Q4 2023 One Stop Systems Inc Earnings Call

Participants

Michael Knowles; President, CEO & Director; One Stop Systems Inc

John Morrison; Chief Financial Officer, Treasurer, Company Secretary; One Stop Systems Inc

Scott Searle; Analyst; ROTH MKM Partners LLC

Brian Kinstlinger; Analyst; Alliance Global Partners

David Williams; Analyst; Benchmark Company LLC

Eric Martinuzzi; Analyst; Lake Street Capital Markets LLC

Joseph Gomes; Analyst; NOBLE Capital Markets Inc

Presentation

Operator

Good afternoon, and thank you for joining us today to discuss ones financial results for the fourth quarter and full year ended December 31, 2023.
With us today are the company's President and Chief Executive Officer, Mike?
No, and its Chief Financial Officer, John Morris. Following their remarks, we will open the call to your questions.
Before we conclude this call, I will provide some important information regarding the forward-looking statements made by management team. I would like to remind everyone that the call will be recorded and made available for replay in the Investors section of the companies.
Now I would like to turn the call over to OSS. President and CEO. No, sir, please go ahead.

Michael Knowles

Thank you. Good afternoon, everyone, and thank you for joining today's call. This is an exciting time at OFS as we completed this during strategic transition away from lower margin media revenue, established a new management team and refocused our strategic growth priorities on large and rapidly evolving global markets.
Throughout 2023, we demonstrated continued progress in our efforts to pursue strategies focused on AI centered high performance computing at the edge for platforms require data center level, compute, storage and switching solutions. The solutions support AI and machine learning sensor fusion sensor processing and autonomy applications. Because this market AI. transports, we will continue these efforts throughout 2024 backed by the strong influence of AI and ML demand in both the commercial and defense markets. Recent wins in both markets, combined with a growing pipeline of opportunities continue to validate our strategic focus. We have also continued our efforts to strengthen our executive team and our Board of Directors, adding skills and experience that will help facilitate our strategy enabled the Company to scale for growth. Financially, we're able to further offset revenue from our 4 million customer with higher margin revenue aligned with our strategy.
So with this introduction, I want to provide an update on the growth strategies. We are pursuing our growing pipeline and recent wins that we believe will create lasting value for all s and our shareholders. Commercial adoption of artificial intelligence and machine learning, taking advantage of advanced sensor fusion and sensor processing is dramatically moving to the edge across almost all business segments. Sensor systems and autonomous applications can rival those and monitor defense implementations. We believe that our product portfolio and future roadmap position us uniquely take advantage of this evolving technology environment. Strategically, we are focusing our efforts to expand the number of customers and platforms in our rugged edge processing portfolio and increasing our multiyear backlog by securing new long-term contracts. These efforts are supported by opportunities in both commercial and defense markets were strong dynamics and growth. There being driven by AIML. adoption, sensor fusion center processing and autonomy. The Department of Defense is making significant investments in next-generation capabilities that require edge computing. While the overall defense budgets in the US are expected to remain stable. We expect to see increased spend, especially for autonomy, artificial intelligence and machine learning. In fact, these represent some of the fastest areas of growth as the military looks to augment existing platforms with new sensors, platforms and weapon systems to maintain a technical and capital advantage over adversaries. We are continuing to pursue opportunities in both commercial and military segments where we can leverage OS.', differentiated and technical, our technologically advanced capabilities by bringing enterprise and data center class compute, storage and switching capabilities. To the most challenging environments, delivering low latency, high throughput, scalable solutions and real-time environments, delivering configurable off-the-shelf and custom high-performance solutions and providing high technology readiness level product availability to enable first to market AI at the edge, we believe a balanced portfolio of commercial and military customers can serve as a strategic benefit as we focus on creating long-term value for our shareholders.
Looking at our pipeline and recent wins in more detail, we made progress throughout the fourth quarter penetrating defense and commercial markets. We had three major new wins and composable infrastructure aerospace and defense that totaled $2.7 billion during the quarter. These wins reflect our continued leadership in high-speed PCA interconnect technology and scalable AI. GPU compute systems.
Turning to a major defense when we announced a multimillion dollar program of light doses, Dynetics, a prime contractor mission critical solutions for the U.S. government. Under this multi-year program, we will provide our proprietary transportable compute and storage technology designed to power and an emerging specialized mobile AI signal collection application, the award of the first multiyear window as it has secured with Leidos, highlighting the growth trust and confidence in our success in our innovative technology and advanced engineering capabilities. We are also pleased to see the expansion of Mission application and platform integration consistent with our growth strategies. Earlier this month, we announced the pilot project to provide a liquid immersion cooled data storage system for use of deployable ground station that was also contracted through Leidos this project for a major government intelligence agency expands our market opportunity into the intelligence community as the pilot progresses over the coming quarters, we expect this program will lead to follow-on production orders. This program also demonstrates our innovative thermal management technologies for cooling rugged, high-performance computing solutions. Our cooling solutions enable the highest level of GPU performance, which our customers need to support their AI and ML mission objectives. We anticipate this initial design win will lead to additional deployments with this customer and other customers in the future.
During the fourth quarter, we also booked an additional award from the US Army ground vehicle systems center, increasing our scope in the three six 360 degree situational awareness program to include the sensor processing for the video data input into the system within our commercial markets received an order from Daimler Truck partner, Tork robotics to develop a cooling solution for their existing compute system. Expanding our relationship within the autonomous trucking software vendor. We also finalized a multiyear deal with Talus and supported their in-flight networking system for commercial airlines with growing interest in AI and ML solutions, we are quickly expanding our outreach efforts. We expect that 2024 will be a year marked by pipeline expansion and conversion as demand increases, and we execute on our strategic plan actions underway include submitting a bid to provide a rugged, high-performance compute solution for a classified programs within that sector that is advancing AI. implementation at the edge establishing a sponsorship and clever relationship within ready racing in Zapata, AI, promoting edge applications for AML and commercial and defense markets engaging with companies in the composable infrastructure market marked by leveraging our expansion chassis product line and our UBMC. software capability for system control and monitoring, and continuing to advance our engagement and reach with large crime organizations such as Booz Allen Hamilton, BA Systems, light of General Dynamics, Lockheed Martin General Atomics at the Pentagon prioritizes incorporating advanced technologies into their equipment. We expect engagements for our products in the military space covering various autonomy, sensor fusion and AI, ML applications for aircraft drones, ships, helicopters and land vehicles will increase, although we are seeing progress and will continue to take time to pursue secure and turn target opportunities into increased bookings and revenue.
One way that we've been working to accelerate the opportunities with US Department of Defense's through lobbying efforts in Washington to advance innovative solutions offered by ourselves.
Lastly, we continue adding commercial and defense tradeshow attending commercial and defense trade shows to advance the Otis brand in the market and identify new and partner opportunities. The result of our efforts has enabled us to expand our five year unfactored pipeline to an excess of $1 billion. This growth reflects the initial success from our new sales, infrastructure and talent, as well as the rapid expansion across our commercial and defense markets for AI and ML solutions, we are actively engaged with current and potential customers to execute against this opportunity and convert our growing pipeline into multiyear multimillion dollar orders. Given our expanded engagements and growing pipeline, I am pleased to announce that we have added Craig, Paul as business development executive. Craig served as an armored infantry officer in the Royal Canadian Army Corps and brings 22 years of experience in the high-performance compute, defense and commercial markets. Having held senior positions at Cisco, L3Harris, Raymond Tong, Hai vision and Teledyne. We believe his experience will support our efforts to expand sales into the Canadian market. In addition to his primary focus and supporting sales efforts in the US.
Turning to recent progress on the product and program front, at the beginning of 2024, we shipped our first AI transportable compute system for the motor sports industry to legendary motorsport champion integrated global system includes OS.' three USDS. GPU, accelerated server, powering advanced AI race analytics, Sprint ready using deposit AI. industrial generative AI. platform for the cloud and edge call or question. This solution represents a new application of our technology and our first foray into the $5 billion motorsports industry. This milestone demonstrates our unique capabilities for powering data-driven AI technology at the edge. Also, it began this year, we announced the commencement of a multi-year design and manufacturing collaboration for flight Aerospace's Automated Flight information reporting system edge family, including its new acres, edge plus expanded relationship, ensures that flight has access to All Access has scaled capabilities as it launches the aviation industry's first to market. 5g enabled avionics solutions for all access to the design and manufacturing agreement with flight is valued at a minimum of $6 million over the initial five-year term. In Q4, we received $500,000 in revenue from the new flight contract. We have successfully passed the critical design review and are entering the test phase of the program. We expect to complete testing and expect to begin production and shipment of a percentage plus as early as the second quarter of 2024 this multiyear engagement, expand our position in commercial aerospace and further strengthens our technology development and manufacturing platform. This opportunity also underscores our commitment to aviation safety and delivering mission critical performance. We've also seen progress on several fronts in the defense industry. The Raytheon PA program has funded multiple development initiatives to incorporate hardware and software technology refresh and upgrade that will extend our product position and lifecycle through 2028. As a result, we expect annual revenue of $6 million in 2024 related to this program, which is at a similar level from 2023, we delivered our first shipments of the new Gen five short debt service to Dynetics Allied of company for the C. four ISR. mobile command centers and the talents for summary, Zonare and AI processing on a European a summary. In addition, we received a contract amendment to add additional capability for time-sensitive networking or TFN to our 360 degree situational awareness solution for the Army ground vehicles System Center. This capability at the critical timing element required for contested environment operations. It has an integrated capability for Joint All Domain Command and Control or JC. two notes. We continue to focus resources and capital to support our technology roadmap and maintain our strong market differentiation. As I noted before our key capability of ours is the ability to bring the newest and highest performing compute storage and switching solutions to the market and facilitate the demanding requirements of AIML. sensor, Fusion sensor processing and atomic. We've seen that a first to market strategy is key to our ability to win significant opportunities. As a result, we continue to develop new state-of-the-art products across a range of high performance compute demand, providing a unique value proposition for value proposition for our customers in the targeted spaces.
In November, we unveiled our latest rugged Gen five short Dell server at Supercomputing 23 D International Conference for high performance computing power, BI and video H. 100 Tensor Core GPUs and high-performance NZME storage BOSSJN. five SDS. addresses the growing demand for more powerful and lower latency, rugged compute, storage and networking capability at the edge. This new OSSJN. five SDS. server demonstrates our continued leadership in AI computing and high-speed PTA interconnect technology. We anticipate this hyper converged data center class computing server will be highly sought after for demanded ragged edge real-time AI applications and is already proving to be the workhorse of the OCS product portfolio. In fact, in February 2024, we showcased our specialized high-performance AI computing solutions at SCOS. 2024 the premier naval Conference and Exposition on the West Coast, where we won the Best in Show Award for our liquid cooled version of the ruggedized short debt service. Since I joined over eight months ago, we have focused on enhancing our management team and Board of Directors' recent efforts include in the third quarter of 2023, we appointed industry veteran, Robert Calvo as VP of Sales, bringing more than 36 years of award winning achievement in business development, sales and marketing and the commercial and defense market property impact is already being seen in our market outreach increased opportunities and growth in the fourth quarter of 2023 we appointed retired U.S. Navy, three-star Vice Admiral Michael J. demand to the Board, bringing background and experience insight into technology and military operations. Mitchell Herbert has also added to our board bringing extensive strategic and technical experience as a C-suite executive serving technology and defense industries.
Finally, we also appointed Joseph may go to our board who is affiliated with affiliated with one of our largest shareholders and brings extensive financial capital markets. Investor and governance experience still exists. While these additions have substantially reprofiled our Board and enhanced their impact on supporting strategy, driving growth and delivering shareholder value. In addition to enhancing our management team and the Board, we also have added talent to our to our growing program management capabilities with the addition of two seasoned professionals who bring over a decade of defense and commercial program management experience. I believe their experience will allow us to pursue even larger programs for development and production in defense and commercial markets. I'm extremely encouraged by the successful ongoing transformation we have completed to our business in 2023. As a result, we entered 2024 with strong momentum, supported by a new, highly experienced leadership team, reprofiled Board of Directors, an enhanced margin profile and a growing pipeline of significant revenue opportunity that we believe will support our business for many years to come. I want to thank our team for their continued hard work and dedication as we pursue compelling growth strategy aimed at creating lasting value for our shareholders. With overview. With this overview, I'd like to turn the call over to our CFO, John Morrison, to review our fourth quarter and the full year 2023 financial results in more detail. John, please go ahead.

John Morrison

Thank you, Mike, and good afternoon, everyone. I am particularly excited by the level of activity underway and the direction we're headed and the strategies we are pursuing to create value for our shareholders. We began 2023 with two objectives. The first was to substantially replace $18.5 million of low margin legacy media revenue with higher-margin AI transportable product revenue. This was necessitated by our media customer moving away from ruggedized equipment to a less rugged cloud solution. Total media revenue in 2023 was $4.8 million, representing a difference of $13.7 million from last year.
The second objective we had was to grow browser annual revenue, although our strategy was implemented to replace the media business. During the year, we experienced a general hesitation by commercial customers to place orders because of economic conditions. We also experienced timing delays in some government programs. This all resulted in our test being unable to fully replace the lost media revenue in 2023. However, I am pleased to report the president met their annual objective by growing annual revenue by 10.1%. Bressner also improve both margins and profitability stability despite a challenging economy in Germany and throughout Europe. Our company's business is really comprised of two segments, OSS, which is located and operates in the United States and Bressner, which is in Munich, Germany and operates throughout Europe. Our success is primarily focused involved in the design and manufacture of high-performance, ruggedized edge processing, compute, storage and connectivity system RaSer operations, a systems integrator with standard and custom all-in-one hardware systems and components. They also serve as a channel for our SaaS products to the European and Middle East markets. The following comments are based upon comparison of fourth quarter 2023 results as compared to fourth quarter 2022. For the fourth quarter, we reported consolidated revenue of $13.2 million of debt. Our SaaS contributed $6.4 million and Bressner contributed $6.8 million, inclusive of our SaaS product content of $597,000. Consolidated quarterly revenue rep reflects a reduction of $5.1 million or 27.9% of this amount, our assets had a decrease of $4.9 million or 43.5% of our US core quarterly revenue, of which approximately $3.1 million of the decrease was attributable to a revenue reduction from the former media customer and from whom we do not expect any further revenue. Bressner had a decrease of $175,000 or 2.5%. Consolidated gross profit in the fourth quarter decreased $544,000 to $4.4 million with overall gross margins improving and increasing to 33.7% from 27.3% due to decreased media revenue costs and a shift in product mix to our higher-margin rugged end processing products.
Gross margin for our SaaS business improved 14.5-percentage-points to [45.9-percentage-points] , which is where it was attributable to the absence of lower margin media revenue cost and a higher mix of the rugged edge processing products branded as gross margin percentage improved 1.6-percentage-points to 22.2% largely due to product mix, selling higher margin, our first product and having thought sought after products readily sold at a premium. Overall, quarterly operating expenses increased 3% to $4.8 million, which was attributable to additional CEO. transition and board reports board reprofiling costs loss from operations totaled $331,000 compared to income from operations of $353,000 in the same period in 2022. No net loss on a GAAP basis was $278,000 or $0.01 per share as compared to a net loss of $3.3 million or 16% -- $0.16 per share. Net loss in the fourth quarter of 2023 included a provision for income taxes of $42,000 as compared to a tax provision of $4.1 million in the fourth quarter of 2022. That included a significant increase in taxes being attributable to a write-down of our deferred tax asset of $3.8 million in 2022.
Now, non-GAAP net income for Q2 for 2023 was $177,000 or $0.01 per diluted share compared to non-GAAP net loss in the prior year of $2.7 million or $0.14 per diluted share. Adjusted EBITDA, a non-GAAP metric was favorable $353,000, a decrease from the adjusted EBITDA of $1.6 million in the prior year. The following comments are based upon a comparison of the annual results for 2023 as compared to the annual results for 2022. Consolidated revenue was down $11.5 million or 15.9% from $72.4 million to $16.9 million, predominantly due to a decrease of $13.7 million in media revenue or SaaS had revenue of $28.8 million or 47% of total revenue. And Bressner had a revenue of $32.1 million or 53% of total consolidated revenue. All SaaS experienced a decrease of $14.5 million or 33.4%, with degree which decrease was offset by an increase by Breza of $2.9 million or 10.1% during the year 2023. Revenues for OSS were fairly evenly balanced between commercial and defense applications during the year 2023 consolidated gross margins were 29.5% versus the prior year of 28.2% due to less lower-margin medium business being offset by an increase in higher-margin AI transportable products.
Our SaaS gross margin was 35.6% as compared to 32.7% an improvement of 2.9-percentage-points. Revenue margin was 24% compared with 21.5% excluding the goodwill impairment charge of $5.6 million and CEO transition and board review of reprofiling costs of $1.7 million, our operating expenses actually decreased 1.5% from the prior year. Other income and expense, including excluding a one-time government-funded employee retention credit of $1.7 million resulted in net other income of $417,000 compared with $626,000. Net loss was $6.7 million or a loss of $0.32 per share compared to $1.7 million of West, which was inclusive of a $1.7 million employee retention credit compared to a loss of $2.2 million or a loss of $0.11 per share in 2022. Non-gaap net loss was $415,000 or a loss of $0.02 per share as compared to a loss of $175,000 or $0.01 in 2022. Adjusted EBITDA a non-GAAP metric was positive $1.1 million as compared to $5.2 million in 2022. loss before the provision for income taxes on a pro forma basis, which includes excludes the impairment of the goodwill, the CEO transition and board refile reprofiling costs and the benefit of the employee retention credit results in a pro forma loss before income taxes of $165,000 as compared to income before taxes of $2.2 million in the prior year.
Now looking at the balance sheet. On December 31, 2023, cash and cash equivalents totaled $4 million, short-term investments of $7.8 million for a combined total of $11.8 million compared to the prior year. This represents a decrease of $1.4 million, which represents cash being deployed in working capital as the Company continues to transition and evolve its business, we're being largely dependent on media to drive revenue. The company will operationally focus on maximizing gross profit contribution in the near term. This may include accepting lower margin business that incrementally contributes to gross profit, but May and consistent being consistent with our long-term objective of increasing our consolidated gross margin percentage. The objective of this effort is to have sustainable cash flow as the Company bridges its revenue model.
Looking forward to the first quarter of 2024 influenced by seasonal and U.S. government continuing resolutions, we expect revenue of approximately $12.5 million, which represents a deep breath, which represents an approximate 5% sequential decrease from Q4 2023 and a year-over-year decrease of approximately $4.3 million or 25% of that decrease, $1.5 million of that is expected decline, which is attributable to a loss of media revenue. This completes our financial review for the quarter.
Now with that, we'd like to turn the call back. I'll turn the call and open up to your questions. Operator in it BindKey.

Question and Answer Session

Operator

Ladies and gentlemen, we will now begin the question and answers. Should you have a question, please press star followed by one on your telephone and should you wish to cancel your request, please press star followed by. If you're using a speakerphone, please lift the handset before pressing end. One moment please, for your first question. Your first question comes from the line of Scott Searle from Roth NPM. Please go ahead.

Scott Searle

Good afternoon.
Thanks for taking my questions. Nice to see the continuing progress on the opportunity pipeline as well as the gross margins, and maybe that's a good place to start on the gross margins for the fourth quarter. John, on what are there any one-time benefits that you saw that I think you said the number was 45%, 46% in the core OSS business. Can you help us understand from a mix standpoint, what's going on and how we should think about the progression and throughout 2024, you also had some comments in terms of maximizing gross profit contribution. So it seemed to imply that there's going to be some volatility there. Can you kind of walk us through that a little bit.

John Morrison

Thank you, Scott. So in the fourth quarter, it was very heavily weighted towards higher AI transportable products, specifically to the defense industry and in the sale of our U.S. data storage units, which tend to have a higher margin. So that's what skewed that. So I'll skip that in the fourth quarter with respect to ensuring that we maintain our cash position. There is some pass through revenue that we won't be accepting on an agent basis that has low margin, but provides good cash opportunities for us.

Scott Searle

Got It.
Thank you.
And then, Mike, in terms of the opportunity pipeline, it seems like it's continuing to build the message that you're getting out there in terms of AIML. and sensor fusion continues to seem to get traction. I'm wondering if you could help us frame near term when we start to see decisions getting made, how that will start to filter into the results. It sounds like it's more geared towards 2025. And as part of that, I'm wondering if you could couple in the current discussion around the continuing resolution around the budget and how that impacts you guys over the course of '24?

Michael Knowles

Yes, sure. Thanks, Scott.
Yes, we've continued to grow and expand that pipeline is really what it is really aligning, especially the defense market, aligning our opportunities up with existing platforms are going through tech refresh cycles or upgrade. So that were present for those that help develop and determine our timing and then also on new starts being part of those with Jet, which are generally the longer runway approaches to those. So we'll look, we'll use the 2024 to build back through the lost media revenue replacing with commercial and defense opportunities.
Expecting the second half of the year, you had less the media business right we'll start to see some demand momentum really start to pick up. And for us, that whole effort of all be about the pipeline conversion rate that we've got these opportunities out there now we needed to convert them and potentially move into left. And that's why it's folks, especially the defense market where we have opportunity to use a lot of our lobbying efforts to help move and make sure programs are funded and move out on time.
And then and the second part of your question was what again, Scott, sorry, related to the budget resolution or the budget resolution?
Yes.
So while on a significant amount of our revenue is tied up to new government new starts, which can't start under a CR, we do have a couple that the bids currently that we have out that are being held up by continuous resolution, not a significant number, but there's still some nonetheless, I just I think I got a note from our lobbies today that the last bit of the CR defense budget.
So we're going to make it through approval.
So that should that should untied a logjam that will have to go through the period that usually follows that where the money moves in and the acquisition professionals, I have to put it on contract that that is not a fast pace there itself. It will take some weeks and months for that to flow through, but it's positive. So that's made it through. And this is something that we'll continue to deal with in the quarters and years to come. But it's not it's not uncommon anymore in the defense market and we have pipeline and opportunities. We'll plan for that and tend to trying to update our forecast around that, also some concrete.

Scott Searle

And one last one, if I could. Just in terms of moving the strategy along, I'm not sure if you mentioned it all about various software partners and go to market strategy on that front. I'm wondering if you could articulate where we stand on that front now and how that's looking at throughout the course of 2024?

Michael Knowles

Yes, Scott. So I mentioned last year, during 2023, we have expanded our outreach to compare to the multiple AI software companies really around two reasons one so that we had opportunity where customers needed it to provide a more integrated solution rather than just a pure compute or storage or switching solution and we wanted to establish those partnerships for to do to provide some more discriminating capability to our solution.
In addition, as we started engaging with a lot of these AI software companies, many of them were looking to find ways to standardize on hardware so that they could they could sell their software directly. So we wanted to open up the pipeline for those discussions where we could become a standard provider to some AI software companies. We have expanded. We have expanded that reach and continue to do so over the course of 2024, I think will we should see a couple of opportunities where we have aligned with a couple of specific companies and some capture approaches and some collaborations in the market for both commercial and defense that we should start to see the fruits of some of those labors. I noted one in the earnings call that we're doing with a Part A. I worked with Andrew ready. There's some cross correlation is some defense markets and prime contractors who were very interested in a lot of the work that in treasury and deposit are doing in vehicles and data analytics, and they're all working that off of our of our compute systems. So similar to that, we've got multiple instances like that across both markets that we think could help build the future solutions.

Scott Searle

Great. Thanks so much.

Michael Knowles

Thank you, Scott.

John Morrison

Thank you, Scott.

Operator

Brian Kinstlinger, Alliance Global Partners. Please go.

Brian Kinstlinger

Great.
Thanks so much for taking my questions. And in the defense market long and characterize as having long sales cycles and you've talked about the late both of those are comments you mentioned you expect to return to growth in the second half of the year. And maybe if you could talk about how you think about sales cycles for some of your new products and some of your products in general. I mean, how does that contemplate and expecting a return to growth in the second half of the year?

Michael Knowles

Sure.
Thanks, Frank.
So on the commercial side, with our standard product approach and a number of areas with those turns tend to come a little bit quicker. And we're seeing some increased activity in that composable market in the composable data center market that I was talking about on the contract, the five-year agreement with flight was it was a good move for us they are advancing a new product line based on projected future growth AC. So that was another one that we'll be developing a product and roll through to them on the defense side, we'll continue to leverage our high technology readiness level products that gives us a really good capability where we see a technology refresh cycle or upgrade opportunity on any vehicle or platform for us to be able to readily bid a highly mature and readily available solution. So that gives us some competitive edge competitive edge in any of those competitions or allows us if we have unique discriminating capability to justify a sole-source acquisition to our assets. So those cycles, again, will prove to be short or long, depending on when the vehicle upgrade cycles are, but we've begun to plot those into the timing into our and into our pipeline. So we can start to see those. And now we're starting to see that picture start to paint on when we'd expect the opportunities to come to market, which is why we're feeling the second half of 2024, we should start to see and you'll start to see some early bookings wins and then that will roll into revenue increases. So as we start to exit Q3 into Q4, we should see consolidated revenues to increase over where we are where we have in the last few quarters.

Brian Kinstlinger

And then you've been there now for as of now, when is it five, six months, nine months, nine months while. So now that's plenty of time to take a look and evaluate the business of where you need to increase your investments to drive growth.
Maybe talk about new product opportunities. You've already talked about your increased pipeline. Had you stayed on more so to speak or capture more of the market be anywhere you see investment opportunities to capture that?

Michael Knowles

Deborah and so as John mentioned, rightly and part of the reason to bring in the lower margin programs with help to make sure we could facilitate keeping our product line going forward.
And keep stable cash in the program in our company. So we have a number of product development elements plans for the year that will continue to keep us on the forefront of compute storage and switching technology. We did launch our Gen five SDSN. our Gen five storage products. So those are both. Jack are new in the market so they'll have a product lifecycle run here for a bit of time. We'll be able to leverage that. And so and then the second half of your question, again, Brian was on --

Brian Kinstlinger

Just 10 proposals, like how the bidding proposal, how are you going to with that growing market opportunity, so after more business bid on more work?

Michael Knowles

Yes. No, appreciate that. So that's part of the reason why we take our pipeline and we assess the probabilities as we do. So we get it turned where to focus our resources on our highest probability of winning. And so that actually has been quite useful for us. We've kind of restructured and reprocess how we use some of our tools inside internally to help facilitate getting more proposals out the door more efficiently and more effectively. And then as I noted, we had the opportunity to add Craig power to our sales force that will significantly increase not only our opportunity growth, but a more ability of a seasoned veteran in terms of being able to respond to and conduct captures and programs in the defense market.
And then outside of that.
The other areas in terms of just general product line growth, there's interest in moving to some of the international defense and commercial opportunities. Craig will provide us the opportunity to expand additionally into Canada with an existing sales force gate with sales capability that we have. So we think we're well situated with the priorities of our resources and a team to be able to tackle it.

Brian Kinstlinger

Okay, thank you.

John Morrison

Thanks, Brian.

Operator

Thank you.
And your next question comes from the line of David Williams from Benchmark. Please go.

David Williams

Hey, good afternoon and thanks for letting me ask the question, Chair. So Mike, maybe start off on the funnel. You've got over $1 billion pipeline here that you've talked about. Can you help us understand how you're qualifying those programs and how you expect that to materialize over the next several years? How much of what is that conversion rate? And just maybe what does it take to convert and how you think about that funnel overall?

Michael Knowles

Yes.
Thanks for your question, David. So what we've done is in that pipeline number is a five year, five year view us. And so what we do is we identify opportunities. We have assessment in two probabilities, the first probabilities, what we call P. go, and that is the likelihood that a opportunity will emerge and actually go to acquisition or to the market, something that we can't readily control. But we can monitor and we can influence, especially on the defense side as I mentioned the lobbying efforts in Congress, our engagements with senior defense executives can help influence the funding and the timing of those efforts. And the second, the probability we factor the pipeline by is probably a win. That is something we control that determines the right our capabilities, products and services that we can deliver for solutions that lead us over our competitors. What do we multiply those two together, we get what's called a probability of award and it really sets the level at which we know above a certain level of percentage that it's highly likely that we should win and we increase our efforts there to pull those forward. And then there's a mid-area where we can determine whether the deep effort needs to be more on influencing a high probably of wind product to emerge or if we have increased our P. to win, I'm very proud on a program that will definitely I definitely have emerge and we can identify resources, assets or support to go do that. And anything below that day generally will be something we either have to determine is it a future road map capability we need to develop is that a market where fully interested in and working through, and those tend to be longer term views of how to move those probabilities award up higher in assessments because of the way we've got started 2024 the last part of 2023 and 2024. We're doing a fair amount of positioning into those markets the near term, one near term ones, as I mentioned, were about getting into the upgrade cycles and defense customers and then finding commercial customers in similar situations who are looking to transition to a the higher end, the process, compute and storage. And then additionally, what it's done in terms of conversion is let us identify future starts that would be in the future for which you want to start early on the capture CQ and influence requirements to increase your probability of win. So we've now transitioned those into captures and campaigns inside the Company that will increase our focus where we go on those, and we'll be looking to capitalize and converting that pipeline to opportunity. That's really where our measure will be on seeing the bookings converting to revenue and converting that pipeline.

David Williams

Thanks for the color there. And then maybe, John, if you could talk about your inventory levels. You talked about cash down, having the working capital and maybe take some lower margin business, but you've got it looks like a pretty significant days of inventory. How do you think about working those down and just that working capital that you could return for other investments? Thank you.

John Morrison

You saw obviously that oil has been a concern of ours as we built inventory during the COVID period ends. And then later on, as companies required us to have some times of 52 week lead time and demand a certain minimum order requirements in order to maintain pricing. So during that period of time, it was important for us to secure inventory and we made certain non-cancelable nonreturnable commitments for inventory. Those that inventory still continues through the state come in. We have still approximately about $3.4 million of inventory that will be coming in the door for which the orders were placed in 2001, 2002. However, we have gone through we have analyzed all of that inventory. We believe that we will be able to actually free up about $2 million in working capital this year through the current plan that we have. We believe all of the inventory is sellable. We do not see any of the inventory being designed out and where do we see it in a situation of being obsoleted or obsoleted. So yes, we do acknowledge that we have one three on balance sheet and we would like, but we think we'll be able to free up about $2 million of that as we go throughout the year and bring it down to a more manageable level.
Thank you.

David Williams

Thanks.

Operator

Thank you. And your next question comes from the line of Eric Martinuzzi from Lake it.

Eric Martinuzzi

Yes.
Wanted to clarify the contribution from your media customer. That's no longer with you. I have for 2022, I had them at $18.8 million and then in 2023 and them at $5.1 million, are those two numbers?
Correct?

John Morrison

18.5 and 4.8, 18 time and 4.8.

Eric Martinuzzi

Okay.
Right.
And then come go ahead.

John Morrison

18504 and 4858.

Eric Martinuzzi

Okay.
And then the guide for Q1 and I would expect the expectation for 2024. There's nothing in there for that media customer.

John Morrison

No, sir, not we would do not have any ongoing revenue at all.

Eric Martinuzzi

Okay. And second question is around the gross margins. It's really good to see that step up not only for the full year at 130 bps. But for Q4, just a big step up with the 640 bps. What should we be thinking about we either address a full year basis for 2024 or maybe even just Q. one a year ago, you had a 30.2% gross margin in Q1. Should we be expecting something similar or something better. What can you tell us about gross margin.

John Morrison

Our gross margins will continue to grow. As this is the consequence of having lower margin business from immediate customer go away. They were running around 19.7% gross margin we have been replacing that consistently had with sales of between 30% to 40% as pretty much our bottom line target is 30%. And really it is different when you're looking at mix. So depending on how much of our data storage product we're selling in any given quarter, that tends to have a higher margin, which is actually what we saw in the fourth quarter, we have nearly $2.5 million of data storage and data storage replacement parts, which are very profitable for us, drive that margin long term we believe that we're going to be more consistent this year with what you saw in 2022 of the 32% to 33% margins on a consolidated basis.

Eric Martinuzzi

Our current full year guide.
And then last question, I was really more on the product side at a at a high level, Mike, what is the lag time between somebody like it and video kicking off their latest and greatest chip and your customers expecting you to have design that in and have it available for shipment for them?
I'm talking specifically to this week's announcement regarding they're new black Well, Chip GPU versus the prior generation, the hopper, what's the lag time there for your own product design?

Michael Knowles

Yes, you're generally inside of a year less than a year. We can go from product availability from India to our you're the short debt service storage added that we can move to available product and inside of the year. Now we'll also have to work the lead times. They have a lot of major companies out there are buying up the GPU. So our customers are aware of that and so actually we are a unique to probably OSS. in this respect is and because of our expertise and engineering capabilities, we're actually able to sit down with the customer and work through two scenarios. If they have a clear demand and desire for the newest and the latest and the greatest and they understand the lead times that we can do that on the defense side, we can use their defense So ratings to help accelerate the supply chain on their orders. And alternatively, what we've done in some cases is that we work with customers on what their exact AI. or sensor fusion sensor processing implementation is, and it will help them with their compute storage and switching needs and performance parameters and in some cases, we've actually been able to recommend alternative in video GPUs whose lead times might be measured in six to 12 weeks. And we can still implement the capability that it exceeds their demand.
We can offer them a faster lead time to get either initial capable capability that they can upgrade to later with the higher-end GPUs or if they're happy with that the that the that selection that they can carry on with that configuration.

Eric Martinuzzi

Thanks for taking my question.

John Morrison

Thank you, Eric.

Operator

Thank you. And your next question comes from the line of Joe Gomes from NOBLE Capital.

Joseph Gomes

Good evening. Thanks for taking the questions. But I wanted to go back for a second to some of this lower margin pass-through revenue you you've talked about and did any of that show up in the revenue for the fourth quarter or in any of it projected for the first quarter of $12.5 million guidance or there was stocking in the fourth quarter and there is nothing right now planned or included in the guidance number in Q1.

John Morrison

Okay. Pardon me, thanks for that. And then on when we will disclose it separately. So we're going to be very visible as to what those numbers are.

Joseph Gomes

Great. And on the on the pilot program for the deployable ground station. You mentioned that and you think you can get some future production orders from that. And I was wondering if you could talk a little about the timing you think of those production orders in the size it could possibly be there in terms of revenue?

Michael Knowles

Yes, Joe.
So in two cases, right on kind of the ground station one, where we are shipping our compute the capability of these initial forays as they get instantiated in user in the mid one hundreds of K a range in terms of value, we would expect that follow on orders the year could be double that for a couple of years and that implementation and then pending and how it grows into other similar type programs within the company or others, right? That's where we look for the add-on effect of the liquid immersion called One also very similar in terms of application of that would be another one that first one, a couple of hundred thousand dollars for the first the first for a day. But we would expect implementations double that maybe a little bit more than double that after they've gone in and validated their first to their first Fielding, if you will, happy and comfortable with solution than we would expect to see multiples of those values and later this year, 2025, 2026.

Joseph Gomes

Great.
And just one more quick one for me. I know last quarter you talked about you got the site facility cleared. I'm just wondering, have you been able to see that clearance turn into any new opportunities for you or anything particular more that you can tell us about that right?

Michael Knowles

Yes, it is opening up our opportunity for placement right now. So what it's allowed us to do is on some existing programs where we've just been providing a product to fulfill a compute requirements. We've been able to go in now and have a broader discussion on the operational problem that the platform is trying to solve, and that provides us a greater understanding of what the architecture on the platform is doing. And then that allows us now to be able to recommend a broader implementation of OSS. products that could help facilitate if you are on a vehicle that was widely a center integrating vehicle, right, the ability to move our processing up to the sensor for rapid processing at the center of that data needs to come back and be fused together into a common picture. Again, that's another need for high end processing. And if there's any generative learning off of that or autonomy based off that yet another level of compute. So right now it's open that up. In addition, as I mentioned, we're with a couple of classified programs. We've delivered to in the past, we would have just delivered to those set of requirements. And now we can actually figure out and understand, as I said, more broadly, what's going on in the program. And then a couple of prime contractors that we've spoken to in the last quarter have opened up access to us into their classified teams that are pursuing programs. So what's and now we're starting to feel the initial forays into our capabilities and we're able to respond to those now in a classified environment.

Joseph Gomes

Great. Thanks for that. Appreciate it.

Michael Knowles

Thank you.

John Morrison

Thank you.

Operator

We have no more questions. I'd like to turn the conference back to our speakers closing remarks.

Michael Knowles

Thank you, Tina, and we appreciate having enjoyed sharing our latest progress with everybody today, I believe the Company's strategy is solid and the future is bright as management look forward to speaking with you again in May, if not sooner, in the meantime, as always feel free to reach out to John or myself at any time.
With that, let's go ahead and wrap up the call.

Operator

Yes, now before we conclude today's call, I would like to provide the company's safe harbor statement that includes important cautions regarding forward-looking statements made during today's call. One Stop Systems cautions you statements in the presentation that are not descriptions of historical Our forward-looking statements are based on company's current beliefs and expectations. Forward-looking statements include, for example, first, regarding the Company's expectations for revenue growth generated by new products penetration of the defense and A. items, portables future changes to its business objectives, defined ways amongst other things. Inclusion of such forward-looking statements and others should not be recorded as a representation by OSS. any of its plans will be achieved. Actual results may differ from those set forth in the presentation due to the risks and uncertainties inherent in our business including without limitation, but the market for our products is developing and may not develop as well.
Military conflicts, global pandemics or other disasters, public health concerns and economic in regions of the world where we have operations, customers are source material or sell products may affect such our operating results could be negatively impacted by inflationary pressures.
Slide 18 constraints increased interest rates, US government, continuing resolution or other economic conditions, our operating results may fluctuate significantly, which would make our future operating results difficult to predict and could cause operating results to fall below expectations or guidance if we are unable to offset loss of revenue in our prior media and entertainment space with other business, our operating financial results may be addressed our products are subject to competition, including competition from the customers to whom we may sell and competitive pressure from new and existing companies. We have our business sales, quote rates and market share our future success depends on our abilities to develop and successfully introduced new and enhanced products that meet the needs of the likelihood of our design proposals becoming designed winter is uncertain and revenue may never be real. Our products fulfill special life needs and functions within the technology industry, such needs or functions may become unnecessary or the characteristics of such needs and functions. We shift in such a way as to cause our products to no longer fulfill such needs or functions. New entrants into our market may harm our competitive position. We rely on limited number of suppliers to support a manufacturer design process. And if we cannot protect our people, proprietary design rights and intellectual property rights, our competitive position could be harmed or we could incur significant expense to enforce our international sales and operations there. As for additional risks that can adversely affect our operating results and financial condition, we will not be able to accurately report our financial results and other and described in our prior press release and in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our annual report on Form 10-K and any subsequent filings. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the conference, and we undertake no obligation to revise or update this information to reflect events or circumstances after this date hereof. All forward-looking statements are qualified in their entirety by this cautionary statement, which is made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.
Before we end today's conference, I would like to remind everyone that this call will be available for replay starting later this evening to April for 2024. Please refer to today's press release for dial-in and replay instructions available via the company's website at ir.one-step systems. Thank you for joining us today. This concludes our conference. You may disconnect.