3 million in general and administrative expenses was $1 1 million attributable to increased cost associated with our organizational restructuring.
T J transitioning our senior management and outside professional services.
Such transition costs include additional wages.
Legal fees.
Fees stock compensation and additional compensation attributable to the strategic transition Committee.
This increase in operating expenses was partially offset by a decrease of 241000 in marketing and selling expenses and 297000 and R&D expense.
Loss from operations totaled $3 4 million compared to income from operations of 402000 in the same period. In 2022. This reduction was predominantly attributable to lower revenue the write down attributable to the impairment of goodwill and transition costs.
Net loss on a GAAP basis was $2 4 million or a loss of <unk> 12 per share as compared to net income of 323000 or two cents per share NAV.
Net loss in the second quarter also included a onetime benefit of $1 3 million attributable to the receipt of COVID-19 funds under the government employee retention credit program.
non-GAAP net loss.
It was 84000 or zero cents per share compared to non-GAAP net income of 871000 or four cents per share.
Adjusted EBITDA, a non-GAAP metric was 487000 or two 8% of revenue a decrease from $1 2 million or six 5% of revenue.
Each of these non-GAAP metrics include adjustments of $2 7 million for the impairment of goodwill and $1 3 million for the employee retention credit.
Now turning to the results for the first half of 2023 has compared to the first half of 2022.
Solid added revenue decreased three 9% to $34 million the decrease in revenue in the first half of 2023 is due to the reasons discussed here referenced Q2.
Our Oss classic revenue decreased 26% to $16 9 million while or.
While Oss core product revenue is growing year over year Oss classic is experiencing delays in orders from the commercial and defense markets, which represent 5% to $6 million of revenue, which we believe will be pushed from 2023 to 2024 and wherever and rep.
Presents deferral only of revenue opportunities.
Oss Europe revenue increased 21, 5% to $17 1 million inclusive of $2 $4 million of Oss core product sales.
As a reminder, Oss classic is defined as all shipments from U S operations delivered throughout the world. Similarly, Oss here. It is defined as all shipments Richard that even from Europe operations. All assess core products are designed in the U S and sold through both opera.
<unk> and 10th yields higher margins.
Overall gross profit was $9 9 million. The overall gross margin percentage was 29% as compared to 29, 2% in the same period in 2022.
Oss classic gross margin percentage was 32, 8% a decrease of one five percentage points as compared to 34 three.
This was due to the predominance of lower margin sales to our media customers and a higher mix of products with third party content.
Oss Europe contributed gross margin at a rate of 25, 3% as compared to 21, 5% an increase of three eight percentage points due to product mix and increased sell of Oss core products and having sought after products sold at a premium.
Total operating expenses increased 45, 1% to $13 5 million. The increase was primarily due to an increase of.
A $2 $7 million write down attributable to an impairment of goodwill and $1 8 million in general and operating expenses of which $1 4 million of the increase is due to increased non reoccurring costs.
<unk> shared with the company's organizational restructuring and outside professional services.
Such costs included wages legal fees search firm fees equity compensation and additional compensation attributed bulk to the strategic transition Committee.
The increase in operating expenses was partially offset by a decrease of 346000.
R&D expense, resulting from more engineers being deployed on chargeable work for which that expense is classified into cost of revenue.
Loss from operations totaled $3 6 million compared to income from operations of $1 1 million.
Net loss on a GAAP basis was $2 8 million inclusive of the $1 3 million employee retention credit or for <unk>.
<unk> 14 per diluted share compared to net income on a GAAP basis of 902000 or <unk> <unk> per.
For diluted share.
non-GAAP net income totaled 6000 or zero cents per diluted share as compared to $1 8 million or <unk> <unk> per diluted share in the same year ago period.
Adjusted EBITDA totaled $1 million or 3% of revenue compared with $2 6 million.
Or seven 3% of revenue both non-GAAP net income and adjusted EBITDA included adjustments included adjustments of the $2 7 million impairment of goodwill and the $1 3 million employee retention credit.
Now turning to the balance sheet.
On June 32023, cash and cash equivalents totaled $6 $1 million with short term investments of $9 3 million for a combined total of $15 4 million.
This combined total represents an increase of $2 7 million as compared to the prior quarter.
This increase was primarily due to the employee retention credit and a decrease in working capital requirements.
Consistent with our prior form S. Three shelf registration statement.
In that expired in May 2022, we anticipate that we already knew such registration and file a new form S. Three later this month.
This completes our financial review for the quarter I would like to now turn the call over to our Chief product Officer, Jim <unk>.
Jeff.
Thank you John and good afternoon, everyone. In Q2, we added six new major program wins, we expect these wins to yield about $3 $3 million in revenue this year across both Oss classic in Oss Europe .
Three of these wins were in AI transportable, including commercial autonomous watercraft and autonomous trucking server and a defense submersible application. The remaining wins included in industrial Iot in two data center <unk> infrastructure applications.
The autonomous watercraft application is our second customer win for commercial Harbor patrol craft that combined several AI applications into a single Oss Sds server.
These customers combine the self navigation functionality with the ability to fuse data from high resolution video infrared imagery and various sensors to provide full spatial awareness.
This sensor fusion allows the watercraft to perform vessel identification.
Security and other Port services.
The autonomous truck application is the first navigation server within a new customer providing autonomous company campus goods transportation.
The third AI transportable application was a defense customer win for submarine AI sonar processing.
This win combines our highly capable STS server platform with innovative Oss liquid cooling techniques to provide data center capabilities under the sea, while reducing the noise signature well below that of our competition.
During the quarter, we also announced the $3 $5 million U S Air Force electronic warfare simulation program win through our new prime contractor for our STS storage servers.
Our ability to expand our footprint with various customers than when multiple designs within an account is key to our growth strategy and for strengthening our leadership position in AIG transportable applications.
We also added seven new pending major programs during the quarter, we expect such pending major programs to each generate $1 million 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 Q2 totaled 33 with 19 of those involving AI transportable applications in the U S Asia Pacific and Europe .
On the product front over the last year, we have expanded our AI transportable product line to target applications in multiple domains from the high performance Rigel edge supercomputer for government Air and sea vehicle deployment to the highly integrated <unk> STS compute and storage systems that bridge rugged commercial and.
Government vehicles and.
And the ultra rugged certainties and donati for government land vehicle deployments.
This complete product line includes our core PCI express switch fabric technologies that enhanced storage and AI application performance, while significantly reducing latency, which is critical to these edge deployment.
As we complete plans to evolve our well positioned product line to the latest PCI Express Gen. Five switch fabric during the year, we continue to make improvements in cooling technologies and creating valuable software products to solve edge computing challenges. These license of <unk> software products include best data movement storage and remote system.
Management monitoring and control.
The full product line and more complete software offerings are attracting full system solution opportunities that tend to make for larger and more sticky deployments were recurring higher margin software revenue and longer term customers and commercial and defense market.
On our previous quarterly conference call I introduced our proprietary unified Baseborn management controller or <unk>.
Since introducing our <unk> BMC, we haven't received initial orders for it to be used in <unk> infrastructure autonomous truck and edge government deployments.
Both rigel in our Gen 540, <unk> Pro accelerator system include you BMC with additional STS and vehicle deployed products to be announced later in the year.
Now with that I'd like to turn the call back over to Mike.
Thank you Jim.
We see Oss it a unique and promising inflection point with the growing adoption of our superior AI transportable edge computing and storage technology.
We believe our AI transportable solutions can have a dramatic impact on war fighter readiness and commercial business objectives.
In the defense market edge computing is important because the U S and its allies have chosen a distributed or decentralized command and control strategy.
This approach has been adopted by the department of Defense and named a joint all domain command and control or <unk> and it has been driving the increased demand for AI enabled edge processing sensor fusion autonomy and stimulation.
Core to this strategy as ability for commanders in the battlefield edge to be able to integrate and few sensor command communications data to assess decided that faster than the centralized command and control operations of its adversary our capabilities and products are key to this strategy and our ability to implement AI processing and the most rugged environments.
In the commercial market AI is now considered part of the fourth industrial Revolution. So recently implementation similar to the military being required at the edge, where sensor indecision systems can interact to support rapid conversion from assessment to action.
Most notably we see this in commercial industries, where the sensor fusion elements.
Such as radar Lidar laser and infrared are correlated and processed by AI to support workflow of our autonomous operation.
In all during the first half of this year, we continue to advance our market position in air Transport holds with our solutions contributed to the future of commercial and military Ruggedized edge processing.
I am excited to build on our strategy driving growth in both defense and commercial markets and creating a powerful business model Oss now has the right team products and innovation to succeed in the global marketplace.
The opportunity to share some of the same thoughts I communicate communicate today, while meeting and talking with investors over the past few months and I'm encouraged by their commitment to our company's strategy I believe it reflects the strong position and forward path for the company.
As I look at the near term however for the third quarter of 2023, we will witness the impact of the market delays we have discussed.
As a result, we anticipate revenues of approximately $13 5 million.
As stated earlier. This is a result of delays in the defense market and the forecast the timing of expectations in the commercial market. It is a result of the consolidation and delays in autonomous trucking market and overall conservative approach, we anticipate investment in Spain.
Im confident with the addition of Robert cable Onda as far as the team will successfully worked through these issues and I reiterate that we have the strategy product and team to execute and grow the business.
Now with that we'd like to open the call to your questions Daryl.
Daryl.
Thank you if you would like 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 off to ensure your signal can reach our equipment again.
Star then one to ask a question.
And we'll first go to.
Scott Searle from Roth MK go ahead Scott.
Hey, good afternoon, thanks for taking my questions.
Mike Congrats again for coming onboard and thanks for all the color.
The opening monologue.
Hey, maybe just to dive in quickly on the third quarter want to clarify I think I heard correctly that disguise will not be in the third quarter results. Just wanted to clarify that and then sequentially as youre looking into the fourth quarter is there a little bit of a recovery there. Despite the push outs and when do you expect some of that $5 million to $6 million to start to come.
Come into the P&L in the first half what is it slide a little bit further than that.
Yes, Scott Thanks for the question so as to the disguise.
Visits were principally have moved off of that business. There are some small trailing bids that we'll see in Q3, but but very small.
Negligible.
As to the delays, we're seeing and the push outs from this year. There is risk that we will see that in the fourth quarter also.
Robert calibre and I are now working through the pipeline and our modeling of that too to get a better feel of what that looks like and the timing and so we would expect to be working on that in the coming months.
Got you, Okay and.
Mike given your background.
I'm wondering what you you could provide in terms of color of the level of interest for rigel and other products.
Within the defense opportunity is there a tremendous amount of interest are you encouraged by the signs that you're seeing and what do you think the sales cycle looks like to try to start to get embedded in post some wins.
Yes, Scott Thanks, I'll try to address those if I Miss one of the kind of kind of questions. There just let me know.
Yeah, So I've been very encouraged by the product line.
And not just rigel rigel to create leadership door opener and provides great capability, but as I mentioned in my notes in the earnings call.
Scale of opportunities of products that we have from from top to bottom.
While I was able to meet with existing customers as a company before I joined.
We worked through my rolodex over the past two months working through some 75, plus contact and been able to turn some of those in meetings over the past few months and I see general response, and the same as we've been able to explore with a number of customers in prime contractors additional areas, where they have where they have opportunities and programs are going after and <unk>.
I've been excited by the scale of bels ability that we can bring to that.
I mentioned top end Rigel, we slate in very nicely at a price point for large production with that with our short that server or the Sps and as we're growing the entrance of certainties and these are not at the next lowest level. It's really it's really drawing a lot of attention in those areas. So I'm encouraged by the full breadth.
The pipeline and by the defense market in that where those can be adopted really across air land and sea platforms.
Got it very helpful and if I could it's interesting to hear you talk about potential AI opportunities and partnerships here I'm wondering if you could flush that out a little bit in terms of what we should expect over the next several quarters, how should we be looking for some more formal announcements and relationships on that front and along with that.
Building up the defense and military opportunity does that require some new costs from an infrastructure standpoint.
And behalf of Oss.
Yes, Scott so on the.
On the artificial intelligence partnerships that we're looking at so its something new we've engaged in starting to build and develop here.
As I understand the market and places I've worked and we spoke to customers. We've generally been offering a hardware only solution.
Actually partnering with some AI providers, we do a couple of things we can bring a more developed or targeted more fully integrated solution that allows us to maybe get more direct access to do the actual services themselves theyre going through a prime that creates additional opportunity for us. The additional thing. It does is theres a lot of our company.
Their software only they're doing the same thing they're trying to find applications for their software with no hardware solutions that go in to provide an end to end integrated solution.
As we are starting to open to explore the partnership we're going to see opportunity not only to.
To collaborate on programs and efforts, but also potentially to develop more integrated products I think that will span a range that our time and where we will expect to see some of these provide positive impact of the growth of the company there'll be your near term opportunities that are that ourselves or others, maybe going after with stated programs.
Request for proposal from the services.
Those could provide near term opportunity as we some built in partnership and develops and concepts and more fully integrated solutions will then that will look probably more so like a normal 18 24 36 months.
Like where you are developing and building in a specific capability. So we will really want the range. We will have more to say on that as Robert myself, and Jim and the team start to explore and expand those over the coming quarters.
Great. Thank you good morning.
Thanks.
Yes, yes, good question infrastructure, Scott actually we're we're well suited now.
Not only just from a production operation standpoint, but even moving into the cleared facility aspect.
The operational layout, we have in the facility here in Escondido, we have opportunities to take advantage of things like mobile skip that are really well priced and we have space and opportunity to bring those in so it should be negligible facility or capital impact as a result of the strategy.
Got you very helpful and to more quickly if I can kind of sneak them in.
With autonomous vehicle slowing down I'm wondering what has you excited on the commercial side of the equation and the re profiling. The board is very encouraging to see some new military base DNA coming onboard it sounds like.
Thank you said there were some further changes to come in the fourth quarter just wanted to Claire.
Clarify if I heard that correctly and my assumption is that Dave Ron continues to be involved with the company from a board level going forward just checking on the high level thoughts from that perspective. Thanks.
Yeah. Thanks, Scott I'll, maybe go those reverse our commitment.
Commitment to re profiled the board since David.
He used to announce with the two two changes being made here in Q3. The board continues to look to those re profiling activities with more planned for Q4 and they are actively working on those Dave Ryan.
This is currently on the board and continues to serve so when we're in that we're in good position there.
Your other question on the commercial side, we're still interested in the autonomous trucking space, we're still getting some orders we're seeing some timing delays I would say in that large scale deployment, our big move to production what that inflection point. It looks like there were still interested in where that will be a when that'll happen and we remain engaged with the customer.
<unk> <unk>.
Ancillary to that while I've spent the majority of my two months really getting.
A lot of the defense stuff moving Robin and I are going to spend a little bit more time here extra time here now in the coming months building out the commercial but as you will have noticed or seen in the notes that we just presented you already see some commercial move in and harbor in maritime.
<unk> seen some of that in Europe . So we have some commercial movement, there and we're doing some stuff in the commercial aerospace area. So there's a number of areas where.
Civil infrastructure. So we're seeing a number of areas where people are still are showing interest and so that still gives us promise, but as I mentioned, Robert and I are going to really work through that pipeline in definition.
Here with some added focus now that Robert onboard and we've kind of I would say have gotten the first gig big kickoff on defense.
Great. Thanks, so much.
Thank you Scott Thank you Scott.
And our next question comes from Brian Kinsinger from Alliance Global Partners go ahead, Brian .
Great. Thanks, so much Mike welcome aboard.
I'm, hoping you can give us some more detail on the decline in revenues in the third versus second quarter.
For classical SaaS, obviously, specifically maybe from a high level. If you can help me with a couple of buckets.
How much of these defense revenue in Q I assume.
Zero in <unk>, maybe I'm wrong.
How much was the sky's revenue in <unk> and <unk>.
Assume it's close to zero in <unk> and then how much pressure are you seeing on timing to trucking and or commercial.
Yes, Brian I wouldn't say, we had those breakouts right now we could clearly follow up with you on the specific numbers in those buckets that you would be looking for as.
As we kind of mentioned in the call as we've seen.
And the defense side, if you will of those delays have been identified as existing.
Existing opportunities that we had to just move back in time the customers just haven't moved to the actual placement of the order.
And then.
On the commercial side very similar very similar actions across a number of different vendors.
Maybe there's some significant way to add.
In some past quarters.
There's already been delays in defense side. So im curious when you get a meaningful revenue contributor in the second quarter.
So the answer there is yes.
We're still tracking to that 25% of total company revenue being in defense that we're looking to move in more into the 50 50 range in the next two to three years.
Okay.
Listening to your comments in the fourth quarter sounds like it's going to.
Probably be similar to the third quarter.
Assuming we don't see a hockey stick recovery in 2024, but knowing defense it's gradual.
Looking at expenses on the other side from the previous call or what are you thinking in terms of right sizing the business how do you balance.
As a new CEO investing which didn't sound like you have to make a lot of investments in growth that you're keeping your current investments versus trying to manage to at least breakeven on the lower revenue.
Yes.
You had mentioned that we don't see a number of large investments coming needed the opportunity in the pipeline.
Should give us room for growth and Thats, what Robert and I are working through now.
Confident in good in the pipeline as I've gone through it the first set I think with Robert on Board, we'll have opportunity to actually grow that pipeline in both in both commercial and defense and so we'll be able to leverage the existing.
<unk> investment products and strategies that we have.
Just to build that growth.
Sorry to be clear I think the.
Part of the question that Youre not thinking at this point within much lower revenues than <unk> had in the first half of the year to be right sizing expenses is that what I'm gathering you'll be holding SG&A and operating expenses.
Where they are there's not going to be significant.
That's correct, yes, I'm sorry, if I missed that first part of your question Ryan Yes.
And and manage those improvement.
And then my last question is.
As.
Revenue in classical SaaS lacks the scale going to tag in the last quarter.
Quarters are there were significant.
Number of significant scale of fixed cost.
We will need to get absorbed and so now youll see significant pressure on the gross margin line until you see that recovery.
Yes.
The risk will be there for that.
Facilities and manufacturing overhead that we have with the declining revenue.
We are taking internal cost actions now to help manage that manage that prudently against.
The delays in revenue.
Okay Andrew.
My question. Thank you.
Thank you Brian .
And up next we have Joe Gomes from Noble capital go ahead Joe.
Good afternoon, and thanks for taking my questions.
So I'm going to I'm going to hit you guys up with.
The question of the day here about the outlook on revenues from a from a different angle.
Yes.
Calculating here correctly.
Reading the release is the first half of the year disguise accounted for about $6 3 million of revenue.
But you also got 13, new wins that are so close to contribute about $8 3 million of revenue in 2023 I think.
So I'm just trying to wrap my head around how we go from that too.
The sharp decline in projected revenue.
Definitely for the third quarter and again the previous call I say it sounds like in the fourth quarter also.
Okay.
So I can I can help answer some of that.
<unk> revenue is.
There were 25% customer rate than prior years, and theyre going to two zero here.
Negligible in the next two quarters at the time that Thats.
Scaling up our Oss core product revenue is actually growing.
That's what is.
Where we're coming in with the third quarter number.
It's just not growing at the same rate that we had hoped it would be that we had planned for and Thats where were at.
Okay.
On the autonomous trucks customer that exited was that one of the top 10 customers that you talked about in past calls and with the slowing of that exit in a slowing.
The growth there is there.
Concerned about any types of inventory write off that would be necessary.
Yes, so that was one of one of our top 10 was one of the companies that left and at this point no. We're not concerned with the inventory write off across the product we had for that market.
Okay.
And then one more for me.
Can you talk about kind of moving into some of the classified work.
And.
Getting the secure.
Consumer <unk>.
But I think you're going to need some secure.
On the labor side.
Some of the other defense companies that I cover.
People with security clearances.
Our unicorns. These days in terms of trying to get them costing in our metal lag.
Because there is so much demand for them.
How are you guys set from a labor market.
Employees would have that have current security clearances are.
Will you need to ramp.
Hiring up to bring more people on that have security clearances.
Yes, Joe Thanks for that question. So we have a couple of people with security clearances right now.
With the arrival of our facility clearance will be able to start to process. Some additional people and you're correct. There is a market for especially at those with special compartmentalize. The tickets that are difficult to find those employees who bring them in.
I think what youre going to see in our journey is that at the at the secret level and that level of classification.
We'll be able to do initial operation and find find opportunities of where we're going and we will be able to as I mentioned here will be able to put in.
Quickly a number of our employees to do to do just that so I'm confident we can pull that theres a couple of us that have had the higher tickets and security cleared that will allow us to open up the doors to find opportunity.
The nice thing about if we can secure those types of programs.
With if we will either find people will have find it time to transition them to get those tickets or those type of programs that we're able to move those costs to bring a higher price employees and if we needed to go find them. So we will be able to make that happen but.
The market will be going in the in the initial opportunities will be growing at we'll be able to operate well at the lower classified levels and we will need a couple of people to help translate mission applications, but we will be able to most likely operate the product development, especially in our commercial products still in the unclassified level. So the skiff in the clearances will.
Allow us to communicate more directly for requirements and customer understanding of implementation to start and we'll be able to use our products and developing the unclassified space.
Okay, great. Thank you.
Thanks, Charles Thanks, Chuck.
And our next question comes from Max <unk> from Lake Street Capital Go ahead Max.
Hey, guys. Thanks for taking my question first one for me just with the exit of one of your autonomous trucking customers. What gives you the confidence that you won't potentially lose another one and then some other things you've been hearing from your economist trucking customers as well.
I'm going to let Jim <unk>, who has been doing some work in that area, taking through some somewhat where.
Where we stand with some place in that market.
In general has.
The Silicon Valley type of.
Feel to it and there is the consolidation that's going on in there so.
While there are some that are exiting like two simple and embark.
Were ones that were announced.
There are still many like.
Those that are backed by the the large trucking companies like Daimler who owns TORC robotics and those are robust and those are the types of customers that we also have and those are the ones that you have.
Heard there was another design win that we added in a new autonomous truck customer.
That's the type of play.
Player in the market that we keep designing our products towards and and keep bringing it.
Okay. Thanks, guys Thats it from me.
Thank you Matt.
And we have no more questions at this time I'd like to turn the conference back to Mike for closing remarks.
Thank you Darren and thanks, everybody for joining us today, we've enjoyed sharing our latest progress in Oss with you today I believe the company's strategy is solid and as futures bright Os's management looks forward to speaking with you again in November if not sooner in the meantime, as always feel free to reach out to John Jim and myself at any time.
With that let's go ahead and wrap up the call Daryl.
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Okay.