OSS - Earnings call transcript Q2 2019

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Operator

Good afternoon, and thank you for joining us today to discuss One Stop Systems' financial results for the second quarter ended June 30, 2019. With us today are the company’s President and Chief Executive Officer, Steve Cooper; and its Chief Financial Officer, John Morrison.

Following their remarks, we will open the call to your questions.

Before we conclude today’s call, I will provide some important cautions regarding the forward-looking statements made by management during the call. I would also like to remind everyone that today’s call will be recorded and will be made available for replay via the instructions in today’s press release in the Investors section of the company’s website.

to Steve call Cooper. like President to would CEO, and I turn over the OSS' Now Please ahead, go sir.

Steve Cooper

record solid Thank you, of report generated to I’m expectations. very increasing Christy, and good that afternoon, QX, well earnings, all non-GAAP everyone. pleased revenue, ahead margins, we

design-ins the our Financially, In of ended growth sheet with for foreseeable a future. and strengthened cash a signed will our on and expect we long-term contract profitability we addition, won $X.X million continue we balance and quarter major number that to drive hand. the

increased revenue for with Our XX%. of QX XXX% organic growth

Our shipments the revenue were second. first delayed QX from did include the quarter into that

XXXX, a to this revenue which growth better think look to shift. rates I look at full is the our of balances So at out way half first

of for year, XX%. first So grew organic with XX% growth our half the of the overall revenue

strong were expenses of earnings our to quarter EPS half $X.XX margins also margins our which higher with than QX which for XX.X%, per and offset Our combination revenue, raised particularly generate loss. more QX non-GAAP solid first us strong to margins The in XX.X%. the at share, of allowed moderate

accounting acquisitions. adjustments they goodwill assets our to to last GAAP statements these relating our affected moment. year’s We intangible and a made John also through adjustments go how will and non-cash show just in

major benefits our deployed one to contract are continued size, our MIL-SPEC prime upon five-year award-winning array small provide to U.S. was for earlier including the a with a aircraft, deliver Poseidon a technology, another contract. flash million Raytheon, surveillance being portability. P-X Navy. the for performance, they Disguise And contractor we builds servers. collaboration confidence These where agreement and $XX major flash agreement ultrahigh storage $XX lightweight is of OEM the that Our media at arrays today, high-value was systems within OEM valued million, This OSS relationship. five-year a contract video display and awarded long-term This announced for long-standing provides

we’re seeing opportunities. As presence the scale increase OEM market and significant a company has in grown, major of our

We’re for opportunities going our these of also design-ins. the growth foundation provide forward. converting an These increasing wins number organic into

wins For we over the each. values new million $X design first of multiyear won with XX XXXX, half

We additional opportunities pursuing. major XX also currently we’re have actively design-in that account

At turn this for like the of point, through our year. market the John? outlook will to results technology us within our CFO, call our the Morrison, key I’d the to return I’ll remainder over quarter. take space John Afterward, and discuss the the financial trends for to who

John Morrison

us quarter available is XXXX. Thank onestopsystems.com. and you, afternoon, everyone. June issued results for Relations on today. our at of Steve, Investors the Thank for our ended we the website you section a The earnings good XX, second release joining Earlier press today, with release

statement included the with Starting release. in of the operations

the second first increased large revenue $X.X $XX.X QX XXXX at the in Our quarter from of million included two XXX% shipments were delayed in to that revenue million. quarter. The valued

from acquisitions. revenue these increases contributions increase traditional OSS addition well as sales In customers was our to in driven the to shipments, QX as by

both XXXX, flash in which contributing was Bressner, XX% XXXX, quarter. array revenue, acquired year. prior of million; contributed server business the for $XX This or increase or period revenue and traditional was QX the driven $X.X OSS our by Our of in media which organic with represented CDI, compared our contributed as was XX% growth quarterly Acquisitions acquired our million August the and of XX% products. million same $XXX,XXX $X to an October in

XX%. For of $X.X the revenue XX% of grew our organic or first overall XXXX, half the growth with million

due increase gross totaled in quarter The sales XX.X% percentage in to the same ago of profit gross $X.X Our array military products. margin. is million compares XX.X% year flash second margin or quarter. our increased or This $X.X to gross gross in margin the million

at This or XX, to or revenue. XX% the profit of period gross $X.X year, ended million million of June half XX.X% $X.X XXXX. the for compares totaled first Looking the X-month

company goodwill. QX, to in intangible accounting mentioned, made and assets the adjustments Steve As

adjustment of with In the price accounting business. a consideration company to period assigned our associated these acquisition preliminarily company to to acquisition values $X.X adjust of an values intangible GAAP the intangible process finalizing of first of The assets intangibles, reallocated assigned CDI goodwill. of the for relates assets purchase the to the our the million X-year allows time. within the

million In GAAP And QX, our was contributed a charge this goodwill net loss analysis the expenses conjunction $X.X of the a GAAP also for compares totaled compared or of $X.X and in in of by for CDI second quarter $X.XX the increase million goodwill. or $X.X the which ago caption in year of with period. in same increased to This general share our percentage $X.X impairment we results XXXX expenses company’s $X.XX also in the reflected a company performed reallocation, result, per to net The the The the million charge expenses. operating $X,XXX,XXX. points as in impaired of this that This or the quarter was test quarter. million impairment loss within an associated goodwill share per amount. took in year-ago increase charge expenses. operating administrative expenses Bressner, second to contributed as total operating this Along XXX% with the of and XX charge with goodwill is operating of

financial in GAAP the significance the per evaluating metrics of non-GAAP financial believe performance. the in earnings Given share statements, be EBITDA included we and adjusted our charges non-cash can helpful

of of reconciliation quarter in definition of press a non-GAAP in $XXX,XXX loss income income period. non-GAAP per GAAP same reference same ago use these a million and release. calculation as $X.X In of share in and the year $X.XX was EBITDA to EBITDA compared goodwill our QX million our and other year Among of the period. compared the or $X.X as or items, to the per Please loss $XXX,XXX today’s excludes share $X.XX totaled the impairment. Adjusted in non-GAAP net second adjusted terms ago adjusted our to XXXX,

balance our to moving sheet. Now

$X.X This and equivalents at million customer we June increase at December $X.X compares the totaled cash cash Our capital XXXX. primarily overpayment, used XX, a for working The funding, expenditures. XXXX. capital less XX, debt was to cash million to due and

As X, of August cash XXXX, and our $X.X totaled million. cash equivalents

public me, strategic the date, investors. payable. operations to raised have are of XX, – June our XX, July a million. – approximately with – $X.X million borrowed raise with $X.X borrowed from we XXXX, we through the our To raised initiated In have through During intent quarter, excuse domestic through XXXX, operations we issuance million, international $X.X follow-on and the notes we $X.X million offering July,

on to hand available are for with investors continuing block-sales funds our liquidity believe current We pursue sufficient We operations. the to balance. company the our remaining and long-term meet cash for the provide requirements cash

that, Steve. the over to back turn with like to call Now Steve? I’d

Steve Cooper

advantage intelligence field. you, and to of of are Thank great into those Two Express trends. data as a of out of I John. want technological are that to believe industry two of our our artificial We in about is areas talk level success design-win the that trends deal the due Gen work X the emerging center leadership the shift computing to deploy the shift those. PCI to to

includes and motherboards, is this technology computer The is moving industry memory, significance Gen these chips, interfaces Express, year X the costs. will element interface within to X being doubles and Express. Express via throughout performance XXXX for GPU with nearly computing rationale This Gen PCI to The obvious. be huge. redesigned items the market the into transition the are of cards. transfer Nearly Gen at add-in later with versions of all CPU chips, of data and PCI XXXX. X identical X transition the They flash every PCI all Gen so

who So that? want doesn’t

second OSS PCI market IO is and Express related We’ve several made PCI investments The systems, the already flash products, compute half in Express which adapters, the arrays the with cable produce breakthrough are lead already shipping projects products, again in Gen this with these of will expansion once equipment strategy announced to over of including GPU and some capital we’ve engineering accelerators. begin innovative to year. needed to process X and

components working with strategy, general but prototype This have of more far of announced the public. difficult pushing transition, a the be OSS is that to products early yet follower than the we is to technology strategy often rewards take this bleeding leadership edge market outweigh systems and challenges. to to if with believe early the breakthrough were we being performing

out a deploying intelligence also artificial is to of frame. inability The part enormous data sensors and computing reasonable into of and amount Internet a the to computing. level data where by in the necessitated the second the in collected it’s that’s the technological data is of This transfer trend field, data by being mobile networks called center shift edge a center time of towards trend and

system data a the network get even to you sent day collect packaged takes FedEx get can over slow that data the up high-end data it petabyte data At data of weeks that example, or For two. systems, the via communication a cases, one are and collection a entire to systems to a Internet data but center or of an in to day, mobile amount transfer a back months collection time. of storage around some In via being or way, from speeds, removed center. in least

computer the with out to intelligence deploy where better in the being much and field. data the artificial way much, problem software collected to the A to the intelligence deal is is full artificial run to

the the that transfer observations. systems or models an with things fit of refine avoiding When plays ruggedness, call utilized really in to amounts AI the can the continually centers. addition and environment. internal massive well are Many that learn application typically time, weight, power, their and can sensors advantage approach on autonomous the confronted learning that computing and are strengths. In Parameters new this real to – that IO on it as are real particularly all new specialized this the their such found OSS' well. field, their OSS in they’re based data with in need does data, become happen high-end of requirements vehicle meaning Fly, in These We interfacing approach are whatever to size, to has these desired key. AI cooling elements not the element

the our difficult become go-to becoming as solve key teams. deployments, that adjunct are OSS to the to presence, and and challenges company Fly can often and our on AI manufacturing the the As continues technical design involved thus more design increase customers' with we market known more

leadership Our marketplace. technological OSS and talent provide a the in unique competitive advantage incredible engineering

our XXXX. Turning for guidance now financial remainder to the of

driving continuing growth the and breakthroughs this We first perhaps contracts, wins our strong see throughout record year. recent growth rest are all technology design major accelerating half of Our and in XXXX. the results,

increasing first QX, $XX.X an $XX.X million midpoint in anticipate revenue guidances, these of which million be will of million to of million revenue We At $XX.X XX% half half growth the versus for to the $XX.X our $XX the in represents of year. QX. to second the organic million,

As customer delivery from in we vary actual the the timing in schedules and factors. March-April time frame, quarter-to-quarter depending of may specific external changes shipments upon saw other

have again time shift quarterly storage For If systems a to QX, QX. September. value large to delayed, these of shipments revenue in this array QX flash would dollar ship from are we expected this

anticipated XX% The company $XX XX% of XX% year XXXX. is representing to the of growth million outlook overall to XX%. million, growth organic and reiterates $XX full be its to between for and Revenue

to to questions. the like your call open now Operator? We’d

Operator

from Ruben Benchmark [Operator Instructions] Company. go And Roy we’ll to first

line Your open. is

Ruben Roy

here, John, and ramp the of PCI Thanks I the the jump new the on new PCI to with Steve Gen some linear kind the next products saw from second-generation Does some products today. wanted chips to stuff the thoughts AMD accelerate extended we coming your gun X-nanometer announcement got hate coming very you’re But products X of I release going Or out Express of on Express of results Steve, Intel that to much. to server wondering, given – EPYC with see first PCI just you that some adoption market. that starting market? of X coming year. of X. traction I I’m server out, CPU out server platform Raytheon Gen guess, as all, ahead to those contract for get we’re congratulations has and the do the server technology those today. as hit shipments? their new think solid

Steve Cooper

important CPU the shifted Gen The most market over the element probably in X. to particular, chips, to get are

ahead announcement, early OSS the their working months making we’ve out. their of months mentioned, you with means been with number about all for prior AMD chips nine pleased As sure AMD just is getting with is first out X AMD Intel our chips. we’re the in be was working Gen And of that. coming announcement. XXXX, we of announced today. in Intel part that What Gen are X and will a together, believe, to systems really fact,

just not over will current an It’s kind also beginning not of over the next three-year GPU flash X of of ecosystem And early a rapidly, probably Gen all those coming NVIDIA of within selling the X. year first other, I to the it’s chips. years. be But quantities X. completely to frame, will lot year, to of of the believe, with obsoleted The It’s be years. together. two-or sort grow the system. Gen for no is people has It’s X all Gen And X. That rev memory are together come two. together This will limited one kind that or or put ship announcement. That it, time three next call of is And Gen X you chips.

you late, but will you earlier out of or So move you either or move business. move go

Ruben Roy

Steve, I late spec spec that Gen had on believe in as the and the finalization, believe? I’ve terms X Gen a a on is like finished expecting And then quick got that, you little of for sort to already market was spec the John. seems the of wondering quick a time I finalized the was it X get Gen as when in for bit if up. one nearing market thoughts But X follow-up

Steve Cooper

unusually an for doubling between being long the unusually X was time be performance Gen to about specification X-year these products and of within and time deployed. X in was things. products Yes. Gen now gap and long stack beginning a period. kind an There That’s of deployed That

Each mentioned, the following will that X-year is and in and to will to a delays. it’s give X is one Gen X also also this Gen As point X. performance. on frame It’s the more X Gen to way shift where X, time at be doubling you Gen Gen time expected

now, those working are us We strategic Gen on from and three years Gen years; already products, to three X X in in you’ll those. announcing our products. So expect planning shipping be more have

We sort premise gen But good change, one if turning that that the from forward, was very believe condensed rapid thing actually to at the question over the more to your the in pushing adopting note, kind that our going there treadmill more speed of companies advantage side, anticipate plays we one to a – to of transition concept, of next. significant leadership are the are have is advantages the quickly. technology to

of believe companies take us competitive. keep to more if even because follower take pushed be And the they road, get you strategies, the will, more we will that this allow off treadmill the the end the So up. safe can’t

Ruben Roy

Steve. Thanks a lot, for John. that, for a thanks follow-up And quick then

up business the the Raytheon the shipments half gross of for some coming you back then that, guess on of out start design kind business, bunch as XX% the wins is and and you’ve coming to scaling then closing talked these about, sort up, up top projecting margin, of XX%. margins I QX, September. year? play of potentially in pushout sounds have the flash of have you John, deals large into do like to sort of you of think the gross And core out then and You business it How a

higher, from scale where a all margins think longer-term you you very much. up had. do gross you That’s As Thank perspective? I end

John Morrison

in first – with currently And that performance goals believe overall we second Thank right for percentage are the a of we’ve with XX% and that’s a you. had as projecting company for an the currently Well, the gross consolidated half with basis we consistent we on the have half. we’re whole. now the margin XXXX,

I it XX%. So would look pretty at as solid a

Operator

next from to Joe Gomes go And we’ll NOBLE Capital.

open. line is Your

Joe Gomes

my add quarter. nice me a let Again, really to congratulations

first these So win half. talked in $X the of deal the first I the won were you about increasing had, that about rate. XX you talking had you an question And and million pipeline

XXX% you the or at think if almost quarter, I in win not last were rate. had

the And to curious one loss? you rate quarter? win of what the just did So was if in what competitions, your was behind second the as lose

Steve Cooper

that we’ve to advantages rate want we’re believe clearly company the wins and longer is year. we a Unfortunately, actually this first XX more and went see no average get scale, the pricing three XXX% technological ahead of with that way we batting of lost the hit But XX% don’t valid. advantages of win too cocky, Historically, better design that year. our won can is now – become lose but did these half We higher having deals. in you three, we’re the having We about total. say to

So continues. we hope that trend

see. Let’s

if Your please? me, other repeat you could question, for that

Joe Gomes

Yes.

was you what selected? Or you consistent three not OSS? the were as choosing why to On there that behind lost, the was not a theme

Steve Cooper

such decided not they But started is the the provides. a need get advantages whereas usually, It’s happens, computer. didn’t reason anything we standard and in they off-the-shelf these by specialized, lost really of customers thinking particularly the OSS that three, Three we They the they could Yes. they a reason lose is one lot computer. And every we need decided lost, when a a with of did in small specialized fact, that number. statistically valid.

data but we each of and one that out win was could we target And them these, of a thought our in center, turned a out of didn’t. had of array flash we kind for market,

out well. for the in something very compute a that as center, was was the had not similar accelerator, a And field Another third again, data specialization. little

So I center data those call standard we would companies. computer two, commercial-grade what lost

Joe Gomes

Okay. And if then John here, for a I may. couple

they were talk about And there’s balances little look I quick doesn’t And hopefully expected. by you appear, the of receivable higher accounts could they cash also would a that end noted we been quarter, second the bit you my a as balance especially see first the movement. that? talk thought you at really business the it the out. the a little down burn the And any how the sheet, that quarter. of – little about in if with rest than come year, big think built through wonder bit then being bit guys I

John Morrison

you significant the you with balances. in if that would accounts do not the you respect see receivable, significant the see a to of the So change balances, The is accounts reality aging at a look improvement. receivable

Some of reason outstanding, in the collect, AR then for the at The in it’s later increased XX-day in due balance. been XX the which which balance. to those older end the shipments we balance current AR receivables, had to outstanding contributing did quarter the is the or But than rather balance. being quarter,

So it a timing to had receiving payment those of delay actually the do on rather than accounts receivable. shipments in with

in to in With half we had actually respect see will burn, cash the first improvement the – We significant notice that $X we that be the half the second half. in in and our capital continuing manufacturing was the in second not ERP initial investments made our the year, into you of investments assets, excess of million in system, into will That there. particularly improvement of year. facilities of an

bit about get I was continued to six as in about believe there, obviously, We see our first year order that overall will in that little margin margins, we’re margin better for that as XX%. continued growth improvement well mentioned second going a the also We to gross gross have the be half. In for our months, XX.X%. as in sales

half won’t So the additional second cash that burn the for we year. you a cash generate believe that and will of see

Joe Gomes

Okay, great. Thanks guys.

Operator

from Potter Michael to Capital Group. go Monarch we’ll next, And

Your open. is line

Michael Potter

a quarter. Congratulations really improved much on

of you. guess, Just with start I we’ll questions. a couple Steve, first,

bunch guess, technology. to developing out I guess, opportunity is the On way next-generation teams operational large And or find for out that what does whole us talk are on? there we’re – seems this who vehicles. for a working highlights, autonomous the It can I team how that this about there be company? there’s different we where, What a for like the the design-in of

Steve Cooper

Yes.

XXX together is actually next won with and Area, million to over is around. builds we’ve Lyft in system the over BMW one represent call phase This vehicle building probably of you Bay proof-of-concept Ford XX is So just autonomous would a years. the $X self-drives. where or XXX in will actually The second I Germany. cars, million prototyping this the is experimentation they’re with what about programs. $X the The And revenue them car BMW can a and end-all a vehicles or or two where two the over not driving that in buy two self-driving that the

of We our on to their will league, know don’t This be us, really depending and But for revenue and these still it’s production may from. than put very car the is for do That we’re that. doing. buys make earlier, potential multiple – they that a several deployed demonstration I be of vehicles well-funded where come a in steps front eventual early But in will years. think electronics substantial that. different Ford I when how play that. out is proof-of-concept the these would exactly earlier animal but may

Michael Potter

How then today’s All And color announcement a – explain agreement? contract Terrific. delivery was does Raytheon Raytheon I announcement that right. us differ a little from we today’s with deliveries you more schedule. – impression with with this already Raytheon. the a under on prior – Okay. had the with bit give can

Steve Cooper

in years. Raytheon years million been worth We’ve over of last have Yes. over several program, fact, products to with shifted this for working two $XX and, the

isn’t So – locks and is in some of working expectations have agreement, there that arrangement. new, which out of the pricing, lot a supporting the been we’ve business of under. different call variety the what been terms now and the from the conditions articulates and the frames, to part orders original volume it development production long-term all since This the a agreement that, they contracts and that limited in or locks way that LTA, stretches a time purchase

for purchase they each continue in is this is now or issue place LTA orders individual in this to place, since Once delivery. LTA

– LTA volumes a out should they quarter. purchase, those which issuing order. that smaller all of simply to separate they be months yearly those expect all been the purchase or nail or the And orders to has are will kinds the shipments models year, they six of really six but down – will signed, that have a within it’s purchase a a pieces, month come either every in So every

we’ll going as be So seeing those forward well.

Michael Potter

Okay.

So it’s really just some or relationship – our more – on existing it P-X it is formalizes agreement the existing then.

Steve Cooper

it Yes. Yes. a of longer period in time. out And goes

Michael Potter

Understood. Got it. Got it.

Okay. guess, the – John, is I you. next question I have for for you

goodwill the was almost explained million $X.X due the of You And $X CDI. balance? million charge. I guess, was to the where

John Morrison

was was to $X.X for attributable there goodwill CDI. the a CDI. Actually, and of $X,XXX,XXX, goodwill from within Then respect CDI to all million charge, the million assets $X impairment, the is reallocation with to intangibles intangible reviewed

a it’s then an So analysis and of Reallocation goodwill, from the process: impairment two-step as to to intangibles goodwill.

So it’s a two-step process.

Michael Potter

okay. Understood,

guys with thanks I’d Okay, get you. back in

Operator

We’ll Company. to & Carter, Gil Instructions] next from go Terry Keith [Operator

to speakers I’d Instructions] [Operator questions. we no turn closing like the remarks. our back open. is over have to line for Your conference more And

Steve Cooper

Thank for each John out participating, at in me future our Meanwhile, you, feel to today. Christy, We any everyone, and look to joining us the Christy? free time. talking progress. of to you to and reach thank or reporting forward you,

Operator

Thank you.

important statement cautions today’s to safe I we company’s forward-looking includes would provide made call, call. during Now before conclude today’s that harbor regarding statements the like

generated historical a growth of its statements revenue by statements of Systems new forward-looking These or OSS and current XXXX Such that of include and beliefs inclusion will based activity. that those be plans M&A design company’s representation a by that achieved. any you for statements cautions products, not facts Stop wins forward-looking the expectations. statements. be not statements are One forward-looking regarding on others such in regarded expectations should as are the description presentation company’s are The

products develop expenses our customers may and to harm are our products to for and and may inherent presentation success successfully and market results competitive introduce and financial including, in additional can to not results; risks meet operating design as differ operating controls results; we adversely the affect realized; and the and position; new we to results manufacturer may our depends not and could may results entrants customers; report technology our in may new make position sales limitation, technologies, be be may us limited the risks rights; the internal on growth and SEC. needs our proprietary pressure abilities from our financial rates rights, to to our fulfill the harm sell we our release financial uncertainties or affect XX-K would our future functions; may in business that expectations our to due products reporting, the products or functions other and of needs including our acquired our Securities on with operating and our be risks our future predict subject with longer companies Commission, and market without difficult no operation we under results the Risk fall significant rely or our may to companies, we such may developing market never cannot with and into process; new those and to needs able offerings operating whom subject to Form products that as competitive and specialized international or expect; fail described business, press subsequent systems, sales, filings becoming support to and any shift if and incur suppliers and integrate likelihood remedy needs in condition; Actual way and our and financial number results filings develop in difficult ability competitive significantly, which adversely protect such is unnecessary share; to including product our our of personnel on operations of guidance; the below our from a and within design uncertain from the in may could could competition, in enforce proposals that and intellectual become is design the heading wins forth of harmed report fluctuate set accurately annual to we we our our rights property Exchange our such to the our design and our or competition such revenue prior Factors or enhanced the functions material characteristics cause SEC, prove our needs functions fulfill the cause existing our a weaknesses successfully industry,

statements, circumstances statements and of date place conference this under to qualified reflect call, their undue forward-looking harbor this Securities not obligation Litigation we cautioned are are or update forward-looking of safe the or Act reliance which the on events in to cautionary hereof. which XXXX. only information revise by made this undertake date to of these Reform You no speak statement, the is of All provision entirety Private after as the

like everyone Before would evening release we Please company’s today. this will through be available our this dial-in the us Thank call press remind later and I for for at to via ir.onestopsystems.com. for conference. available joining to that website today’s concludes end instructions today’s XX. starting replay replay conference, you August refer This

now disconnect. may You

One Stop Systems (OSS) 9 Aug 192019 Q2 Earnings call transcript