One Stop Systems, Inc. (OSS) Q2 2026 Earnings Call Transcript

Good day and welcome to the One Stop Systems second quarter 2026 conference call and webcast. At this time all participants are in a listen-only mode. Later we 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 and expectations will be achieved. Please be advised that these forward-looking statements are covered under the safe harbor provisions of the Private Securities Legislation Reform Act of 1995 and that OSS desires to avail itself of the protections of the safe harbor for 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, Mr. Mike Knowles. Please go ahead, sir.

Thank you, Sylvie. Good morning, everyone, and thank you for joining today's call. It's the continued success of our multi-year strategic growth plan and growing demand for rugged enterprise class compute at the edge. In fact, our year-over-year growth rate in revenue for the second quarter accelerated from what we delivered in the first quarter, and we achieved the strongest quarterly bookings results in our history. Before discussing our second quarter performance in greater detail, I want to remind everyone that our second quarter results reflect the opportunistic sale of our wholly-owned subsidiary, Bresner, in December of 2025 for proceeds of $22.4 million. As a result, Bresner's historical financial results are now reported as discontinued operations, and the results we are discussing today reflect the performance of the remaining core OSS business. We entered 2026 as a more focused and scalable company, fully aligned around delivering market-leading enterprise-class compute solutions. We believe our performance during the first half of 2026 is already demonstrating the benefits of this transition and reinforcing the earnings potential of our go-forward strategy. Looking at our operational performance in the second corner, we delivered strong 2.3% year-over-year to $9.3 million, reflecting growth across both our defense and commercial businesses. Second quarter revenue growth was primarily driven by increased sales of liquid-cooled server products to a medical imaging OEM, supporting a breast cancer screening application. Products engineered for military applications aboard naval vessels and aircraft, and sales of compute products supported. Importantly, each of these programs began and with development, engineering, and qualification work performed over the past several years and has now advanced into larger-scale multi-year production and deployment orders. We are also seeing meaningful progress in expanding our customer base with multiple new customers contributing to revenue in Q2 2020. We believe the combination of an expanding customer base and a growing number of large multi-year programs provides evidence that our strategic plan is working. These positive trends have also built longer-duration relationships that we believe are providing greater visibility into our business with more predictable recurring 26 customer funded development was increasing 145 percent year over year to approximately $944,000 these engagements allow us to work closely with customers early in the development of next generation platforms designing and qualifying purpose-built compute solutions while the timing and ultimate production opportunity associated with each engagement can vary we We believe this work strengthens our customer relationships, expands our technical position within their platforms, and creates a pathway to potential future production. The revenue mix included a higher level of customer-funded development, early prototype, and low-rate initial production activity. These earlier stage programs generally carry lower initial gross margins due to smaller production volumes and higher levels of engineering and manufacturing activity. As these programs mature and transition into higher volume production, we believe they have the potential to generate both greater revenue contributions and improve gross margins. The question from development to production that is contributing to our revenue growth is also evident in our strong bookings performance. This quarter, we generated over $15 million in new bookings that we expect to deliver in 2026 and 2027. Year-to-date, we have secured more than $30 million in new bookings, resulting in a book-to-bill ratio of approximately 1.7. Bookings for both second quarter and year-to-date periods are record amounts for the company, and to put this performance into perspective, our bookings through the first six months of 2026 nearly equaled our total product revenue for the full year of 2025. Second quarter bookings were driven by several important program wins across both defense and commercial markets. First, we announced an $8.4 million initial contract from a leading defense and technology solutions company. We expect the first shipments to commence in 2026 and to contribute to revenue throughout the year. We believe this platform has the potential to contribute approximately $44 million in total revenue over the next four years. Second, we've received an initial order valued at over $500,000 from a renewable energy technology company that focuses on generating clean energy for data center applications. Follow-on orders are expected to exceed $1 million year-over-year and anticipated to scale to $10 million opportunity over the next five years. Passing the initial order in April, we received an additional order of nearly $1 million as the customer prepares for the commercial launch of its renewable energy-powered data center solution. We received a $1.4 million order for short-depth servers from a government systems integrator. This order from the second quarter was on top of a nearly $600,000 order. The relationship with this customer is expanding, and we expect continued demand. To end in July, we announced a $2.2 million initial production order from a commercial robotics customer. This order followed an initial purchase order received in February and marked the successful transition of the program from prototype development into production deployment. Based on the customer's anticipated deployment plans, we believe this program could generate cumulative orders of approximately $10 million to $15 million over the next five years. Program wins reflect a combination of expansion within existing customer platforms and the addition of new customers across defense and commercial markets. They also demonstrate a clear shift in the size, duration, and composition of our bookings. Quarter call, our orders are becoming larger, more programmatic, and increasingly connected to multi-year deployments across a broader customer base. Since 2023, our average order size has nearly tripled, and during the past 12 months, we have added a growing number of programs with meaningful multi-year revenue potential. In fact, to date, OSS is supporting 14 programs with estimated multi-year revenue potential exceeding $42 million compared to just one program three years ago. Reporting the momentum we are seeing in revenue and bookings is the continued expansion and maturation of our pipeline of opportunities. We continue to take steps to build a more disciplined pipeline aligned with our defense and commercial go-to-market strategies, technology roadmaps, and applications that we believe can scale into meaningful multi-year production programs. Within the defense market, we are pursuing a growing number of opportunities within the U.S. Department of Defense research laboratories and defense organizations that are evaluating future compute architectures for advanced AI sensor process applications. These engagements position OSS early in the development lifecycle and provide opportunities to work alongside customers as they define requirements, test new technologies, and prepare next generation. We are also advancing a new classified program opportunity and pursuing additional programs across the U.S. Army, including applications that require high-performance compute and data processing in rugged and space. We believe this activity reflects growing awareness of OSS and the increasing relevance of our enterprise class compute capabilities across next generation warfighting platforms. We are seeing encouraging customer interest in commercial and defense applications designed to harness our PCIe Gen 6 architecture. PCIe Gen 6 represents an important advancement in data transfer performance and is expected to support increasingly demanding AI, machine learning, and sensor-intensive workloads. We are actively engaged with prospective customers on initial Gen 6 opportunities and expect the first customer to programs to emerge in the near future. This pipeline growth are strong and durable market dynamics. AI, machine learning, and sensor fusion workloads are increasingly moving beyond traditional data centers and into vehicles, aircraft, ships, and other edge environments. The combination of higher revenue, strong bookings, and stable gross margin provide OSS with greater capacity to invest in people, technology, and sales capabilities needed to support our continued growth. An important personnel addition during the quarter was Paul P.K. Averna, who joined OSS as Vice President of Business Development and growth. PK brings more than 30 years of experience across defense, commercial technology, and mission-critical applications. He will focus on expanding our market reach, deepening engagement with defense and commercial customers, and helping convert our growing pipeline into new development and production opportunities. PK will also assume the responsibility previously held by Robert Kalbaugh, our Vice President of Sales, who intends to retire following several years of dedicated service to OSS. We sincerely thank Robert for his leadership and significant contributions to the company. Robert will remain engaged with OSS on a part-time consulting basis, helping facilitate a seamless transition and supporting our continued growth initiatives. Given PK's extensive industry experience, familiarity with our team, and understanding of our markets, we believe he's a natural successor who will help us maintain our momentum and continue advancing our growth strategy. We also continue to invest in advancing our technology platform to support the next generation of AI enabled systems operating at the edge research and development remains a critical component of our strategy and we are increasingly working alongside customers through customer funded development programs to design purpose-built compute architectures for emerging applications cycle of next-generation platforms deepen our customer relationships and create a potential pathway to future production programs as we discussed early or a majority of our second quarter revenue and recent bookings can be traced back to internal research and development and customer funded development efforts initiated two, three, or four years ago that have now progressed into deployment and reinforces why we intend to continue growing customer-funded development activity and investing in our technology roadmap during the second half of the year. The development work we undertake today is intended to create the next generation of test and pilot programs, production deployments, sustainment revenue, and future technology refresh opportunities. Following quarter end, we reached an agreement to resolve a commercial dispute involving a former customer relationship related to events dating back several years ago. While OSS disputed the claims, after evaluating the relevant business, financial, and other considerations, the company determined that resolving the matter for approximately $6.25 million was in the best interest of the company and its shareholders. The financial impact of this settlement is reflected in our second quarter fiscal 2026. The settlement does not constitute an admission of liability, is unrelated to our current operations and growth programs, and fully resolves the dispute. Importantly, we believe this resolution allows the management team to remain focused on executing our strategy and supporting the significant opportunities we see across our defense and commercial markets. I also want to briefly address a housekeeping matter, an upcoming renewal of our shelf registration statement this month. Maintaining an effective shelf registration statement is a routine element of prudent corporate and financial planning and provides OSS with appropriate flexibility as we execute our strategic plan. The renewal itself should not be viewed as an indication that the company has decided to undertake a financing transaction. Overall, we continue to believe OSS is well-positioned for long-term sustained growth, and the first half of 2026 has exceeded our initial expectations. As a result, based on our current performance and business outlook, we are increasing our full-year 2026 revenue growth guidance. We now expect revenue growth in the range of 25% to 30%, up from our prior full-year guidance of 20 to 25 percent. Our higher revenue expectation is supported by our strong bookings, growing pipeline and platform opportunities, increasing in customer engagements, higher customer-funded development activities, and the continued transition of development programs into production deployments. We continue to expect full-year gross margins of approximately 40 percent, reflecting product mix and an increasing contribution from customer-funded development programs. At the same time, we expect to generate positive EBITDA and adjusted EBITDA, inclusive of planned strategic investments and personnel in research and development to support continued growth and technology leadership. We encourage that 2026 has started stronger than we initially expected, with accelerating revenue growth, record quarterly and year-to-date bookings, and continued progress converting multiple development programs into larger multi-year production opportunities. With a strong balance sheet, expanding customer relationships, and a growing pipeline driven by the adoption of AI-enabled systems at the edge, we believe OSS is well positioned to build on this momentum through the second half of the year and beyond. Our strength and financial position also provides the flexibility to continue investing in our people, technology, and go-to-market capabilities, while selectively evaluating strategic acquisitions that could complement our technology platform, expand our customer base, and enhance our long-term growth opportunity. 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.

Reflecting both strong customer demand and disciplined operational results reflect a number of key accomplishments. Top-line growth of six record bookings of 15.1 million for the second quarter and 30 million. Third is in line with our 2026 expectations reflecting operational improvements gross margin reflects a higher mix of customer funded development now for a quick overview of q2 2026 for the second quarter we reported total revenue from continuing operations of 9.3 million compared to 5.8 million last year the 62.3% year-over-year increase in total revenue was primarily due to higher sales to medical imaging OEM of liquid cooled server products to support breast cancer screening application, 25, onboard naval compute products to support continuing operations in the second quarter was 39.1%, compared to 41.3% in the prior year quarter. The 2.2 percentage point decrease from the prior year was primarily driven by product mix, including a higher level of customer-funded development, production volume, level of variability in gross margins quarter to quarter based on absorption, product mix, and program life cycle. On a sustaining basis, we continue to target margins in the mid-30s to mid-40s. The 32 operating expenses from continuing operations increased 129.8% to $11.3 million and included the $6.25 million legal settlement charge. The 31.2... In the second quarter, the company reported a gap net loss from continuing operations of $7.3 million, or $0.29 per share, compared to a net loss from continuing operations of 2.5 million, or a company reported a non-GAAP net loss from continuing operations of 0.2 million, or one cent per share, compared to a non-GAAP net loss from continuing operations of 2 million. Adjusted EBITDA loss from continuing operations, a non-GAAP metric, EBITDA loss from continuing operations of 1.8 million. The balance sheet and statement of cash flow. Our balance sheet remains strong with 31.4 million of total cash. For the six months ended June 30, 2026, we used $629,000 in cash from continuing operations, a million-dollar investment. As Mike mentioned, based on higher-than-expected sales and bookings, we're increasing our revenue guidance for the year. We continue to expect full-year gross margin of approximately 40% and positive EBITDA for the full year, inclusive of planned strategic investments, research and development support. As we enter the third quarter, we remain focused on disciplined execution, including managing our supply chain to convert customer demand into revenue, profit, and cash. We also remain focused on continuing to drive growth by investing in our technology, pursuing M&A opportunities, and securing new platforms that may provide sustain. This completes our prepared remarks. Operator, please open the call for questions.

Thank you, sir. Ladies and gentlemen, if you do have any questions, please press star followed by one on your touchtone phone. You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by two. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. First, we will hear from Brian Kinslinter at AGP. Please go ahead, Brian.

Hi, guys. Thanks for taking my questions. Can you provide an update on two opportunities for the 360 vision solution at Army Vehicles? Where in the procurement lifecycle are these programs, and when is a reasonable timeline for these competitions?

Yeah, morning, Brian. Thanks for the question. As they do that, they can identify new requirements. They can identify applications. They can extend the technology to other elements. While at the same time, the acquisition vehicle classes can make a determination on their meeting with the Army.

Thank you. And my follow-up question is, you've had two consecutive quarters of $15 million of bookings, which is great to see. As you look at the next 6, 12, 18 months, how should we think about your goals for bookings and what's reasonable to assume? Should we think about, given the size of your pipeline, equal or even stronger bookings going forward? Will it be lumpy? Just maybe speak to, you know, how you're viewing that.

Yes, as we mentioned, I mean, we're encouraged by coming into view. You know, we've been comfortable indicating that our pipeline, you know, indicates that we believe we can be on that 30% a year growth. Bookings can be very lumpy. You can see very strong periods of bookings, and then they can fade off based on timing. So, you know, we generally monitor that year-to-date slash trailing 12-month book-to-bill ratio, and that's been fairly consistent here over the last year or so in showing that kind of manageable. We're starting to convert, as I said, more elements out of that, so we kind of retain on that view of what we think it can do, but as we've noted, we've had more customers coming into view. You're starting to fill in. It gives us more optimism because of our reach, one or two really big large orders, though we still... I think we look forward to, you know, a kind of continued performance, but we expect that, you know, we will see some lumpiness quarter to quarter.

Thanks so much.

Question will be from Eric Martinuzzi at Lake Street Capital. Please go ahead, Eric.

Yeah, I wanted to focus on the customer-funded development that was around 10 percent of revenue this quarter. Is this, is the expectation here that that will be at that kind of similar run rate?

I know it's hard to predict these things, but it's become a meaningful amount of the top line yeah we're definitely in future growth as we go through the year we have a number of opportunities that we're working I do expect that it will continue to be strong throughout the year I think that you know what the levels that you're seeing in the first half should should okay and then one of the things that you mentioned was also

just the diversity of your customer base which is a good thing nobody likes to be too concentrated in any particular vertical what's really behind this was this a proactive effort on your part a sales effort to proactively diversify the customer base or is this to say you know people move around the industry they they know where to come back to to get a reliable organization partner yeah I think it's a Eric I think it's a culmination of all the hard work the company's been putting in in the strategy and that early the company to build opportunities where exist.

As we started to prosecute that pipeline and getting into different markets, then you start to gain some recognition. And then that increases your reach to people who understand what you're doing. And we're able to then prosecute each of that to where multiple customers, you know, we start getting that flywheel momentum moving off of notoriety and what we're delivering. And it starts to stick to market application. So we can reach to markets, markets, and customer sets. So this is really all built into the strategy and the plan, and I think we're seeing that in, you know, decent-sized programs.

Last question for me is on the supply chain side. Given the upward revision to your revenue, as well as the reiteration of the gross margins, it would seem like you're in pretty good shape for FY 2026. Just curious to know if you've taken steps and have you confident that you're the memory The motherboards, the kinds of nuts and bolts things that have gone up in price for a lot of tech hardware manufacturers, if those are things that you feel in good shape for FY27.

We're closing out this year into 2027. The strategies that have worked for us this year should continue to help us work into next year. The early bookings clearly helps with that also with customers and setting the expectations. So the methodologies and strategies that we've used this year have been helping. The memory market hasn't necessarily gotten any better in lead times. It's just how we've been able to, as I mentioned, use the strategies that we've had to help us be able to generate the revenue and the growth that we have. It's always still a little bit metering as we continue to see such strong bookings as to how fast and what we convert. But as you mentioned on 21st half, we're seeing the long lead times quoted.

But we are seeing some opportunities to bring in particularly memory ahead of those lead times.

Thanks for taking my questions, and congratulations on the strong bookings.

Yeah, thanks, Eric. Appreciate it.

Next question is from Brian Dobson at Clear Street. Please go ahead, Brian.

Hey, thanks. Congrats on a good quarter in Outlook. So, you know, as you're thinking about defense spending over, you know, this year and over the next few years, But what do you think has changed recently about how defense customers are thinking about rugged AI compute? And do you think that there's more opportunity in terms of level of compute per vehicle or aircraft, you know, so on and so forth?

Thanks, Colin. I appreciate you joining coverage on OSS. Yeah, so I think the intriguing thing in which is the company is so well set in this market is this inevitable transition as sensor fusion and autonomy. our platforms to increase and enhance capability we're seeing it emerge and new youth that we deliver so we're seeing that generated in in a number of ways though oftentimes the Department of Defense is is slow in their movement but you can see from our customer funded development stuff that we have operating in labs and under test is you're seeing the communities across those will slowly transit continue then transition into you know ultimately production we're helping that that technology and that timing some of the compute open architectures the things that that we excel in realizing that the only way they're gonna what's going on in with Iran now just the application of autonomous systems the weapon system application and also I think you'll see this continue to feed back and strengthen again a compute as our company has demonstrated we can move these technologies we have been able to do in months what has taken other people years to deliver these capabilities. And in a fast-moving operational tempo environment like the U.S. and its allies are seeing in computing systems to the field is going to be important. And I think we'll see that continue to be back and grow in strength as the years come.

Yeah, great. And then just one follow-up question on the pipeline. Those numbers look good, but how do you see the composition of the pipeline evolving over the next year or two, and could that be a contributor to margin expansion?

Yeah, I believe so, Brian. So, the pipeline we established, you know, continues to grow with opportunities, 50-50 commercial defense space. You know, we don't purposely, you will see, but the platform is longer term for more certainty.

Thanks very much for the call.

Yeah, thank you, Brian.

Next question will be from Austin Moeller at Canaccord Genuity. Please go ahead, Austin.

Hi, good morning. So if we look at the fiscal year 27 budget that's coming together after the CR, does the 50% projected increase in the shipbuilding budget, is that more beneficial to you just given the needs for network computing and C5ISR at the edge, or is there more opportunity on the Golden Dome and short-range air defense side?

Yeah, Austin, thanks for the question and being on the call. You know, ironically, we're engaged in all those areas. So being forward heavy with sensors and compute and applications and AI and ML, and they all need high-end compute, low latency, generally fit into a rugged, the key systems, graders are in those solutions.

And there's a lot of new contract awards that are starting to come out of the fiscal year 26 budget in Q2 and Q3 here. So if we just think about your pipeline going forward, When might we start seeing some of the programs that you're involved in on the R&D valuation stage flip to LREF or serial production with higher margins? And do you anticipate doing advanced procurement of component inventory if that starts to inflect into serial production?

Yeah, we don't have an exact view into the timeline of when these early-stage systems that we have with the Army under test would flow into a program of record, you know, low-rate initial production followed by production. We continue to work with them and advise that a number of ways from time. So I don't have the ability really to give a time frame or a period of time frame on when and if it does, or in advance of contract and funding from the government on something like that.

Awesome. Thanks for all the callers. Yeah, thanks, Austin.

Thank you. And at this time, we have no further questions registered, so that will conclude our question and answer session, as well as our conference call for today. We would like to thank you all for attending and ask that you please disconnect your lines. Enjoy the rest of your day.