ONE STOP SYSTEMS, INC. Q3 FY2024 earnings call

• OSS segment revenue growth helped offset softness in Bressner segment due to European market sluggishness. - Highlights include positive OSS segment orders outpacing quarterly revenue in four of the five last quarters, consolidated sequential revenue growth, expanded customer-funded development revenue, and OSS segment revenue growth of 17.5%. - Identified obsolete and slow-moving inventory, taking a $6.1 million charge, which had limited impact on cash position. - Focused on converting over $1 billion pipeline to sales and pursuing customer-funded development projects. - Year-to-date customer-funded development revenue increased to $2.8 million from $877,000 last year. - Hired new CFO Daniel Gabel and VP of Operations Fabrizio Sardo, and assembled a new leadership team. - Five product efforts in OSS segment focused on edge computing for defense and commercial applications expected to be announced by end of 2024 and first half of 2025.

In the third quarter, OSS segment revenue grew 17.5% year-over-year. OSS segment gross margin was 43.2% excluding a $6.1 million inventory charge. Consolidated revenue for the third quarter was $13.7 million, exceeding the guidance of $13.3 million. The slight year-over-year decrease in consolidated revenue was due to a $1 million reduction in Bressner revenue from sluggish European economic activity, offset by a $1 million year-over-year increase in OSS segment revenue. Bressner segment had a gross margin percentage of 22%, a 0.6 percentage point decrease from the same period last year, driven by a less profitable revenue mix and an additional inventory reserve.

• Anticipates consolidated revenue of approximately $15 million in the fourth quarter of 2024. - Expect OSS segment revenue of $7 million in Q4 2024, representing over 9% year-over-year growth. - Expect Bressner segment revenue of $8 million in Q4 2024, with 17% growth primarily due to easier year-over-year comparison. - Plans to update investors on new strategic growth plan and long-term guidance in the first half of 2025.

• Sluggish economic activity in European markets impacting Bressner segment. - Risk of inventory obsolete and slow-moving leading to potential charges. - Economic uncertainty globally affecting business operations.

Q: What's driving the strengthening trends in OSS bookings and how much of this is government versus commercial?

A: Bookings strengthening is driven by both defense and commercial markets. Since Mike joined, extending reach in defense markets and broader outreach on commercial side, plus underlying trends in autonomy, AI, and machine learning. Ballpark, around 55%-60% defense to commercial.

Q: Can you quantify roughly the addressable percentage of the $1 billion pipeline in 2025 and does it breakdown similar to bookings?

A: Five-year pipeline is around the same percentage, 50-50 plus or minus 5%-10% in any direction. Large element of pipeline is addressable, probability weightings used to prioritize resources.

Q: Can you give more detail on gross margin related to customer-funded development and what's reasonable gross margin to assume for core segment over next 18 months?

A: OSS segment gross margin of 43% includes margin on customer development work. Over next 18 months, expect to drive up to 35% or better gross margin as products and customer-funded development balance in volume.

Q: What does the customer-funded development conversion timeline to production translate into in terms of revenue run rate?

A: Development cycles 1-2 years, followed by LRIP or low rate initial production, then full rate production. Development amount is usually 10%-20% of whole program as it rolls through LRIP and production, with tech refresh and support over time.

Q: What does OSS book-to-bill ratio translate into for 2025 growth outlook and swing factors for Bressner?

A: OSS book-to-bill ratio around 1.25 in last three quarters anticipated to carry into 2025, expecting 25% revenue growth. Bressner may see turnaround in 2025, likely Q2 at earliest, with optimistic views of upper single-digit growth, but affected by seasonality and supply chain factors.

Q: Is there a step-up in adjusted EBITDA in Q4 and any investment expenses planned?

A: No additional investments planned in Q4 that would negatively impact adjusted EBITDA, expecting step-up in adjusted EBITDA in Q4.