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OS

ONE STOP SYSTEMS, INC. (OSS)·Q2 2024 Earnings Summary

Executive Summary

  • Q2 2024 revenue was $13.2M, up 4.3% sequentially and above the company’s prior Q2 guidance of $13.0M; GAAP EPS was $(0.11), non-GAAP EPS $(0.09), and gross margin was 25.2% .
  • Management guided Q3 2024 consolidated revenue to approximately $13.3M, with OSS segment revenue expected at $6.3M (+15% y/y), partially offset by lower Bressner revenue due to European softness .
  • OSS segment orders outpaced revenue for the second consecutive quarter; book-to-bill was “a little over 1.3” in Q2 and ~1.1 in Q1, signaling strong pipeline conversion momentum .
  • Company continues to expand customer-funded development revenue ($1.45M in Q2 vs $0.39M in Q1), a leading indicator of multi-year production awards; cash and short-term investments remained $11.8M at Q2-end with working capital of $32.6M .
  • Wall Street (S&P Global) consensus estimates were unavailable at time of analysis; thus beat/miss vs consensus cannot be assessed. The company’s revenue slightly exceeded its own Q2 guidance .

What Went Well and What Went Wrong

What Went Well

  • OSS segment orders outpaced quarterly revenue (>20%); book-to-bill improved to “a little over 1.3” in Q2, with management expecting >1.0 through the next two quarters, supporting backlog and revenue visibility .
  • Customer-funded development revenue expanded sharply to $1.4M in Q2 from $365k in Q1; CEO emphasized this establishes OSS as an incumbent for future multi-year production contracts: “establishes OSS as a platform incumbent...” .
  • Sequential revenue growth (+4.3%) achieved and Q2 revenue exceeded internal guidance; management reiterated confidence in continued sequential growth, citing a strong pipeline and Q3 guide of ~$13.3M .

What Went Wrong

  • Consolidated revenue declined 23.3% y/y to $13.2M due to ~$3.2M impact from a former media customer and ~$1.3M decline in Bressner (European softness); gross margin compressed to 25.2% on underutilization and inventory reserves .
  • Adjusted EBITDA swung to a loss of $1.3M in Q2 vs +$0.52M in Q2 2023; non-GAAP EPS moved to $(0.09) vs $(0.00) in Q2 2023 .
  • Defense procurement award timing and U.S. budget continuing resolutions elongated sales cycles (e.g., 12–14 weeks vs historic 3–4 weeks), introducing timing risk to bookings and revenue conversion .

Financial Results

Headline Metrics vs Prior Periods

MetricQ2 2023Q4 2023Q1 2024Q2 2024
Revenue ($USD Millions)$17.2 $13.2 $12.7 $13.2
GAAP Diluted EPS ($USD)$(0.12) $(0.01) $(0.06) $(0.11)
Gross Margin (%)27.9% 33.7% 29.4% 25.2%
Adjusted EBITDA ($USD Millions)$0.52 $0.353 $(0.456) $(1.295)

Notes: Q2 2024 revenue sequentially increased vs Q1 and slightly exceeded internal guidance of $13.0M .

Segment Revenue Breakdown

Segment Revenue ($USD Millions)Q4 2023Q1 2024Q2 2024
OSS Segment$6.4 $5.6 (calc: $12.7 total − $7.1 Bressner) $5.522
Bressner Segment$6.8 $7.1 $7.679

KPI and Cash Metrics

KPI / Balance MetricsQ1 2024Q2 2024
Customer-Funded Development Revenue ($USD)$0.387 $1.448
OSS Segment Gross Margin (%)N/A24.9%
Bressner Gross Margin (%)N/A25.5%
Book-to-Bill (OSS Segment)~1.1 ~1.3+
Cash + Short-Term Investments ($USD Millions)$12.9 $11.8
Working Capital ($USD Millions)$34.3 $32.6

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Consolidated Revenue ($USD Millions)Q2 2024~$13.0 (Q1 call) Actual: $13.2 Achieved/Above internal guidance
Consolidated Revenue ($USD Millions)Q3 2024N/A~$13.3 New
OSS Segment Revenue ($USD Millions)Q3 2024N/A$6.3 (+15% y/y) New
Bressner Revenue (qualitative)Q3 2024N/ALower due to European softness New (qualitative)
Segment GM Expectation (%)FY 2024N/AOSS ~32.5%; Bressner ~23–24 Ongoing framework

Additional note: ~$1.6M of Q3 orders pushed to Q4 as timing shifted .

Earnings Call Themes & Trends

TopicQ4 2023 (Prev-2)Q1 2024 (Prev-1)Q2 2024 (Current)Trend
AI/Technology InitiativesHighlighted Gen5 SDS/H100 rugged systems; expanding AI at edge; “Best in Show” liquid-cooled SDS Building pipeline in AI/ML edge; partnerships (e.g., Zapata) 5 product efforts in development for edge compute; continued platform wins Strengthening execution and roadmap
Customer-Funded DevelopmentNot emphasized quantitativelyBegan separate disclosure; strategic focus to create incumbency Jump to $1.4M; pipeline of proposals expanding Accelerating and scaling
Orders/Book-to-BillBuilding pipeline >$1B OSS book-to-bill ~1.1; expect >1 through year >20% orders>revenue; ~1.3+ book-to-bill Improving momentum
Defense Procurement TimingCR and award delays; lobbying to accelerate Impact from FY24 CR; expect continued delays Contracting cycles elongated (12–14 weeks vs 3–4) Timing risk persists
Regional Trends (Europe/Bressner)Germany/Europe challenging but improved margins Bressner down 12.7% y/y; expected 2H recovery Ongoing softness; Q3 Bressner lower Weakness likely near term
Media Customer TransitionCompleted strategic transition in 2023 Ongoing y/y impact from former media customer ~$3.2M y/y Q2 headwind persists Lapping through 2024
Cash/Working CapitalCash+STI $11.8M; inventory high but sellable Cash+STI $12.9M; OCF $2.0M Cash+STI $11.8M; OCF $1.23M (6M) Stable liquidity; WC efficiency focus

Management Commentary

  • CEO: “We expect continued sequential revenue growth in the third quarter, led by an expected 15% year-over-year increase in OSS segment revenue... well positioned for continued growth in the 2024 fourth quarter.”
  • CEO on strategy: “Customer-funded development revenue is an important indicator of future growth, as this establishes OSS as an incumbent on future multiyear contracts.”
  • CFO: “Consolidated revenue of $13.2 million, which exceeds our guidance of $13 million… decline primarily attributable to $3.2 million related to a former media customer and $1.3 million decline in Bressner revenue.”
  • CEO on pipeline: “Our unfactored pipeline at the end of the second quarter remained over $1 billion… ~70% comprised of platform opportunities.”

Q&A Highlights

  • Defense concentration risk: Management views mix as balanced (~50/50 defense/commercial) and not a concentration risk; broadened across more defense customers .
  • Government procurement cycles: Award processing elongated (12–14 weeks vs historic 3–4 weeks); CRs impact new starts but incumbency mitigates risk; primes sometimes fund smaller firms to protect schedules .
  • Customer-funded development cycle times: NRE periods typically 6–18 months; initial LRIP prototypes 3–6 months post-development; production 1–5 years with periodic tech refresh .
  • Book-to-bill: Trailing six months ~1.26; Q2 “a little over 1.3” with forecast >1 in next two quarters; supports revenue visibility .
  • Year-end budget flush: Benefits incumbents via extra production/spares; OSS positioning to capture lab/exercise buys; potential lever as defense market penetration grows .

Estimates Context

  • S&P Global consensus estimates were unavailable during this session due to provider limits; therefore, beat/miss vs Street could not be assessed. We note the company slightly exceeded its own Q2 revenue guidance (~$13.0M guided vs $13.2M reported) .
  • Given rising customer-funded development and >1.0 book-to-bill, near-term estimate revisions may bias upward for OSS segment revenue and backlog conversion, while European softness may weigh on consolidated levels .

Key Takeaways for Investors

  • Sequential revenue growth and orders>revenue underpin improving trajectory; Q3 guide of ~$13.3M and OSS segment +15% y/y suggests continued momentum despite Bressner softness .
  • Mix shift away from legacy media is largely complete; lapping media headwinds (~$3.2M Q2) should ease y/y comps into 2H/2025 .
  • Customer-funded development is scaling and is strategically important for multi-year production awards; track this KPI as a leading indicator .
  • Defense procurement timing remains the key execution risk; elongated award cycles can push revenue across quarters (e.g., $1.6M pushed from Q3 to Q4) .
  • Gross margin compression in Q2 reflects underutilization and inventory reserves; margin recovery depends on scale, mix (storage/OSS vs Bressner), and absorption improvements .
  • Liquidity is adequate (cash+STI $11.8M; WC $32.6M) to support development and capture cycles; watch working capital efficiency and inventory drawdowns through 2H .
  • Near-term trading: Stock could react to order announcements (e.g., recent U.S. Army SDS order, CRADA with USSOCOM), Q3 print vs guide, and signs of European demand stabilization .