OSS - NASDAQ

Good day, everyone, and welcome to today's One Stop Systems 2024 Quarter 1 Conference Call and Webcast. [Operator Instructions]. Please note this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to President and CEO, Mr. Mike Knowles. Please go ahead, sir.

Thank you, Jennifer. Good afternoon, everyone, and thank you for joining today's call. So they joined the company as CEO almost a year ago, we are focused on transitioning our business away from legacy media and niche enterprise customers to pursue emerging opportunities within large and growing defense and commercial markets. As early adopters of applications that will utilize artificial intelligence or AI, machine learning or ML and sensor processing at the edge, we believe defense and commercial markets support significant opportunities for the company's market-leading rugged enterprise-class compute products. I've also had the opportunity to engage with current and prospective customers and continually hear positive feedback on the value of OSS' products as well as our engineering and support capabilities. I continue to believe our existing products and future road map align extremely well with the growing market trends and technology adoption. With strong product offerings, our efforts over the past 12 months have focused on building a team of proven sales, business development and program management associates. This first phase of our transformation created the necessary infrastructure to identify new opportunities and rebuild our sales pipeline to serve new defense and commercial applications and customers. I'm extremely pleased with the progress we have made throughout my first year at OSS as we have assembled a strong sales organization, expanded our 5-year unfactored pipeline to over $1 billion and enter new multiyear and large-scale platform-based sales opportunities with new and existing customers. In addition, approximately 70% of our current pipeline is comprised of platform opportunities, which we believe will help contribute predictable multiyear revenue and backlog to OSS. We have also pursued a second phase of our transformation aimed at creating a growth-focused multiyear strategic plan. Our new strategic plan was presented to our Board of Directors in early May, and we are now incorporating their feedback. Once our plan is finalized in the next month or 2, we plan on including the growth strategies we are pursuing to achieve our 5-year financial targets in an updated presentation and subsequent quarterly conference calls. The third phase of our transformation will focus on executing against our 5-year strategic plan to profitably scale our business and build greater long-term value for our customers, associates and shareholders. So with this overview, I'd like to review the progress we made during the 2024 first quarter and our expectations for the remainder of the year before turning the call over to John to provide additional information on our first quarter results and balance sheet. Overall, I'm encouraged by our performance during the 2024 first quarter as consolidated revenue, bookings, gross margin and EBITDA met or exceeded our plan. This is a testament to the focus and investments we have made over the past year within our sales and product teams and the diverse sales pipeline we are building. I want to thank everyone at OSS for their continued hard work during the quarter. Our first quarter results also reflect the early days of a multiyear investment cycle for the rugged AI, ML and edge computing solutions we provide. The recent explosion in overall AI and ML investments have primarily benefited hardware, data center and select software companies. While we believe these trends will benefit OSS in the coming quarters and years, many of the opportunities we are pursuing are still in development, testing and concept basis. The near-term focus of our sales organization is to identify customers, prioritize resources and pursue strategic platform-based opportunities that are funded or have a high likelihood of getting funded and require our rugged enterprise-class compute solutions at the edge. Discovering opportunities at the design phase allows OSS to get spec-ed in early in the platform, which we believe solidifies our position once the project moves to commercialization. In addition, this approach creates a moat around our business as we offer highly engineered solutions that not only meet current technology requirements, but also provide the compute power needed to meet future technology requirements, thus creating a protected incumbent position. This is a multiyear approach that we expect to create significant value as programs are developed and commercialized. A recent example of our potential was the order we announced in the first quarter to design and manufacture a new ruggedized liquid cooling system for cooling self-driving technology in a commercial autonomous truck deployment. The initial $300,000 order was for new design and prototypes. More importantly, this reflects the progress we are making building valuable relationships with the customer's engineering team and pursuing opportunities that provide integrated solutions on a platform. While this customer is still years away from final configuration and production, we believe our current development work supports a significant multiyear revenue opportunity for OSS in the future. We are actively pursuing similar relationships and we started to break out separate revenue and cost lines in our financial results associated with customer-funded development projects to show our potential and track new win more easily. We have defined program-related development work as customer-funded development on our financial statements. Through customer-funded development programs, we are typically providing a more integrated solution compared to the company's historic offerings. In addition, it establishes OSS as an incumbent on what is almost always a multiyear contract. As a result, we expect our business model to benefit from a higher mix of annual recurring revenue and contracted multiyear backlogs in the future. Development relationships are expected to take 1 to 2 years before leading to production orders. So as our business scales, we expect to benefit from steady quarter-on-quarter revenue growth while building a solid foundation of potential large-scale program opportunities. Additional customer momentum in the quarter included a pilot project to provide a liquid and merchant cool data storage system for use in a deployable ground station. This project has begun and is expected to lead to follow-on production orders in the coming quarters. We started shipping our latest Gen 5 4U Pro Accelerator System to a large composable infrastructure provider with expected shipments to total between $4 million and $6 million over the next 3 years. It is important to note that we are early in our transformation as we grow revenues to more customers within the defense and commercial markets. At the same time, we will continue to feel the impact in the second quarter from transition of a former media customer. Finally, we are not immune from softer European demand impacting our Bressner business and the prolonged U.S. government budgeting process resulting from an extended continuing resolution for fiscal year 2024, which affected certain contracts in the first quarter. As we successfully transform our business and navigate a more fluid operating environment, we are focused on controlling the items under our control and maintaining a strong balance sheet. Near-term priorities include converting our growing pipeline into new bookings, maintaining a positive book-to-bill ratio, investing in product development and supporting our expanding customer base. I'm also pleased with the progress we've made over the past 3 months, improving our working capital efficiency. These efforts allowed OSS to generate $2 million in positive operating cash flow during the quarter, which we used to pay down term loans at Bressner and increase our cash position. As a result, we ended the quarter with a stronger balance sheet that included net cash and short-term investments of $12.9 million compared to $11.8 million at December 31, 2023. We believe our balance sheet provides us with significant flexibility to support our long-term growth strategies, and we are committed to being good stewards of the company's capital. As we look to the remainder of 2024, we are excited by the long-term strategies we are pursuing to scale our business and drive profitable growth. Our OSS segment ended the first quarter with a book-to-bill ratio of 1.1, and we anticipate positive order trends will continue throughout the remainder of the year as our growing pipeline successfully converts to orders and backlog. We continue to invest in the future, and we are finalizing a new multiyear strategy that I look forward to sharing with you on our next call. 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. With this overview, I'd like to turn the call over to our CFO, John Morrison, to review our 2024 first quarter financial results in more detail. John, please go ahead.

Thank you, Mike, and good afternoon, everyone. I believe all show a clear path to deliver strong financial returns over the coming years, and I look forward to updating investors on the progress we are making on future calls. Turning to our financial results for the first quarter ended March 31, 2024, our first charter results reflects the continued transformation of our business model as well as the effect of a fluid operating environment. Despite these impacts, I am pleased to report that our consolidated revenue, gross margin and EBITDA met or exceeded our plans. As a reminder, the company has operated in 2 operating segments. All our OSS segment operates in the United States and is primarily focused and involved in the design and manufacture of high-performance rugged edge processing, compute, storage and connectivity systems. Our Bressner segment operates throughout Europe and is a system integrator who are standard and customer all in one part of our systems and components. Bressner also serves as a channel for OSS products to the European and Middle East markets. The following comments are based upon comparison to the first quarter results of 2024 as compared to the first quarter of 2023. For the first quarter, we reported consolidated revenue of $12.7 million, which exceeds our guidance of $12.5 million. The 24.6% year-over-year reduction in consolidated revenue was primarily due to the timing of orders for data storage component from our large defense customer. Our orders from this customer can fluctuate on a quarterly basis by millions of dollars, which during the first quarter resulted in an approximately $4.4 million swing on a year-over-year basis. For 2024, we anticipate a similar amount of annual order volumes with customers as compared to the prior year. In addition, we experienced the $1.5 million year-over-year reduction in revenue related to our former media customers. This was offset by approximately $1.9 million in incremental revenue to an existing aerospace customer and $600,000 in additional revenue to the existing autonomous truck customers. Our Bressner segment revenue decreased 12.7% to $7.1 million as expected and primarily due to the discontinued and delays program. As Mike mentioned, in our first quarter financial statements, we started a breakout, separate revenue and cost line items associated with customer-funded development work. Customer funded development typically represents nonrecurring design and development work associated with the introduction of new products paid for by our customers. We expect our customer-funded development revenue to grow throughout 2024, benefiting from the strategies we are pursuing to provide more integrated solutions to our growing customer base. Consolidated gross profit in the first quarter was 29.4% compared to 30.2% for the same period last year. This slight decline in our consolidated gross margin was primarily due to under absorption of our production capability. That was particularly offset by a more profitable mix of revenue at our Bressner segment. Compared to the fourth quarter, our consolidated gross margin was down 430 basis points, primarily due to manufacturing absorption. Total first quarter operating expenses decreased 5.4% to $5 million, which was attributable to the elimination of the higher year costs associated with our organization restructuring and outside professional services as well as reduced R&D expenses, which are primarily offset by higher marketing and selling expenses during the quarter. For the first quarter, the company reported a GAAP net loss of $1.3 million or $0.06 per share compared to a net loss of $401,000 or $0.02 per share in the prior year. The company reported a non-GAAP net loss of $931,000 or $0.04 per share compared to non-GAAP net income of $90,000 or $0.00 per diluted share. Adjusted EBITDA, a non-GAAP metric was a loss of $456,000 compared to a positive EBITDA of $633,000 in the prior year first quarter. Now looking at the balance sheet in more detail. As of March 31, 2024, OSS had cash, cash equivalents and marketable securities of $12.9 million and total working capital of $34.3 million compared to total cash and cash equivalents and marketable securities of $11.8 million and total working capital of $30.6 million on December 31, 2023. OSS had no borrowings outstanding on $2 million revolving line of credit on March 31, 2024, and December 31, 2023, respectively. The company's Bressner operations had a consolidated balance outstanding on its 2 loans on March 31, 2024, of $1.4 million, down from $2.1 million on December 31, 2023, and $3.2 million as of March 31, 2023. For the 3 months ended March 31, 2024, OSS generated $2 million in cash from operating activities compared to $24,000 for the 3 months ended March 31, 2023. Looking forward, we expect revenue of $13 million in the second quarter of 2024. Our revenue guidance for the second quarter of 2024 includes expected program delays from certain defense customers as a result of the prolonged government budget process and continuing resolution for the fiscal year 2024 and softer European customer demand for the near term. While we expect revenue in the second quarter will be down on a year-over-year basis, we believe we will continue to experience sequential revenue growth throughout the year. This will be supported by a continued positive book-to-bill ratio as we execute on our on converting our growing opportunity pipeline. In addition, European demand is expected to improve in the second half of 2024 and higher bookings in our core case business to help support year-over-year revenue growth and positive consolidated EBITDA in the coming quarters. This completes our financial review for the quarter and would like to now open the call to questions. Jennifer?

[Operator Instructions]. And we'll take our first question from Max Michaelis with Lake Street Capital Markets.

First one for me. It's nice to see bookings return to growth here. I was wondering if you could share a percentage increase from this quarter and maybe a bookings growth number for Q2.

Thanks for the question, Max. I would think you're asking if we have the percentage growth year-on-year for bookings?

Yes, maybe for this quarter and then maybe what your expectation is for Q2?

I don't know if John -- I don't have those numbers handy, but we're expecting that to continue to see positive -- our book-to-bill ratio is greater than 1 as we go into Q2 and the following quarters in the fiscal year.

And then a couple more from me. Gross margin seemed to outperform. I think, correct me if I'm wrong, prior expectation was for 32% to 33% in the OSS segment. I think you guys came in a little over 34%. What you may be expecting for maybe the outer quarter or Q2, Q3, Q4? Is this outperformance can continue? Or do you guys expect to return to the norm?

No, you're going to be returning to a norm of about 32.5% for a stand-alone. And for Bressner, you'll see more in the 23% to 24% range as we go throughout the year. And as you see our revenue increased over the period of time.

And then the last one to me. I know you guys are seeing some delays on the defense side. Wondering if you've seen any order cancellations.

On our side, we have not seen order cancellations, Max. Realistically, the biggest impact has been because of the CR. So there's a few bids that we have in that are tied to new programs. The government is not allowed to release new programs or award new programs under CR. So that CR for the Defense Department. I believe it was mid-April when it was finally lifted or other budgets approved. So the government now has been spending the last few weeks and months aligning and getting money flowing and awarded. So no cancellations in the forecast or in our pipeline.

Okay. And then maybe other outside of defense and other commercial markets.

Yes. We have not seen cancellations in commercial either. Just some softness, if you will, as we mentioned in Bressner with the European economy. But as we've checked in with experts and data there, there's still an expected recovery in the second half of the year.

[Operator Instructions]. We will take our next question from Joe Gomes with Noble Capital.

So when you talk about I wonder if you could size possibly when you're transitioning away I understand we all do for how big the legacy media customer was. But when you talk about the niche enterprise customers, what size of that of that business you're transitioning away from?

Sure. I think you're asking what was the size of the media customer business we're moving away from.

No, we all knew that. When you also say niche enterprise customers that you're transitioning away from, just trying to get what size of on revenue contribution those customers were making to the company.

Yes. they were minimal comparative to the media customer.

Okay. And then it sounds a lot of opportunity there. You guys think you're going to see some after the second quarter, some sequential growth. But really, what's going to give you that confidence? We've seen many delays, a lot of system starts historically. And so just trying to get a better handle on what is there giving you that confidence that we're actually going to start to see sequential revenue growth here in the back half of the year?

Yes. Thanks, Joe, for that question. I think it's a couple of things. So right now, we have multiple bids that are out for some of these customer-funded development programs and a couple of other multiyear contract opportunities that we have out there. So that we'll expect to see from Q2 on to see those awards. Those are the ones that will start to lay in quarter-on-quarter ability to have backlog built in. So that gives me confidence. When I joined the company over a year ago, we did not have that the scope or scale of these kinds of programs that we already had proposals out and we're pursuing. So that gives me some good confidence. The other one is I'll take it back to the comment I made, as we've gone through and reorganized and reestablished our pipeline, around 70% of our pipeline is built out on customers that would be bringing multiyear type programs and opportunities to the company. And as we prosecute those, it just continues to build the floor of consistent available quarter-on-quarter, year-on-year revenue that allows us to build up and drive that growth. So given the bids that we already have out and the ones that we have forecasted, we'll be submitting between Q2, Q3 and Q4 this year. That's what gives me the confidence to drive the sequential growth for this year and establish that kind of firm foundation of kind of multiyear revenue opportunities.

Great. And then I know it's very early days, but just maybe a little color here on you hired Craig and looking at that international defense and opportunities and some international commercial opportunities. Just maybe give us an update on progress to date.

Yes, we're making steady progress, I think, on that effort. So Craig was a key addition. There's a lot just in the U.S. DoD space that he's bringing to bear and into the pipeline given his experience in the market. So we're really excited about leveraging that. He's already making impacts in just the few short weeks that he's been here. But in addition, his reach into Canada and some other areas has started to open up some avenues for us to procure and pursue and look at to build our pipeline and our opportunities to go after given his experience in those markets. And I'd say the other thing is we've really spent in the last year a lot of time continuing to utilize our Bressner facility as an opportunity for channel to market for a lot of the products we're developing out of the U.S. site here. And they've done a really good job year-on-year growing the amount of product they pull through and sell. We've been able to use that channel through training them and supporting their technical ability and their technical ability to operate with that in our products in Europe. But we've really expanded through trade shows and outreach all across Europe, the U.K. and into the Middle East with our reach in just the last year. So that's another way we're finding expanding our international reach with the existing resources that we have. As we continue to grow the company and as affordable, we'll look to expand upon that even more.

[Operator Instructions]. We will pause for a moment to allow questions to queue. It appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

We thank you for your support, and we can transition ending the call.