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OS

ONE STOP SYSTEMS, INC. (OSS)·Q4 2023 Earnings Summary

Executive Summary

  • Q4 2023 revenue of $13.2M decreased 27.9% YoY due primarily to the cessation of a former media customer and timing delays in certain government programs; however, consolidated gross margin expanded 640 bps to 33.7% on mix shift to higher‑margin rugged edge/AI Transportables, with OSS segment gross margin at 45.9% .
  • Non‑GAAP turned positive: Q4 non‑GAAP net income was $0.18M ($0.01/share) vs. a non‑GAAP loss in the prior year, while GAAP net loss narrowed to $(0.28)M (EPS $(0.01)) as the 2022 tax DTA write‑down rolled off .
  • The five‑year unfactored pipeline increased to $1B+ (from ~$850M four months earlier) on rising AI/ML edge demand and deeper prime contractor engagement; management expects YoY sales growth to resume in 2H24 with improved gross margins as pipeline converts .
  • Q1 2024 revenue guidance: ~$12.5M (seasonality and U.S. government continuing resolutions), implying ~5% sequential decline from Q4; management aims to maximize gross profit and may selectively accept low‑margin pass‑through revenue (none in Q4 or Q1 guide) to support cash while transitioning mix .
  • Stock reaction catalyst: margin inflection and defense/commercial wins (e.g., Leidos/Dynetics multi‑year AI signal program; FLYHT AFIRS Edge collaboration), plus debut of Gen5 SDS with NVIDIA H100 GPUs—tempered near‑term by softer macro and CR timing risk and a lower Q1 revenue outlook .

What Went Well and What Went Wrong

  • What Went Well

    • Margin inflection: consolidated gross margin +640 bps YoY to 33.7% on mix shift away from low‑margin media; OSS segment gross margin 45.9% (+14.5 pts YoY) on rugged edge products .
    • Strategic wins and TAM expansion: multi‑year Leidos/Dynetics AI signal collection award ($2.5–$3.5M over three years; initial $0.5M), FLYHT AFIRS Edge manufacturing collaboration (min. $6M over five years), added scope on Army 360‑degree SA program .
    • Strengthened pipeline and product leadership: five‑year unfactored pipeline >$1B; launched Gen5 short‑depth server with NVIDIA H100 GPUs; won “Best in Show” for liquid‑cooled SDS at a premier Naval event (early 2024) .

  • What Went Wrong

    • Top‑line pressure: Q4 revenue fell 27.9% YoY to $13.2M on media revenue cessation (~$3.1M impact in Q4), softer commercial demand, and government timing delays; adjusted EBITDA decreased YoY to $0.35M .
    • Operating expense overhang: Q4 OpEx rose 3% to $4.8M on transition costs (~$175k); FY23 OpEx +37% on $5.6M goodwill impairment and $1.7M CEO/board transition costs, though ex‑items OpEx fell 1.5% .
    • Near‑term guide soft: Q1 2024 revenue guided to ~$12.5M (seasonality/CR effects) and management cautioned it may accept some low‑margin pass‑through revenue (none in Q4 or included in Q1 guide) to support cash generation during the transition .

Financial Results

MetricQ2 2023Q3 2023Q4 2023
Revenue ($USD Millions)$17.21 $13.75 $13.16
Gross Profit ($USD Millions)$4.80 $3.65 $4.43
Gross Margin % (Consolidated)27.9% 26.6% 33.7%
Operating Income ($USD Millions)$(3.41) $(3.98) $(0.33)
Net Income ($USD Millions)$(2.40) $(3.64) $(0.28)
GAAP Diluted EPS ($)$(0.12) $(0.18) $(0.01)
Non‑GAAP Net (Loss)/Income ($USD Millions)$(0.084) $(0.597) $0.177
Non‑GAAP Diluted EPS ($)$(0.00) $(0.03) $0.01
Adjusted EBITDA ($USD Millions)$0.487 $(0.248) $0.353
Cash + Short‑Term Investments (Period‑End, $USD Millions)$15.4 $13.2 $11.8
Inventories (Period‑End, $USD Millions)$21.46 $22.23 $21.69

Segment revenue and gross margin (naming aligned per quarter):

SegmentQ2 2023 Revenue ($M)Q2 2023 GM%Q3 2023 Revenue ($M)Q3 2023 GM%Q4 2023 Revenue ($M)Q4 2023 GM%
OSS/Classic$8.3 29.2% $5.5 32.4% $6.4 45.9%
Bressner/Europe$8.9 26.7% $8.2 22.6% $6.8 22.2%

KPIs and other items:

KPIQ2 2023Q3 2023Q4 2023
Five‑Year Unfactored PipelineNot disclosed numerically Robust; AI Transportables mix rising >$1B (up from ~$850M 4 months prior)
Employee Retention Credit recognized (quarter)$1.298M $0.418M $0 (none in Q4 table)
Cash + STI (period‑end)$15.4M $13.2M $11.8M

Context vs prior year and quarter:

  • YoY: Revenue down 27.9% (to $13.2M) with gross margin +640 bps (to 33.7%); drivers include exiting lower‑margin media (~$3.1M impact) and product mix toward rugged edge/AI .
  • Seq: Revenue roughly flat vs Q3 ($13.7M → $13.2M); gross margin step‑up on higher OSS mix (notably storage) .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent Guidance / ActualChange
RevenueQ4 2023~$13.0M (given on Nov 9) Actual $13.16M Beat company guidance (slight)
RevenueQ1 2024N/A~$12.5M New
Consolidated Gross Margin %FY 2024 contextN/AManagement expects consistency with 2022 levels (~32–33%) depending on mix; higher storage/AI mix helps Qualitative
Program revenue (Raytheon PA)2024N/A~$6M expected, similar to 2023 Qualitative
Low‑margin pass‑through (cash support)Near termN/AMay accept some; none in Q4 and none in Q1 guide; will disclose separately Qualitative

Earnings Call Themes & Trends

TopicQ2 2023 (Q‑2)Q3 2023 (Q‑1)Q4 2023 (Current)Trend
AI/Technology initiativesNVIDIA‑certified Rigel; liquid immersion demo; 6 major wins incl. 3 AI Transportables Continued focus on rugged AI edge; Gen5 SDS roadmap Gen5 SDS w/ H100s launched; “Best in Show” liquid‑cooled SDS; first motorsport AI system shipped Accelerating
Defense pipeline/engagementSecurity clearance anticipated; primes engagement growing Added board/leadership with defense pedigree; pipeline robust Pipeline >$1B; wins with Leidos/Dynetics; Army 360 SA scope expansion; lobbying to advance funding Improving
Supply chain/inventoryBuilt inventory under prior constraints; cash + STI $15.4M Cash + STI down to $13.2M; inventory elevated Plan to free ~$2M working capital from inventory in 2024; cash + STI $11.8M Improving execution
Macro/Gov’t (CR)Delays push $5–$6M to 2024 Government timing delays cited CR easing but contracting cycles still slow; Q1 guide reflects seasonality/CR Headwind moderating
Software/partnershipsNot highlighted quantitativelyNoted outreachGrowing partnerships (e.g., Zapata AI/Andretti); aim to standardize hardware with AI ISVs Building
Product performance/mixGM 27.9% GM 26.6% GM 33.7%; high‑margin storage in mix Positive mix shift

Management Commentary

  • CEO Mike Knowles: “2023 was a transformative year…transition away from lower margin media revenues to…AI Transportables…our overall gross margin increased by 130 bps for the year and 640 bps for the fourth quarter,” highlighting early success of the strategy .
  • CEO on pipeline: “our five-year, unfactored pipeline has increased to over $1 billion…driven by…AI/ML solutions…enhanced sales and marketing…prime contractors…we…return to year-over-year sales growth in the second half of 2024, with improved gross margins” .
  • CFO John Morrison: “Q4 consolidated revenue of $13.2M…gross margins improving to 33.7%…OSS gross margin improved 14.5 pts to 45.9%…Operating expenses increased 3%…Net loss $0.28M; non‑GAAP net income $0.18M; Adjusted EBITDA $0.35M” .
  • CEO on product roadmap: Gen5 SDS with NVIDIA H100s positions OSS as first‑to‑market at the rugged edge; liquid‑cooled variants recognized with “Best in Show” at a Naval conference .
  • CEO on defense/commercial mix: leveraging high‑TRL rugged solutions to win refresh and new starts; expanding into intelligence community (deployable ground station pilot) and aerospace (FLYHT AFIRS Edge) .

Q&A Highlights

  • Gross margin sustainability: Q4 was “heavily weighted” to higher‑margin AI transportable storage; mix will drive variability; company may accept some low‑margin pass‑through revenue to support cash but will disclose separately .
  • Pipeline conversion and CR: Expect pipeline conversion to build through 2024 with 2H acceleration; CR resolution should unlock awards but contracting lag persists .
  • Software GTM: Expanding partnerships with AI ISVs to offer integrated solutions and become standard hardware providers (e.g., Zapata AI/Andretti) .
  • Sales cycles and bookings: Defense cycles tied to platform refreshes/new starts; mapping upgrade cycles informs timing; anticipate bookings wins in 2H24 and sequential revenue improvement exiting Q3 into Q4 .
  • Working capital: Inventory remains elevated from prior supply constraints; plan to free ~$2M working capital in 2024; inventory seen as sellable and not obsolete .
  • NVIDIA roadmap: Ability to productize new GPUs in <1 year; can propose alternative NVIDIA SKUs with shorter lead times to meet customer performance/availability needs .

Estimates Context

  • Wall Street consensus (S&P Global) for revenue/EPS was unavailable at this time due to system limits, so we cannot provide a consensus comparison for Q4 2023. As a proxy, OSS slightly exceeded its own Q4 2023 revenue outlook (~$13.0M guide vs $13.16M actual) .
  • Where estimates are critical for your workflow, we recommend refreshing S&P Global consensus before trading decisions.

Key Takeaways for Investors

  • Margin inflection underway: Consolidated GM rose to 33.7% (Q4) with OSS segment at 45.9%, demonstrating leverage from media exit and rugged edge/AI mix; monitor storage mix to gauge margin durability .
  • Pipeline scale and defense traction: Five‑year unfactored pipeline surpassed $1B with multi‑year wins at Leidos/Dynetics, Army scope expansion, and intelligence community pilots; execution on conversion is the key 2H24 catalyst .
  • Near‑term softness vs 2H setup: Q1 2024 revenue guide of ~$12.5M reflects seasonality/CR timing; management expects YoY growth resumption in 2H24 as awards convert .
  • Cash and working capital: Cash+STI at $11.8M; plan to release ~$2M from inventory in 2024; watch acceptance of low‑margin pass‑through as a bridge (none embedded in Q1 guide) .
  • Product leadership as differentiator: Gen5 SDS with H100s and liquid‑cooled variants enhance win rates in rugged AI deployments across defense, aerospace, and industrial edge .
  • Risk factors: Government budget/CR timing, commercial demand volatility, and program lead times remain execution risks; margin outcomes tied to product/segment mix each quarter .