One Stop Systems, Inc. (OSS) Q3 2025 Earnings Call Transcript

Good day and welcome to the One Stop Systems, Inc. 3rd quarter 2025 earnings conference call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. 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, the company's multi-year 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 for these statements. Also, please be advised that the 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, 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's President and CEO, Mr. Mike Knowles. Please go ahead, sir.

With significant consolidated revenue growth, higher gross margin, and positive EBITDA net income, our third quarter and year-to-date performance underscored the solid foundation we have built as we capitalized on increasing demand from both defense and commercial customers for our rugged enterprise-class compute solutions. Since implementing several strategic actions in 2023 and 2024 to reposition OSS for growth, we have seen continual improvements in our financial and operating results. These actions included strengthening our leadership team of proven defense industry executives, launching a multi-year strategic plan, rebuilding our go-to-market approach, expanding our sales pipeline, and driving higher growth. We experienced positive bookings momentum over the past 12 months, translating into increased sales and positive operating leverage. I'm extremely proud of what our teams have accomplished and believe we're well-positioned for continued growth and strong profitability in the remainder of 2025 and into 2026. Digital growth opportunities that leverage our high-performance edge computing, 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. On a 12-month basis, our OSS segment had a book-to-fill ratio of 1.4. After a historic level of bookings in the second quarter, third quarter trends reflected expected quarter-to-quarter variability. Our growing pipeline and customer engagement activities remain strong across both defense and commercial markets. Our second quarter performance also reflects our continued focus on fulfilling recent awards, investing in next-generation product development and advancing new program opportunities that are expected to contribute to positive bookings growth in 2026. We are tracking ahead of our plan and product-developed milestones, which gives us confidence in our long-term growth. In the third quarter, we continue to support and increase our exposure on the P-8 Poseidon Reconnaissance Aircraft. To date, we have recognized lifetime contracted revenue over $50 million on the P-8 platform. In addition, we had previously announced a five-year sole-source supply agreement and a five-year extension support, which involves equipping the PA aircraft and ground-based stations with high-capacity flash storage systems, spare flash storage canisters, and related support services. We expect continued orders from both the U.S. Navy and our Defense Prime customer into 2026. In relationship with the leading medical imaging OEM, underscoring the growing relevance of our compute and storage solutions in healthcare. We believe there are opportunities to expand our presence with this customer beyond the current five-year expected program value of over $20,000. Looking highlights include the September announcement of an initial $500,000 contract with Saffron Federal Systems, with additional orders expected totaling over $3 million. While smaller in size, this award establishes a new relationship with one of the world's leading high-technology defense contractors, and we see meaningful opportunity to expand this partnership over time. In October, we announced an initial $1.5 million order from a Canadian-based integrator of passenger cabin systems for the commercial aerospace industry. We expect this platform to contribute approximately $6 million in total revenue over the next three years. This award highlights the growing demand for high-performance compute in the commercial aerospace sector, an increasingly important component of our commercial market. As our pipeline demand remains strong, supported by growing interest for our enterprise-class compute solutions. While the ongoing government shutdown may impact the timing of near-term bookings, we view this as a timing issue, not a demand issue, since OSS remains the sole source provider on affected platforms. As a result, we expect defense-related bookings to improve as conditions normalize, though timing may remain uncertain. We also continue to see signs of stabilization in our European markets that are served by our Bresner operating unit. Recent bookings and revenue within our Bresner segment have been in line with our targets and Bresner remains on track to achieve higher sales and profitability for 2025, and we're deeply positioned to capitalize on multi-year 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 increased R&D investments in 2025 to capitalize on emerging opportunities we see developing within our markets. Wattage high-density expansion products such as Ponto are currently under evaluation with several potential commercial customers as we focus on delivering high-density, high-wattage GPU and AI accelerator solutions that address the growing need for performance-intensive compute and data-rich environments. We're also encouraged by recent traction in commercial aerospace, highlighted by our recent award, which underscores how OSS technology is extending into new regulated markets where reliability and compute performance. Looking ahead, we expect to further broaden our commercial product lineup with the planned launch of two new Gen 6 systems in November, designed to bring even greater processing capability and efficiency to our customers. Together, these initiatives demonstrate how we are executing on our strategy to leverage our rugged enterprise-class engineering heritage into fast-growing commercial segments driven by AI and data-centric workloads. We continue to execute against a growing pipeline in both commercial and defense markets. We recently attended the Association of the U.S. Army, or AUSA, conference in Washington, D.C., and introduced a newly developed portfolio of products that leverage the advanced compute and low-latency advantages of commercial data centers. In addition, we showcased our wide array of scalable AIML sensor fusion and autonomy compute solutions delivering leading compute and latency capability and advantaged size, weight, power, and cost. These solutions generated strong interest and multiple new engagements across ARMY and OEM programs. We recently attended the NVIDIA GTC conference in Washington, D.C., where we highlighted OSS's expanding capabilities in high-performance GPU and AI accelerator expansion. at GTC reinforced OSS's growing presence within the AI compute ecosystem, where our technology complements leading platforms from NVIDIA, Broadcom, and AsteroLabs. The conference provided valuable engagement with commercial and government customers exploring next-generation architectures for AI, machine learning, and data analytics at the edge, and further validated the role OSS can play in enabling high-bandwidth, low-latency compute. Relationships we're developing through these engagements are creating meaningful opportunities to expand our role on next generation. For example, our delivery of a rugged compute solution for combat vehicles for the US Army remains under test and evaluation, which is expected to continue for the remainder of the year. We are encouraged by the growing number of multi-year platforms we now support, adding to our portfolio that includes the likes of the P-8 for the US Navy, the medical imaging platform, and the autonomous maritime program for leading defense prime in Asia. Pursuing these types of recurring programmatic opportunities remain central to our long-term strategy. To accelerate our growth initiatives, we strengthen our balance sheet after quarter end through a registered direct offering, raising approximately $12.5 million in gross proceeds. This enhanced financial position, combined with improving fundamentals, provides the flexibility to fund operations, pursue strategic opportunity, and capitalize on expanding global. Our solid execution and year-to-date performance give us the confidence to raise our full-year 2025 consolidated revenue guidance range from 59 million dollars to 61 million dollars to 63 million dollars to 65 million dollars while reaffirming our expectation to achieve positive annual evita i'm pleased with how 2025 is shaping up our turnaround strategies are progressing faster than expected reflecting strong demand and operational execution as we look ahead we remain focused on accelerating growth expanding profitability and creating long-term value for our shareholders. I want to thank our entire team for their dedication, innovation, and relentless focus on delivering results for our customers. I'd like to now turn the call over to Dan.

Good morning to everyone on today's call. Our Q3 results reflect a number of important financial milestones. Robust top-line growth, increasing revenue year-over-year by 36.9% at a consolidated level and by 43.4% for the OSS sector. Strong demand for our product. These results were supported. After the quarter closed, we also strengthened our balance sheet by securing $12.5 million of gross proceeds through a registered direct offering of common stock. This offering strengthens our balance sheet, provides flexibility around working capital to support and positions us to pursue a disciplined M&A strategy. In the backlog of orders, we are on track to achieve our increased full-year guidance and $14.1 million year-over-year increased gross margin has benefited from both operational efficiency and a favorable product mix. We continue to expect some level of variability in gross margins quarter to quarter based on absorption, product mix, and staining basis we continue to target OSS segment margins in the fourth quarter of 2025 we anticipate OSS segment margins. The company's brezzler segment had gross margin percentage of 26% in the third quarter. The 400 basis point increase from the same period last year was primarily due to a more profitable mix of products shift in the quarter. Total third quarter operating expenses increased 22% to $6.1 million. This increase was predominantly attributable to higher R&D expenditures, reflecting targeted investment in new product development. For the third quarter, the company reported gap net income of $0.3 million, or $0.01 per diluted share, compared to a net loss of $6.8 million in the prior year quarter. The company reported non-GAAP net income of $0.7 million, or $0.03 per share, compared to a non-GAAP net loss of $6.4 million, or $0.30 per share, in the prior year quarter. We balance outstanding on our term loans of $1.2. Offering with participation from before deducting cash from operating activities, compared to operating cash flow of $2.1 million for the nine-month ended September 30, 2024. The change from prior year period was primarily due to the timing of working capital, particularly receivables associated with our revenue ramp, partially offset by full-year financial guidance due to stronger-than-expected bookings over the trailing 12 months, $63 million to $60 million for the full year 2025, compared to prior guidance of $59 million to $60 million. We remain 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 can provide sustained multi- Ladies and gentlemen, we will now begin the question and answer session.

Should you have a question, please press the star followed by the number 1 on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question is from Brian Kinslinger from Alliance Global Partners. Please go ahead.

Great. Thanks so much, and solid results. As we think about the uptick of revenue in the second half of the year, how should investors think about the seasonality going forward for core OSS in light of the strong bookings execution, but also as we think about the government shutdown.

Talk a little bit more about the government shutdown. So in general, we've seen this consistent pattern where we tend to see higher revenues in the second half of the year, just based on timing of bookings, you know, as the government goes into a slowdown in bookings, and so just the timing of that tends to drive second quarter revenue. We'd expect that to continue as we go into 2026, probably, you know, a somewhat moderated ramp compared to what we saw in 2025, but still somewhat.

If we close out the year, we'll expect it to be starting next year. We think while we had a fairly decent-sized ramp this year, as Brian mentioned, or as Dan mentioned, we'll soften that. government shutdown here. As we may have noted prior, further support that and or build into main bookings that are affected for us by the government shutdown are anticipated sole source awards. So we won't be losing opportunity. We'll just, we'll be affected.

And then maybe you can update us on the data center market opportunity and the advancement you're making. I mean, that market has seen unprecedented demand in the last few months.

And then maybe also at a high level touch on the situational awareness technology procurement evaluation by the army i don't know if that's been able to progress given the government shutdown but that was something obviously of importance to the company yeah great brian thanks uh yeah on the data center side uh remarks here you know we launched ponto uh for you um gpu expansion solution and so um that product's under evaluation by a couple customers, specifically in these kind of data center markets where we've got product in that market, we've got outreach, we've got interest, we have people testing. So we'll look through the end of this year and into the first half of next year to likely and hopefully see that transition into awards and backlog. And then as we noted in this call, we'll be augmenting that with bringing forward some of the new PCI Gen 6 and launching into those. We'll be well. On the Army, situation continues on tracking well. The Army has also seen how they could use our distributed prosecute coming into our position and the technology across those. So we'll look for hopefully more news on that in the coming year and where that could progress to.

Great. I got some more questions, but I'll get back in the queue and ask some more after. All right. Thank you, Brian.

Thanks, Brian.

Your next question is from Eric Martinuzzi from Lake Street. Please go ahead.

Yeah, it was good to see the EOSS segment come back so strong there. There was a terrific recovery. Obviously that was something that you guys have been or investors have been patiently waiting for. But actually I wanted to ask about Bresner. That was outperformance at least versus what I was estimating for the third quarter. Can you tell us what was behind that and then if were there any, you know, pull forwards out of Q4 or maybe point us in a direction for where we expect the final quarter of the year for Bresner?

They're in their industrial end markets and, you know, expect continued strength as we go through the year. A million, about 600k of that was due to FX, strength in their end markets and some of the larger products or projects that they've been executing on. And so we continue to see Bresner performing well.

I mean, as in fully recovered in Germany, Brezner's been able to for the year, and they've seen some pockets of people.

Well, let me just sequentially then, is your expectation that we're in line to better with the final quarter of the year?

Yeah, I would model, so there's a few shipments in Brezner that are going to be right on the cusp between this year and next year. So where those fall will kind of impact Q4. But I would model Q4 as being basically flat to Q2.

Okay. And then you talked about the registered direct offering that closed on October 1st and the $12.5 million of gross cash raised. Just curious to know how are we, at least here in the near term, how are we deploying the cash? Are you sitting on it? Are you investing in an inventory, sales channel investments? What can you tell us?

Yeah, absolutely. So the cash rates did a couple of things for us. One, it supported our working capital ramp as we're going through this growth phase. So you can see that in our results this quarter, particularly in AR. So we have, I think, good visibility towards collecting that AR this year. I expect that as we go into Q4, we'll see positive cash flow. We'll have a number of shipments that will be going out between the end of November and the beginning of December. So where those shipments fall within that range will somewhat impact where our cash flow is for Q4. But I do expect that it will be positive. And then in terms of the cash rate, so as we support the working capital ramp, we're using it for that. But then, you know, companies generating positive EBITDA will be generating positive cash flow. So then we look to redeploy that cash rate.

Thanks for taking my question.

The next question is from Scott Searle from Roth Capital. Please go ahead.

Hey, good morning. Thanks for taking my questions. Congrats on the quarter, guys. Hey, Mike, maybe just to get some clarifications on the government shutdown, I want to understand a little bit better about what's still operating and what isn't. It sounds like some larger sole source opportunities might just be delayed from a timing standpoint, But I'm just kind of wondering, you know, what you're able to do in concert with government entities at the current time. And I think given the backlog you've talked about in the past, you felt pretty good for the next six months or so. I'm wondering if that still holds and when the shutdown becomes a little bit more concerning for me as you start to look into 26.

Yeah, thanks, Mike. if the government is using a third-party services independent company and the government is set up to freeze we have planned for this quarter through defense primes and or directly to the end services, we will be able to ship and deliver those, and we should be able to. We'll have some backlog to start in the first half of next year. So if that number will be, well, we've got some runway to watch.

Great. That great clarification really helps to see that we got visibility then through the first half. Looking to the fourth quarter and the guidance, it really implies that the core OSS is either flat to up 2 million. So you're starting to get to new highs in terms of the business, which I guess brings sustained EBITDA profitability with it. So I guess as we're looking into 2026 now, is that sustainable? And are you thinking about the core OSS business now being even positive for the year, which is, you know, I think well ahead of prior expectations. Just want some clarification on the early thoughts there.

Yeah, I'll let Dan follow up on it too. But, yeah, in general, this opportunity to grow at 20. Bookings this year, the pipeline for next year, how we've been performing still gives us picks for the OSS segment in that range. Actually, we'd be accelerating our plans a little bit. But given where we are, how we're performing the opportunity, I think it would be our intent.

We're kind of at that nexus. ...that we've been targeting. Gross margins for the OSS segment, we continue to see it in that mid-30s to low to mid-40s range for the segment. OPEX, we modelization of R&D expense. And then Bresner segment, we model growth in the range of 5% a year and stable growth.

And lastly, if I could, Mike, just kind of looking at the opportunity pipeline, certainly been a lot of government and military opportunities. But commercial as well now, kind of given the slowdown with the current government infrastructure, are some more of those commercial opportunities kind of accelerating to the forefront? I think you referenced some, you know, in-flight entertainment opportunities and commercial aviation. But are there some bigger things that we should be thinking about in the 2026 timeframe on the commercial side?

Continue to advance the commercial side of us. We're probably a little thinking that hopefully we'll start to see that coming to fruition. tax engagements across a number of fronts, as we mentioned, not only around data centers, but around medical imaging and some of the work we were doing with commercial aerospace. So we're selling as the economy and the investment.

Thanks so much.

Thank you, Scott.

Ladies and gentlemen, as a reminder, should you have any questions, please press the star key followed by the number one.

We will pause a moment for further questions. questions. There are no further questions at this time.

Please proceed with closing remarks. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.