Q4 2024 One Stop Systems Inc Earnings Call
Brian Kinstlinger, Brian Kinstlinger, Brian Kinstlinger Brian Kinstlinger, Brian Kinstlinger, Brian Kinstlinger
Speaker Change: Good Day, and welcome to the One Stop Systems 4th Quarter 2024 Conference Call on Webcast. At this time, all participants are in the missing only mode. Later, you will have the opportunity to ask questions during the question and answer session.
Speaker Change: Please also be advised that actual results could differ materially from those stated or implied by the forward looking statements get the saudis and the risks and uncertainties, including those described in the company's most recent annual report on Form 10-K subsequent quarterly reports on Form 10-Q, and recent press releases.
Speaker Change: Please read these reports and other future filings that Oh, what's that you'll make with S. E C.
Speaker Change: Oh, that's S disclaims any duty to update or revise its forward looking statements, except as required by applicable law.
Michael: It is now my pleasure to turn the conference over to Oh, what's that precedent and CEO Mr. Michael <unk>. Please go ahead Sir.
Michael: Thank you Larry Good morning, everyone and thank you for joining today's call.
Michael: As I've mentioned on prior calls we're working through a multiyear plan to transform the company and pursue growth opportunities driven by the increasing adoption of artificial intelligence machine learning sensor processing and autonomy.
Michael: We are still early in our plan our performance throughout 2024 highlights the progress we have made over the past few years repositioning the company for long term success.
Michael: Oh, that's returned to consolidated year over year revenue growth for the fourth quarter and sequential consolidated growth for every quarter in 2020 for this important milestone was driven by strength across both of our operating segments higher customer funded development revenue and a continued focus on converting our Oss segment $1 billion pipe.
Michael: With the sale.
Michael: As efforts to reposition the company for revenue growth gained momentum. During 2024, we also made certain adjustments to legacy inventory and program related issues. These effort.
Michael: <unk> are aligned with our focus on improving operational efficiencies and driving profitability.
Michael: Ken will provide additional color on these changes in his prepared remarks.
Michael: With this introduction I want to use my time today to review the progress we made in 2024 and highlight several near term and longer term opportunities. We are pursuing that we believe will support the next phase of our growth.
Michael: Looking at the progress we made in 2024 from a revenue perspective, we experienced consolidated growth on a sequential basis in every quarter throughout the year driven by growth in the auto segment. As a reminder, our former media customer contributed $4 $8 million George that segment revenue in 2023 that did not occur in 2024.
Michael: Throughout 2024, we experienced greater adoption within our Oss segment for both defense and commercial end markets. These trends help grow our customer base and broaden our customer concentration during the year or.
Michael: Oh is that segment growth in our defense market was from new and existing customers. We experienced demand from several programs within the U S Army a renewal for the U S. Navy Ta program, a new HBC solution for our U S Intelligence agency and a new design win with a leading defense contractor in Asia for an autonomous maritime applications.
Michael: In our commercial end market, we saw customer demand for our solutions come from several sectors, including Motorsport autonomous trucking commercial aerospace and importantly, the data center market.
Michael: Growing customer funded development revenue was an important objective this past year and I'm pleased that we were able to increase its revenue stream by 118% in 2024 to $3 7 million.
Michael: While still small numbers now this customer funded development is a great indicator that could lead to a much larger revenue. If our products are adopted in large scale multiyear programs as it establishes oss and an incumbent position on key military and commercial applications.
Michael: From a booking standpoint, we looked at our annual book to Bill ratio of one one for borrowers that segment, which includes a delay in certain orders in the fourth quarter, but we expect those opportunities to manifest through 2025, we believe that uncertainty related to business and government spending is likely to continue throughout the first half of 2025, but our embedded position.
Michael: Remains strong with our customers and the programs. We have pursued are aligned with our customers' priorities. As a result, we believe it is not a question of if but when these orders are placed and we currently expect the 2025 annual book to Bill ratio for Oss segment to be on the order of 1.2.
Michael: We plan to update investors on our book to Bill ratio on an annual basis going forward.
Michael: Overall, despite the current environment in Washington, we have seen market interest in our solutions strengthened over the past year as we continue to respond to increasing request for information and proposals and white papers.
Michael: That's 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.
Michael: Driving these trends are the emerging requirements for artificial intelligence machine learning autonomy and sensor processing at the edge.
Michael: 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 OSA has to take advantage of current and future demand trends.
Michael: As we look to 2025, we expect certain development programs that we worked on during 2024 to transition to orders and sales. This includes commercial applications and data center healthcare and aerospace markets combined with multiple opportunities across the U S Department of defense.
Michael: We have several orders that we believe will close shortly on the commercial side, we have a new order from a health care customer that is expected to develop into significant production orders over the next five years on the defense side, we are broadening our platform application with several defense contractors. One of these expanded relationship is expected to lead to a new program win with production orders in 2025.
Michael: I look forward to updating investors on these near term opportunities as they develop.
Michael: I also wanted to highlight the progress we made in 2024 and potentially transformative opportunities underway across our commercial and defense markets. While none of these opportunities are given and remains subject to fielding and funding decisions. They do represent a transformative opportunity for Oss segment solution.
Michael: In the commercial space that proposal infrastructure for Datacenters represents what we expect to be at $200 million multiyear pipeline opportunity for Oss.
Michael: Proposal infrastructure and architecture that connects compute storage and networking resources to optimize applications and improved performance.
Michael: We're working with leaders in the space that have mandates from their end customers to increase the density of GPU processing capability within data centers. This specialized application sports users that need data center capabilities near their operations, but lack of footprint to build a large scale data center representative universities corporations organizations are public.
Michael: This entity.
Michael: The acceleration systems, we built for this application utilizes our expertise delivering igpu concentration solutions that effectively manage temperature power and optimize performance.
Michael: These solutions also leverage our discriminating leadership and Pcie technology, which is a high speed interface that connect computer components components, such as expanding cards and storage devices to a motherboard and.
Michael: In 2024, we announced an initial contract for 100 accelerator units with a customer we expect our best in class solution will expand to multiple customers in 2025, leading to increased revenue potential for 2025 and beyond.
Michael: On the defense side, we successfully delivered a rug at 360 degree situational awareness system in the U S Army for their assessment and testing. This system provides military spec low latency video processing to support on vehicle video dissemination.
Michael: Army will test and assess a system for application to their combat vehicle inventory, which we currently expect to occur sometime in the second half of 2025 Oss is uniquely positioned for this application as we developed and built a ruggedized compute visualization system using oss's Pcie Gen four switch fabric technology and video jetson.
Michael: <unk> system on module.
Michael: As a result of test and assessment the army chooses to fund the deal the capability across one or multiple combat vehicles classes.
Michael: Estimate the value of such an opportunity it could exceed $200 million in production orders over a three to five year period with additional opportunities for follow on logistics support a tech refresh options.
Michael: Our product solution is also gaining the attention of multiple defense prime contractors in the combat vehicle market driving request for information a proposal that would align with the army opportunity.
Michael: While it will take time for these opportunities to formulation development potential production orders, we are working hard with our customers in Congress to ensure the fielding of his capability is funding and realignment.
Michael: The proposal infrastructure and army visualization programs will have important milestones over the next few years and I look forward to providing updates in future calls.
Michael: As we look to 2025, we are off to a good start in both segments and anticipate a projected consolidated revenue of $59 million to $61 million for the full year of 2025. This includes inspected Oss segment revenue of approximately $30 million representing over 20% year over year growth in the Oss segment.
Michael: In addition, the company expects to be EBITDA breakeven for the full year of 2025, we expect revenue and profitability to improve at a higher rate in the second half of 2025 based on current trends and our expanding sales pipeline.
Michael: We expect some near term volatility associated with budget delays and uncertainty related to impact tariffs will have on the economy, we feel good about our financial position and the potential for 2025, we believe we have the right products the right team and the right strategy in place to capture significant opportunities across defense and commercial market.
Michael: As customers look for technology partners like Oss to support their expanding needs for rugged enterprise class compute solution.
Michael: With this overview I would like to now turn the call over to Dan Dan. Thank you, Mike and good morning to everyone on today's call.
Dan: I joined <unk> in November of last year, and as I've gotten to know the company I've been impressed by the differentiated technology by the energy and dedication of the team and by the robust opportunity pipeline.
Dan: As Mike mentioned in 2024, we adjusted certain legacy inventory and program related issues as our transformation strategies gained momentum.
Dan: With these adjustments behind us we remain focused on driving growth, increasing our operational efficiency and driving profitability.
Dan: We incurred two main charges in 2024.
Dan: First Oss took a charge during the fourth quarter of 2024 related to contract losses of $1 2 million for incurred unanticipated costs to satisfied performance obligations on a customer funded development contracts that was introduced in 2022.
Dan: While this charge negatively impacted our 2020 for financials. Our efforts on this development program position us to compete for large multiyear production opportunities in 2025 and beyond.
Dan: Second Oss incurred $7 1 million of inventory charges in 2024 related to obsolete and slow moving inventory associated with the transition of the company's business model and operating strategy as well as slower adoption movement in certain commercial and defense edge compute market.
Dan: These one time charges reduced reported gross margin net income and adjusted EBITDA for the fourth quarter and full year of 2024.
Dan: Importantly, we believe we have taken all appropriate measures and we do not expect any further significant adjustments to cost related to the customer funded development contract or tour inventory outside of normal historical trends.
Dan: Turning to our fourth quarter financial results.
For the fourth quarter, we reported consolidated revenue of $15 1 million.
Dan: The 15, 1% year over year increase in consolidated revenue was a result of double digit growth across both our Oss and fresh air business segment.
Dan: Consolidated gross margin in the fourth quarter was 15, 7% compared to 33, 7% in the prior year quarter.
Dan: Gross margin, excluding one time charges was 23, 8% compared to 33, 7% in the same period last year.
Dan: This decline reflects a less profitable mix of revenue in the quarter.
Dan: We expect our consolidated gross margin to return to our target range in the low 30% in 2025 first quarter.
Dan: On a segment basis gross margin for companies Oss segment for the fourth quarter was nine 4% compared to 45, 9% for the same period a year ago.
Dan: Oss segment gross margin, excluding the one time charges was 26, 8% compared to 45, 9% for the same period a year ago.
Dan: This decline reflects the less profitable mix of Oss segment revenue.
Dan: We expect Oss segment gross margin to improve in the first quarter of 2025 to our target range in the mid to upper 30% range.
Dan: The company's pressure segment had gross margin percentage of 21, 2% a one percentage point decrease from the same period last year.
Dan: Total fourth quarter operating expenses increased 15, 1% year over year to $5 5 million.
Dan: This increase was predominantly attributable to increased general and administrative costs related to planned marketing sales and program management investments that we made during the course of 2024.
Dan: For the fourth quarter, the company reported a GAAP net loss of $3 1 million or <unk> 15 per share compared to a net loss of 278000 or <unk> <unk> per share in the prior year.
Dan: It is important to note the GAAP net loss in the quarter included the $1 2 million one time charge mentioned earlier.
Dan: The company reported a non-GAAP net loss of $2 6 million or <unk> 12 per share compared to a non-GAAP net income of 219000 or <unk> <unk> per share for the same period last year.
Dan: The 2024 fourth quarter net loss and non-GAAP net loss included the $1 2 million in one time charges related to loss on the contract that we entered into in 2022.
Dan: Adjusted EBITDA, a non-GAAP metric was a loss of $2 3 million, which included the above mentioned $1 2 million in one time charges compared to an adjusted EBITDA of 322000 in the prior year fourth quarter.
Dan: Turning to the balance sheet.
Dan: As of December 31, 2024, but with less had total cash and short term investment of $10 million no borrowings outstanding on our 2 million revolving line of credit and the consolidated balance outstanding on our term loan of $1 million.
Dan: For the 12 months ended December 31, 2020 for Oss used $108000 in cash from operating activities.
Dan: To a use of cash of $440000 for the 12 months ended December 31 2023.
Dan: This completes our prepared remarks, operator, please open up the call to questions.
Dan: Thank you ladies and gentlemen, we will now begin the question and answer session to ask a question you May press star followed by the number one on your telephone keypad to withdraw. Your question you May press as star followed by the number two once again, please press star one to join the queue. One moment. Please for your first question.
Speaker Change: And your first question comes from the line of Bryan Keane Slinger with AGP. Please go ahead.
Speaker Change: Okay, great. Thanks, good morning.
Speaker Change: I wanted to start with the gross margin, which you addressed.
Speaker Change: Excluding the one time charge like you've mentioned it Oss core segment gross margin was pressured and you mentioned this is based on the mix.
Speaker Change:
Speaker Change: This also happened in the second quarter I believe so first what was it about the next what is the low lower margin revenue that is generated in core Oss and what gives you the confidence based on your comments that in the first quarter and maybe for 2025, you will see those mid to higher 30% gross margins.
Speaker Change: For that segment.
Speaker Change: Yeah, Thanks, Brian I'll get started and Mike can jump in with any any color. So for the whole of that segment in particular, especially given our scale. We do see variability in gross margin based on mix of products. We saw that in 2020 for fourth quarter. As you pointed out as we shipped some of that lower margin work of course that works both ways.
Speaker Change: In Q3 of 24 Oss segment gross margins, excluding the inventory charge were about 43, 2%, so well above that kind of target range in the mid 30.
Speaker Change: So I would really look at it on a full year basis for.
Speaker Change: For the Oss segment, our full year 2024 gross margin, excluding the inventory and contract loss impact was about 36, 4% net compared to 36, 5% in 'twenty three so very stable in that mid <unk> range that we target.
Speaker Change: As we look to <unk>.
Speaker Change: Hardware.
Speaker Change: Is it hardware pass throughs I mean.
Speaker Change: I mean, you're you have quite valuable services.
Speaker Change: And products, so I'm curious what drives that lower pass through revenue that contractors have.
Speaker Change: Yes.
Speaker Change: We have both we had some customer budget and our read is that certainly with the onetime impact impacted our gross margins in the fourth quarter, but we also have.
Speaker Change: Pretty wide variety of products, some of which are higher margin some of which are lower margin.
Speaker Change: And in the fourth quarter, we just saw more of those lower margin products shipping.
Speaker Change: Okay.
Speaker Change: Then it sounds like you the company, which I'm sure the industry two we experiencing order delays and you expect that will persist in the first half of the year, if I heard that right.
Speaker Change: We've got <unk>, we've got.
Speaker Change: The natural budget delays, maybe talk about how this may or may not have changed your weighted pipeline that you provided last quarter.
Speaker Change: So what's addressable in 2025.
Speaker Change: Yes, Brian. Thanks, So interesting enough I was actually just on the Hill last week with the house and the Senate are working on 2026 budget and so.
Speaker Change: The.
Speaker Change: Really two interesting sides of the coin here on the on the technology side, we're seeing that even increased momentum and interest in transitioning commercial technologies into the department of defense.
Speaker Change: Especially in this area of artificial intelligence center and Greg.
Speaker Change: The opportunity to take high technology readiness level of products and move them onto existing platforms to increase capabilities something thats greatly aligned with the current administration and within the services. So we continue to see a lot of.
Speaker Change: A willingness and interest in the kinds of products and capabilities that Oss can deliver as you did mentioned.
Speaker Change: We are seeing as a result, you can see just last Friday, they passed the continuing resolution not a full budget.
Speaker Change: That has impact in the way that the department spends and how they how they place orders. So we're seeing.
Speaker Change: Stability in the intent and where the purchases are going to be.
Speaker Change: The timing and how that will be executed will be affected by.
Speaker Change: How they work continuing resolution there.
Speaker Change: Some informal discussion that a defense budget may still be passed in the coming months, even though that they have a full year continuing resolution.
Speaker Change: So we'll continue to monitor those and then as I said it <unk>.
Speaker Change: Effective dose where.
Speaker Change: We're still seeing our end customers in the Dod procurement offices are moving through.
Speaker Change: As a bit of confusion and slowness in there is that they're working through their internal request back through.
Speaker Change: Through that through that process that is that is.
Speaker Change: Causing causing some delays in awards, but we still are inside communication lines are still open we can still track where things are we're just having to manage through the process.
Speaker Change: As Dan noted and I noted.
Speaker Change: As we're looking at 2025.
Speaker Change: We'll see a little bit broader pick up in the second half of the year as a result of that will account for anticipated delays here Q1 Q2 on some of it some of these defense orders.
Speaker Change: So do you think the addressable pipeline for 2025 is still.
Speaker Change: Around $200 million, which I think you mentioned total was $1 billion in addressable was 20% for 2025 is that still a good picture of where the business is or has some of that 200 million shifted to the right.
Speaker Change: At this point, but I haven't seen a big shift in anything in our pipeline as a result of what we're seeing.
Speaker Change: In fact that we've been seeing a little bit of the reverse where with our expanded reach and broadening.
Speaker Change: Customer reach we're seeing more opportunities that we can load into the pipeline that are seeking information are requesting.
Speaker Change: Pricing on our on our opportunities and capabilities. So I feel that our pipeline is stable, where there's some elements that allow us to adjust for some of that timing.
Speaker Change: And our pipeline is as I wouldn't take the $1 billion and divided by five.
Speaker Change: It builds out over time as you would expect that we land customers early customer funded development programs they lead to larger scale production orders in.
Speaker Change: As follow ons and follow on years right. So we see some of that growing out over time, but for the for the pipeline. We're looking to address in 2025 that drive the growth and the revenue we were talking about.
Speaker Change: You'll feel comfortable and our internal assessments are indicating we have the available pipeline to continue to drive those kinds of orders.
Speaker Change: Great One last question for me.
Speaker Change: As it relates to the server extension box order for $2 million can.
Speaker Change: Can you talk about maybe the opportunity for similar sales to AI infrastructure companies, including that existing customer what is what's the market opportunity you've seen maybe over the next in the short to medium term.
Speaker Change: Yes, I mean, I mentioned that that overall broad term with $200 million. Yes. So they are there is.
Speaker Change: There is a set of customers.
Speaker Change: That have requested and we responded to multiple customers in terms of those <unk>.
Speaker Change: <unk> accelerator to an expansion boxes. So we're seeing increased interest and demand for that we also see the end customer applications and.
Speaker Change: Oems if you will in that market and that has allowed us to be able to reach out directly to them also and engage in broader communications, which is continuing to increase our interest in <unk>.
Speaker Change: This field and where we can go on what we can do.
Speaker Change: We also presented now the new.
Speaker Change: Our devices for this application this market at embedded World last week and we're at.
Speaker Change: The GTC Tradeshow this week.
Presenting the same technology and so there is also an emerging set of new.
Speaker Change: Higher and higher wattage, Nvidia Gpus and other.
Speaker Change: GPU boards bye.
Speaker Change: Several vendors inside the commercial market and our product suite, we're adapting and adjusting to that so it will be it will be one of the early market adopters of some of the high wattage GPU accelerators.
Speaker Change: Great. Thanks, so much.
Brian: Thank you Brian Thanks, Brian.
Mark Nicholas: And your next question comes from the line of Mark Nicholas with Lake Street Capital markets. Please go ahead.
Mark Nicholas: Hey, guys. If we look at your order growth for 2025, and maybe if we split that up between the so thats for the Oss segment, if we split that up between the commercial and defense market, maybe help me understand where youre seeing.
More of the growth coming from or is it pretty.
Mark Nicholas: Stable across the two segments in terms of like size of order expansion.
Mark Nicholas: Yes, Thanks, Matt for the question.
Mark Nicholas: So we see the growth almost equally across commercial and defense markets. So the pipeline opportunities. We have the opportunities. We're chasing are well balanced between both and so we highlighted a couple of them here data center on the commercial side the data centers the <unk>.
Mark Nicholas: Medical imaging commercial aerospace all our all our areas.
Mark Nicholas: Our deepen our pipeline of interest and we're tracking two opportunities there in 2025, and then on the defense market.
Mark Nicholas: We just noted that we had a renewal of our long term contract, we have had with Raytheon and Lockheed Martin.
Mark Nicholas: So we've got we've got several existing customers that are expanding their opportunities. They're also creating opportunity first Brian more broadly within large prime contractors inside of other company divisions. So we're seeing opportunity to defense there too to find new platforms to move our our.
Mark Nicholas: Don and then and then as I mentioned, we have an <unk>.
Mark Nicholas: Order of the medical field in an article.
Mark Nicholas: And the defense field that we expect to be announcing soon that will give you. Some good insight into the broadening application and the building of our platforms and our strategy, where we can stack stack. These long term capabilities together so.
Mark Nicholas: Short answer we're seeing activity in both sides commercial and defense and as expected and tied to our strategy.
Speaker Change: I guess, if we stay on the commercial segment is there any areas in that market where.
Speaker Change: You Werent originally forecasting strength going into 2025, but you are seeing an uptick in orders.
Speaker Change: I would say, we've been pretty broad in our assessment of that market.
Speaker Change: The one on the medical imaging is coming on probably a little bit faster a little bit larger than we had first anticipated.
Speaker Change: But that does that.
Speaker Change: That customer set and some of that medical imaging areas is is creating a quicker adoption of artificial intelligence into imaging processing and.
Speaker Change: Doug I continue to note application of AI ml. The data sources that sensors is a sweet spot for our company and our hardware and so some of the capabilities built out and the new GPU processing allows them unique advances where sensors directly at the at the point of medical imaging can be prop.
Speaker Change: <unk> real time, using the likes of our hardware so.
Speaker Change: So we're seeing some some acceleration of that that maybe we hadn't anticipated a couple of quarters ago.
Speaker Change: Awesome and then just one last one for me I don't know if I missed it but how many are your current product programs under your Oss segment. How many are currently in development.
Speaker Change: <unk>.
Speaker Change: Number for you but.
Speaker Change: The intent for the company really as we talked about customer funded development as we grow there'll be a percentage of our revenue and our efforts every year that are tied to customer funded development. This is how we identify early on opportunities to develop a bespoke solution to a customer set that we know well.
Speaker Change: Lead to low rates and at full production and Sustainment support.
Speaker Change: Like what we've done in our long running.
Speaker Change: Program to Raytheon in the Navy started with a small development opportunity over the six or seven years, we've been on that program, we've been able to generate double digit millions of dollars over that program through production Tech refresh sustainment support.
Speaker Change: Logistics.
Speaker Change: We announced we had another multiyear extension on that program.
Speaker Change: To continue to support that program. So this customer funded development programs are what substantiated. This onto these long running opportunities and so we will see multiple programs in any given year as a percentage of revenue as we grow out and the production elements start to hit that will that will decrease from where we are right now so we're.
Speaker Change: We're on the front end of really building those platform legacy positions.
Speaker Change: Thanks, guys.
Speaker Change: Thanks, Matt I appreciate it.
Speaker Change: Thank you and Im showing no further questions. At this time. This will conclude today's conference call. Thank you all for joining you may now disconnect.
Speaker Change: Okay.