Q4 2023 One Stop Systems Inc Earnings Call - Q&A
Please continue to stand by your conference will begin shortly.
[music].
Good afternoon, and thank you for joining us today to discuss one stop systems' financial results for the fourth quarter and full year ended December 31 2023.
With us today are the company's president and Chief Executive Officer, Mike knows.
Chief Financial Officer, John Morrison following their remarks, we will open the call to your questions.
Before we conclude this call I will provide some important information regarding the forward looking statements made by management during the call I.
I would like to remind everyone that the call will be recorded and made available for replay in the investors section of the company's website.
Now I would like to turn the call over to Oss, President and CEO, Mike knows Sir. Please go ahead.
Thank you Ian.
Good afternoon, everyone and thank you for joining today's call.
It's an exciting time at OSF as we completed the strength strategic transition away from lower margin media revenue established a new management team and refocused our strategic growth priorities on large and rapidly evolving global markets.
Throughout 2023, we demonstrated continued progress in our efforts to pursue strategies focused on AI centered high performance computing at the edge, where platforms required data center level of compute storage and switching solutions.
These solutions support AI and machine learning sensor fusion sensor processing and autonomy applications.
This market transport rules, we will continue these efforts throughout 2024 backed by the strong influence of AI and ml demand in both the commercial and defense markets.
Recent wins in both markets combined with a growing pipeline of opportunities continue to validate our strategic focus. We've also continued our efforts to strengthen our executive team and our board of directors, adding skills and experience that will help facilitate our strategy enabled the company to scale for growth.
Financially, we were able to further offset revenue from our foreign media customer with higher margin revenue aligned with our strategy.
So with this introduction I want to provide an update on the growth strategies, we are pursuing our growing pipeline and recent wins that we believe will create lasting value for Oss and our shareholders.
Commercial adoption of artificial intelligence the machine learning taking advantage of advanced sensor fusion and sensor processing is dramatically moving to the edge across almost all business segments.
Sensor systems and autonomous applications can rival those of moderate defense implementation, we believe that our product portfolio and future roadmap position us uniquely take advantage of this evolving technology environment.
Strategically we are focusing our efforts to expand the number of customers and platforms in our rugged edge processing portfolio and increasing our multiyear backlog by securing new long term contracts.
Efforts are supported by opportunities in both commercial and defense markets were strong dynamics in growth are being driven by AI ml adoption sensor fusion sensor processing and autonomy.
The department of Defense is making significant investments in next generation capabilities that require edge computing, while the overall defense budgets in the U S are expected to remain stable, we expect to see increased spend especially for autonomy artificial intelligence and machine learning in fact, these represent some of the fastest areas of growth as the military looks to augment existing.
With new sensors platforms and weapon systems to maintain our technical and tactical advantage over our adversaries.
We are continuing to pursue opportunities to both commercial and military segments, where we can leverage Oss is differentiated and technical technologically advanced capabilities.
Bringing enterprise and data center class compute storage and switching capabilities to the most challenging environments.
<unk> low latency high throughput scalable solutions in real time environments, delivering configurable off the shelf and custom high performance solutions, and providing high technology readiness level product availability to enable first in market AI at the edge.
We believe our balanced portfolio of commercial and military customers can serve as a strategic benefit as we focus on creating long term value for our shareholders.
Looking at our pipeline and recent wins in more detail, we made progress throughout the fourth quarter penetrating defense and commercial markets. We had three major new wins and proposal infrastructure aerospace and defense that totaled $2 $7 million during the quarter. These wins reflect our continued leadership in high speed Pcie interconnect technology and scalable AI.
GPU compute systems.
Turning to our major defense, when we announced the multimillion dollar program with White Oaks is dianetics, our prime contractor mission critical solutions for the U S government.
Under this multi year program, we will provide our proprietary transportable compute and storage technology designed to power an emerging specialized mobile AI signal collection application.
Award is the first multiyear win Oss had secured with light us highlighting the growth trust and confidence in Oss and our innovative technology and advanced engineering capabilities.
We are also pleased to see the expansion of mission application and platform integration consistent with our growth strategies.
Earlier this month, we announced the pilot project to provide a liquid emerging cool data storage system for use on a deployable ground station that was also contracted through light us.
This project for a major government intelligence agency expands our market opportunity into the intelligence community as a pilot progresses over the coming quarters. We expect this program will lead to follow on production orders.
This program also demonstrates our innovative thermal management technologies for cooling rugged high performance computing solutions.
Our cooling solutions enable the highest level of GPU performance, which our customers need to support their AI and ml mission objectives. We anticipate this initial design win will lead to additional deployments with this customer and other customers in the future.
During the fourth quarter. We also booked an additional award from the U S Army ground vehicle system center, increasing our scope in the $3. Six 360 degree situational awareness program to include the sensor processing for the video data input into the system.
Within our commercial markets received an order from Daimler truck partner TORC robotics to develop a cooling solution for their existing compete system expanding our relationship within the autonomous trucking software vendor. We also finalized a multiyear deal with talent and supported their in flight networking system for commercial airlines.
With growing interest in AI and ml solutions, we are quickly expanding our outreach efforts. We expect that 2024 will be a year marked by pipeline expansion and conversion as demand increases and we execute on our strategic plan.
<unk> is underway include submitting a bid to provide a rugged high performance compute solution for classified programs within the sector that is advancing AI implementation at the edge.
Establishments sponsorship and collateral relationship with Andretti racing in the Potter AI promoting edge applications for AI ml and commercial and defense markets.
Gauging with companies like opposable infrastructure market marked by leveraging our expansion chassis product line and are you BMC software capability for system control and monitoring and continuing to advance our engagement and reach with large crime organizations, such as Booz Allen Hamilton VA system Lighthouse General dynamics Lockheed Martin in general.
<unk>.
And dependent upon prioritizes incorporating advanced technologies into their equipment, we expect engagements for our products in the military space covering various autonomy sensor fusion and AI ml applications for aircraft drone ship helicopters and land vehicles will increase although we are seeing progress we will continue to take time to pursue secure.
<unk> target opportunity into increased bookings and revenue.
One way that we've been working to accelerate the opportunities with U S. Department of defense is through lobbying efforts in Washington to advance innovative solutions offered by Oss Lastly.
Lastly, we continue adding commercial and defense tradeshow attending commercial and defense Tradeshows to advance the Oss brand in the market and identify new and partner opportunities.
As a result of our efforts has enabled us to expand our five year on factor pipeline to in excess of $1 billion.
This growth reflects the initial success from our new sales infrastructure and talent as well as the rapid expansion across our commercial and defense markets for AI and ml solutions. We are actively engaged with current and potential customers to execute against these opportunity and convert our growing pipeline into multiyear multimillion dollar orders.
Given our expanded engagements and Greg pipeline I am pleased to announce that we have added Craig Powell as business development Executive Craig served as an RV Infantry officer in the Royal Canadian Army Corps and brings 22 years of experience in the high performance compute defense and commercial markets, having held senior positions at Cisco <unk> Harris Brian.
Hi vision intelligent, we believe his experience will support our efforts to expand sales into the Canadian market. In addition to its primary focus on supporting sales efforts in the U S.
Turning to recent progress on the product and program.
At the beginning of 2024, we shipped our first AI transportable compute system for the motor sport industry. So legendary Motorsport champion is ready global system includes Oss's three U Sds GPU accelerated server coloring advanced AI Reis analytics friends ready using deposit AI industrial generative AI.
Reform for the cloud and edge called Markwest drop.
This solution represents a new application of Oss technology in our first foray into the $5 billion Motorsports industry. This milestone demonstrates our unique capabilities for powering generative AI technology at the edge.
Also at the beginning of this year, we announced the commencement of a multiyear design and manufacturing collaboration for flight Aerospace's automated flight information reporting system edge family, including its new <unk> edge plus.
The expanded relationship ensures that flight has access to oss's scaled capabilities as it launches the aviation industry's first to market <unk> enabled avionics solutions.
For Oss in the design and manufacturing agreement with flight is valued at a minimum of $6 million over the initial five year term in Q4, we received $500000 in revenue from the new flight contract.
We have successfully passed the critical design review and are entering the test phase of the program, we expect to complete testing and expect to begin production and shipments of <unk> edge pluses early in the second quarter of 2024.
This multi year engagement expands our position in commercial aerospace and further strengthens our technology development and manufacturing platform. This opportunity also underscores our commitment to aviation safety and delivering mission critical performance.
We've also seen progress on several fronts in the defense industry. The Raytheon Ta program is funded multiple development initiatives to incorporate hardware and software technology refresh and upgrade that will extend our product position in lifecycle through 2028 as a result, we expect annual revenue of $6 million in 2024 related to this program.
Just had a similar level from 2023.
We delivered our first shipments of the new Gen. Five short depth server two dynamics, our lightest company for the <unk> for ISR Mobile command centers and to talent for submarine sonar and AI processing on our European Navy submarines and.
In addition, we received a contract amendment to add additional capability for time sensitive networking are TSN, two or 360 degree situational awareness solution for the army ground vehicle system Center. This capability is a critical timing element required for contested environment operations and as an integrated capability for joint all domain command and control.
Troll are Jesse two nodes.
We continue to focus resources and capital to support our technology roadmap and maintain our strong market differentiation.
I have noted before a key capability of ours is the ability to bring the newest and highest performing compute storage and switching solutions to the market and facilitate the demanding requirements of AI ml sensor fusion sensor processing and autonomy.
<unk> seen that a first to market strategy is key to our ability to win significant opportunities.
As a result, we continue to develop new state of the art products across a range of high performance compute demand, providing unique value proposition for value proposition for our customers and the targeted spaces.
In November we unveiled our latest rugged gen. Five short depth server supercomputer 'twenty three the international conference for high performance computing power.
Powered by Nvidia H 100, tensor core Gpus and high performance Nvme storage.
Oss Gen five STS addresses the growing demand for more powerful and lower latency rugged compute storage and networking capability at the edge.
This new Oss Gen. Five Sds server demonstrates our continued leadership in AI computing and high speed Pcie interconnect technology.
We anticipate this hyper converged data center class computing server will be highly sought after for transport demanded rugged edge real time, AI applications and is already proving to be the workhorse of the Oss product portfolio. In fact in February 2024, we showcased our specialized high performance AI computing solutions.
2020 for the Premier Naval Conference and Exposition on the West Coast, where we won the best in show award for our liquid cooled version of the Ruggedized short depths are.
Since I joined over eight months ago, we are focused on enhancing our management team and board of directors.
Recent efforts include in the third quarter of 2023, we appointed industry veteran Robert <unk> VP of sales, bringing more than 36 years of award winning achievement in business development sales and marketing in our commercial and defense market Robert's impact is already being seen in our market outreach increased opportunities in growth.
In the fourth quarter of 2023 appointed retired U S. Navy three-star Vice Admiral Michael J demand to the board, bringing background and experience insight into technology and military operations Mitch.
Mitchell Herb has also added to our board, bringing extensive strategic technical experience.
G suite executive serving technology and defense industries.
Finally, we also appointed Joseph Manko to our board who is affiliated with affiliated with one of our largest shareholders and brings extensive financial capital markets investor and governance experienced Oss.
These additions have substantially re profiled our board and enhance their impact on supporting strategy driving growth and delivering shareholder value.
In addition to enhancing our management team and the board. We also have added talent to our to our growing program management capabilities with the addition of two seasoned professionals, who bring over a decade of defense and commercial program management experience.
I believe their experience will allow us to pursue even larger programs for development and production in defense and commercial markets.
I am extremely encouraged by the successful ongoing transformation.
Pleased to our business in 2023.
As a result, we enter 2024 with strong momentum supported by a new highly experienced leadership team re profiled board of directors and enhanced margin profile and a growing pipeline of significant revenue opportunities that we believe will support our business for many years to come I want to thank our team for their continued hard work and dedication as we pursue compelling growth strategy aimed at creating.
Lasting value for our shareholders.
With this overview I would like to turn the call over to our CFO, John Morrison to review, our fourth quarter and the full year 2023 financial results in more detail. John. Please go ahead. Thank you, Mike and good afternoon, everyone I am, particularly excited by the level of activity underway. The direction, we're headed and the strategies we are.
Pursuing to create value for our shareholders.
We began 2023 with two objectives.
What's the substantially replace 18 $5 million of low margin legacy media revenue with higher margin AI transportable product revenue.
Listen that suffocated by our media customer moving away from Ruggedized equipment to a less rugged cloud solution.
Total media revenue in 2023, with $4 8 million, representing a difference of $13 7 million from last year.
Second objective, we had was to grow browser annual revenue.
Although the strategy was implemented to replace the media business during the era, we experienced a general hesitation by commercial customers to place orders because of the economic conditions. We also experienced timing delays and some government programs.
All resulted in us being unable to fully replace lost media revenue in 2023.
However, I am pleased to report that <unk> met their annual objective by growing annual revenue by 10, 1% RASM to also improve both margins and profitability ability and despite a challenging economy in Germany and throughout Europe.
Our company's business is really comprised of two segments OSF, which is located and operate in the United States and Brian here, which is in Munich, Germany and operate throughout Europe.
Oss is primarily focused and involved in the design and manufacturer of high performance Ruggedized edge processing compute storage and connectivity systems.
Sure.
So as a systems integrator with standard and custom all in one hardware systems and components. They also serve as a channel for Oss products to the European and Middle East markets.
The following comments are based upon comparison of fourth quarter, 2023 result, as compared to fourth quarter of 2022.
For the fourth quarter, we reported consolidated revenue of $13 2 million.
Our SaaS contributed $6 4 million and <unk> contributed $6 8 million inclusive of our first product content of 597000.
Consolidated accordingly revenue reflects.
It reflects a reduction of $5 1 million or 27, 9%.
<unk> had a decrease of $4 9 million or 43, 5% of Oss Corp, quarterly revenue of which approximately $3 1 million of the DS Kris was attributable to our revenue reduction from the former media customer and from whom we do not expect.
Any further revenue Bryan.
<unk> had a decrease of 175000 or two 5%.
Consolidated gross profit in the fourth quarter decreased 544000 to $4 4 million with overall gross margins improving that increasing to 33, 7% from 27, 3% due to decreased media revenue cost and a shift in product mix.
Our higher margin rugged as processing products.
Gross margin for Oss business improved 14, five percentage points to $45 nine.
Pivotal role to the absence of lower margin media revenue and cost and the higher mix of the rugged the edge processing products.
<unk> gross margin percentage improved one six percentage points to 22, 2% largely due to product mix the sale of higher margin Oss products and having thought sought after products readily sold at a premium.
Overall quarterly operating expense increase.
<unk> increased 3% to $4 8 million, which was attributable to additional CEO transition and reported.
Re profiling call.
Loss from operations totaled 331000 compared to income from operations of 353000.
In the same period in 2022.
Net loss on a GAAP basis was 278000 or <unk> <unk> per share as compared to a net loss of $3 3 million or <unk> 16 per share.
Net loss in the fourth quarter of 2023 included a provision for income taxes of $42000.
As compared to a tax provision of $4 1 million in the fourth quarter of 2022 that included a significant increase in taxes being attributable to a write down of our deferred tax assets of $3 8 million in 2022.
Now non-GAAP net income for Q4, 2023, and was 177000 or one cent per diluted share compared to non-GAAP net loss in the prior year of $2 7 million or 14 per diluted share.
Adjusted EBITDA, a non-GAAP metric with favorable 353.
<unk> thousand dollars a decrease from the adjusted EBITDA of $1 6 million in the prior year.
The following comments are based upon a comparison of the annual results for 2023 as compared to the annual results for 2022.
Consolidated revenue was down $11 5 million or 15, 9% from $72 $4 billion to $60 9 million predominantly due to a decrease of $13 7 million in media revenue.
<unk> had revenue of 28.
$28 8 million or 47% of total revenue and Brashear had revenue of $32 1 million or 53% with total consolidated revenue.
Oss experienced a decrease of $14 5 million or 33, 4% with the Greek which decrease was offset by an increase by brazier up $2 9 million or 10, 1%.
During the year 2023 revenues for Oss were fairly evenly balanced between commercial and defense applications.
During the year 2023, consolidated gross margins were 29, 5% versus the prior year of $28 two due to.
Lower margin media business being offset by an increase in higher margin AI transportable products.
Our SaaS gross margin was 35, 6% as compared to $32 seven an improvement of two nine percentage points.
<unk> margin was 24% compared to 21 five.
Excluding the goodwill impairment charge of $5 6 million and CEO transition and board.
We are profiling costs of $1 7 million are operated.
<unk> actually decreased one 5% from the prior year.
Other income and expense, including excluding a one time government funded employee retention credit.
Of $1 7 million resulted in net other income of 417000 compared with 626000.
Net loss was $6 7 million or a loss of 32 per share compared to $1 7 million.
Which was inclusive of a $1 7 million employee retention credit compared to a loss of $2 2 million or a loss of <unk> 11 per share in 2022.
non-GAAP net loss was 415000 or loss of two cents per share as compared to a loss of 175000 or one.
In 2022 <unk>.
Adjusted EBITDA, a non-GAAP metric was positive $1 1 million as compared to $5 2 million in 2022.
Loss before the provision for income taxes on a pro forma basis, which includes excludes the impairment of the goodwill the CEO transition and board re file re profiling costs and the benefit of the employee retention credit results in a pro forma loss before income taxes of 160.
$5000 as compared to income before taxes of $2 2 million in the prior year.
Now looking at the balance sheet on December 31, 2023, cash and cash equivalents totaled 4 million short term investments of $7 8 million.
Buying total of $11 8 million.
Back to the prior year. This represents a one four decrease of $1 4 million, which represents cash being deployed and working capital.
As the company continues transition involved with this business, we're being largely dependent on media to drive revenue. The company will operationally focus on maximizing gross profit contribution in the near term. This may include accepting lower margin business that incrementally contributes to gross profit but may.
And consistent be inconsistent with our long term objective of increasing our consolidated gross margin percentage.
<unk> business effort is to have sustainable cash flow as the company bridges its revenue model.
Looking forward to the first quarter of 2024.
Influenced by seasonal and U S government continuing resolution, we expect revenue of approximately $12 5 million, which represents a deep rich.
Which represents an approximately 5% sequential decrease from Q4, 2023, and a year over year decrease of approximately $4 3 million or 25%.
That decreased $1 5 million of that is expected to decline, which is attributable to a loss of media revenue.
This completes our financial relief for the quarter now with that wed like to turn the call back turn the call and open up to your questions operator.
Thank you ladies and gentlemen, we will now begin the question and answer session.
So you have a question. Please press star one on your telephone keypad and should you wish to cancel your request. Please press star followed later too.
Using a speaker phone. Please keep your handset before pressing net's one woman. Please first question.
Okay.
Your first question comes from the line of Scott Searle from Roth MTN. Please go ahead.
Hi, good afternoon. Thanks for taking my questions nice to see the continued progress on the opportunity pipeline as well as the gross margins.
Maybe that's a good place to start on the gross margins for the fourth quarter. John I was wondering are there any one time benefits that you saw on that I think you said the number was $45, 46% in the core Oss business could you help us understand from a mixed standpoint, what's going on and how we should think about the progression.
Throughout 2024, you also heard some comments in terms of maximizing gross profit contribution. So it seemed to imply that there is going to be some volatility. There can you kind of walk us through that a little bit.
Got it thanks, Scott so in the fourth quarter it was very heavily weighted towards.
AI transportable products, specifically to the defense industry and in the sell off our Ross David storage units, which tend to have a higher margin. So that's what skewed that so.
Skip that in the fourth quarter with respect to.
Ensuring that we maintain our cash position there is some pass through revenue that we are going to be accepting an agent basis that has low margins.
Divides good cash opportunities for us.
Got you okay. Thank you.
And Mike in terms of the opportunity pipeline it seems like.
It's continuing to build the message that youre getting out there in terms of the AI ml and sensor fusion continues to seem to get traction.
If you can help us frame near term when we start to see decisions getting made habits will start to filter into the results. It sounds like it's more geared towards 2025 and as part of that I'm wondering if you could coupling.
Current discussion around the continuing resolution around the budget and how that impacts you guys over the course of 'twenty four.
Yes sure. Thanks, Scott Yeah, we've continued to grow and expand that pipeline and really what it is is really aligning, especially the defense market aligning our opportunities with existing platforms are going through tech refresh cycles or upgrade so that were present for those that helped develop and determine our timing.
And then also on new starts being part of those with jet, which are generally the longer runway approaches to those so.
We'll use the 2024 to build back through the last media revenue, replacing with commercial and defense opportunities.
We're expecting the second half of the year less the media business right, we'll start to see some.
The momentum really start to pick up and for us that whole effort of all be about the pipeline conversion right.
Got these opportunities out there now we needed to convert them and potentially move until left and that's why I spoke especially in the defense.
Market, where we have opportunity to use the locked our lobbying efforts to help.
Move and make sure programs are funded and move out on time and then.
The second part of your question was what again Scott.
Sorry related to the budget resolution.
The budget resolution, yes. So.
A significant amount of our revenue is in tied up to new government, new starts which can't start under a CR. We do have a couple that.
Currently we have out that are being held up by continuous resolution not a significant number but there's still.
Some nonetheless.
I think I got a note from our lives today that the last bit of <unk>.
Our defense budgets, we're going to make it through approval so that should that should untie. The logjam that will we will have to go through the period that usually follows that where the money moves and then the acquisition professionals have to put it on contract.
That is not a fast pace either itself it will take some weeks and months for that to flow through but it's positive. So that's made it through and this is something that we'll continue to deal with in quarters and years to come.
But it's not it's not uncommon any more on the defense market and we have a pipeline of opportunities we'll plan for that and tend to try to update our forecast around that also.
Okay, Great and one last one if I could.
Just in terms of moving the AI strategy, along I'm not sure. If you mentioned it all about various software partners and go to market strategy on that front I'm wondering if you could articulate where we stand on that front now and how that's looking throughout the course of 2024.
Yeah. Thanks, Scott So I had mentioned last year during 2023, we have expanded our outreach to some.
Multiple AI software companies.
Round two reasons, one we had opportunity where our customers needed it to provide a more integrated solution.
Rather than just a pure compute or storage or switching solution and.
And we wanted to establish those partnerships.
For <unk> to provide some more discriminating.
Capability to our solution. In addition, as we started engaging with a lot of these AI software companies. Many of them were looking to find ways to standardize on hardware so that they could they could sell their software directly. So we wanted to open up the pipeline for those discussions where we could become a standard provider to some AI software comes.
<unk>.
We have expanded we have.
Expanded that reach and continue to do so over.
Over the course of 2024, I think we should see a couple of opportunities where we have aligned with a couple of specific companies in some capture approaches and some collaborations in the market for both commercial.
And defense that we should start to see the fruits of some of those labors I noted one in the earnings call that we're doing with the Potter AI through worked with and ready. There is some cross correlation is some defense markets and prime contractors, who are very interested in a lot of the work that <unk> deposit are doing in vehicles and data analytics.
<unk>.
They're all working that off of our off of our compute systems.
So similar to that we've got multiple instances like that across both markets that we think could help build our future solutions.
Great. Thanks, so much.
Thank you Scott.
Alliance Global partners. Please go ahead.
Great. Thanks, so much for taking my questions.
Defense market.
I'm going to characterize as having long sales cycles, and you've talked about delayed both of those are common.
You mentioned you expect to return to growth in the second half of the year, maybe if you could talk about how you think about sales cycles for some of your new products.
And some of your products in general and then.
How is that contemplated and expecting.
We returned to growth in the second half of the year.
Speaker Change: Sure. Thanks, Brian.
So on the commercial side with our standard product approach in a number of areas.
Those terms tend to come a little bit quicker, we're seeing some increased.
Activity in that composed of oil.
Market proposal data center market that I was talking about.
Contract a five year agreement with flight.
It was a good move for us.
We're advancing a new product line.
Based on projected future growth AC so that was another one that we'll be developing a product and roll through to them.
<unk> side, it will continue to leverage our high technology readiness level products.
That gives us a really good capability, where we see a technology refresh cycle or upgrade opportunity on on any vehicle or platform for us to be able to readily bid are highly mature and readily available solution. So that gives us some competitive <unk>.
Competitive edge in any of those competitions or allows us if we have a unique discriminating capability to justify a sole source acquisition to Oss. So those cycles again will prove to be.
Shorter long depending on when the vehicle upgrade cycles are but we've begun to plot.
Plot those into the timing into our.
Into our pipeline. So we can start to see those and now we're starting to see the picture start to paint on when we'd expect the opportunities to come to market, which is why we are feeling the second half of 2024, we should start to see.
You'll start to see some early bookings wins, and then that will roll into revenue increases. So as we start to exit Q3 into Q4, we should see consolidated revenues.
Increase over where we are we have in the last few quarters.
Got it Okay and then.
And you've been there now for I don't know.
What is it.
Slide six months nine months nine months.
Nine months Wow, So now thats plenty of time to.
Take a look and evaluate the business of where you need to increase your investments to drive growth maybe talk about new product opportunities you already talked about your increased pipeline. How do you bid on more so to speak of capturing more of the market.
B anywhere you see investment opportunities to capture that.
Yes, Brian So as John mentioned rising and part of the reason to bring in the.
<unk> margin programs with to help to make sure. We can facilitate keeping our product line going forward in and keeps stable cash in the program in the company. So we have a number of product development elements plan for the year that will continue to keep us on the forefront of compute storage and switching technology, we did just launch.
Our Gen five Ses and our Gen five storage products. So those are both.
Our new in the market. So they will have a product lifecycle run here for for a bit of time, we'll be able to.
To leverage that and.
So and then the second half of your question again, Brian.
Just on proposals like.
Opinion proposal, how are you going to with that.
Growing market opportunity.
More business to bid on more work so to speak.
Yes, no I appreciate that so that's part of the reason why we take our pipeline and we assess it probabilities as we do so we get a turn where to focus our resources on our highest probability.
Of winning and so that actually has been quite useful for us we've kind of <unk>.
We restructured and reprocessed, how we use some of our tools inside internally to help facilitate getting more proposals out the door more efficiently and more effectively and then as I noted we had the opportunity to add Craig Paul to our sales force that will significantly increase not only are our opportunity growth, but more ability of a seasoned veteran.
And in terms of being able to respond to and conduct captures our programs in the defense market.
And then.
Side of that.
Other areas in terms of just general product line growth.
Interest in moving to some of the international defense and commercial opportunities Craig will provide us the opportunity to expand additionally into Canada with an existing sales force with sales capability that we have so we think we're well situated with the priorities are for our resources and a team to be able to.
Tablet.
Yes.
Okay. Thank you.
Thanks, Brian.
Thank you and your next question comes from the line of David Williams from Benchmark. Please go ahead.
Hey, good afternoon, and thanks for letting me ask a question.
Sure.
So Mike maybe maybe start off on the funnel.
Over a $1 billion pipeline here that you talked about can you help us understand how you are quantifying those programs and how you expect that maybe materialize over the next several years, how much what does that conversion rate and just maybe what does it take to convert and how you think about that funnel overall.
Yes, Thanks for your question David.
What we've done is in that pipeline numbers is a five year five year view.
So what we do as we identify opportunities we.
Assess it and two probabilities. The first probability is what we call P. Go and that is the likelihood that a opportunity will emerge and actually go to acquisition or to the market.
That we can't readily control, but we can monitor and we can't influence, especially on the defense side as I mentioned, the lobbying efforts in Congress or engagements with senior defense executives can help influence the funding and the timing of those efforts.
The second the probability we factor the pipeline by US probably to win that is something we control that determines our capabilities products and services that we can deliver for solutions.
That lead us over our competitors when we multiply those two together and we get what's called a probability of award and it really set the level at which we know above a certain level of percentage that it's highly likely that we should win and we increased our efforts there to pull those forward and then there is a mid <unk>.
Area, where we can determine whether the eight these effort needs to be more on influencing.
Probably a wind product to emerge or if we have to increase our Peter win on a product on a program that will definitely definitely emerging we can identify resources assets our support to go do that.
And then anything below that generally will be something we either have to determine is it a future roadmap capability, we need to develop is in a market where fully interested in and working through and those tend to be longer term views of how to move those probabilities award up at higher and assessment.
Because of the way we got started 2024 last part of 2023 and 2024, we're doing a fair amount of positioning into those markets.
The near term near term ones as I mentioned, we're about getting into the upgrade cycles in defense customers and then finding commercial customers in similar situations you were looking to transition to.
To higher end.
<unk> compute and storage.
And then additionally, what it has done in terms of conversion has led us to identify future starts that it would be in the future for which you want to start early on the capture CQ and influence requirements to increase your probability of win so we've now transitioned those into captures and campaigns inside the company that will increase our focus.
Where we go on those and we'll be looking to.
Capitalize on converting that pipeline to opportunity and that's really where our measure will be on seeing the bookings converting to revenue and converting that pipeline.
Great. Thanks for the color there and then maybe John if you could talk about your inventory levels you talked about cash just now on having the working capital and maybe take some lower margin business, but you've got it looks like a pretty significant days of inventory. How do you think about working those down and just that working capital that you could return for other investments. Thank you.
Thank you obviously.
All of this has been a concern of ours as we built inventory during the Covid period and.
Later on as companies required us to have some times, a 52 week lead time and demand in certain minimum order requirements in order to maintain pricing. So during that period of time. It was important for us to secure inventory and we made certain <unk>.
Non accountable non returnable commitments for inventory.
That is a twice still continues to this day to come in we have still approximately about $3 4 million.
Inventory that will be coming in the door for which the orders were placed in 2001 2000.
Two.
However, we have.
Gone through we have analyzed all of that inventory, we believe that we will be able to actually free up about $2 million in working capital. This year through the current plan that we have we.
We believe all of the inventory is sellable, we do not see any of the inventory being designed out.
Do we see it in a situation of being <unk>.
<unk> or.
Obsolete.
Yes, we do acknowledge that we have more inventory on the balance sheet and we would like but we think we will be able to free up about $2 million of that as we go throughout the year.
And bring it down to a more manageable level.
Thank you.
Thanks.
Thank you. Your next question comes from the line of Eric <unk> from Lake Street. Please go ahead.
Yes to clarify the contribution from your media customer that's no longer with you.
For 2022 I had them.
$18 8 million and then in 2023, and then at $5 1 million of those two numbers correct.
$18, five and $4 eight.
18, five and $4.
Okay.
Alright, and then.
Yes.
Go ahead.
Yes, 18 504.
4858.
Okay.
And then the guide for Q1, and I would expect the expectation for 2024, there is nothing in there for that media customer.
No Sir not we would have any ongoing revenue at all.
Okay.
Then second question is around the gross margins is really good to see that step up.
Not only for the full year at 130 bps for Q4 just.
A big step up with the 640 bps, well, how should we be thinking about.
Either address a full year basis for 2024, or maybe even just Q1.
A year ago, you had a 32% gross margin in Q1 should we be expecting something similar or something better.
What can you tell us about gross margin.
Our gross margins will continue to grow and just as a consequence of having lower margin business from the media customer go away. They were running about 19, 7% gross margin.
We have been replacing that consistently with.
With sales up between 30% to 40% that's pretty much our bottom line target is 30%.
And it really is different when they are looking at mix so depending on how much of our data storage product were selling in any given quarter that tends to have a higher margin, which is actually what we saw in the fourth quarter, we had nearly $2 $5 million of data storage and data store.
Replacement parts, which are very profitable for us drive that margin long term, we believe that we're going to be more consistent this year with what you saw in 2022.
<unk>, 32% to 33% margins on a consolidated basis.
Okay Hello year.
Yes.
And then last question really more on the product side and at a high level, Mike what is the lag time between somebody like that.
Nvidia kicking off their latest and greatest chip and your customers expecting you to have designed that and have it available for shipment for them I'm just talking specifically to this week's announcement regarding their new Blackwell chip GPU versus the prior.
Generation.
The hopper.
What's the lag time, there for your product.
Design.
Yes, Eric generally.
<unk> of the year less than a year, we can go from product availability from.
From Nvidia too.
Okay.
Sure the short depths are with storage added we.
We can move to available product inside of a year now.
We will also have to work the lead times.
A lot of.
Major companies out there are buying up the GPU. So our customers are aware of that.
And so actually we are unique to probably Oss in this respect is.
Because of our expertise and engineering capabilities, we're actually able to sit down with the customer and work through two scenarios. If they have a clear demand and desire for the newest and the latest and the greatest.
And they understand the lead times on that we can do that on the defense side, we can use there.
Fence ratings to help accelerate.
Supply chain on their orders.
Alternatively, what we've done in some cases as we've worked with customers on what their exact AI or a sensor fusion sensor processing implementation is and we will help them with their compute storage and switching needs and and performance parameters and in some cases, we've actually been able to recommend alternatives the Nvidia Gpus.
Lead times might be measured in six months to 12 weeks and we can still implement capability.
Exceeds their demand we can offer them faster lead time to get either initial capable capability that they can upgrade to later with the higher end gpus or if they're happy with that.
That.
That selection than they can carry on with that.
Configuration.
Okay.
Thanks for taking my questions.
Thank you thank you Eric.
Thank you and your next question comes from the line of Joe Gomes from Noble capital. Please go ahead.
Good evening, thanks for taking the questions.
I just I wanted it to.
To go back for a second to some of this lower margin pass through revenue.
Talking about.
Did any of that show up in the revenue for the fourth quarter or.
Any projected.
Projected for the first quarter $12 5 million guidance.
Although it was starting in the fourth quarter and there is nothing right. Now planned were included in the guidance number in Q1.
Okay.
Pardon me, thanks for that and then onward.
We will disclose it separately so.
<unk> can be very visible lots to what those numbers are.
Great.
And on the.
The pilot program for the deployable ground stage.
Mentioned that.
Thank you can get at some future production orders from that.
And I was wondering maybe you could talk about the tie.
Timing do you think those production norms.
Size.
Possibly be there in terms of revenue.
Yes, Joe so.
Two cases right on the kind of the ground station one.
We're we're shipping our compute capability.
Initial forays as they get instantiated and used are in the mid one hundreds of K a range in terms of value. We would expect that follow on orders, yes. It.
Speaker Change: It could be double that.
Speaker Change: For a couple of years and that implementation and then depending on how it grows into other similar type programs within the company or others right, that's where we look for that.
Add on effect.
Speaker Change: Liquid immersion called one also very similar in terms of application.
That would be another one that first one a couple of hundred thousand dollars for the first the first foray, but we would expect implementations double that maybe a little bit more than double that.
After they've gone in and validated their first their first fielding if you will happy and comfortable with the solution. Then we would expect to see multiples of those values and later this year of 2025 2026.
Okay, Great and just one more quick one for me I know last quarter, you talked about you got the site facility clearance.
Just wondering.
Have you been able to see that clearance turned into any new opportunities for you or anything particular more that you can tell us about that.
Right.
It is opening up our opportunity for replacement right now so what it's allowed us to do is on some existing programs, where we've just been providing.
Our product to fulfill our compute requirements.
We've been able to go in now and have a broader discussion on the operational problem that the platform is trying to solve and that provides us a greater understanding of what the architecture on the platform is doing and then that allows us now to be able to rec.
Recommend broader implementation of Oss products that could help facilitate.
If you were on a vehicle that was widely a sensor integrating vehicle right the ability to move our processing up to the sensor for rapid processing at the sensor that data needs to come back and be fused together into a comment picture again thats another need for high end processing and then if there's any general.
<unk> learning off of our autonomy based off that they've yet another level of compute so right now it's open that up in addition, as I mentioned were.
A couple of classified programs, we've delivered to in the past we would have just delivered to those.
Set of requirements now, we can actually figure out and I understand that I said more broadly what's going on in the program.
And then a couple of prime contractors that we've spoken to in the last quarter have have opened up access to us into their classified teams that are pursuing programs.
So now we're starting to feel the initial forays into our capability and we're able to respond to those now in a classified environment.
Great. Thanks for that I appreciate it.
Thanks, Jeff Thank you.
Thank you we have no more questions I'd like to turn the conference back to you all with speakers for closing remarks.
Okay.
Okay. Thank you.
And.
We appreciate it.
Having enjoyed sharing our latest progress with everybody today I believe the company's strategy is solid and the future's bright Oss management looks 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.
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's safe Harbor statement.
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Generated by new products penetration of the defense and <unk> items applicable sectors.
Jesse please place objectives design wins.
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