8-K: One Stop Systems Reports Mixed Q2 2024 Results, Revenue Declines Offset by Order Growth

One Stop Systems reported a 23.3% year-over-year revenue decrease in Q2 2024, but saw sequential revenue growth and increased orders in its OSS segment.

Summary

• One Stop Systems (OSS) announced its financial results for the second quarter of 2024, showing a consolidated revenue of $13.2 million, a decrease of 23.3% compared to the same period last year.
• The revenue decline was primarily due to the loss of a major media customer and reduced sales in Europe through Bressner.
• However, the company experienced a sequential increase in revenue compared to the previous quarter and customer-funded development revenue grew.
• OSS segment orders outpaced quarterly revenue for the second consecutive quarter, indicating future growth potential.
• The company reported a net loss of $2.3 million, or $0.11 per share, compared to a net loss of $2.4 million, or $0.12 per share, in the prior year.
• Non-GAAP net loss was $1.8 million, or $0.09 per share, compared to a non-GAAP net loss of $84,000, or $0.00 per diluted share in the prior year.
• Adjusted EBITDA was a loss of $1.3 million, compared to an adjusted EBITDA of $520,000 in the prior year.
• For the first half of 2024, consolidated revenue was $25.9 million, a 23.9% decrease year-over-year.
• The company expects Q3 2024 consolidated revenue to be approximately $13.3 million, with OSS segment revenue increasing 15% year-over-year to $6.3 million.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the significant year-over-year revenue decline and net losses, although there are some positive signs such as sequential revenue growth and increased orders in the OSS segment. The company's future outlook is cautiously optimistic, but the current financial performance is concerning.

Positives

• Sequential revenue growth was achieved in Q2 2024.
• OSS segment orders are outpacing revenue for the second consecutive quarter, suggesting strong future demand.
• Customer-funded development revenue is increasing, indicating potential for future long-term contracts.
• OSS segment revenue grew 8.3% year-over-year when excluding the impact of a former media customer.
• Operating expenses decreased significantly due to cost-cutting measures and the absence of a prior year goodwill impairment.
• The company expects 15% year-over-year growth in OSS segment revenue in Q3 2024.
• The company maintains a strong balance sheet with $11.8 million in cash and short-term investments.

Negatives

• Consolidated revenue decreased by 23.3% year-over-year in Q2 2024.
• The company experienced a net loss of $2.3 million, or $0.11 per share, in Q2 2024.
• Adjusted EBITDA was a loss of $1.3 million in Q2 2024.
• Gross margin percentage decreased to 25.2% in Q2 2024, compared to 27.9% in the same quarter last year.
• OSS segment gross margin decreased by 4.3 percentage points due to production facility underutilization and additional inventory reserves.
• Bressner revenue declined due to slower economic activity in Europe.
• The company reported a non-GAAP net loss of $1.8 million, or $0.09 per share, for Q2 2024.
• The company reported a net loss of $3.7 million, or $0.18 per share, for the first half of 2024.

Risks

• The company faces risks related to uncertain economic conditions and softness in European markets.
• The company's revenue is impacted by the loss of a major media customer.
• The company's gross margin is under pressure due to production facility underutilization and inventory reserves.
• The company's financial performance is subject to the risks and uncertainties inherent in its business, as described in its SEC filings.
• The company's forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict.

Future Outlook

The company expects consolidated revenue of approximately $13.3 million in Q3 2024, with OSS segment revenue increasing 15% year-over-year to $6.3 million. Management believes the company is well-positioned for continued growth despite uncertain economic conditions and softness in Europe.

Management Comments

• Our second-quarter performance demonstrates the successful execution of our plan, as consolidated revenue increased sequentially to $13.2 million, OSS segment orders outpaced quarterly revenue for the second consecutive quarter, and we expanded customer-funded development revenue.
• The sequential increase in customer-funded development revenue is an important indicator of future growth, as this establishes OSS as an incumbent on future multiyear contracts.
• I am encouraged that our transformational strategies are tracking to plan.
• As a result, we expect continued sequential revenue growth in the third quarter, led by an expected 15% year-over-year increase in OSS segment revenue.
• Based on our current pipeline we believe we are well positioned for continued growth in the 2024 fourth quarter.

Industry Context

The company operates in the edge computing market, which is experiencing rapid growth, particularly in AI-enabled solutions. The results reflect the challenges of navigating economic uncertainty and customer-specific impacts, while also highlighting the potential of the company's strategic focus on customer-funded development and the OSS segment.

Comparison to Industry Standards

• Comparing OSS to companies like Supermicro (SMCI) and Dell Technologies (DELL), which also operate in the server and edge computing space, OSS's revenue decline is significant, while SMCI has shown strong growth in recent quarters.
• However, OSS's focus on ruggedized solutions for AI at the edge differentiates it from more general-purpose server providers.
• The 15% year-over-year growth expected in the OSS segment for Q3 2024 is a positive sign, but the overall revenue decline and losses are concerning when compared to industry leaders.
• Companies like NVIDIA (NVDA) and AMD (AMD) are also relevant as they provide the underlying technology for AI and high-performance computing, and their performance can influence the demand for OSS's products.
• The decline in Bressner revenue due to European market softness is a common challenge for companies with international exposure, as seen in the results of other tech companies with European operations.

Stakeholder Impact

• Shareholders may be concerned about the revenue decline and net losses, but encouraged by the sequential growth and order backlog.
• Employees may be affected by the company's cost-cutting measures and restructuring.
• Customers may benefit from the company's focus on customer-funded development and new product offerings.
• Suppliers may be impacted by changes in the company's production and inventory levels.
• Creditors may be concerned about the company's financial performance and ability to repay debts.

Next Steps

• The company will hold a conference call to discuss the Q2 2024 results.
• The company will focus on executing its transformational strategies to drive continued sequential revenue growth.
• The company will continue to monitor economic conditions and softness in European markets.
• The company will work to capitalize on its strong balance sheet and committed team to create long-term value for shareholders.

Key Dates

Keywords

AI, edge computing, rugged compute, machine learning, sensor processing, OSS, Bressner, revenue, EBITDA, financial results, non-GAAP, orders, gross margin