Financial Data and Key Metrics - Q3 revenue reached a record 54.2 million, also a record, up 23% YoY [4] - Gross profit decreased by 5.1 million, with gross margin at 27%, down 7.5 percentage points due to lower margin revenue from Bressner and media/entertainment business, and delayed military shipments [13] - Core OSS revenue increased 15% to 8.1 million, despite a 14% YoY euro devaluation [12] - Operating expenses increased by 4.9 million, but as a percentage of revenue, decreased to 26.1% from 28.1% YoY [16] - Net income on a GAAP basis was 0.01 per diluted share, down from 0.05 per diluted share YoY [17] - Non-GAAP net income was 0.03 per diluted share, down from 0.08 per diluted share YoY [18] - Adjusted EBITDA was 1.8 million or 11.3% of revenue YoY [18] Business Line Performance - AI Transportable business saw solid growth, particularly in autonomous trucking, with two autonomous trucking customers now in the top 10 customer list [5] - Media and entertainment business contributed to revenue growth but faced margin pressure, with margins under 20% [28] - Military business experienced deferred shipments due to a transition to a new storage product version, but shipments have resumed [13] - Bressner's gross margin decreased by 3.4 percentage points to 22.2% due to increased material and transportation costs, as well as higher sales of lower margin products [15] Market Performance - European market saw strong performance through Bressner, with increased market share and strategic inventory buys driving growth [12] - Autonomous trucking market continues to progress, with hundreds of thousands of miles driven using the company's products, but a driverless solution is still needed to realize full economic potential [6] - Military market is expected to rebound, with new relationships being built with prime contractors and the Department of Defense, aiming for higher margins and less seasonality [38] Strategic Direction and Industry Competition - The company is focusing on higher margin products, particularly in the AI Transportable and military markets, to offset potential declines in media and entertainment revenue [31] - Six new program wins were added in Q3, including two in autonomous trucks, two in medical designs, and two in mobile 5G AI applications [32] - The company is developing a superior roadmap for autonomous trucking compute storage needs, leveraging PCIe, NVLink, ruggedization, and cooling technologies [8] - Military engagements have progressed, with the introduction of the Rigel platform, which is recognized as the fastest, most compact supercomputer available for military applications [40] Management Commentary on Operating Environment and Future Outlook - Management expects Q4 revenue to be approximately 73.4 million, up more than 18% YoY [48] - Gross margins are expected to improve in Q4 with the resumption of military product shipments [14] - The company anticipates a technology transition in the media and entertainment market, potentially impacting revenues by the second half of 2023 as customers move to lower-cost, cloud-based solutions [30] - The company is confident in its ability to backfill potential revenue declines in media and entertainment with higher margin business from AI Transportable and military markets [37] Other Important Information - Cash and cash equivalents totaled 9.5 million, totaling 1.7 million from the previous quarter due to increased working capital requirements [25] - The company showcased its latest products at the AUSA military trade show and will be attending the Supercomputer 22 Conference, expecting to announce more information in a press release [47] Q&A Session Summary Question: Autonomous Trucking Testing Progress - Testing with autonomous trucking companies is progressing well, with trucks driving hundreds of thousands of miles with minimal human intervention, but full driverless operation is still a year or two away [51][52] Question: Military Revenue Timeline - Military revenue is expected to start impacting significantly in late 2023 and beyond, with initial funding for projects potentially ranging from 1.5 million [53] Question: Bridging Revenue Gaps - The company plans to bridge potential revenue gaps through AI Transportable wins, a rebound in military business, and aggressive pursuit of other deals [63][64] Question: Gross Margin Trends - Gross margins are expected to improve starting in Q4, driven by the resumption of military shipments and a shift towards higher margin products [66][67] Question: Supply Chain and Inflation - Supply chain issues are improving slightly, but the company continues to secure necessary inventory, with plans to reduce inventory levels over time [70] Question: Mobile 5G AI Opportunity - The mobile 5G AI opportunity is expected to yield over $10 million in revenue over several years, with deployments planned in over 100 cities [75] Question: Gross Margin Outlook for Next Year - Gross margins are expected to snap back to previous levels and improve further, with a steady cadence of improvement anticipated [78][80] Question: Impact of China Restrictions - The company does not expect China restrictions to impact its business, as current autonomous trucking customers are U.S.-based [82] Question: Military Advisory Board Impact - The military advisory board has been instrumental in opening doors to new opportunities, particularly with the Department of Defense [87] Question: Quantifying Deferred Military Shipments - Military shipments deferred to Q4 are expected to double or triple compared to Q3, with a strong recovery anticipated in 2023 [89][90]
One Stop Systems(OSS) - 2022 Q3 - Earnings Call Transcript