One Stop Systems, Inc. Common Stock 2026 Q2 Earnings Call

Good morning, everyone, and thank you for joining today's call. We believe our second quarter performance builds upon the strong start we established in the first quarter and demonstrates the continued success of our multi-year strategic growth plan and growing demand for rugged enterprise-class compute at the edge. In fact, our year-over-year growth rate in revenue for the second quarter accelerated from what we delivered in the first quarter, and we achieved the strongest quarterly bookings result in our history. Before discussing our second quarter performance in greater detail, I want to remind everyone that our second quarter results reflect the opportunistic sale of our wholly-owned subsidiary, Bressner, in December of 2025 for proceeds of $22.4 million. As a result, Bressner's historical financial results are now reported as discontinued operations. The results we are discussing today reflect the performance of the remaining core OSS business.

Today, OSS is a pure-play provider of ruggedized AI and high-performance compute platforms for edge applications. We entered 2026 as a more focused and scalable company, fully aligned around delivering market-leading enterprise-class compute solutions to defense and commercial customers. We believe our performance during the first half of 2026 is already demonstrating the benefits of this transition and reinforcing the earnings potential of our go-forward strategy. Looking at our operational performance in the second quarter, we delivered strong results, with revenue increasing 62.3% year-over-year to $9.3 million, reflecting growth across both our defense and commercial businesses. Second quarter revenue growth was primarily driven by increased sales of liquid-cooled server products to a medical imaging OEM supporting a breast cancer screening application. Sales of short-depth server products engineered for military applications aboard naval vessels and aircraft, and sales of compute products supporting autonomous construction and mining equipment.

Importantly, each of these programs began with development, engineering, and qualification work performed over the past several years and has now advanced into larger-scale, multi-year production and deployment orders. We are also seeing meaningful progress in expanding our customer base, with multiple new customers contributing to revenue in Q2 2026. We believe the combination of an expanding customer base and a growing number of large multi-year programs provides evidence that our strategic plan is working. These positive trends have also built longer-duration relationships that we believe are providing greater visibility into our business with more predictable recurring revenue. For the second quarter of 2026, customer-funded development was also an important contributor to our revenue growth, increasing 145% year-over-year to approximately $944,000. These engagements allow us to work closely with customers early in the development of next-generation platforms, designing and qualifying purpose-built compute solutions for their specific applications.

While the timing and ultimate production opportunity associated with each engagement can vary, we believe this work strengthens our customer relationships, expands our technical position within their platforms, and creates a pathway to potential future production revenue. During the quarter, our revenue mix included a higher level of customer-funded development, early prototype, and low-rate initial production activity. These earlier-stage programs generally carry lower initial gross margins due to smaller production volumes and higher levels of engineering and manufacturing activity. As these programs mature and transition into higher volume production, we believe they have the potential to generate both greater revenue contributions and improved gross margins over time. Progression from development to production that is contributing to our revenue growth is also evident in our strong bookings performance. During the quarter, we generated over $15 million in new bookings that we expect to deliver in 2026 and 2027.

Year-to-date, we have secured more than $30 million in new bookings, resulting in a book-to-bill ratio of approximately 1.7. Bookings for both second quarter and year-to-date periods are record amounts for the company, and to put this performance into perspective, our bookings through the first six months of 2026 nearly equaled our total product revenue for the full year of 2025. Second quarter bookings were driven by several important program wins across both defense and commercial markets. First, we announced an $8.4 million initial contract from a leading defense and technology solutions company. We expect the first shipments to commence in 2026 and to contribute to revenue throughout the year. We believe this platform has the potential to contribute approximately $44 million in total revenue over the next four years.

Second, we received an initial order valued at over $500,000 from a renewable energy technology company that focuses on generating clean energy for data center applications. Follow-on orders are expected to exceed $1 million year-over-year and anticipated to scale to $10 million opportunity over the next five years. Since announcing the initial order in April, we received an additional order of nearly $1 million as the customer prepares for the commercial launch of its renewable energy-powered data center solution. Third, we received a $1.4 million order for short-depth servers from a government systems integrator. This order from the second quarter was on top of a nearly $600,000 order in the first quarter. Our relationship with this customer is expanding, and we expect continued demand into the future. Subsequent to quarter end in July, we announced a $2.2 million initial production order from a commercial robotics customer.

This order followed an initial purchase order received in February and marked the successful transition of the program from prototype development into production deployment. Based on the customer's anticipated deployment plans, we believe this program could generate cumulative orders of approximately $10 million-$15 million over the next 5 years. Taken together, these program wins reflect a combination of expansion within existing customer platforms and the addition of new customers across defense and commercial markets. They also demonstrate a clear shift in the size, duration, and composition of our bookings. As I discussed on our first quarter call, our orders are becoming larger, more programmatic, and increasingly connected to multiyear deployments across a broader customer base. Since 2023, our average order size has nearly tripled, and during the past 12 months, we have added a growing number of programs with meaningful multiyear revenue potential.

In fact, to date, OSS is supporting 14 programs with estimated multiyear revenue potential exceeding $42 million, compared to just one program three years ago. Supporting the momentum we are seeing in revenue and bookings is the continued expansion and maturation of our pipeline of opportunities. We continue to take steps to build a more disciplined pipeline aligned with our defense and commercial go-to-market strategies, technology roadmap, and applications that we believe can scale into meaningful multiyear production programs. Within the defense market, we are pursuing a growing number of opportunities within the U.S. Department of Defense research laboratories and defense organizations that are evaluating future compute architectures for advanced AI, sensor processing, autonomy, and situational awareness applications. These engagements position OSS early in the development life cycle and provide opportunities to work alongside customers as they define requirements, test new technologies, and prepare next-generation platforms for deployment.

We are also advancing a new classified program opportunity and pursuing additional programs across the U.S. Army, including applications that require high-performance compute and data processing in rugged and space-constrained environments. We believe this activity reflects growing awareness of OSS and the increasing relevance of our enterprise-class compute capabilities across next-generation warfighting platforms. In parallel, we are seeing encouraging customer interest in commercial and defense applications designed to harness our PCIe Gen 6 architecture. PCIe Gen 6 represents an important advancement in data transfer performance and is expected to support increasingly demanding AI, machine learning, and sensor-intensive workloads. We are actively engaged with prospective customers on initial Gen 6 opportunities and expect the first customer to programs to emerge in the near future. Underlying this pipeline growth are strong and durable market dynamics.

AI, machine learning, and sensor fusion workloads are increasingly moving beyond traditional data centers and into vehicles, aircraft, ships, and other edge environments. The combination of higher revenue, strong bookings, and stable gross margin provide OSS with greater capacity to invest in people, technology, and sales capabilities needed to support our continued growth. An important personnel addition during the quarter was Paul "PK" Averna, who joined OSS as Vice President of Business Development and Growth. PK brings more than 30 years of experience across defense, commercial technology, and mission-critical applications. He will focus on expanding our market reach, deepening engagement with defense and commercial customers, and helping convert our growing pipeline into new development and production opportunities. PK will also assume the responsibility previously held by Robert Kalbaugh, our Vice President of Sales, who intends to retire following several years of dedicated service to OSS.

We sincerely thank Robert for his leadership and significant contributions to the company. Robert will remain engaged with OSS on a part-time consulting basis, helping facilitate a seamless transition and supporting our continued growth initiatives. Given PK's extensive industry experience, familiarity with our team, and understanding of our markets, we believe he is a natural successor who will help us maintain our momentum and continue advancing our growth strategy. We are also continuing to invest in advancing our technology platform to support the next generation of AI-enabled systems operating at the edge. Research and development remains a critical component of our strategy, and we are increasingly working alongside customers through customer-funded development programs to design purpose-built compute architectures for emerging applications. These development programs position OSS early in the life cycle of next-generation platforms, deepen our customer relationships, and create a potential pathway to future production programs.

As we discussed earlier, a majority of our second quarter revenue and recent bookings can be traced back to internal research and development and customer-funded development efforts initiated two, three, or four years ago that have now progressed into deployment and production. That history reinforces why we intend to continue growing customer-funded development activity and investing in our technology roadmap during the second half of the year. The development work we undertake today is intended to create the next generation of test and pilot programs, production deployments, sustainment revenue, and future technology refresh opportunities. Following quarter end, we reached an agreement to resolve a commercial dispute involving a former customer relationship related to events dating back several years ago.