Company Overview and History
One Stop Systems, Inc. (OSS) is a leading provider of rugged, high-performance computing solutions designed to power the edge in artificial intelligence (AI), machine learning (ML), and sensor processing applications. The company’s history and evolution have positioned it as a key player in addressing the growing demand for enterprise-class compute capabilities at the edge of the network.
Established in 1998 and headquartered in Escondido, California, OSS initially operated as a California limited liability company before being reincorporated as a Delaware corporation in 2017 in connection with its initial public offering. The company specializes in designing, manufacturing, and marketing specialized high-performance compute, high-speed switch fabrics, and storage hardware and software. Throughout its history, OSS has demonstrated a commitment to innovation and growth through strategic acquisitions and expansions.
Global Expansion and Acquisitions
In 2015, the company expanded its global footprint by forming a wholly owned subsidiary in Germany, OSS GmbH. This strategic move enabled OSS to better serve customers across Europe, the Middle East, and Africa (EMEA) markets. The company further strengthened its capabilities in 2016 through the acquisition of Magma, a company that complemented OSS’s expertise in custom high-performance compute server manufacturing.
OSS continued to grow its portfolio and customer base in the following years. In 2018, the company acquired Concept Development, Inc. (CDI), a specialist in the design and manufacture of custom high-performance computing systems for airborne in-flight entertainment, flight safety equipment, and networking systems. This acquisition allowed OSS to integrate CDI’s business into its core operations, expanding its reach and capabilities. By 2020, CDI’s business was fully integrated into OSS’s core operations.
Another significant milestone occurred in 2018 when OSS GmbH acquired 100% of the outstanding equity of Bressner Technology GmbH, a German company specializing in the design and manufacture of standard and customized servers, panel PCs, and PCIe expansion systems. The acquisition of Bressner gave OSS a strategic foothold in the European market and enhanced its ability to serve as a channel to market for its ruggedized data center-level compute and storage products.
Business Segments
OSS operates in two reportable segments:
Bressner Technology GmbH Segment: OSS’s German subsidiary, Bressner Technology GmbH, operates as a value-added reseller, providing standard and customized servers, panel PCs, and PCIe accelerator systems, as well as systems integration services, to customers in Europe, the Middle East, and Africa (EMEA). Bressner serves as a channel to market for OSS’s ruggedized data center-level compute and storage products in these regions.
Financials
The company’s financial performance has been mixed in recent years, with global economic uncertainty and supply chain challenges impacting its results. In 2023, OSS experienced a decline in revenue due to the acceleration of one of its long-term media and entertainment customers’ investment in cloud technology, reducing the need for OSS’s products. This transition had a negative impact on the company’s results of operations for that year. Additionally, OSS has had to navigate global issues such as the ongoing military conflict between Russia and Ukraine, supply chain delays and shortages, and economic uncertainty, all of which have impacted its business and operations.
In the fiscal year ended December 31, 2023, OSS reported total revenue of $60.90 million, a decrease from $72.42 million in the prior year. The company’s net loss for the year was $6.72 million, or $0.32 per diluted share, compared to a net loss of $2.23 million, or $0.11 per diluted share, in the previous year. Operating cash flow for the 2023 fiscal year was negative $439,679, while free cash flow stood at negative $1.26 million.
For the third quarter of 2024, OSS reported consolidated revenue of $13.70 million, slightly lower than the $13.75 million reported in the same period of the previous year, representing a year-over-year decrease of 0.30%. The company’s net loss for the quarter was $6.82 million. Operating cash flow improved to $916,803, with free cash flow of $822,108.
Breaking down the Q3 2024 performance by segment:
The Bressner segment generated revenue of $7.24 million, with a gross profit of $1.59 million and a segment operating profit of $437,300. Bressner’s gross margin for the quarter was 22.0%.
The slight year-over-year decrease in consolidated revenue was a result of a $1 million reduction in Bressner revenue associated with slower economic activity in Europe, offset by a $1 million year-over-year increase in OSS segment revenue.
In terms of geographic performance, revenue from customers with non-U.S. billing addresses represented approximately 55% of the company’s revenue during the third quarter of 2024, down from 65% in the same period of 2023. For the nine-month period ended September 30, 2024, non-U.S. revenue accounted for 59% of total revenue, compared to 67% in the same period of 2023.
Market Focus and Growth Strategies
One of the key drivers of OSS’s performance has been its focus on the growing market for AI, ML, and sensor processing at the edge. The company’s specialized computing platforms are designed to provide the processing power and low latency required for these demanding applications, catering to customers in the commercial, industrial, and defense sectors.
To further capitalize on these opportunities, OSS has made strategic investments in its sales and product development efforts. The company has expanded its sales reach by hiring experienced professionals, such as the new president and chief executive officer, Michael Knowles, and the new vice president of sales, Robert Kalebaugh, both of whom have extensive experience in the defense industry. OSS has also added relevant defense market experience to its board of directors. These changes have positioned the company to further pursue revenue opportunities with major defense contractors and the military.
Additionally, OSS has increased its focus on customer-funded development programs, which establish the company as an incumbent on platforms that often lead to follow-on production and multiyear support contracts. During the first nine months of 2024, the company’s customer-funded development revenue grew to $2.83 million, up from $876,560 in the same period of the previous year.
Liquidity
As of September 30, 2024, OSS maintained a strong balance sheet with $12.6 million in cash and short-term investments. The company’s debt-to-equity ratio stood at 0.033 as of December 31, 2023, indicating a low level of leverage. OSS also has access to a $2 million revolving line of credit, which had no outstanding balance as of September 30, 2024.
The company’s current ratio of 3.32 and quick ratio of 1.99 as of September 30, 2024, suggest a healthy short-term liquidity position. These ratios indicate that OSS has sufficient current assets to cover its short-term liabilities, providing a buffer against potential financial challenges.
While the company has faced some challenges, such as the $6.1 million inventory charge taken in the third quarter of 2024, OSS remains committed to improving its financial performance and positioning itself for long-term growth. The company’s strong balance sheet and focus on high-margin opportunities in the AI, ML, and edge computing markets suggest a promising future.
Future Outlook
Looking ahead, OSS expects to continue its momentum. For the fourth quarter of 2024, the company is guiding for consolidated revenue of approximately $15 million. This guidance includes OSS segment revenue of $7 million, representing over 9% year-over-year growth, and Bressner segment revenue of $8 million, expected to grow 17% year-over-year.
While specific guidance for the full year 2025 has not been provided, OSS believes they are building a strong foundation to achieve their long-term growth objectives. The company expects to see continued sequential revenue growth throughout the remainder of 2024 and into 2025. OSS plans to update investors on their new strategic growth plan and long-term guidance in the first half of 2025.
The company is also optimistic about its long-term prospects, with a pipeline of over $1 billion in unfactored opportunities, of which approximately 70% are platform and multiyear deals. This robust pipeline, combined with the company’s strategic focus on high-growth markets, positions OSS well for future success.
Industry Trends
The global increase in load on cloud infrastructure and the rise in AI applications are primary factors driving growth in the edge computing market. Industry estimates suggest that the Compound Annual Growth Rate (CAGR) for the edge computing market is around 20-25% over the next five years. This trend aligns well with OSS’s focus on providing high-performance computing solutions for edge applications, particularly in AI, ML, and sensor processing.
Conclusion
In conclusion, One Stop Systems, Inc. (OSS) has a compelling history of innovation and growth, leveraging its expertise in rugged, high-performance computing solutions to address the burgeoning demand for enterprise-class compute capabilities at the edge. Despite recent challenges, including inventory charges and market fluctuations, the company’s strategic investments, focus on high-margin opportunities, and strong balance sheet position it well to capitalize on the ongoing trends in AI, ML, and sensor processing applications. With a clear focus on the defense and industrial sectors, a growing pipeline of opportunities, and a commitment to technological innovation, OSS is poised to navigate the dynamic edge computing landscape and drive long-term value for its stakeholders.
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