One Stop Systems, Inc. Q2 FY2025 Earnings Call

Good day, and welcome to the One Stop Systems Second Quarter 2025 Conference Call and Webcast. As a reminder, this call is being recorded. As part of the discussion today, the representatives from OSS will be making certain forward-looking statements regarding the company's future financial and operating results, including those relating to revenue growth as well as business plans, bookings and the company's multiyear strategy, business objectives and expectations. These statements are based on the company's current beliefs and expectations and should not be regarded as a representation by OSS that any of its plans or expectations will be achieved. Please be advised that these forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and that OSS desires to avail itself of the protections of the safe harbor of these statements. Please also be advised that actual results could differ materially from those stated or implied by the forward-looking statements due to certain 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, current reports on Form 8-K and recent press releases. Please read these reports and other future filings that OSS will make with the SEC. OSS disclaims any duty to update or revise its forward-looking statements, except as required by applicable law. It is now my pleasure to turn the conference over to OSS President and CEO, Mike Knowles. Please go ahead, sir.

Thank you, Aaron. Good morning, everyone, and thank you for joining today's call. I'm pleased to report another quarter of progress, highlighted by year-over-year growth in both revenue and gross margin for the second quarter. Most notably, we ended the quarter with one of the highest levels of bookings in our history. This strong start to 2025 underscores the solid foundation we have built as we capitalize on increasing demand from both defense and commercial customers for our rugged enterprise-class compute solutions. As a reminder, we implemented several strategic actions in 2023 and 2024 to reposition OSS for growth. These included strengthening our leadership team with proven defense industry executives, launching a multiyear strategic plan rebuilding our go-to-market approach, expanding our sales pipeline and driving higher gross margins. I'm proud of what our teams have accomplished across each of these initiatives and believe we're well positioned for strong growth and improved profitability in the second half of 2025 and beyond. We continue to pursue strategic growth opportunities that leverage our high-performance edge compute solutions to meet the growing demands of AI, machine learning, autonomy and sensor fusion at the edge. Our pipeline is expanding across leading defense organizations and advanced commercial enterprises that seek trusted, proven partners like OSS. As I outlined last quarter, our sales strategy centers on three priorities. First, we are pursuing development work with prime platform vendors to design OSS into key platforms and become the incumbent supplier. We believe this will result in positioning OSS as the best value and provider of choice going forward. Next, we are focused on expanding the number of OSS systems that are integrated into existing platforms and customer systems. Finally, we are leveraging our integrated compute and storage architecture to deliver higher-value turnkey solutions. Balancing the success of these priorities, our OSS segment has generated one of the highest levels of bookings in our history over the first half of the year, totaling $25.4 million and representing a book-to-bill ratio of 2.3. In Q1, we secured a record $6.5 million contract from a leading defense and technology company for 80 high-performance servers and field programmable gate array systems, engineered for mobile tactical military environments. This win represents the first large-scale success from our strategy aimed at our goal of establishing OSS as an incumbent supplier on next-generation defense platform. We also received a third order from a major defense contractor in Asia for an autonomous maritime application. The latest $340,000 order follows a $200,000 award in December 2024 and signals a transition from system development to production deployment. Based on current forecast and the expected expansion of our customer's product line production, we expect approximately $4 million in cumulative sales between 2026 and 2029. In Q2, we received new awards from the U.S. Navy and a leading prime defense contractor to support the P-8A Poseidon reconnaissance aircraft. These awards for $5 million and $3.9 million, respectively, showcase our intent to become the compute and storage provider of choice for next-generation AI-driven applications at the edge, as well as our platform-focused growth strategy. To date, we have recognized lifetime contracted revenue of over $50 million on the P-8 platform. In addition, we have previously announced a 5-year sole-source supplier agreement and a 5-year extension for support, which involves equipping the P-8 aircraft and ground base stations with high-capacity flash storage systems, fare flash storage canisters and related support services. We also received a $2 million production order from a leading medical imaging OEM, underscoring the growing relevance of our compute and storage solutions in healthcare. We believe the total value of this program will represent over $25 million of revenue over the next five years. Across our pipeline, demand remains strong, supported by growing interest for our enterprise-class compute solutions, and we anticipate further commercial and defense announcements in the coming months. In addition, we are seeing signs of stabilization in our European markets that are served by our Bressner operating unit. Recent bookings and revenue within our Bressner segment have been in line with our targets, and Bressner remains on track to achieve higher sales and profitability for 2025 as compared to last year's results. Looking ahead, we believe OSS is uniquely positioned to capitalize on multiyear growth opportunities driven by accelerating adoption of artificial intelligence, machine learning, autonomy and sensor fusion at the edge. As these requirements become increasingly central to defense and commercial innovation, customers are turning to trusted partners like OSS with proven expertise in rugged enterprise-class compute solutions. In support of this, we've increased R&D investments in 2025 to capitalize on emerging opportunities we see developing within our markets. In July, we announced Ponto, the world's first PCIe Gen 5 GPU expansion platform purpose-built for commercial data centers. This product was designed to address the growing composable infrastructure market, a market expected to grow from $5.87 billion in 2024 to $28.44 billion by 2031, according to verified market research. This launch is aligned with our commercial strategy to deliver standard products in addition to customized solutions and marks pivotal steps in OSS' evolution toward leading the transformation of composable infrastructure and enterprise-scale AI compute while also generating new commercial opportunities. Ponto is engineered to bring high-density enterprise-class compute optimized for composable infrastructure environments. It enables dynamic resource pooling and real-time orchestration of compute, storage and networking to efficiently scale workloads up or down based on application demand. Ponto is ideally suited for space-constrained deployments such as remote data centers, corporate campuses, hospitals and research-intensive universities where performance, density and operational flexibility are critical. We're excited about the long-term commercial opportunity this product and platform represents. We're actively engaged with potential customers about deploying our new data center solution, which we expect will begin contributing to revenue in 2026. Beyond the potential of our Ponto product, we are executing against a growing pipeline in both commercial and defense markets. Our delivery of a rugged compute solution for combat vehicles for the U.S. Army remains under test and evaluation, which is expected to continue for the remainder of the year. We continue to transform the business, and I'm encouraged by the growing number of multiyear platforms we are now supporting, as demonstrated by the continued growth on the P-8 for the U.S. Navy and recently announced ongoing production orders for a medical imaging device company and the autonomous maritime product for a leading defense prime in Asia. Pursuing these types of platform opportunities is an important component of our strategy. We believe that our bookings growth to date in 2025 points to sustained demand for our products. We are receiving a more diverse mix of larger orders that are extending over multiple periods compared to order trends in prior years. These higher-quality orders further support our strategy to build more predictable revenue streams, and we are building backlog for 2026 as our business scales to meet rising market demand. Consistent with our expectation for stronger second half performance in 2025, we expect OSS segment revenue of approximately $19 million in the second half of the year compared to $11 million in the first half of this year. At this level of second half revenue, we would expect positive EBITDA in our OSS segment in the second half of 2025. As a result, we expect full year revenue within our OSS segment of approximately $30 million, representing over 20% year-over-year growth. On a consolidated basis, we continue to expect revenue of $59 million to $61 million for the full year of 2025, based on current bookings, orders and market conditions. In addition, we expect EBITDA breakeven for the full year of 2025. I'm excited about the opportunities ahead and look forward to reporting on continued execution and success in the quarters to come. Finally, I want to thank our entire team for their dedication, innovation and relentless focus on delivering results for our customers and shareholders. So with this overview, I'd like to turn the call over to Dan.

Thank you, Mike, and good morning to everyone on today's call. In Q2, we achieved strong operating performance and continued to build momentum for sustained growth. We believe that OSS segment book-to-bill of 2.6 for the second quarter and 1.63 for the trailing 12 months demonstrates that our technology is resonating with customers and validates our strategic focus on securing platform position with differentiated edge computing technology. With record bookings in the first half of 2025, we are on track to achieve our full year guidance and to execute on our robust growth and profitability objectives for the second half. Now for a quick overview of Q2 2025 financial performance. For the second quarter, we reported consolidated revenue of $14.1 million compared to $13.2 million last year and $12.3 million for the 2025 first quarter. The 6.9% year-over-year increase in consolidated revenue was a result of approximately $239,000 of higher OSS segment revenue and $669,000 of higher Bressner segment revenue. Second quarter sales were in line with our expectations. And as Mike outlined in his prepared remarks, we continue to expect revenue and profitability to grow at a higher rate in the second half of 2025. Consolidated gross margin in the second quarter expanded 610 basis points to 31.3% compared to 25.2% in the prior year quarter. On a segment basis, gross margin for the company's OSS segment improved to 41.3% compared to 24.9% for the same period a year ago. The 16.4 percentage point increase was due to the nonrecurrence of an inventory charge recognized in last year's second quarter, as well as a more profitable mix of products shipped this year. Year-to-date, OSS segment gross margin has benefited from both operational efficiency and a favorable product mix. We do expect some level of variability in gross margins quarter-to-quarter based on absorption, product mix and program life cycle. On a sustained basis, we continue to target OSS segment margins in the mid-30s to low 40s. For full year 2025, we now expect OSS segment margins in the 40% range, up from our prior guidance of mid- to upper 30s. The company's Bressner segment had gross margin percentage of 24.3% in the second quarter. The 120 basis point decrease from the same period last year was primarily due to product mix. Total second quarter operating expenses increased 11.6% to $6.2 million. This increase was predominantly attributable to higher R&D expenditures, reflecting targeted investment in new product development. For the second quarter, the company reported a GAAP net loss of $2 million or $0.09 per share compared to a net loss of $2.3 million or $0.11 per share in the prior year quarter. The company reported a non-GAAP net loss of $1.5 million or $0.07 per share compared to a non-GAAP net loss of $1.8 million or $0.09 per share in the prior year quarter. Adjusted EBITDA, a non-GAAP metric, was a loss of $1 million compared to an adjusted EBITDA loss of $1.4 million in the prior year second quarter. Turning to the balance sheet. As of June 30, 2025, OSS had total cash and short-term investments of $9.5 million, no borrowings outstanding on our $2 million revolving line of credit, and a consolidated balance outstanding on our term loans of $1.2 million. For the 6 months ended June 30, 2025, OSS used $1.5 million in cash from operating activities compared to operating cash flow of $1.2 million for the 6 months ended June 30, 2024. The change from the prior year period was primarily due to the timing of working capital. As Mike mentioned, we believe we are on track to achieve our 2025 annual guidance, including over 20% year-over-year revenue growth for the OSS segment and EBITDA breakeven at a consolidated level. Our strong first half bookings give us valuable visibility into our second half ramp. As we move through the second half of the year, we are focused on disciplined execution, including managing our supply chain and achieving our planned production ramp. We also remain focused on continuing to drive growth by investing in our technology and securing new platform opportunities that will provide sustained multiyear revenue streams. I look forward to updating you on our success. This completes our prepared remarks. Operator, please open the call to questions.

And we can take our first question from Scott Searle with ROTH Capital.

Great job on building the backlog and providing that outlook into the second half of this year. And maybe, Mike, to dive in, in terms of the OSS outlook or core OSS outlook implies a pretty significant ramp-up on that front. The counterweight to that, I guess, is maintaining your existing 2025 guidance implies that there's some decline on the Bressner side of the equation. Wondering if anything is going on, on that front, specifically in Europe or otherwise? It sounded like things were getting better there? Or are you guys just being conservative? And then looking out to 2026, I know it's early, but you're building a nice pipeline and opportunity set. Does that mix in terms of OSS and Bressner continue off of the second half base?

Yes. Thank you, Scott, for your question. I'll let Dan give you a quick summary of how the Bressner line is coming in. But we've been happy with their performance compared to last year and the growth they're showing. We have seen market recovery in the economic outlook in Germany and Europe. But also if you've been watching the news, the increased interest in the defense market in Germany and Europe now has started to pose opportunities that would go into 2026 and beyond. So we'll be looking to hopefully take advantage of some of those. But I'll let Dan give you some color on the mix between OSS and Bressner.

Yes, Scott. What I'd add, so in our guidance, we've modeled Bressner second half roughly in line with the first half. Certainly, as we put our guidance together, we track a range of opportunities and risks, and the strong backlog, strong bookings in the first half of the year do give us a lot of opportunity to drive some upside. But we are remaining cautious in our outlook at this point, mostly because of the significant ramp that we have in the second half of the year and all the work that we have to do with our supply chain and with our production to make sure we're able to achieve that. So I think there's opportunities, but we are remaining cautious in our guidance.

Got you. And just in extrapolating the strength in core OSS of 20% growth, does that continue into 2026, given what you're seeing right now in terms of the early tea leaves of wins in the existing pipeline?

Yes. For OSS segment, the way our pipeline looks out for multiple years, we continue to believe there's opportunity for us to continue to grow OSS at that rate. So the ratio of revenue comparatively between OSS and Bressner will change as time goes forward because of the anticipated larger growth rates in OSS compared to the growth we'll see in Bressner. The growth rates expected for Bressner will be consistent with historical growth that we've seen in Bressner, and they’re back in line to forecast to achieve this year.

Great. Very helpful. And Mike, on the data center front, you've had some comments in the past this opportunity is starting to open up to you guys. I'm wondering if you could provide us with some quick thoughts and comments in terms of what you're seeing in that pipeline and what's going on from an AI partnership standpoint?

Yes, we are excited about these products. Recently, the data center markets have quickly shifted towards higher wattage GPUs and card sets. We have adjusted some of our product lines to take advantage of this trend, enabling us to provide high-density GPUs and cards with significantly higher wattage. This allows us to manage heat dissipation effectively. We've expedited the introduction of products like Ponto to support our customers and partners in this area. As I mentioned earlier, we are looking ahead to 2026 for these developments to progress, alongside our standard products designed for data centers, particularly in GPU expansion servers. We also anticipate the next generation of PCIe will be coming to the market, and we have products lined up for that as well. We are optimistic about seeing growth in the data center business as we move through the upcoming quarters and will keep you informed on our progress. And, Scott, could you remind me what the last part of your question was?

AI partnerships from the software vendors. I think you've been talking to various guys to help pull you through the channel.

Yes, exactly. So we continue those as a normal course of business. We continue to align with new and existing AR partners as they roll through that and align on either more fully integrated solutions for our customers and/or if our product sets can serve as the base of compute for AI companies. We continue to move through those. As we formalize more strategic relationships, we'll look to announce those.

Great. And lastly, if I could, Mike, you mentioned about higher watch GPUs, but there's some architectural shifts that are going into the data center as well in terms of inference processing or AI accelerators. Are you seeing design requests and activity on that front to potentially expand your product portfolio from GPU-centric architectures to something else? And Dan, just a quick clarification in terms of supply chain otherwise tariff impact. Any updated thoughts on that front in terms of limited component availability or pricing headwinds?

Yes, Scott, quickly on the data center market. We continue to watch those elements of technology around AI accelerators and others. Yes, we adjust and work on adjusting our product line and strategy as we go through as that market adopts. We have a number of core customers that we keep aligned with and where their product roadmap needs to go. Our Chief Product Officer and their team stay aligned for that. So I think you'll see us continue to make announcements about new products and product alignment as we continue through the quarters and well into next year.

Yes. And on the supply chain front, I'd just add, so certainly, with the higher production that we have in the second half of the year, we're ordering larger volumes from our suppliers. And so that is impacting lead times. We are seeing longer lead times for some of those components. We're working really closely with our supply chain, driving our suppliers to make sure we're able to mitigate those lead time risks. We think that all those risks are kind of captured in our guidance, but it's a key focus. Supply chain execution will be a key driver for our second half performance.

And we can take our next question from Eric Martinuzzi with Lake Street.

I wanted to clarify your comment on Bressner. You mentioned anticipating normal growth rates, but I'm having trouble understanding what that means. We saw an increase of 10% in 2023, followed by a decline of 6% in 2024. For 2025, I'm projecting a growth of about 2%. However, I thought you indicated it should grow at the overall IT rate, which I would estimate to be in the range of 5% to 9%. Could you help me understand what constitutes normalized growth for Bressner?

Yes. So for our guidance, we've guided consolidated revenue of $59 million to $61 million, $30 million for OSS segment. So that implies Bressner segment at about $30 million to $31 million for the year. As I said before, we track a range of risks and opportunities to that. Right now, that's probably biased towards opportunity. But particularly because of the supply chain lead times that we've seen on the OSS segment and the significant production ramp that we have, we've kind of taken the conservative position and held our guidance. But we are continuing to strive for opportunity.

But I'm asking more of a 2026 question, I guess, for what is...

Yes. So in general, our longer-term outlook as we look into '26, '27, we see the OSS segment growing at about 20% a year, 20%, 25%, and the Bressner segment, we model in the range of 7% to 9%.

Okay. That's what I was looking for. Mike, you've had a chance or I guess, maybe your customers have had a chance to digest the One Big Beautiful Bill Act on their business. And I'm just curious to know, since the passage on the 4th of July and today, what are you hearing about the potential impact to your pipeline in 2026, 2027?

Yes, Eric, we aren't seeing significant changes in the pipeline or the forecasts for 2026 and 2027. The defense markets we focus on are well aligned, particularly in areas like sensor processing fusion, AI, and autonomy, which continue to see strong investment. We are keeping an eye on the timing of bill releases for 2025 and 2026. This year, being under a full year continuing resolution led to delays in new program launches and existing funding. It seems that for 2026, the current process is on track for a bill, although we might start with a few short continuing resolutions. Our primary concern is the timing of these resolutions and new program releases rather than the potential scale or opportunities within the markets. In fact, we feel more optimistic about the overall pipeline and outlook since there has been a longstanding desire to move into more commercial applications, which has increased under the new administration. We have seen some early requests for information and thoughts on architecture, which we hope will lead to awards. Therefore, it’s the timing we focus on more than concerns about growth or changes in the pipeline or scope moving forward.

Got it. You mentioned the U.S. Army Combat vehicle opportunity that they're exploring with you. Do you have any idea about the size of this opportunity and the timing? I'm not very familiar with it. I understand it's a significant chance, but I'm uncertain whether it will require a 1- or 2-year sample set before moving into full production, even if you secure the contract. Please help clarify the size and timing of this opportunity.

We're in the very early stages on this. As we've mentioned in various investor presentations, we have identified opportunities in our pipeline that could be larger in scale than our usual projects, but there is still time to develop them, and we've aligned their potential accordingly. Currently, we are working with the Army, collaborating in research labs where they are sharing technology along with their testing and evaluations with the acquisition offices assessing these against their needs, requirements, and budgets. Based on their schedule, I expect that testing will continue for the rest of this year, which will help shape their definition of requirements and budget planning for 2026 and beyond. The pace, scale, and volume of these efforts will depend on demand and how they decide to allocate existing or new funds. Therefore, it's too early for me to determine the duration or scope of this opportunity. I believe we will have a clearer understanding in the coming quarters as testing progresses and requirements are defined on the acquisition side.

My last question is about the gross margin. I was pleased to see that the OSS segment is maintaining gross margins over 40%. Considering that we anticipate a faster growth rate in the OSS segment compared to Bressner in 2026, can we expect the gross margins for the business to increase in 2026 as well?

Yes. I think from a gross margin perspective, so we look at gross margin as really being driven by two things. One is absorption. As we get better volume, we get better absorption. The other is product mix and program life cycle. So from a product mix perspective, straightforward, we have some products that are higher margin, and some products that are lower margin. So we see some variability from quarter to quarter. From a program life cycle perspective, we typically see early in the program, you have customer-funded development that tends to be lower margin. You move maybe to some prototype builds. Those also tend to be lower margin. You don't have as much opportunity for learning curve and supply chain efficiencies. And then you get into low rate, full rate production, tech refresh and sustainment. And that's really where you see the expanding margin. So as we model '26, we kind of weigh all of those factors. I think that for the OSS segment overall, we continue to guide mid-30s to low to mid-40s. I think that will sustain through 2026, but there could be some variability from quarter to quarter on where in that range of mid-30s to low to mid-40s we land.

And we can go next to Brian Kinstlinger with Alliance Global Partners.

Sorry, I joined late if it's already been discussed. Several companies have been sharing that government short-term awards have been hurt by an uncertain government funding year, which I know you know and have discussed that. What was the mix of government to commercial bookings in the first half that's been so strong? And then in terms of your bid and proposal activity, how is it being impacted on the government side?

Yes. Thanks, Brian. On the bookings side, the percentage has been a little more weighted to defense over commercial as we've gone through the first half of the year. And part of that was driven by we saw a pickup in defense orders in the second half of the second quarter of this year. So look, we started to see the government start to pull out, and as they got closer to the end of their fiscal year to start aligning and moving budget and making awards. So we were encouraged by that movement through the year. And as we look forward, our way our company builds as we're aligning bid and proposals, we look into 2026 and beyond, the opportunity set that's in there, I think we're well aligned with the teams and the bid and proposal budgets we have set to capture the opportunities we're in. So I think we're still well aligned. As I mentioned earlier, for us, we continue to monitor the timing on how the government will be able to move its budgets down to awardable releases.

How do you approach bid and proposal? Is the aim to bid three times your revenue rate? Do you have a number in the pipeline that you believe is addressable through 2026? Any insights you can share on that would be appreciated, especially in comparison to where you were in 2024 and 2025.

Yes, Brian. I'll explain our process. We have a 5-year forecast that includes both factored and unfactored pipelines. Each year, we pursue opportunities in both categories. The factored pipeline represents the projects where we've achieved growth of 20% or more. We have many more factored opportunities in each quarter, which helps drive our revenue for that period as well as for the year. The likelihood of winning bids fluctuates from quarter to quarter based on the size of the programs and our chances of winning them. However, we have been successful at converting opportunities into wins. Most of the contracts we secure are sole source, meaning our offerings are unique compared to our competitors, who are usually incumbents or existing systems. When we do compete directly, we tend to win around 70% to 75% of the programs we bid on, resulting in a strong conversion rate from our pipeline into revenue. Our main concern remains the timing of when projects are funded and ready to start compared to when our customers identify them.

Just to make sure I understand what I heard because I thought it was a big takeaway there. Are you saying...

In the competitions that we bid that are competitions, we're winning 75% or more of those.

Wow, that's really insightful. My last question is to clarify whether proposal activity in the near-term pipeline is steady, rapidly increasing, or consistent. Could you discuss the trends you are observing in the near-term pipeline?

Yes. As the company has grown from the fourth quarter of 2024 into 2025, we have observed a consistent rise in our bids and proposals, reflected in the book-to-bill ratios. This includes initial requests for information and early interactions with customers regarding architectural ideas and concepts. We are experiencing a noticeable and steady increase in these requests from 2024 into 2025, which appears set to continue well into the second half of 2025. Consequently, we are generating more proposals stemming from these initial engagements and requests for information. Additionally, as our pipeline expands each year, the opportunities for bids are also increasing. Therefore, we are witnessing a steady rise in the number of proposals and requests for information from quarter to quarter.

Great. Congratulations on the progress over the last couple of years of turning the business around.

Thanks, Brian.

And this does conclude our question-and-answer session. I'd like to turn the program back over to our presenters for any closing remarks.

No closing remarks, Aaron. You can close the call.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.