One Stop Systems (OSS) 8 Aug 24 2024 Q2 Earnings call transcript

In the second quarter of 2024, One Stop Systems (OSS) reported a significant shift in its business strategy, focusing on emerging opportunities within large and growing defense and commercial markets. The company's financial performance reflected this strategic move, with key highlights including positive segment orders, sequential revenue growth, and a 8.3% increase in OSS segment revenue, excluding revenue from a former media customer.

Strategic Focus on Defense and Commercial Markets

OSS's President and CEO, Mike Knowles, emphasized the company's progress in transitioning its business, citing a favorable market landscape and a healthy pipeline as catalysts for growth. The company's recent achievements include outpacing quarterly revenue in 3 of the last 4 quarters and expanding customer development revenue. These trends position OSS for continued sequential revenue growth, especially in light of the increasing demand for AI, machine learning, and edge computing solutions across defense and commercial markets.

Growing Pipeline and Customer-Funded Development

One of OSS's key objectives is to convert its pipeline into orders, particularly in the OSS segment. The company reported over $1 billion in unfactored pipeline at the end of the second quarter, with approximately 70% comprised of platform opportunities. This growth reflects the success of OSS's sales organization and strategic investments in product development. In the second quarter alone, OSS saw orders outpace revenue by over 20%, driven by existing customers in the ground, intelligence, surveillance, and reconnaissance (ISR) market and the commercial aerospace market. New customer awards in the air ISR market also contributed to this positive trend, signaling potential for future multiyear revenue opportunities.

Customer-Funded Development Programs

Another strategic focus for OSS is customer-funded development programs, which are expected to establish the company as an incumbent on future production contracts. This approach aligns with market trends towards more integrated solutions and multiyear contracts, positioning OSS to benefit from a higher mix of annual recurring revenue and contracted multiyear backlogs. Customer-funded development revenue increased to $1.4 million in the second quarter, driven by an expansion of an existing relationship with a commercial aerospace customer. OSS anticipates continued growth in this area, with multiple proposals currently under consideration.

Market Outlook and Financial Performance

OSS's financial results for the second quarter reflected the company's strategic investments and market expansion efforts. Consolidated revenue for the quarter was $13.2 million, with a GAAP net loss of $2.3 million or $0.11 per share. While the company's revenue declined year-over-year, the decline was primarily attributed to a reduction in revenue related to a former media customer and slower economic activity in Europe. However, OSS reported an increase in OSS segment revenue, reflecting the success of its strategic initiatives.

Looking Ahead

Looking ahead, OSS anticipates consolidated revenue of approximately $13.3 million in the third quarter of 2024, with expected OSS segment revenue of $6.3 million, representing a 15% year-on-year growth. The company remains optimistic about its long-term growth prospects, despite economic uncertainties and challenges in Europe. OSS's strategic focus on defense and commercial markets, coupled with its growing pipeline and customer-funded development programs, positions the company well for sustainable revenue growth and profitability in the future.