ONE STOP SYSTEMS, INC. Q1 FY2025 earnings call

• Mike Knowles reported progress in Q1 2025 with year-over-year and sequential improvements in gross margin, stable revenue, and strong OSS segment bookings. Consolidated gross margin increased 320 basis points to 32.6% driven by OSS segment's 45.5% gross margin.
• Announced a $6.5 million record contract award, new multiyear relationship with medical imaging OEM, and two renewals from DoD programs. Near-term market conditions affected some OSS segment orders but bookings remain strong with a 2.0 book-to-bill ratio in Q1 and 1.33 trailing 12-month ratio.
• Sales strategies include early engagement in engineering cycles for collaborative relationships, land and expand with ruggedized enterprise-class solutions, and leveraging compute/storage integration for integrated solutions. OSS segment had notable contract awards like $1.4M for radar processing, $1.6M for submarine sonar upgrade, etc.
• Bressner segment saw stable bookings and revenue in 2025, with potential from European market stability and defense spending increases.

For the first quarter of 2025, consolidated revenue was $12.3 million. The OSS segment had a gross margin of 45.5%, contributing to a consolidated gross margin of 32.6% which increased 320 basis points year-over-year. The Bressner segment had a gross profit margin of 23.1%. OSS segment gross margins improved to 45.5% compared to 34.2% in the prior year quarter, driven by a larger volume of higher-margin products and a $212,000 reduction in inventory reserves. Consolidated revenue decreased 3.1% year-over-year due to lower OSS and Bressner segment revenue.

• Expect to achieve 2025 annual guidance with consolidated revenue of $59M to $61M and EBITDA breakeven. Second half of 2025 expected to be a period of growth and transformation. OSS segment bookings expected to remain strong supporting profitable revenue growth in second half 2025 and 2026. Revenue and profitability growth expected to accelerate in second half 2025 with first half roughly flat to prior year.
• The $6.5M contract award is expected to convert to revenue within 2025 with deliveries spread across Q2-Q4.

• Near-term market conditions affected timing of certain OSS segment orders. Uncertainty in business and government spending. Tariffs and shifts in government spending have delayed certain programs for second half of 2025. Government discretionary budgets and their impact on program awards and timelines.

Q: How much of the $30 million of core OSS revenue expected this year is from signed contracts vs new business to win?

A: Mix of both, with bookings in first half leading to second half revenue and some backlog from end of 2024 delivering in second half.

Q: Will the $6.5 million contract be delivered in 2025?

A: Yes, expect all to be delivered and converted to revenue within 2025 with spread across Q2-Q4.

Q: How many $20M+ opportunities are in the pipeline and when will they be adjudicated?

A: Pipeline has various opportunities, expecting more programs like recent announcement with longer runs in future.

Q: Details on Army situational awareness opportunity and data center market?

A: Army opportunity has existing solution under test/evaluation, OSS is only solution meeting requirements. Commercial data center market has growing demand for high-density GPU products with potential for multiyear contracts.

Q: Army contract: other solutions being evaluated? Book-to-bill ratio explanation?

A: Only OSS solution under evaluation by Army. Book-to-bill ratio of 2.0 for Q1 OSS segment bookings vs revenue, 1.33 is trailing 12-month OSS segment book-to-bill ratio.

Q: Data center opportunity timeline for revenue? Tariff-driven partnerships timeline?

A: Data center product line available now, expecting sales in second half 2025. Tariff-driven partnerships in discussions, expecting revenue from late Q2/early Q3.

Q: AI software partnerships update?

A: Actively engaged with companies for standardizing AI processing on hardware, expecting product releases and program positions in back half of 2025 and 2026.

Q: Impact of government discretionary budgets? Customer-funded development multiplier?

A: Government continuing resolution causing delay in some DoD programs, 2026 budget cycle accelerating. Customer-funded development can lead to long-term products, e.g., P-8 program example showing $500k customer-funded leading to $40M+ revenue over years.

Q: Near-term market conditions affecting orders? Details on $6.5M contract term?

A: Near-term market conditions delayed some DoD and commercial orders. $6.5M contract is majority production with modest customer-funded NRE, to be delivered in 2025.

Q: Profitable product mix verticals? Confidence in second half ramp?

A: High margin data storage products for defense customer, mix of defense and commercial. Confident in second half ramp with enough staff and capacity to meet objectives.

Q: Tariffs impact on supply chain and margin?

A: Diversified supply chain, procurement team managing tariffs, and passing on tariff impact to customers with no pushback seen.