One Stop Systems: Fiscal 1Q23 Financial Results

One Stop Systems, Inc. (OSS) reported results for the first quarter ended March 31, 2023.

1FQ23 financial highlights

• Revenue totaled $16.8 million.
• Gross profit flat at $5.1 million.
• Gross margin increased 10 basis points and sequentially by 290 basis points to 30.2%, attributable to a greater mix of AI transportable products.
• Net loss on a GAAP basis was $401,000 or $(0.02) per share, as compared to net income of $579,000 or $0.03 per share.
• Adjusted EBITDA, a non-GAAP term, totaled $529,000, as compared to $1.4 million.
• Cash, cash equivalents and short-term investments totaled $12.7 million on March 31, 2023.

1FQ23 operational highlights

• Seven new major program wins, including three wins in AI Transportables. The company expects these seven wins to yield approximately $5 million in revenues this year.
• Received a $3 million order from a prime military contractor to upgrade a radar simulation system operated by the US Department of Defense Missile Defense Agency.
• Won a $1.3 million contract from the US Army for the design, development and prototypes for a vehicle mounted 360-degree situational awareness system using OSS PCIe Gen 4 switched fabric technology and NVIDIA Jetson AGX Orin system-on-modules.
• Low margin media revenue decreased $3 million, replaced by AI Transportable revenue.
• Announced pending changes to leadership and implemented internal organizational changes to better align the company with its AI Transportable strategy and growing military business.

Management Commentary
“In the first quarter, our consolidated revenue totaled $16.8 million, slightly above our guidance of $16.6 million,” commented OSS president and CEO. “Excluding our legacy lower-margin media business, revenue increased 21.8% for the quarter compared to the same period last year.

“OSS classic revenue, excluding the lower-margin media business, increased 17.3% for the quarter compared to the same period a year ago. OSS Europe also had strong revenue growth, increasing 26.0%, which includes $1.2 million in OSS core product sales as we engage with more industrial and military AI Transportable European customers. In contrast, we sold approximately $180,000 of OSS core products in Europe in 1FQ22.

“Our overall gross margin was 30.2% in 1FQ23, up from 27.3% in 4FQ22 and a slight increase from 1FQ22, driven by increased sales of OSS core products in the US and Europe, as well as a planned reduction of low-margin sales to our legacy media customer.

“In February we announced the execution of a $1.3 million contract directly with the US Army for the design, development, and prototypes for a rugged 360° visualization compute system for land vehicles, including the Stryker, Bradley, and Abrams. We expect to start realizing revenue from this contract in 2FQ23. This program represents a significant revenue opportunity, while also potentially opening other applications within the Army.

“We are also engaged with several Air Force opportunities, both directly and through top ten prime contractors. Early proof points include the $3.5 million US Air Force program win we announced yesterday. We also recently learned that one of our prime contractor partners won a program that includes our flagship compact HPC, Rigel Edge HPC. We expect to announce more about this opportunity and ship product later this year. In both cases, these were new prime contractors for OSS that further diversified our customer base.

“In addition to other defense-related opportunities throughout the DOD in the US and for Europe military applications, we have continued to advance in multiple industrial markets, including autonomous trucks and agriculture. Our pipeline of prospective major programs at the end of 2FQ23 totaled 34, with 18 involving AI transportable applications in the US, AsiaPac, and Europe.

“Looking ahead, we are anticipating growth across several industrial verticals, including autonomous trucks, cellular carrier trucks, and agricultural equipment. We also expect growth from multiple segments within the military as we establish additional application proof-points. The Army, Navy, Marine Corps, and Air Force are all deploying autonomous and AI capabilities, which is creating new opportunities and stronger tailwinds for OSS.

“As with many companies, we identify opportunities and maintain a pipeline database. In our case, we include wins, pending wins, opportunities, and targets, many of which we project will generate revenue. The current total identifiable value of these opportunities for 2024 through 2026 is approximately $850 million and growing.

“After we apply weighted and judged probabilities to these opportunities, the outcome supports solid growth projections for 2024 and beyond, with estimated growth rates in the range of 20% to 30%. These opportunities represent a combination of industrial and military applications, with the%age of military applications growing each year.

“As communicated on our last call, 2023 is a transitional year for OSS on many fronts, ranging from reducing low margin business, increasing high margin AI Transportable business, bringing down inventory levels, delivering more military proof-points and the addition of new talent.

“We are projecting growth from our industrial portion of the business, including autonomous trucks, cellular carrier trucks, agricultural equipment, as well as multiple segments within the military. Our 2023 objective remains the same: to offset the reduction of our lower-margin media business with AI Transportable growth and move back into an overall growth mode in 2024.”

Outlook
For 2FQ23, OSS expects revenue of approximately $17.5 million.

1FQ23 financial summary

• Consolidated revenue in Q1 declined $271,000 to $16.8 million. This includes an expected $3 million reduction in revenue from the company’s low margin media customer, which was mostly offset by 21.8% growth in sales to other customers.
• The company defines OSS Classic as all shipments from US operations delivered throughout the world. Similarly, OSS Europe is defined as all shipments originating from Europe operations. OSS Core Products are designed in the US and sold through both operations and tend to yield higher margins.
• OSS Classic revenue decreased 18.4% to $8.6 million for 1FQ23, representing 51% of total revenue. Excluding the lower-margin media customer revenue, OSS Classic revenue increased 17.2%. Revenue from OSS Europe increased 26% to $8.2 million, including an incremental $1 million of higher-margin OSS core products. OSS Europe represented 49% of total quarterly revenue.
• Overall gross profit in 1FQ23 was $5.1 million. Gross margins increased 10 basis points and sequentially by 290 basis points to 30.2%, which was due to a greater mix of AI transportable products.
• The gross margin for the company’s OSS Classic business increased 60 basis points to 36.3%, which was also attributable to the greater mix of AI transportable products. OSS Europe’s gross margin percentage improved 280 basis points to 23.8% as compared to 21.0%, due to more OSS core products sold in European markets.
• Overall quarterly operating expenses increased 17.3% to $5.3 million, with operating expenses as a percentage of revenue increasing to 31.4% compared to 26.3%. The increase was primarily due to increases of $510,000 in general and administrative expenses, with $249,000 attributable to CEO transition costs. Marketing and selling expenses increased $315,000, with approximately $100,000 attributable to severance costs associated with the recent realignment of sales resources designed to support the company’s AI Transportable strategy. The increase in operating expenses was partially offset by a decrease of $49,000 in R&D expense.
• Loss from operations was $196,000 compared to income from operations of $650,000 in 1FQ22. This difference was predominantly attributable to higher operating expenses.
• Net loss on a GAAP basis was $401,000 or $(0.02) per share, as compared to net income of $579,000 or $0.03 per share.
• On a non-GAAP basis, the net income was $90,000 or $0.00 per share, down from non-GAAP net income of $978,000 or $0.05 per share.
• Adjusted EBITDA, a non-GAAP metric, was $530,000 or 3.2% of quarterly revenue, a decrease from $1.4 million.
• As of March 31, 2023, cash and cash equivalents totaled $3.5 million with short-term investments of $9.2 million for a combined total of $12.7 million. This represents a decrease of $547,000 compared to cash, cash equivalents and short-term investments as of December 31, 2022.

Earnings call transcript