Q2 2024 One Stop Systems Inc Earnings Call
Good day and welcome to the one-stop system second quarter, 2024 conference call and webcasts. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session.
Operator: conference call and webcast. At this time, all participants are in a listen-only mode.
Operator: Later, you will have the opportunity to ask questions during the question and answer session. As a reminder, this conference is being recorded. As part of the discussion today, the representative of OSS will be making certain forward-looking statements regarding the company's Twitter, Financial, and Operating Results, as well as its business plans, objectives, and expectations. These statements are based on the company's current release and should not be regarded as a representation of OSS that any of these plans or expectations will be achieved.
As a reminder, this conference is being recorded.
Speaker Change: As part of the discussion today, the representative of OSS will be making certain forward-looking statements regarding the company's future financial and operating results.
as well as their business plans, objectives and expectations.
These statements are based on the company's current beliefs and expectations.
and should not be regarded as a representation of OSS that any of these plans or expectations will be achieved.
Operator: Please be advised that these forward-looking statements are covered under the Safe Harbor Provision of the Private Security Solicitation Reform Act of 1995 and that OSS desires a fairly equal access to the protections of the safe harbor for these states. Please also be advised that the actual results could differ materially from those stated or implied by the forward-looking statements due to certain risks and uncertainties, including those described in the company's most recent annual report on Form 10-K.
Please be advised that these forward-looking statements are covered under the safe harbor provision of the private securities.
Legislation Reform Act of 1995, and that OSS desires to avail itself to the protections of the safe harbor for these statements.
Please also be advised that the actual results could differ materially for those stated or implied by the forward-looking statements due to certain risks and uncertainties.
Including Knowles Describe in the company's most recent annual report from Form 10K.
Operator: Subsequent quarterly reports of Form 10-Q and the recent press release. This reads the report and the future filings that OSS will be making with the SEC. OSS disclaims any duty to update or revise its forward-looking statements except as required by applicable law. It is now my pleasure to turn the conference over to OSS.
Subsequent Quarterly Reports of Form 102.
and the recent brass release.
Speaker Change: Please read these reports and the future filings that OSS will be making with the SEC.
Speaker Change: OSS disclaims any duty to update or revise its forward-looking statements, except as required by applicable law.
Mike Knowles: It is now my pleasure to turn the conference over to OSS, President and CEO Mr. Mike Knowles, please go ahead sir.
Michael Knowles: Thank you, John. Good afternoon, everyone, and thank you for joining us on today's call. I'm pleased with the progress we made during the 2024 second quarter as we continue transitioning our business to pursue emerging opportunities within large and growing defense and commercial markets. Second quarter performance was in line with our plan as we continue to pursue opportunities in AI, machine learning, and edge computing. Highlights for the 2024 second quarter include positive segment orders, which have outpaced quarterly revenue in three of the last four quarters.
Mike Knowles: Thank you, Jeff. Good afternoon everyone and thank you for joining today's call.
Speaker Change: I'm pleased with the progress we made here in the 2024 setting quarter as we continue transitioning our business to pursue emerging opportunity within large and growing distancing for our smartness.
Speaker Change: Second quarter performance was aligned with our plan as we continue to pursue opportunities in AI, machine learning, and edge computing.
Speaker Change: [inaudible]
Michael Knowles: Sequential revenue growth of 4.3%, expanded customer development revenue, and year-over-year OSS segment revenue growth of 8.3% as adjusted to include revenue attributable to a former media customer. We believe these favorable trends are positioning OSFs for continued revenue growth robbery through the remainder of 2024. This year we've been focused on two important objectives to take advantage of favorable market dynamics and the healthy pipeline we have developed. First, we are focused on converting our pipelines to orders in our OSS segment, and second, we are pursuing customer-funded development opportunities that we believe will establish OSS as an incumbent on platforms, driving future multi-year production countries.
Speaker Change: Expanded customer defelments revenue, and year over year OSS segment revenue growth of 8.3% As a job to do is include revenue, a trip at old world to a former media customer.
Speaker Change: We believe these favorable trends are positioning OSS for continued sequential revenue growth throughout the remainder of 2024.
Speaker Change: This year we've been focused on two important objectives to take advantage of favorable market dynamics and the healthy pipeline we have developed.
Speaker Change: First, we are focused on converting our pipeline to orders in our OSS segment, and second, we are pursuing customer-funded development opportunities that we believe will establish OSS as an incumbent on platforms driving future multi-year production contracts.
Michael Knowles: Across our global defense and commercial markets, customers are looking for technology partners like OSS to support their expanding needs for rugged enterprise class compute solutions. Driving these trends are the emerging requirements for AI, machine learning, autonomy, and sensor processing at the edge.
Speaker Change: Across our global defense and commercial markets, customers are looking for technology partners like OSS to support their expanding needs for rugged enterprise class compute solution.
Speaker Change: Driving these trends on the emerging requirements for AI, machine learning, autonomy, and sensor processing at the edge.
Michael Knowles: The company's best-in-class hardware and software platforms bring the latest data center performance to harsh and challenging applications that we believe will allow OSS to take advantage of current and future demand trends. Our underlying performance during the second quarter and first half of the year is aligned with our plan. We continue to believe 2024 is creating a strong foundation for sustainable year-over-year revenue growth and profitability in 2025, even as we navigate growing economic uncertainty and continued weakness in our European markets through 2024, with expected recovery in 2025.
Speaker Change: The company's best-in-class hardware and software platforms bring the latest data center performance to harsh and challenging applications that we believe will allow us to take advantage of future current and future demand trends.
Speaker Change: Our underlying performance during the second quarter and first half of the year is aligned with our plan.
Speaker Change: We continue to believe 2024 is creating strong foundation for sustainable year-over-year revenue growth and profitability in 2025, even as we navigate growing economic uncertainty and continued weakness in our European markets through 2024, with expected recovery in 2025.
Michael Knowles: So with this introduction, let's take a look at the progress we made during the second quarter in more detail, starting with our efforts to convert our pipeline to orders. Our unfactored pipeline at the end of the second quarter remained over a billion dollars.
Speaker Change: So with this introduction, let's take a look at the progress we've made during the second quarter in more detail, starting with our efforts to convert our pipeline to orders.
Michael Knowles: Approximately 70% of our current pipeline is comprised of platform opportunities which we believe will help drive predictable, multi-year revenue and backlog to OSU. I'm pleased with the growth and transformation of our pipeline, reflecting the positive contribution of our sales organization, the strategic investments we are making in product development, and the growing demand for our hardware and software platform. As we continue pursuing opportunities throughout the pipeline, our operating plan for 2024 remains focused on increasing orders within our OSS segments.
Speaker Change: Our unfactored pipeline at the end of the second quarter remained over a billion dollars.
Speaker Change: Approximately 70% of our current pipeline is comprised of platform opportunities which we believe will help drive predictable multi-year revenue and backlog to OSUS.
Speaker Change: I'm pleased with the growth and transformation of our pipeline reflecting the positive contribution of our sales organization, the Strategic Investments we are making in product development, and the growing demand for our hardware and software platforms.
Speaker Change: As we continue pursuing opportunities to grow our pipeline, our operating plan in 2024 remains focused on increasing orders within our OSS segment.
Michael Knowles: For the 2024 Second Quarter, we saw orders outpace revenue by over 20% for the second quarter in a row. Order growth over the past three months was driven by existing customers in the ground intelligence, surveillance, and reconnaissance market, known as the ISR market, and from customers in the commercial aerospace market. In addition, we had new customer awards in the air, ISR Marks.
Speaker Change: For the 2024 second quarter, we saw orders outpaced revenue by over 20% for the second quarter in a row.
Speaker Change: Order growth over the past three months was driven by existing customers in the ground intelligence, surveillance, and reconnaissance market, known as the ISR market, and from customers in the commercial aerospace market.
Michael Knowles: We expect many of these new engagements will evolve into multi-year follow-on revenue opportunities in future periods. The second important objective we are pursuing this year is focused on growing our presence in a customer-funded development program. As we mentioned on our first quarter call, we started to disclose separate revenue and cost lines that our financial results associated with customer-funded development projects to show our potential and track new ways. We have defined program-related development work as customer-funded development on our financial statements.
Speaker Change: In addition, we had new customer awards in the Air ISR market.
Speaker Change: We expect many of these new engagements will evolve into multi-year follow-on revenue opportunities in future periods.
Speaker Change: The second important objective we are pursuing this year is focused on growing our presence on customer-funded development programs.
Speaker Change: As we mentioned on our first quarter call we started to disclose separate revenue and cost lines that our financial results associated with customer funded development project. To show our potential and track new wins.
Speaker Change: We have defined program-related development work as customer-funded development on our financial statement.
Michael Knowles: Through customer-funded development programs, we are typically providing a more integrated solution compared to the company's historic offer. In addition, it establishes, oh, the excesses of platforming combat, and what is almost always a follow-on production in multi-year support companies. As a result, we expect our business model to benefit from a higher mix of annual recurring revenue and contracted multi-year backlogs in the future. Development Railway Relationships are expected to take one to two years before leading to production orders.
Speaker Change: Through customer-funded development programs, we are typically providing a more integrated solution compared to the company's historic offerings.
Speaker Change: In addition, it establishes OSS as a platform incumbent on what is almost always a follow-on production and multi-year support contract. As a result, we expect our business model to benefit from a higher mix of annual recurring revenue and contracted multi-year backlogs in the future.
Speaker Change: Development Relationships are expected to take one to two years before leaving to production orders. So as business scales we expect to benefit from steady quarter over quarter revenue growth, while building a solid foundation of potential large scale program opportunity.
Speaker Change: I'm pleased to report that customer funded development revenue increased to $1.4 million in the 2020-4 second quarter compared to $365,000 just three months ago. This growth was driven principally by the expansion of an existing relationship with the commercial aerospace customer for fielding of a new product and follow-on production.
Michael Knowles: As expected, we are seeing increased interest from customers to support their development programs, and we have multiple proposals currently submitted. As a result, we believe we will continue to experience sequential growth throughout the remainder of 2024 in customer-funded development revenue. We have also expanded our product development efforts this year and currently have five product efforts under development in the OSS segment focused on edge computing for both defense and commercial applications.
Speaker Change: As expected, we are seeing increased interest from customers to support their development programs, and we have multiple proposals currently submitted. As a result, we believe we will continue to experience sequential growth throughout the remainder of 2024 in customer-funded development revenue.
Speaker Change: We also expanded our product development efforts this year and currently have five product efforts under development in the OSO OSS segment focused on edge computing for both defense and commercial application.
Michael Knowles: We expect to announce the demonstration of these products in the second half of this year and the first half of 2025. Our second quarter results also reflect strategic investments we are making to support current and future growth. For the past 12 months, we have had new program management personnel with experience managing large, complex development and production programs for government and defense customers.
Speaker Change: We expect to announce and demonstrate these products in the second half of this year and the first half of 2025.
Speaker Change: Our second quarter results also reflect strategic investments we are making to support current and future growth. Over the past 12 months, we have added new program management personnel with experience managing large, complex development and production programs for government and defense customers.
Michael Knowles: We believe their experience will allow us to pursue even larger programs for development and production in defense and commercial markets. As I mentioned last quarter, we are developing a new growth-focused multi-year strategic plan. Our markets are rapidly evolving, which has required additional time to finalize our three-year strategic plan.
Speaker Change: We believe their experience will allow us to pursue even larger programs for development and production in defense and commercial markets.
Speaker Change: As I mentioned last quarter we are developing a new growth focus multiple year strategic plan. Our markets are rapidly evolving, which is required additional time to finalize our three year strategic plan. We expect to communicate the growth strategies we are pursuing in a presentation later this year.
John Morrison: We expect to communicate the growth strategies we are pursuing in a presentation later this year. As we look to the remainder of 2024, I'm excited by the long-term strategies we are pursuing to scale our business and drive profitable growth. So it is taking some time, but I'm encouraged by the growing progress underway as we establish ourselves in our markets. We continue to educate and execute against our near-term transformation plan as we focus on driving orders, building backlog, growing revenue, and improving profitability.
Speaker Change: As we look to the remainder of 2024, I'm excited by the long-term strategies we are pursuing the scalar business and drive proper growth.
Speaker Change: So it is taking some time, I'm encouraged by the growing progress underway as we establish ourselves in our markets. We continue to execute against our near-term transformation plan as we focus on driving orders, building backlog, growing revenue and improving profitability.
John Morrison: While it's time of orders, we'll remain a factor as we get to scale. I'm confident we are building a strong foundation to achieve our long-term growth strategy for Jack. I want to thank our team for their continued hard work and dedication as we pursue compelling growth strategies aimed at building greater value for our shareholders. Looking forward, we anticipate consolidated revenue of approximately $13.3 million in the third quarter of 2024, which accounts for approximately $1.6 million of orders that we pushed to the fourth quarter.
Speaker Change: While the timing of orders will remain a factor as we get to scale, I am confident we are building a strong foundation to achieve our long-term growth objectives.
Speaker Change: I want to thank our team for their continued hard work and dedication as we pursue compelling growth strategies aimed at building greater value for our shareholders.
Speaker Change: Looking forward, we anticipate consolidated revenue of approximately $13.3 million in the third quarter of 2024, which accounts for approximately $1.6 million of orders that we pushed to the fourth quarter.
Speaker Change: Our guidance for the third quarter of 2024 also includes expected OSS segment revenue of $6.3 million, representing 15% year-on-year growth in the OSS segment, partially offset by lower Bresner revenue due to continued softness in the company's European markets.
Speaker Change: Well, in certain economic conditions and softness in Europe may negatively impact our controllative second half performance. We believe our leading enterprise class, compute solutions, strong balance sheet, and commitment team are well positioned to take advantage of positive fundamentals across global markets and create long-term value for shareholders.
John Morrison: Our guidance for the third quarter of 2024 also includes expected OSS segment revenue of $6.3 million, representing 15% year-on-year growth in the OSS segment, partially offset by lower Bresner revenue due to continued softness in the company's European market. However, certain economic conditions and softness in Europe may negatively impact our consolidated second half performance. We believe our leading enterprise class compute solutions, strong balance sheet, and committed team are well positioned to take advantage of positive fundamentals across global markets and create long-term value for shareholders. With this interview, I'd like to turn the call over to our CFO, John Morrison, to review our 2024 second quarter financial results in more detail. John, please go ahead. Thank you, Mike, and good afternoon.
John Morrison: With this interview overview, I'd like to turn the call over to our CFO John Morrison to review our 2024 second quarter financial results in more detail.
John Morrison: Thank you, Mike, and good afternoon, everyone. Our 2024 second quarter results reflect the ongoing transformation of our business model and continue the improvements in order. As a reminder, the company is comprised of two operating segments. Our OSS segment operates in the United States. It is primarily focused and involved in the development and manufacture of hyper-pulmit to ruggedize its processing, compute, storage, and connectivity systems.
Speaker Change: John, please go ahead.
John Morrison: Thank you, Mike, and good afternoon, everyone. Our 2024 second quarter results reflect the ongoing transformation of our business model and continued improvements in orders.
Speaker Change: As a reminder, the company is comprised of two operating segments. Our OSS segment operates in the United States and is primarily focused and involved in the design and manufacture of high-performance ruggedized edge processing, compute, storage, and connectivity systems.
John Morrison: Our breadwinner segment operates throughout Europe and is a system integrator with standard and custom all-in-one hardware systems and components. Gretchen also serves as a channel for OSS products to the European and Middle East markets. The following comments are based upon comparing second quarter 2024 results to second quarter 2023. For the second quarter, we recorded consolidated revenue of 13.2 million, which exceeds our guidance of 13 million. The 23.3% year-over-year decline in college consolidated revenue was primarily attributable to a 3.2 million dollar reduction in revenue related to our former media customer and a 1.3 million dollar decline in revenue associated with slower economic activity in Europe.
Speaker Change: Our browser segment operates throughout Europe and is a system integrator with standard and custom all-in-one hardware systems and components.
Speaker Change: Regeneron also serves as a channel for OSS products to the European and Middle East markets.
John Morrison: The following comments are based upon comparison of second quarter 2024 results to the second quarter 2023.
John Morrison: For the second quarter, we reported consolidated revenue of $13.2 million, which exceeds our guidance of $13 million.
John Morrison: The 23.3% year-over-year decline in college consolidated revenue.
John Morrison: was primarily attributable to a $3.2 million reduction in revenue related to our former media customer, and a $1.3 million dollar decline in measure revenue associated with slower economic activity in Europe.
John Morrison: Lower second-quarter revenue was partially offset by new customer-funded development orders and revenue growth to new and existing customers. Looking at our OSS segment and backing out the $3.2 million impact from a former media customer, revenue at our OSS segment grew 8.3%, reflecting revenue growth from new and existing customers and the initial success of a new customer-funded development project. As Mike mentioned, in the first quarter of 2024, we start to separately disclose revenue and cost of sales line items associated with customer-funded development work in our financial statement. Customer-funded development typically represents non-recurring design and development work associated with the introduction of new products paid for by the customer. We expect customer-funded development to grow throughout 2024.
John Morrison: Lower second quarter revenue was partially offset by new customer funded development orders and revenue growth to new and existing customers.
John Morrison: Looking at our OSS settlement and backing out the $3.2 million impact from a former media customer,
John Morrison: Revenue at our OSS segment grew 8.3%.
John Morrison: We're reflecting revenue growth from new and existing customers and the initial success at a new customer funded development project.
John Morrison: As Mike mentioned, in the first quarter of 2024, we started to separately disclose revenue and cost the sales line items associated with customer funded development work in our financial statement.
John Morrison: Customer-funded development typically represents non-recurring design and development work associated with the introduction of new products paid for by the customer. We expect customer-funded development to grow throughout 2024.
John Morrison: Consolidated growth profit in the second quarter was 25.2% compared to 27.9% for the same period last year. The decline in our consolidated growth margin was primarily attributable to our under absorption of our OSF segment production capacity and additional inventory reserves. Total second quarter operating expenses decreased 31.9% to $5.6 million, which was attributable to the elimination of prior costs associated with organizational restructuring and outside professional services. These were partially offset by planned program management and investments made during the quarter.
John Morrison: Consolidated gross profit in the second quarter was 25.2% compared to 27.9% for the same period last year.
John Morrison: The decline in our consolidated growth margin was primarily attributable to our underabsorption of our OSS segment production capacity and additional inventory reserves.
John Morrison: Total second quarter operating expenses
John Morrison: Expresses decreased 31.9% to 5.6 million, which was attributable to the elimination of prior cost. So she's...
John Morrison: with organizational restructuring and outside professional services. And these were partially offset by planned program management and investments made during the quarter.
John Morrison: In addition, our financial results for the second quarter of 2023 were impacted by a $2.7 million charge related to the impairment of goodwill and a $1.3 million charge related to the employee retention, excuse me, $1.3 million benefit related to the employee retention tax credit. For the second quarter, the company reported a net loss of $2.3 million or $0.11 per share compared to a net loss of $2.4 million or $0.12 per share in the prior year.
John Morrison: In addition, our financial results for the second quarter 2020-23 were impacted by a $2.7 million dollar charge related to the impairment of goodwill and a $1.3 million dollar charge related to the employee retention benefits, excuse me, $1.3 million benefit related to the employee retention tax credit.
John Morrison: For the second quarter, the company reported a gap net loss of $2.3 million or $0.11 per share compared to a net loss of $2.4 million or $0.12 per share in the prior year.
John Morrison: The company reported a non-gap net loss of $1.8 million, or $0.09 per share, compared to a non-gap net loss of $84,000, or $0.00 per share. Adjusted EBITDA, a non-GAAP metric, was a loss of $1.3 million compared to a positive adjusted EBITDA of $520,000 in the prior year's second quarter.
Speaker Change: The company reported an on-gab net loss of 1.3, 1.8 million, or a nice sense for share compared to a non-gab net loss of $84,000, or a zero-sense per share.
John Morrison: Adjusted EBITDA, a non-gab metric was a loss of 1.3 million compared to a positive Adjusted EBITDA of 520,000 in the prior year's second quarter.
John Morrison: Now, looking at the balance sheet in more detail, as of June 30, 2024, OSS had total cash, cash equivalents, and marketable securities of $11.8 million and total working capital of $32.6 million. This is compared to total cash, cash equivalents, and marketable securities of $11.8 million and total working capital of $35.6 million at December 31, 2023. OSS had no borrowings outstanding on its $2 million revolving line of credit on June 30, 2024, and December 31, 2023, respectively.
John Morrison: Now, looking at the balance sheet in more detail, as of June 30, 2024, OSS had total cash, cash equivalent and marketable securities of 11.8 million, and total working capital of 32.6 million.
John Morrison: This is compared to total cash, cash equivalent and marketable securities of 11.8 million and total working capital of 35.6 million at December 31, 2023.
John Morrison: OSS had no borrowings outstanding on its $2 million revolving line of credit on June 30, 2024, and December 31, 2023, respectively.
John Morrison: The company's pressure operations had a consolidated balance, balance outstanding on its term loans of June 30, 2024 of $1.1 million, down from $2.1 million at December 31, 2023 and $3 million at June 30, 2023. For the 6th month on the June 30th, 2020 Corps, OSS generated 1.2 million in cash from operating activities compared to $2 million for the 6th month on June 30th, 2023.
John Morrison: The company's regular operations had a consolidated balance.
John Morrison: The balance outstanding on its term loans of June 30, 2024 of $1.1 million, down from $2.1 million at December 31, 2023, and $3 million at June 30, 2023.
John Morrison: For the six months ended June 30, 2024, OSS generated $1.2 million in cash from operating activities compared to $2 million for the six months ended June 30, 2023.
Operator: This completes our financial review for the quarter. We would like to now turn the call over to questions. Operator, John? Yes, sir. Thank you, ladies and gentlemen.
Speaker Change: This completes our financial review for the quarter, and we'd like to now open the call to questions. Operator?
Operator: Yes, sir. Thank you.
Operator: Yes sir, thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, please press star followed by the number one on your touchtone phone.
Operator: Ladies and gentlemen, we will now begin the question and answer session. To ask a question, please press star followed by the number one on your touchtone phone. If you are using a speakerphone, please pick up the handset before pressing any key.
Operator: If you are using a speakerphone, please pick up the handset before pressing any keys.
Operator: Once again, Star [inaudible], Let's take a look at this, let's take a look at this, let's take a break for waiting. We now have our first question. And this comes from the line of Tony Filling from Lake Street Capital. Let's go ahead. Your line is now open.
Operator: ask a question.
Speaker Change: Thank you for joining us today.
Operator: Thank you for waiting. We now have our first question. And this comes from the line of
Operator: Tony Filling from Lake Street Capital. Please go ahead. Your line is now open.
Tony Felling: Good afternoon, guys. Yeah, this is Tony Felling filling in for Eric Martinuzzi. Appreciate that question. Yeah, so do we feel the company is properly staffed for a tighter focus on the defense customers?
Tony Felling: Good afternoon, guys. Yeah, this is Tony Felling filling in for Eric Martinuzzi. Appreciate you taking my question. Yeah, so do we feel the company is properly staffed for a tighter focus on the defense customers?
Speaker Change: Yeah, Tony, I do, and we've made some really, really good progress over the year to where we are. I think we're very well set to actually scale really well, too, with the people we have.
Speaker Change: I'm going back over the course of the year, just quick summary. Of course, myself joined the team, run commercial and defense, but...
Speaker Change: Defense background of 30-plus years.
Speaker Change: and then we brought on a VP of sales and marketing, Robert Kaleball, he and I worked for a decade together in the defense market. He has over 35 years experience of selling and marketing into none of the U.S. but global defense.
Speaker Change: And then as I mentioned in the script, we wanted to augment the team with experienced program managers who are used to running large-scale defense programs that have development, production, sustainment, fielding, etc. So we added two program managers to the staff.
Speaker Change: Each who, in their own right, have experience running $100 million plus programs on the defense side.
Speaker Change: So a few of them are really well situated there. In addition, it is an AS9100 certified company.
Speaker Change: and ISO 9001 certified. We're really well set in policy, process, quality, etc. to meet the standards required for defense and commercial. So I think we're in a really good place to execute against defense programs.
Michael Knowles: That's great. And I mean, do you think there's any risk in terms of revenue concentration with more focus on defense customers going forward? Or, you know, is that kind of where we're headed?
Michael Knowles: That's great. And I mean, do you think there's any risk in terms of revenue concentration or more focus on the defense customers going forward or, you know, that kind of where we're headed?
Tony Felling: Just, you know, revenue risk, or risk in terms of revenue concentration with more focus on defense customers. Yeah.
Speaker Change: Can you prepare your visa front of that stone?
Tony Felling: Just, you know, revenue risk, you know, or risk in terms of revenue concentration with more focus on defense customers.
Michael Knowles: Yeah, I don't think so. When I showed up at the company, we were primarily on a larger value on the commercial side. So we've kind of increased up to about a 50-50 ratio right now. As we're projecting and looking at our pipeline for the next three to five years, we see that same ratio in our pipeline. So I don't think we'll get a revenue concentration specifically that would become a risk.
Michael Knowles: Yeah, I don't think so when I showed up the company we were primarily on with a larger value on the commercial side
Michael Knowles: So as we've kind of increased up to about a 50-50 ratio right now, as we're projecting and we're looking at our pipeline for the next three to five years, we see that same ratio in our pipeline. So I don't think we'll get a revenue concentration specifically that would become a risk.
Michael Knowles: If anything, we've seen quite a decent success here in the first year in broadening that revenue across more defense customers in addition to the commercial customers that we've had. So I don't see a risk in the concentration in defense.
Michael Knowles: If anything, we've quite seen quite a decent success here in the first year, and broadening out that revenue across more defense customers in addition to the commercial customers that we've had, so I don't see a risk in the concentration of defense.
Tony Felling: For sure great, that's why I appreciate you taking the questions; I'll jump back.
Speaker Change: For sure. Great. I appreciate you taking the questions. I'll jump back.
Operator: and we now have our next question, and this comes from the line of Brian Kinstlinger from AGP. Your line is not open, please go ahead.
Brian Kinstlinger: Thank you. Thank you.
Brian Kinstlinger: Thank you.
Speaker Change: And we now have our next question and this comes from the line of
Operator: Brian Kinstlinger from AGP, your line is now open, please go ahead.
Brian Kinstlinger: Great, thanks so much. Can you speak to the government procurement environment? Are you seeing reasonable sales cycles? Are they still elongated?
Speaker Change: Great, thanks so much. Can you speak to the government procurement environment? Are you seeing reasonable sales cycles? Are they still elongated? And then as we enter the new fiscal year for the federal government, which always brings
Michael Knowles: And then, as we enter the new fiscal year for the federal government, which always brings a set of budget delays, what can the company do to ensure a steady flow of orders, if at all?
Michael Knowles: set of budget delays, what can the company do to ensure a steady flow of orders if at all?
Michael Knowles: Brian, you know, the band of existence doing these businesses with the U.S. government defense actually, it's the same in most global MODs also. So the interesting thing we've seen is the, I would say the normal acquisition cycles from, from markets like I mentioned the ISR markets. Their kind of technology roadmap timeframes have generally been consistent, so it's not really concerned there in terms of where the markets are going and their needs.
Michael Knowles: Yeah, Brian, you know the bane of existence doing business with the U.S. government and defense actually it's the same in most global MODs also. So the interesting thing we've seen is the I would say the normal acquisition cycles from
Michael Knowles: from Markets, like I mentioned, the ISR market. Their kind of technology roadmap time frame...
Michael Knowles: have generally been consistent, so it's not really concerned there in terms of where the markets are going their needs.
Michael Knowles: The biggest factor really has been, and this has kind of been a trend over the last three to five years, is we're just seeing the procurement arms on the contract side taking exorbitantly longer time to award and contract out the contracts that have already been selected as winners or awarded at sole source.
Speaker Change: And when I take extensions, right, it used to be when a winner would select it or they're getting to the end of a procurement. It might be three to four weeks for them to process.
Michael Knowles: You know, it's not uncommon now to see those that sometimes take 12 to 14 weeks, which is really gotten a bigger impact now in the timing. So we work through some timing issues, a little bit that's probably our biggest risk. In terms of their demand, the market needs and the technology and the process they've gone through, those are still remained fairly consistent.
Brian Kinstlinger: And then, as for next year, yes, you know, we always hear concerns about CRs. The benefit you get on winning programs the year prior is that CRs usually affect new starts. So the more we win this year, the more stability we have in business for the next year. But we do keep an eye on the CRs, we work with customers, as best we can to plan for those. We did, we had two or three programs this year that were delayed close to seven months past when we thought they would hit just because of the longer CR we had this year.
Brian Kinstlinger: And then, as for next year, yes, you know, we always are concerned about CRs.
Brian Kinstlinger: The benefit you get on winning programs the year prior is the CRs usually affect new starts.
Brian Kinstlinger: So the more we win this year, the more stability we have in business in the next year. But we do keep an eye on the CRs, we work with customers.
Brian Kinstlinger: We did have two or three programs this year that were delayed close to seven months past when we thought they would hit, just because of the longer CR we had this year, and then the follow-on impact of them having to get the money appropriated.
Brian Kinstlinger: So timing issues definitely we have to deal with.
Brian Kinstlinger: Not much we can do rather than work closely with our customers, have things aligned and ready to go. We have seen some large crimes have
Brian Kinstlinger: taking on considerations of funding smaller companies to protect schedules.
Brian Kinstlinger: for awards they know they're going to get but are waiting on award.
Brian Kinstlinger: Um...
Brian Kinstlinger: And then the last thing we've been doing is we've some of our lobbying efforts just to help facilitate programs and timing and movement. Ultimately, if it's a CR, there's not much we can do, but we do work through our lobbying office to help resolve or supplant or put in place anything we can.
Brian Kinstlinger: Great. And then, when you talk about customer funding development, I assume growth in these programs is a leading indicator of larger awards, and that's the case. I think about the average time of a customer funding development program, and how long it may take for it to take until it turns into something that I might call a production, or I'm not sure how to describe it.
Brian Kinstlinger: Great.
Brian Kinstlinger: And then, when you talk about customer-funded development, I assume growth in these programs are leading indicators of larger awards, and if that's the case, how do you think about the average time of a customer-funded development program, and how long might it take, or typically take, until it turns into a full-time job?
Michael Knowles: Yeah, I know, Brian. I think it's safe to say now for the kinds of programs that we're bidding on and we've started to win, we'll generally see the NRE or the development period be on the order of 6 to 12 or 18 months. So we're in that 6 to 18 month range, depending on the size and scope of the development and the system we're developing. Usually, at the end of that 18 months, you have the first fieldings.
Speaker Change: Something that I might call production or I'm not sure how to describe it.
Michael Knowles: Yeah, no, Brian , I think what you could, it's safe to say now, for the kinds of programs that we're bidding, and we've started to win, we'll generally see the NRE or the development period be on the order of 6 to 12 or 18 months. So we're in that 6 to 18 month range, depending on...
Michael Knowles: Usually, that's the LRIP, the low rate initial production. You know, that's usually the first 4, 5, or 6 prototypes. They're usually delivered within the first kind of 3 to 6 months after that development period. And then you roll into the production period, which can usually run anywhere from 1 to 2 to 3 to 5 years. And then you usually have a technology refresh cycle that rolls up on the back end of that.
Michael Knowles: the size and scope of the development and the system we're developing. Usually at the end of that 18 months...
Michael Knowles: You have the first fieldings, usually that's the low-rip, the L-rip, the low-rate initial production. You know, that's usually the first four, five, or six prototypes. It's usually delivered within the first kind of three to six months after that development period, and then you roll into production period.
Michael Knowles: That can usually run anywhere from...
Speaker Change: 1 to 2 to 3 to 5 years, and then you usually have a technology refresh cycle that rolls up on the back end of that. So a perfect example is the Raytheon P8 program we have. There was initial front end development. We've been on that program for the better part of...
Michael Knowles: So a perfect example is the Raytheon P8 program we have. There was initial front end development. We've been on that program for the better part of... seven, eight years now, and we're on, I think, our second or third tech refresh. We're just finishing some development right now for the next technology refresh update for our system there. So that's the benefit of getting in on these front-end customer development programs. So a little bit of a long answer, but between six to 18 months, depending on the scope, is what I would say is average for us on those front-end developments.
Michael Knowles: It's been seven, eight years now, and we're on, I think, our second or third tech refresh. We're just finishing some development right now for the next technology refresh update for our system there. So that's the benefit of getting in on these front-end customer development programs.
Michael Knowles: So a little bit of a long answer, but between 6 to 18 months, depending on the scope, is what I would say is average for us on those front-end developments.
Brian Kinstlinger: Thank you. Last question I have. As we start to think about the revenue expectations that we like to think about from the OSS segment, Is there any way you can quantify either the first six months or the trillion 12 months?
Brian Kinstlinger: Thank you. Last question I have, as we start to think about the revenue expectations that we'd like to think about from the OSS segment,
Speaker Change: Is there any way you can quantify either the first six months or the trillion twelve months booked to bill?
Speaker Change: Yeah, so we've been tracking it this year. So, as I mentioned in the earnings call, right, the bookings have been outpacing revenue in that OSS segment by a little over 20%, right? So those would be like 1.2.
Speaker Change: 1.2 maybe in this last, so maybe like 1.2 in this last quarter is kind of the initial
Speaker Change: For the trailing six months for this year, we've been probably a little bit closer to 1.26. The last quarter here was a little bit stronger. We were upwards of a little over 1.3.
Speaker Change: So we're starting to see some pickup on the booking side from, you know, a lot of work we initiated last year.
Speaker Change: And then we're forecasting that...
Michael Knowles: Yeah, Tony, I do, and we've made some really, really good progress over the year to where we are. I think we're very well set to actually scale really well too with the people we have. Going back over the course of the year, just a quick summary.
Michael Knowles: See that continued.
Speaker Change: Positive Book to Bill Ratio greater than one through the next two quarters, based on
Speaker Change: where we see things. The biggest impact would be timing on some, making sure the awards come in as planned. But based on where we're sitting, the majority of the pipeline that we have bid right now, we're waiting on awards, is either competitions we've won or sole source work. So we're feeling pretty confident in the scope and the value that we could potentially pull through. We're working the timing, as I mentioned, on processing it through the systems.
Brian Kinstlinger: Let me squeeze one more in. Back to our head about the end of the government fiscal year. Some businesses in government obviously have a budget flush at the end of the year. Obviously, that also helps for the year after, because you've had some budget this year and your protects against CR. Does your business have a budget flush in September, generally, a benefit from that, or you've got it's not typically the case.
Brian Kinstlinger: May I squeeze one more in?
Brian Kinstlinger: Back to, we're headed to the end of the government fiscal year.
Brian Kinstlinger: Some businesses in government obviously have a budget plus at the end of the year.
Brian Kinstlinger: Obviously that also helps for the year after because you've had some budget this year and it protects against CR. Do your business have a budget flush in September generally a benefit from that or is that not typically the case?
Michael Knowles: So not much last year, so generally, on the government side, when they get to year-end and they're trying to use up budget at the end of the year, they will generally go for buying additional production buys or spare buys. So generally, if you're incumbent on a platform, you'll see a better return on those year-end sweep-up funds. So we've started to position ourselves in some of those programs so we can start to take advantage of that.
Michael Knowles: So not much last year, so generally on the government side when they get to your end and they're trying to use up a budget at the end of the year. They will generally go for buying additional production, buys, or spare buys.
Michael Knowles: So, generally, if you're incumbent on a platform, you'll see a better return on those year end sweep up funds.
Michael Knowles: So we've started as position ourselves in some of those programs so we can start to take advantage of that
Michael Knowles: Because of some of the positioning work we did last year, the other way you can grab sweep up funds is usually if some labs or organizations are interested in some early technology fielding so they can work them in their lab or try them in exercises, we can sometimes see those pick-ups. So we've expanded our relationships across the defense so that we try to pursue opportunities where we can for people who might want to buy something for their lab or for some experiment in anticipation of a program in the following year.
Michael Knowles: Um, because of some of the positioning work we did last year the other way you can grab sweep up buns is
Michael Knowles: Usually if some labs or organizations are interested in some early technology fielding so they can work them in their lab or try them in exercises, we can sometimes see those pick-ups.
Michael Knowles: So we've expanded our relationships across the defense so that we, you know, try to pursue opportunities where we can for people who might want to buy something for their lab or for some experiment in anticipation of a program in the following year.
Michael Knowles: So as we get a bigger market share in defense, snatching up money will definitely be a lever that we can pull. We just need a little bit more penetration and incumbency across a few more platforms, and then I think we'll start to see that really add more to our opportunities.
Michael Knowles: So as we get a bigger market share and defense,
Michael Knowles: Sweep-Up Money will definitely be a lever that we can bold. We just need a little bit more foot more penetration, and it comes to you across a few more platforms. And then we'll start to see that really add more to our opportunities.
Brian Kinstlinger: Thanks for answering all my questions.
Michael Knowles: Thank you, Brian. Thank you, Brian.
Brian Kinstlinger: Thanks for answering all my questions.
Operator: Thank you, and there are no further questions at this time, sir. Please continue.
Operator: Thank you, Brian . Thanks, Brian .
Speaker Change: Thank you and there are no further questions at this time, sir. Please continue.
Michael Knowles: Okay, John, thank you very much. We appreciate it.
Speaker Change: Good job. Thank you very much. We appreciate it.
Operator: Thank you. This concludes our conference for today. Thank you all for participating. You may now disconnect.
Operator: Thank you. This concludes our conference for today. Thank you all for participating. You may now disconnect.
Operator: Can you read Major Vita in front of that?
Michael Knowles: Yeah, so we've been tracking this year, so the, as I mentioned in the earnings call, right, the booking has been outpacing revenue and that, oh, it's that segment by a little over 20%. Right, so that, those will be like one point of view. I'm going to start your hand point two maybe, to maybe like 1.2 in this last quarter is a kind of initial. Yeah, for the training six months, for this year we've been probably a little bit closer to 1.26, the last quarter here was a little bit stronger, we were upwards of a little over 1.3, so we started to see some pickup on the booking side, a lot of work we initiated last year, and then we're forecasting that to see that continue positive, booked a bill ratio, greater than 1 through the next two quarters based on where we see things, the biggest impact of be timing on some, making sure the awards come in as planned, but based on where we're sitting, the majority of the pipeline that we have did right now, we're waiting on awards, is either competitions we've won or sole source work, so we're feeling pretty confident in the scope and the value that we could potentially pull through, we're working the timing, as I mentioned on processing it through the systems.
Michael Knowles: So, as business scales, we expect to benefit from steady quarter-over-quarter revenue growth while building a solid foundation of potential large-scale program opportunities. I'm pleased to report that customer-funded development revenue increased to $1.4 million in the 2024 second quarter, compared to $365,000 just three months ago. This growth was driven principally by the expansion of an existing relationship with a commercial aerospace customer for the fielding of a new product and follow-on production.
Michael Knowles: Of course, myself joined the team to run commercial and defense, but defense, background of 30 plus years. And then we brought on a VP of sales and marketing, Robert Kaleball. We worked for a decade together in the defense market. He has over 35 years of experience selling and marketing to none of the U.S. but global defense. And then, as I mentioned in the script, we wanted to augment the team with experience, the program managers, who are used to running large-scale defense programs that have development, production, sustainment, fielding, et cetera.
Michael Knowles: The biggest factor really has been, and this has kind of been a trend over the last three to five years, is that we're just seeing the procurement arms on the contract side taking the government a longer time to award and contract out the contracts that have already been selected as winners or awarded solely to one supplier. And when I take extensions, right, it used to be, you might, when a winner would select them or they're getting the end of a procurement. It might be three to four weeks for them to process.
Michael Knowles: And then the follow-on impacted them having to get the money appropriated. So, it's timing issues we definitely have to deal with. There is not much we can do rather than work closely with our customers, having the line ready to go. We have seen some large crimes have taken on considerations of funding smaller companies. To protect schedules for a word they know they're going to get, but are waiting on a word. And then the last thing we've been doing is using some of our lobbying efforts just to help facilitate programs and timing and movement. Ultimately, if it's a CR, right, there's not much we can do. But we do work through our lobbying office to help resolve or to plan or put in place anything we can.
Michael Knowles: So we had two program managers on the staff, each who, in their own right, had experience running $100 million plus programs on the defense side. So if you were, we're really well situated there. In addition, as an AS-9100 certified company and ISO-90001 certified company, we're really well set in policy, process, quality, et cetera, to meet the standards required for defense and commercial. So I think we're in a really good place to execute against defense programs.
Michael Knowles: You know, it's not uncommon now to see those that sometimes take 12 to 14 weeks, which has really gotten a bigger impact now. So we work through some timing issues, a little bit that's probably our biggest risk in terms of their demand, the market needs, and the technology and the process they've gone through. Those are those that still remain fairly consistent.