Good afternoon, and thank you for joining us today to discuss One Stop Systems' first quarter results ended March 31, 2019..
With us today are the company's President and Chief Executive Officer, Steve Cooper, and its Chief Financial Officer, John Morrison..
Following their remarks, we will open the call to your questions. Before we conclude today's call, I will provide some important cautions regarding the forward-looking statements made by management during the call.
I would also like to remind everyone that today's call will be recorded and will be made available for replay via instructions in today's press release in the Investors section of the company's website..
Now I'd like turn the call over to OSS President and CEO, Steve Cooper. Sir, please go ahead. .
Thank you, Gwen, and good afternoon, everyone. Let me start with a discussion of our revenue for the first quarter of 2019..
Our revenue increased 41% to $10.1 million. This was below our expectations with customer delayed shipments slipping out of the first quarter and into the second. There were 2 specific delayed shipments that totaled $3.2 million.
One was for our primary military flash array customer, which was delayed due to customer-requested postponement of the shipment. And these products were subsequently shipped in April..
The second delayed shipment was for our largest in-flight entertainment systems customer, which was delayed due to late-arriving materials that did not meet our specifications. The issues that delayed this second shipment have also been resolved, and these products are expected to ship later this month..
These 2 delays effectively shifted revenue from the first to our second quarter. This reduction in revenue in Q1 was partially offset by about $1 million in shipments to other customers that exceeded our expectations..
Other than these delays, it was actually a strong first quarter in many respects. We're encouraged by several positive developments. The broader segments of our business are exceeding our expectations.
Our major OEM customers are scaling up, we're winning new OEM design wins and our technology and architectural leadership with PCI Express Gen 4 and AI on the Fly are really resonating in the marketplace..
At this point, I'd like turn the call over to our CFO, John Morrison, who'll take us through the financial results for the quarter.
John?.
Thank you, Steve, and good afternoon, everyone. Thank you for joining us today. Earlier today, we issued a press release with our first quarter results for the period ended March 31, 2019. The earnings release is available in the Investor Relations section of our website at onestopsystems.com..
Starting with our statement of operations, consolidated revenue in the first quarter of 2019 increased 41% to $10.1 million from $7.1 million in the same year ago quarter. The increase was primarily driven by revenues from acquisitions, which contributed $4.8 million in the quarter.
This was partially offset by $1.9 million decrease in organic revenue..
Q1 was the first quarter that included 3 months of revenue from our Bressner business unit, which contributed $4.5 million or 45% of our consolidated revenue in Q1..
Our CDI business unit contributed $300,000 or 3%. As Steve discussed, our overall revenue for the first quarter was significantly impacted by the delay of shipments for 2 orders totaling $3.2 million, of which $2.6 million would have been organic revenue and $600,000 would have been CDI revenue.
These delays effectively shifted revenue from the first to the second quarter and were partially offset by $1 million in shipments to our other customers that exceeded expectations..
Our gross profit in the first quarter was $2.4 million or 24% of revenue. This compares to $2.2 million or 31% of revenue in the same year ago quarter.
The decrease in gross margin percentage was due to lower revenue from high-margin flash array products and our in-flight entertainment systems that resulted from the shipment delays as well as lower margins from Bressner due to a large bulk sale..
Our total operating expenses increased 52% to $4.4 million from $2.9 million, with the increase primarily due to expenses associated with being a public company and increased expenses associated with inclusion of CDI and Bressner..
Net loss attributable to common stockholders on a GAAP basis was $945,000 or a loss of $0.07 per share in Q1. This compares to a loss of $794,000 or $0.08 per share in the year ago quarter..
We believe non-GAAP earnings per share and adjusted EBITDA metrics can be helpful in evaluating the company's financial performance. Adjusted EPS on a non-GAAP basis was a loss of $0.03 per share in Q1. This compares to a loss of $0.07 per share in the same year ago period..
Adjusted EBITDA was a loss of $1.4 million in Q1 as compared to a loss of $237,000 in the same year ago period. Please reference our definition and use of these non-GAAP terms and a reconciliation to GAAP in today's press release..
Now let's turn to the balance sheet. Cash and cash equivalents totaled $455,000 at March 31, 2019 compared to $2.3 million at December 31, 2018. The decrease was primarily due to cash used to pay down Bressner debt, working capital and infrastructure investments.
To provide for future liquidity, during the quarter, certain members of our Board of Directors agreed to commitments of up to $4 million..
Additionally, Bressner entered into a new line of credit for an additional EUR 2 million. Subsequent to the quarter end, the company did borrow $1.5 million of the $4 million commitment from multiple parties, inclusive of members of the Board of Directors. Bressner also entered into a new term loan agreement for EUR 500,000.
And currently, our cash on hand is approximately $2.4 million..
In 2019, the company is investing approximately $1.5 million in infrastructure projects to increase our capacity, improve operating efficiencies and to stay on the forefront of high-performance computing technologies..
In Q1, the company incurred CapEx expenditures of $803,000.
These CapEx investments include a major expansion and remodeling of our corporate headquarters and our primary manufacturing facility in Escondido, the implementation of a new company-wide ERP system and investments in new hardware and software tools relating to high-bandwidth systems design.
We are also developing plans for cost containment as well as looking at debt and/or equity financing to ensure our liquidity will be sufficient to meet cash requirements or CapEx and operations for at least the next 12 months..
Now, to help put these results into perspective and discuss forward-looking guidance, I would like to turn the call back over to Steve.
Steve?.
Thanks, John. As I mentioned earlier, we are encouraged by several positive developments. First, our technology and architectural leadership with PCI Express Gen 4 and AI on the Fly are resonating in the marketplace.
A positive perception that comes from being a technology leader combined with effective marketing is creating many new customer opportunities..
Designers of state-of-the-art future products want to partner with technology leaders, and thus our strategies and messaging are helping to increase our sales opportunities..
We're also winning new OEM design-ins. These include significant wins for autonomous self-driving vehicles, mobile signal analysis systems, instrumentation and high-speed storage systems. We're also seeing an increase in our design win rate, closing a higher percentage of our opportunities..
Further, our major OEM customers are scaling up. This includes our media and entertainment customer for whom we recently introduced new state-of-the-art video display controllers. These products have been well received in the marketplace and are driving additional sales..
And finally, the broader segments of our business are also exceeding our expectations. In particular, our Bressner business was quite strong in Q1 and we're excited to see this strength continue..
Now turning to our guidance for the remainder of the year. Due to the revenue shift, we anticipate record revenue for Q2. And although, the first half revenue is expected to be below our previous internal expectations, we believe that the full year will remain within the guidance range previously issued..
The company reiterates its outlook for the full year 2019. Revenue is anticipated to be between $54 million and $58 million, representing overall growth of 51% to 54% and organic growth of 12% to 18%..
The company expects revenue for Q2 to be in the range of $13.8 million to $15 million, representing growth of 134% to 155%, with organic growth of 54% to 68% as compared to the same year ago quarter..
At the midpoint of the guidance, the revenue is expected to be approximately $9.6 million organically, with Bressner contributing $3.8 million and CDI adding $1 million..
As we've seen this quarter, quarterly revenue may fluctuate plus or minus 15% from the company's guidance in any given quarter due to variations in delivery schedules and/or seasonal fluctuations..
So in summary, this quarter's results were significantly affected by delays in shipping 2 key orders. The larger of these orders has already been shipped and the other order will be shipping later this month..
At a more strategic level, we're encouraged that we've positioned the company ahead of the emerging trends. We believe this will continue to move customers in our direction, thus continuing to drive our corporate growth..
At this point, we'll open the call to your questions. .
[Operator Instructions] And we'll take our first question from Joe Gomes with NOBLE Capital. .
I was wondering if we might give it a little more color, detail, you talked about an increase in design win rate. Historically, you said about, I think, 30% or about 1/3.
And you talked about some -- many new customer opportunities, so you can provide some more color with that, along with when you talked about some of the major million-dollar design wins. And you had talked, I think, last quarter, you had about 20 of them out there.
Where do we stand on that base today?.
Yes. Of the 20 that we've been talking about, these are design wins that are all above $1 million potential per year run rate. So they are all fairly large. Of those 20, we've closed about half a dozen in the first quarter and did not lose a single one.
So the other 14-or-so are still pending and we think we're in good shape to win, perhaps, many of those if not all of them. So that is why we're saying that our design win rate seems to have gone up, whereas, historically, we win about 30% of all of our large opportunities.
At least, recently, knock on wood, it will continue, we seem to be winning a very much higher percentage than that. .
And the half a dozen that you won in the quarter, are they already in this year's guidance? Or does there -- you see -- some of this maybe that was not in guidance that might help overcome the shift in revenues towards the back half?.
Yes. We're very encouraged as these wins begin to ramp-up. It does tend to be a fairly long cycle in that most of the wins require custom-engineered products.
So we get some revenue for the design effort, the NRE charges, relatively small amount of revenue and then that ramps up once the products go into production, which is usually about a 6-month delay after the initial NRE purchase order.
So these wins in Q1, we could expect some of them to start ramping up in the Q3, Q4 time frame, which gives us a nice push at the end of this year and then into 2020. .
Great. And just on the cash. Obviously, the first quarter was a big use, you guys went out and some of the members of the Board stepped up to the plate here.
Can you just kind of walk us through how you see the cash burn for the rest of the year?.
So yes. We used a lot of cash in Q1 for the CapEx, the [ billing ] facility and the ERP in particular, but also the engineering tools. And those expenses are 2/3 complete, so there will be another $500,000 in CapEx for the rest of the year. It was just mostly in Q1 timing-wise.
We did as we got a little closer than we wanted to or a little lower than we wanted to on cash on hand, make the decision to do 2 things, one was put a commitment letter in place, including Board members; and then secondly, we also took out a $2 million line of credit over in Germany and those gave us confidence.
And then subsequent to the end of the quarter, we have drawn down $1.5 million here in the U.S. and taken on another term loan in Germany. So we've raised some funds so that as of today, I think we're at about $2.4 million in cash on hand and we're feeling more comfortable about that. .
Okay. And then you mentioned that you've got about $1 million of shipments in the quarter that exceeded your expectation.
Was any of that pulled from, let's say, the second or third quarter? Or was that just all new stuff that you were not expecting to come at all this year?.
It's a little bit clear, but I think it's probably fair that some of that we had previously assumed would have been in April or May. So some of that came out of Q2. Some of it, again, we're talking about the smaller customers now. Some of it we -- it just happened sooner than we expect, I think, is the short answer to that.
If the trend continues, that's obviously a very positive sign going into the later part of the year. .
[Operator Instructions] And we'll go next to Scott Searle with Roth Capital. .
Steve, just to follow up on some of the key customers. Raytheon sounds like some of the orders slipped out from the first quarter into the second quarter.
Can you talk a little bit about the year? What you're seeing for these guys, are they in the same realm as you thought earlier? Also, there have been some recent sockets and opportunities you've been working with them, both from a GPU accelerator standpoint and some storage arrays.
Could you give us your updated thoughts on that? And same thing for the Skys. Highly seasonal business last year, really ramped up over the summer time period.
Is that the same sort of cadence and flow of orders that you're looking for this year?.
So let me start with our large flash array customer. And yes, we see Raytheon purchases to be probably in the $6 million to $8 million in total for the year. The $2.6 million order that slipped from March to April was disappointing but it was really a matter of a couple of weeks, so we don't see that as any significant thing.
They had a purchasing issue that made it difficult for them to receive the products and they asked us to postpone that shipment. And although, we weren't particularly happy about that, we agreed to do what we say, do right by the customer in that case. We, on the other piece of Raytheon, which is the military's GPU systems.
We continue to work that and we believe we will be winning additional business. And as soon as this quarter, perhaps next quarter, we should be prepared to announce some new business on that. So it's looking very good at this point. .
And Steve, would that be 2020? Or is that a 2019 opportunity then from a revenue standpoint?.
There will definitely be revenue this year, 2019, however, it will be somewhat modest revenue.
And at first, as they're doing proof-of-concept and engineering-development contracts, it'll probably be then a full year of development before we're ready to deploy the airborne full MIL-SPEC version, which would then be, say, a 10-year run rate of production.
So there's some revenue but the big revenue is out in time until after we develop the custom product..
Regarding our large video display control company. I don't mean to be describing who they are. Regarding the Skys, their sales are going through the roof right now. They've launched several new products that we developed for them late last year. And they're getting very good reception throughout their general market.
They've also expanded through their software and this new hardware into what they call the virtual studio market space. And just had a major demonstration at the NAB Show in Las Vegas just about a month ago..
They've got great reception from that. And basically, what these video display control systems historically have done is put on large shows like concerts and Super Bowls and Winter Olympics.
This expansion allows them to participate in television studios and replace what used to be done with the green screen and also movie production sets, again, replacing what used to be done with the green screen with actual display, so that the actors or newscasters can visualize what they're pointing at.
It's a new way to do those things and the Skys and OSS are really leading the state-of-the-art in that new technology as it goes into those spaces. So that we believe will cause significant upswing in their business. Of course, with any new venture, the timing is yet to be determined.
But we believe there's significant upside to our revenue to the Skys in 2019. We think this could happen within the next -- the second half of this year, in particular. So we're very optimistic about that. .
Got you. And if I could shift over to John for a minute. Couple of questions on the gross margin front. Certainly, some mix issues this quarter as it related to Bressner, lack of some of the storage array shipping, which end up higher gross margins.
What is the outlook for the rest of the year? How should we be thinking about gross margins second through fourth quarter this year, given the anticipated mix of business that you're seeing within the funnel?.
So why don't I address that by business units. So our target for Bressner is 25% to 26% from a gross margin standpoint. The CDI business is going to be running 28% to 30%. And the OSS core business, we are projecting at 33% to 34%. .
Okay. Got you. And lastly, on the cash front, John. Obviously, this is a tough quarter from a cash burn perspective, but inventory levels seemed a little bit high, you get the top line coming back.
What is your expectation in terms of cash consumption over the course of this year?.
We actually are sitting at a high point from both accounts receivable and the inventory. Some of that was, first of all, the inventory increase was mainly attributable to our Bressner unit, which is required to purchase upfront inventory for a specific customer, which was about $1.5 million in the quarter.
So that took about $1 million, that was working capital..
In addition, as we've been expanding the business, we have more working capital tied up in our accounts receivable. We do anticipate that accounts receivable balance coming down over time hopefully by about June 30, which will free up some additional capital for us. And hopefully, finish the year more closer in the $3.5 million to $4 million range. .
Okay. And lastly, Steve, just if I could follow up in terms of AI on the Fly and PCI Express 4. Kind of the demand of the applications and how that pipeline's shaping up, sounds like you're excited about some of the opportunities.
But I was hoping you could give a little bit more color on some of the applications, some of the timelines, some of the size of these deals and sales cycles related to closing?.
Yes. When we talked about our $20 million-plus deals that we're working, probably 2/3 of them are related to either PCI Express or AI on the Fly. So even though those technologies are brand-new, that's what people want. With PCI Express Gen 4, we're really ahead of the general -- we're at a very high leadership position.
We have products now shipping whereas other companies are just now starting their development. So we're probably about 1.5 years to 2 years ahead of the marketplace, which is perfect for our business model in that other customers that want to use that technology go, well, who's got it, you know, not many people out there yet..
So the PCI Express we're quite a ways ahead of. Gen 4 will really hit the market, in general, in mid-2020 we expect, when Intel comes out with a new family of servers. Some people are moving in the development phase already. But as I said, it's really a 2020 thing so we're ahead of that game..
The AI on the Fly is really an overall architectural switch that is now starting to gain significant traction. The overall concept is that it's much better if you can do it to put the high-end compute power out in the field or out where the data is being collected.
So that you can do the artificial intelligence analysis where the data is being collected near the sensors or if you're in a car, in the car, as opposed to collecting data, storing it somehow, getting it back to a big data center and analyzing it for a month and then redeploying it back into the vehicle or something you want to use it.
That's the traditional way of doing it..
This AI on the Fly, or what some people are calling AI on the Edge, is really a new trend. When we looked at the NVIDIA Conference just a few months ago, it was a major trend that was being discussed at the conference so it's one of those hot topics right now.
They call it AI on the Edge, it means the same thing as what we use the term AI on the Fly to mean. So we're really excited about that. And again, if that is the hot topic and we're shipping products, it drives customers to us that -- assuming they want customized, specialized computers, we're a really good solution for them. .
[Operator Instructions] And it appears, there are no other questions at this time. I would like to turn the conference back to our speakers for any additional or closing remarks. .
So thank you, Gwen. And thank you, everyone, for joining us today. We look forward to talking to each of you in the future and reporting on our progress. Meanwhile, feel free to reach out to John or myself at any time. Thank you, everyone.
Operator?.
Thank you. Now before we conclude today's call, I would like to provide the company's safe harbor statement that includes important cautions regarding forward-looking statements made during today's call. One Stop Systems cautions you that statements in the presentation that are not a description of historical facts are forward-looking statements.
These statements are based on company's current beliefs and expectations. Such forward-looking statements include those regarding the company's expectations for 2019 revenue growth, generated by new products, design wins or M&A activity.
The inclusion of such forward-looking statements and others should not be regarded as a representation by OSS that any of its plans will be achieved.
Actual results may differ from those set forth in the presentation due to the risks and uncertainties inherent in our business, including without limitation, that the market for our products is developing and may not develop as we expect.
Our operating results may fluctuate significantly, which would make our future operating results difficult to predict and could cause operating results to fall below expectations or guidance.
Our ability to successfully integrate the operations, systems, technologies, products, offerings and personnel of acquired companies may prove difficult and adversely affect our financial results..
Our products are subject to competition, including competition from the customers to whom we sell and competitive pressure from new and existing companies may harm our business sales, growth rates and market share.
Our future success depends on our abilities to develop and successfully introduce new and enhanced products that meet the needs of our customers. The likelihood of our design proposals becoming design wins is uncertain and revenue may never be realized.
Our products fulfill specialized needs and functions within the technology industry and such needs or functions may become unnecessary or the characteristics of such means and functions may shift in such a way as to cause our products to no longer fulfill such needs or functions..
New entrants into our market may harm our competitive position. We rely on the limited number of suppliers to support our manufactured design process, and if we cannot protect our proprietary design rights and intellectual property rights, our competitive position could be harmed or we could incur significant expenses to enforce our rights. .
Our international sales and operations subject us to additional risks that can adversely affect our operating results and financial condition and we sell the remedy material weakness in our internal controls or financial reporting.
We may not be able to accurately report our financial results and other risks described in our prior press releases and in our filings with the Securities and Exchange Commission, SEC, including under the heading Risk Factors in our annual report on Form 10-K and any subsequent filings with the SEC..
You are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of the conference call, and we undertake no obligation to revise or update this information to reflect events or circumstances after this date hereof..
All forward-looking statements are qualified in their entirety by this cautionary statement, which is made under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. .
Before we end today's conference, I would like to remind everyone that this call will be available for replay starting later this evening through May 23..
Please refer to today's press release for the dial-in replay instructions available via the company's website at ir.onestopsystems.com..
Thank you for joining us today. This concludes today's conference. You may now disconnect..