One Stop Systems, Inc. Q3 FY2025 earnings call

OSS delivered a strong third quarter with consolidated revenue growth, higher gross margin, positive EBITDA, and net income. Strategic actions since 2023-2024, such as strengthening leadership, implementing a multiyear plan, rebuilding the go-to-market approach, expanding the pipeline, and driving higher gross margins, have contributed to improved financials. The pipeline is expanding in both defense and commercial markets, including awards related to the P-8 Poseidon, medical imaging, Safran Federal System, and a Canadian integrator. R&D investments were made in 2025 to capitalize on AI, machine learning, etc., and new Gen 6 systems are set to launch in November. Attendance at AUSA and NVIDIA GTC conferences helped showcase products and generate interest. The balance sheet was strengthened via a $12.5 million registered direct offering.

For the third quarter, consolidated revenue was $18.8 million compared to $13.7 million last year. The OSS segment experienced a 36.9% year-over-year consolidated revenue growth and a 43.4% growth for the OSS segment itself. The OSS segment's gross margin improved to 45.6% compared to an adjusted gross margin of 43.2% for the same period last year. The Bressner segment saw a $2.3 million increase in revenue and had a gross margin of 26% in the third quarter, up from 22% in the prior year quarter, primarily due to a more profitable product mix.

The full year 2025 consolidated revenue guidance was raised from $59 million to $61 million to $63 million to $65 million. Expect continued strength in revenue and profitability during the fourth quarter of 2025. The OSS segment margin is targeted in the mid-30s to mid-40s, with the fourth quarter of 2025 expected to be in the upper end of this range. The company expects to achieve positive EBITDA at the consolidated level.

The government shutdown may impact the timing of near-term bookings, though it is viewed as a timing issue rather than a demand issue. The ongoing government shutdown is also affecting the Army's situational awareness technology procurement evaluation.

Q: How should investors think about seasonality going forward for Core OSS in light of strong bookings execution and government shutdown?

A: Yes. I'll start with the seasonality and then Mike can talk a little bit more about the government shutdown. So, in general, we've seen this consistent pattern where we tend to see higher revenues in the second half of the year just based on timing of bookings. As the government goes into the holiday period, you tend to see a bit of a slowdown in bookings, and so, just the timing of that tends to drive second quarter revenue or second half revenue higher than first half. We'd expect that to continue as we go into 2026, probably a somewhat moderated ramp compared to what we saw in 2025, but still somewhat of a ramp as we go through the year. Michael Knowles: Yes, Brian, and we're -- with the kind of the strong bookings we've had this year and as we close out the year, we'll expect to be starting next year with a little bit more backlog. So, we think while we had a fairly decent sized ramp this year, as Brian mentioned -- or as Dan mentioned, hopefully that, that backlog and the way we'll prosecute will soften that. A bunch of that will be dependent on the government shutdown here. As we may have noted prior, we have everything in backlog we need to achieve our guidance for 2025. And the bookings that we are making now are -- will further support that and/or build into backlog for next year. And the main bookings that are affected for us by the government shutdown are anticipated sole source awards. So, we won't be losing opportunity. We'll just -- we'll be affected by time.

Q: Update on data center market opportunity and Army situational awareness tech.

A: Michael Knowles: Yes. Great, Brian. Yes, on the data center side, as we had noted prior and in the remarks here, we launched Ponto, which is a bigger version of our standard 4U GPU expansion solution. And so that product is under evaluation by a couple of customers, specifically in these kind of data center markets where they're looking for this opportunity for big GPU and compute expansion. So we're -- we've got product in that market. We've got outreach. We've got interest. We have people testing. So, we'll look through the end of this year and into the first half of next year to likely and hopefully see that transition into awards and in backlog. And then as we noted in this call, we'll be augmenting that with bringing forward some of the new PCIe Gen 6 and some of the other new technologies that will be launching into those data center architectures. So, we'll be well positioned with multiple products across that to leverage into that market. On the Army situation awareness side, that testing continues on. As you noted, yes, anything that had been going on now has stalled as a result of the government shutdown. So we'll be losing time on their evaluation as they went through. Things are being progressing and tracking well. The Army has also seen how they could use our distributed compute system for that solution in multiple other ways. So it's created other opportunities that we will look to prosecute coming into 2026 and beyond to leverage our position in the technology across those. So we'll look for hopefully more news on that in the coming year and where that could progress to.

Q: Bressner performance and cash deployment.

A: Daniel Gabel: Yes. Bressner has been performing strong. We've seen some nice recovery in their industrial end markets and expect continued strength as we go through the year. FX has been a tailwind to Bressner's segment revenue. In the third quarter, they grew by about $2.3 million, about $600,000 of that was due to FX. The other $1.7 million was growth on a constant currency basis, just really based on strength in their end markets and some of the larger products or projects that they've been executing on. And so, we continue to see Bressner performing well and see strength as we close out the year and go into '26. Eric Martinuzzi: Okay. Well, just sequentially then, is it your expectation that we're in line to better with the final quarter of the year? Or what... Daniel Gabel: Yes, I would model -- so there's a few shipments in Bressner that are going to be right on the cusp between this year and next year. So where those fall will kind of impact Q4. But I would model Q4 as being basically flat to Q3 for Bressner. Eric Martinuzzi: Got you. Okay. And then you talked about the registered direct offering that closed on October 1 and the $12.5 million of gross cash raised. Just curious to know how are we -- at least here in the near term, how are we deploying the cash? Are you sitting on it? Are you investing in inventory, sales channel investments? What can you tell us? Daniel Gabel: Yes, absolutely. So, the cash raise did a couple of things for us. One, it supported our working capital ramp as we're going through this growth phase. So you can see that in our results this quarter, particularly in AR. So we have, I think, good visibility towards collecting that AR this year. I expect that as we go into Q4, we'll see positive cash flow. We'll have a number of shipments that will be going out between the end of November and the beginning of December. So where those shipments fall within that range will somewhat impact where we -- where our cash flow is for Q4, but I do expect that it will be positive. And then in terms of the cash rate, so as we support the working capital ramp, we're using it for that. But then companies generating positive EBITDA will be generating positive cash flow. So then we look to redeploy that cash rate towards a disciplined M&A strategy as we go into 2026.

Q: Government shutdown impact and commercial opportunities.

A: Michael Knowles: Yes. I think consistent with what we said in the earnings call here was we're seeing that movement. We've got some product placement, right? That was all about trying to continue to advance the commercial side of the strategy. We're probably a little bit slow to where we thought some commercial opportunity would have showed up. And so, we're thinking that hopefully, that we'll start to see that come to fruition in 2026, where we thought we might have seen it closer to the back end of 2025. But we're positioned well, I think, now with the products. We've got contacts, engagements across a number of fronts, as we mentioned, not only around data centers, but around medical imaging and some of the work we were doing with commercial aerospace. So, we're starting to see some of that expansion. And as long as the economy and the investments in those markets continue to go, I think we'll start -- we'll continue to see us being able to operate in those markets.