Executive Summary

Q3 revenue of $13.70M rose sequentially (+3.8% q/q) and was roughly flat y/y (-0.3%), while a $6.1M inventory charge drove gross margin to -12.5% and GAAP EPS to $(0.32); excluding the charge, gross margin was 32.0% .
OSS segment grew 17.5% y/y to $6.46M, with orders of $8.1M outpacing segment revenue for the third straight quarter; Bressner remained soft on European macro .
Management guided Q4 revenue to ~ $15.0M with OSS segment >$7.0M and called out positive bookings/backlog and improving mix; Bressner Q4 revenue expected at ~$8.0M on easier comps .
Catalyst: one-time inventory cleanup largely behind them, growing customer-funded development, defense-led demand, and sequential growth outlook; CFO transition announced with defense-experienced successor .

What Went Well and What Went Wrong

What Went Well
- OSS segment revenue up 17.5% y/y to $6.46M, offsetting European weakness; “positive momentum is building within our OSS segment” .
- Orders strength: OSS segment orders of $8.1M in Q3, outpacing revenue for the third consecutive quarter; “year-to-date orders well in excess of revenue” and pipeline >$1B .
- Excluding the inventory charge, consolidated gross margin was 32.0% (up from 26.6% y/y); OSS segment ex-charge GM was 43.2% (+10.8pp y/y) driven by mix and defense .
What Went Wrong
- A $6.1M obsolete/slow-moving inventory charge drove reported gross margin to -12.5% and adjusted EBITDA to a $(6.0)M loss; GAAP net loss was $(6.8)M/$(0.32) per share .
- Bressner segment revenue declined 12.2% y/y on European macro softness; Bressner GM of 22.0% was down 0.6pp y/y on mix and additional inventory reserve .
- Analysts probed government procurement timing/CR risks; management cited elongated award cycles (12–14 weeks vs prior 3–4) and seasonality around holidays, though demand trends remain intact .

Financial Results

Metric	Q3 2023	Q2 2024	Q3 2024	Consensus Estimate (Q3 2024)
Revenue ($M)	$13.75	$13.20	$13.70	NA – S&P Global consensus unavailable
Gross Margin % (reported)	26.6%	25.2%	-12.5%	NA
Gross Margin % (ex-inventory charge)	—	—	32.0%	NA
Adjusted EBITDA ($M)	$(0.16)	$(1.30)	$(6.05)	NA
GAAP Diluted EPS	$(0.18)	$(0.11)	$(0.32)	NA
Non-GAAP EPS	$(0.03)	$(0.09)	$(0.30)	NA

Note: We attempted to retrieve S&P Global consensus; data was unavailable at time of analysis.

Segment revenue (Q3 2024 vs Q3 2023):

Segment	Q3 2023 Revenue ($M)	Q3 2024 Revenue ($M)	y/y
OSS	$5.50	$6.46	+17.5%
Bressner	$8.25	$7.24	-12.2%
Total	$13.75	$13.70	-0.3%

Key P&L/context KPIs:

KPI	Q2 2024	Q3 2024
OSS segment orders ($M)	$7.5	$8.1
Orders vs revenue (OSS segment)	>20% over revenue	~25% over revenue
Customer-funded development revenue ($M, quarter)	$1.45	$1.02
Customer-funded development revenue ($M, YTD)	$1.81 (H1)	$2.83 (9M)
Cash + short-term investments ($M)	$11.8 (6/30)	$12.6 (9/30)
Working capital ($M)	$32.6 (6/30)	$26.7 (9/30)

Additional margin detail:

OSS segment GM: -51.2% reported; 43.2% ex-charge (+10.8pp y/y) .
Bressner segment GM: 22.0% (down 0.6pp y/y) .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Consolidated Revenue	Q4 2024	—	~ $15.0M	New
OSS Segment Revenue	Q4 2024	—	> $7.0M	New
Bressner Segment Revenue	Q4 2024	—	~ $8.0M	New
Consolidated Revenue	Q3 2024	~$13.3M (8/8 guide)	— (Actual $13.70M)	Beat vs guidance

Management also noted expectation of sequential growth and improving profitability into 2025 as mix shifts to higher-margin OSS programs and customer-funded development converts to production .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q1 & Q2 2024)	Current Period (Q3 2024)	Trend
AI/edge compute positioning	Building pipeline >$1B; targeting AI/ML/autonomy at the edge	Reinforced pipeline >$1B; OSS products enable 20–25 AI inferences with far lower latency vs embedded architectures	Improving demand narrative
Customer-funded development (CFD)	Began separate disclosure; 6–18 month NRE leading to multi-year production; Q2 CFD $1.4M	YTD CFD $2.8M; sets incumbent position; typical 10–20% of program value before LRIP/FRP	Scaling, stronger funnel
Book-to-bill/orders	OSS book-to-bill >1 in Q1; >20% orders>revenue in Q2	Q3 OSS orders ~25% above revenue; 3rd consecutive quarter	Strengthening
Defense/commercial mix	Shifting to ~50/50; reducing legacy media exposure	Bookings ~55–60% defense; growth in C5ISR air/maritime	Defense-led
Gross margin trajectory	Target ~32.5% OSS standalone longer-term; underabsorption headwinds	OSS ex-charge GM 43.2%; aiming to ~35% blended within ~18 months as mix normalizes	Positive mix/GM
Europe/Bressner macro	Softness expected H1; gradual improvement H2	Still soft; Q4 Bressner lift on easier comps; 2025 rebound as supply chains catch up	Stabilizing into 2025
Procurement/CR timing	CR delays impacted timing in H1	Procurement timelines elongated to 12–14 weeks; CR length a watch item, seasonality in Q4/Q1	Ongoing timing risk

Management Commentary

“With this inventory adjustment now behind us, I am encouraged by the improvement in OSS segment profitability during the quarter… I believe OSS is well positioned for revenue growth and improving profitability in 2025 and beyond.” — CEO Mike Knowles .
“Our 5-year unfactored pipeline at the end of the third quarter remained over $1 billion… we are expecting to close [multimillion, multiyear] in the coming quarters.” .
“We do not currently foresee any further inventory changes outside of historical trends.” .
“Operating cash flow of over $900,000 and a return to adjusted EBITDA profitability after backing out the inventory charge.” .
CFO transition: Daniel Gabel appointed CFO effective Nov 11, 2024, bringing defense finance leadership experience (RTX, CAES/Honeywell) .

Q&A Highlights

Mix and bookings: Defense/commercial bookings ~55–60% defense; OSS segment book-to-bill ~1.25 over last three quarters; planning ~25% OSS revenue growth in 2025 if trends persist .
Margin outlook: Despite low-margin CFD early phases, management targets ~35% blended OSS gross margin over ~18 months as product mix balances and production ramps .
Government timing: Award processing elongated (12–14 weeks); CR length and holidays create seasonality; a shorter CR would be positive for new starts .
Q4 EBITDA: No incremental investments expected that would weigh on Q4 adjusted EBITDA relative to Q3 ex-inventory context .

Estimates Context

Wall Street consensus from S&P Global was unavailable at the time of this analysis; we attempted retrieval but could not obtain data.
Versus company guidance, Q3 revenue of $13.70M exceeded prior guidance of ~$13.3M; management guided Q4 consolidated revenue to ~ $15.0M with OSS segment >$7.0M and Bressner ~$8.0M .

Key Takeaways for Investors

One-time inventory cleanup masked underlying improvement: ex-charge GM was 32% (vs 26.6% LY), with OSS ex-charge GM 43.2% on better mix; watch margin normalization in Q4 and 2025 .
Orders momentum continues (OSS book-to-bill >1); Q3 OSS orders ~~$8.1M vs $6.46M revenue sets a base for sequential growth into Q4 (~~$15M guide) .
Defense-led growth vector: bookings 55–60% defense with C5ISR traction; CFD provides platform incumbency and future production leverage, though early-stage margins are lower .
Bressner is the swing factor: macro softness persists but Q4 aided by easier comps; potential 2025 recovery as supply chains normalize .
Execution watch items: procurement/CR timing, European macro, and conversion of $1B+ pipeline to orders; however, management does not foresee additional abnormal inventory charges .
Near-term setup: potential positive stock reaction to beat-vs-guide and “one-off” charge framing; medium-term thesis hinges on continued order conversion, margin mix, and defense program ramps .

Appendix: Additional Contextual Releases

CRADA with U.S. Special Operations Command to co-develop rugged edge AI/ML compute for Hyper-Enabled Force objectives (strategic alignment with defense pipeline) .
CFO transition press release (Nov 6, 2024) detailing appointment of defense-experienced finance leader Daniel Gabel .

ONE STOP SYSTEMS, INC. (OSS)·Q3 2024 Earnings Summary