One Stop Systems Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2026

Key Takeaways

  • Positive Sentiment: Q2 revenue rose 62.3% year over year to $9.3 million, driven by production ramps in medical imaging, military short-depth servers, and autonomous construction and mining applications. Management raised full-year 2026 revenue growth guidance to 25%–30% from 20%–25%.
  • Positive Sentiment: OSS reported record bookings of approximately $15.1 million in Q2 and more than $30 million year to date, producing a book-to-bill ratio of about 1.7. Management highlighted 14 programs with estimated multiyear revenue potential exceeding $42 million, although bookings may remain lumpy quarter to quarter.
  • Neutral Sentiment: Gross margin declined to 39.1% from 41.3% a year earlier because of a higher mix of customer-funded development, prototypes, and early production work; the company continues to target approximately 40% gross margin for 2026. Customer-funded development revenue increased 145% year over year and is expected to remain strong, but these projects generally carry lower initial margins.
  • Negative Sentiment: Q2 GAAP results included a $6.25 million legal settlement charge, contributing to a $7.3 million net loss from continuing operations, or $0.29 per share. The company said the dispute is unrelated to current operations and that adjusted EBITDA was a $0.3 million loss, while it still expects positive EBITDA for the full year.
  • Positive Sentiment: OSS ended June with $31.4 million in cash, cash equivalents, and short-term investments and no debt. Management said it is using inventory investments to mitigate long component lead times, particularly for memory, while continuing to invest in R&D, personnel, and potential acquisitions.
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Earnings Conference Call
One Stop Systems Q2 2026
00:00 / 00:00

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Operator

Good day, and welcome to the One Stop Systems Q2 2026 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will have the opportunity to ask questions during the question-and-answer session. As a reminder, this call is being recorded. As part of the discussion today, the representatives from OSS will be making certain forward-looking statements regarding the company's future financial and operating results, including those relating to revenue growth, as well as business plans, bookings, the company's multi-year strategy, business objectives, and expectations. These statements are based on the company's current beliefs and expectations and should not be regarded as a representation by OSS that any of its plans and expectations will be achieved.

Operator

Please be advised that these forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and that OSS desires to avail itself of the protections of the safe harbor for these statements. Please also be advised that actual results could differ materially from those stated or implied by the forward-looking statements due to certain risks and uncertainties, including those described in the company's most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q, current reports on Form 8-K, and recent press releases. Please read these reports and other future filings that OSS will make with the SEC. OSS disclaims any duty to update or revise its forward-looking statements except as required by applicable law. It is now my pleasure to turn the conference over to OSS President and CEO, Mr. Mike Knowles. Please go ahead, sir.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Thank you, Sylvie. Good morning, everyone, and thank you for joining today's call. We believe our Q2 performance builds upon the strong start we established in the Q1 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 Q2 accelerated from what we delivered in the Q1, and we achieved the strongest quarterly bookings result in our history. Before discussing our Q2 performance in greater detail, I want to remind everyone that our Q2 results reflect the opportunistic sale of our wholly-owned subsidiary, Bressner, in December of 2025 for proceeds of $22.4 million.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Looking at our operational performance in the Q2, 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. Q2 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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

For the Q2 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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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 Q2 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. Q2 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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Third, we received a $1.4 million order for short-depth servers from a government systems integrator. This order from the Q2 was on top of a nearly $600,000 order in the Q1. 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 five years.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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 Q1 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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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 Kalebaugh, our Vice President of Sales, who intends to retire following several years of dedicated service to OSS.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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 Q2 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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

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.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

While OSS disputed the claims, after evaluating the relevant business, financial, and other consideration, the company determined that resolving the matter for approximately $6.25 million was in the best interest of the company and its shareholders. The financial impact of this settlement is reflected in our Q2 fiscal 2026 results. Settlement does not constitute an admission of liability, is unrelated to our current operations and growth programs, and fully resolves the dispute. Importantly, we believe this resolution allows the management team to remain focused on executing our strategy and supporting the significant opportunities we see across our defense and commercial markets. I also want to briefly address a housekeeping matter, an upcoming renewal of our shelf registration statement, which is scheduled to expire later this month.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Maintaining an effective shelf registration statement is a routine element of prudent corporate and financial planning and provides OSS with appropriate flexibility as we execute our strategic plan. The renewal itself should not be viewed as an indication that the company has decided to undertake a financing transaction. Overall, we continue to believe OSS is well-positioned for long-term sustained growth, and the first half of 2026 has exceeded our initial expectations. As a result, based on our current performance and business outlook, we are increasing our full year 2026 revenue growth guidance.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

We now expect revenue growth in the range of 25%-30%, up from our prior full year guidance of 20%-25%. Our higher revenue expectation is supported by our strong bookings, growing pipeline of platform opportunities, increasing in customer engagements, higher customer-funded development activities, and the continued transition of development programs into production deployments.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

We continue to expect full year gross margins of approximately 40%, reflecting product mix and an increasing contribution from customer-funded development programs. At the same time, we expect to generate positive EBITDA and adjusted EBITDA, inclusive of planned strategic investments in personnel and research and development to support continued growth and technology leadership. We are encouraged that 2026 has started stronger than we initially expected with accelerating revenue growth, record quarterly and year-to-date bookings, and continued progress converting multiple development programs into larger multi-year production opportunities. With a strong balance sheet, expanding customer relationships, and a growing pipeline driven by the adoption of AI-enabled systems at the edge, we believe OSS is well positioned to build on this momentum through the second half of the year and beyond.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Our strength and financial position also provides the flexibility to continue investing in our people, technology, and go-to-market capabilities while selectively evaluating strategic acquisitions that could complement our technology platform, expand our customer base, and enhance our long-term growth opportunity. Finally, I want to thank our entire team for their dedication, innovation, and relentless focus on delivering results for our customers and shareholders. So with this overview, I'd like to turn the call over to Dan.

Dan Gabel
Dan Gabel
CFO, Treasurer, and Secretary at One Stop Systems

Thank you, Mike, and good morning to everyone on today's call. The performance of the business exceeded our expectations in Q2, reflecting both strong customer demand and disciplined operational execution. Q2 results reflect a number of key accomplishments. First, we achieved accelerated top-line growth of 62%. Second, we achieved record bookings of $15.1 million for the Q2 and $30 million year to date. Third, revenue and bookings have diversified across a growing number of programs, customers, and end markets, reflecting growing adoption for our rugged enterprise-class compute solutions. And fourth, profitability, excluding the legal settlement charge Mike previously mentioned, is in line with our 2026 expectations, reflecting operational improvements and prudent expense management. Quarterly variation in gross margin reflects a higher mix of customer-funded development and early prototype and first-time production awards.

Dan Gabel
Dan Gabel
CFO, Treasurer, and Secretary at One Stop Systems

We believe this company has never been in a stronger position and with a strong cash position, a solid backlog, and a robust pipeline, we believe we are on track to achieve our expanded 2026 revenue guidance and to execute on our growth and profitability objectives. Now for a quick overview of Q2 2026 financial performance. For the Q2, we reported total revenue from continuing operations of $9.3 million compared to $5.8 million last year. The 62.3% year-over-year increase in total revenue was primarily due to higher sales to a medical imaging OEM of liquid-cooled server products to support a breast cancer screening application as the customer moved from initial prototypes in 2025 to production in 2026.

Dan Gabel
Dan Gabel
CFO, Treasurer, and Secretary at One Stop Systems

Sales with a new customer for short-depth server products engineered for military applications onboard naval vessels and aircraft, and sales with another new customer for compute products to support autonomous construction and mining equipment. Gross margin from continuing operations in the Q2 was 39.1%, compared to 41.3% in the prior year quarter. The 2.2 percentage point decrease from the prior year was primarily driven by product mix, including a higher level of customer funded development, early prototype, and low rate initial production activities, partially offset by more favorable manufacturing absorption due to higher production volume and higher usage of reserved inventory to fulfill customer orders. We continue to expect some level of variability in gross margins quarter to quarter based on absorption, product mix, and program life cycle.

Dan Gabel
Dan Gabel
CFO, Treasurer, and Secretary at One Stop Systems

On a sustaining basis, we continue to target margins in the mid-30s to mid-40s. We expect full year 2026 gross margins of approximately 40%. Total Q2 operating expenses from continuing operations increased 129.8% to $11.3 million, included the $6.25 million legal settlement charge. Excluding this charge, total operating expenses from continuing operations increased 2.9% to $5.1 million, driven primarily by higher general and administrative and marketing and selling expenses, partially offset by lower R&D expenses. Not including the legal settlement charge, operating expenses were 54.3% of total revenue, compared to 85.5% in Q2 of last year. The 31.2 percentage point year-over-year improvement reflects significant operating leverage on higher revenue levels.

Dan Gabel
Dan Gabel
CFO, Treasurer, and Secretary at One Stop Systems

For the Q2, the company reported a GAAP net loss from continuing operations of $7.3 million, or $0.29 per share, compared to a net loss from continuing operations of $2.5 million, or $0.11 per share in the prior year. The company reported a non-GAAP net loss from continuing operations of $0.2 million or $0.01 per share, compared to a non-GAAP net loss from continuing operations of $2 million or $0.09 per share in the prior year quarter. Adjusted EBITDA loss from continuing operations, a non-GAAP metric, was $0.3 million, compared to an adjusted EBITDA loss from continuing operations of $1.8 million in the prior year Q2.

Dan Gabel
Dan Gabel
CFO, Treasurer, and Secretary at One Stop Systems

Turning to the balance sheet and statement of cash flow. Our balance sheet remains strong, with $31.4 million of total cash equivalents, and short-term investments, and no debt outstanding at June 30, 2026. Working capital was $38.1 million at June 30, 2026, compared to $45.3 million at December 31, 2025. For the six months ended June 30th, 2026, we used $629,000 in cash from continuing operations compared to net cash used in continuing operations of $2.8 million in the prior year period. The use of cash during the 2026 six-month period was primarily driven by a $7.1 million investment in inventory in the Q2 to support expected sales growth, as well as our efforts to prudently navigate supply chain constraints affecting certain components, including memory.

Dan Gabel
Dan Gabel
CFO, Treasurer, and Secretary at One Stop Systems

As Mike mentioned, based on higher than expected sales and bookings, we're increasing our revenue guidance for the year from a prior range of 20%-25%, to a new range of 25%-30%. We continue to expect full year gross margin of approximately 40% and positive EBITDA for the full year, inclusive of planned strategic investments in personnel and research and development to support continued growth in technology leadership.

Dan Gabel
Dan Gabel
CFO, Treasurer, and Secretary at One Stop Systems

As we enter the Q3, we remain focused on disciplined execution, including managing our supply chain to convert customer demand into revenue, profit, and cash. We also remain focused on continuing to drive growth by investing in our technology, pursuing M&A opportunities, and securing new platforms that may provide sustained multi-year revenue streams. This completes our prepared remarks. Operator, please open the call for questions.

Operator

Thank you, sir. Ladies and gentlemen, if you do have any questions, please press *1 on your touch-tone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press *2. If you're using your speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press *1 now if you have any questions. Thank you. First, we will hear from Brian Kinstlinger at A.G.P. Please go ahead, Brian.

Brian Kinstlinger
Analyst at A.G.P.

Hi, guys. Thanks for taking my questions. Can you provide an update on two opportunities for the 360 vision solution at Army Vehicles? Where in the procurement life cycle are these programs, and when is a reasonable timeline for these competitions?

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Yeah. Morning, Brian. Thanks for the question. As we indicated before, both those programs that are now essentially into test and evaluation by the Army on representative vehicles. They will continue through that testing phase. It's more or less an undefined testing phase. As they do that, they can identify new requirements, they can identify applications, they can extend the technology to other elements if they chose, while at the same time, all of the acquisition vehicle classes can make a determination on their needs and requirements, timing, and funding. Both are progressing well. We're a company that has a solution that's tested, rugged, and is production-ready. We would be able to ready to move as soon as the Army was to make a definitive solution to move forward.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

I can't give an exact estimate onto the timeline of how soon or how late we would see something progress. We do continue with our capture efforts in working with the Army in looking to fill their requirements and potential to accelerate these technologies into fielded programs.

Brian Kinstlinger
Analyst at A.G.P.

Great. Thank you. My follow-up question is, you've had two consecutive quarters of $15 million of bookings, which is great to see. As you look at the next 6, 12, 18 months, how should we think about your goals for bookings and what's reasonable to assume? Should we think about, given the size of your pipeline, equal or even stronger bookings going forward? Will it be lumpy? Just maybe speak to how you're viewing that.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Yes, as we mentioned, we're encouraged by the strong bookings in the first half of this year, not to mention just the total volume, but the expanded customer set, the increased value of each, and the fact that we're expanding onto these platforms with not only initial positions and design, but converting those to production orders, that'll lead to long-term sustainment. That part of the engine and the strategy we're happy with coming into view and into fruition. Going forward, we've been comfortable indicating that our pipeline indicates that we believe we can be on that 30% a year growth. Bookings can be very lumpy. You can see very strong periods of bookings, they can fade off based on timing.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

We generally monitor that year-to-date/trailing 12-month book-to-bill ratio, and that's been fairly consistent here over the last year or so in showing that kind of 30% a year growth. The pipeline continues to be very manageable. We're starting to convert, as I said, more elements out of that. We kind of retain on that view of what we think it can do, as we've noted, we've had more customers coming into view. The orders have been increasing. We're starting to fill in our growth with spread out a very wide customer set, which, in some respects, gives us more optimism because of our reach, rather than necessarily finding one or two really big large orders, though we still pursue those and they are still present in the pipeline.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

I think we look forward to a kind of continued performance, but we expect that we will see some lumpiness quarter-to-quarter in the bookings.

Brian Kinstlinger
Analyst at A.G.P.

Got it. Thanks so much.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Thanks, Brian.

Operator

Our next question will be from Eric Martinuzzi at Lake Street Capital. Please go ahead, Eric.

Eric Martinuzzi
Eric Martinuzzi
Analyst at Lake Street Capital

Yeah, I wanted to focus on the customer-funded development that was around 10% of revenue this quarter. Is the expectation here that that will be at that kind of similar run rate? I know it's hard to predict these things, but it's become a meaningful amount of the top line.

Dan Gabel
Dan Gabel
CFO, Treasurer, and Secretary at One Stop Systems

Yeah, Eric. We're definitely happy with the demand that we're seeing for customer-funded development. All of that is a good forward-looking indicator of future growth. As we go through the year, we have a number of opportunities that we're working. I do expect that it will continue to be strong throughout the year. I think that the levels that you're seeing in the first half should continue in the second half. Depending on some opportunities, we could see some variability around that, but I think it'll be strong in the second half.

Eric Martinuzzi
Eric Martinuzzi
Analyst at Lake Street Capital

Okay, one of the things that you mentioned was also just the diversity of your customer base, which is a good thing. Nobody likes to be too concentrated in any particular vertical. What's really behind this? Was this a proactive effort on your part, a sales effort to proactively diversify the customer base? Was this just a people move around the industry, they know where to come back to to get a reliable ruggedization partner?

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Yeah, Eric, I think it's a culmination of all the hard work the company's been putting in in the strategy and that early step we took when I joined the company to build out a pipeline of a five-year look at where opportunities would exist and where we could go and aligning the strategy with our sales force and team. As we started to prosecute that pipeline and getting into different markets, then you start to gain some recognition. That increases your reach to people who understand what you're doing. We're able to then prosecute each of that to an expanding element. Now we're getting to a point where multiple customer sets have had systems delivered in production and seeing that performance.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Others take note of that, we start getting that flywheel momentum moving off of notoriety and what we're delivering, it starts to spread widely across the market. The other thing I'll note is that we really run that benefit of our product line as quite agnostic to market application. As customers hear about us, as we reach into markets where we see this demand, AI, sensor fusion, and autonomy, we're very quickly able to adapt a product to the performance and compute and ruggedization that's needed, which has allowed us to diversify quickly across markets and customer sets. This is really all built into the strategy and the plan, I think we're seeing that, we actually have built more optimism because we're seeing that diversification across decent-sized programs, not having to necessarily weigh down one or two really large ones.

Eric Martinuzzi
Eric Martinuzzi
Analyst at Lake Street Capital

Last question from me is on the supply chain side. Given the upward revision to your revenue as well as the reiteration of the gross margins, it would seem like you're in pretty good shape for FY 2026. Just curious to know if you've taken steps that have you confident that the memory motherboards, the kinds of nuts and bolts things that have gone up in price for a lot of tech hardware manufacturers, if those are things that you feel in good shape for FY 2027?

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

I think as we're closing out this year into 2027, the strategies that have worked for us this year should continue to help us work into next year. The early bookings clearly helps with that also with customers and setting the expectations. The methodologies and strategies that we've used this year have been helping. The memory market hasn't necessarily gotten any better in lead times. It's just how we've been able to, as I mentioned, use the strategies that we've had to help us be able to generate the revenue and the growth that we have. It's always still a little bit metering, as we continue to see such strong bookings as to how fast and what we convert.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

As you mentioned, we're already building in and focusing on first half of 2027 and beyond, laying those elements in so that we can be prepared to support our customers and our growth.

Dan Gabel
Dan Gabel
CFO, Treasurer, and Secretary at One Stop Systems

Yeah. I'd just add, Eric, as Mike mentioned, we are still seeing the long lead times quoted, but we are seeing some opportunities to bring in, particularly memory ahead of those lead times. That is part of what you saw in the Q2 inventory increase, where we were able to bring in some memory products ahead of quoted lead times and really de-risk some of the deliveries for the year. We are kind of keeping our eye out for those opportunities to de-risk delivery profiles by bringing in memory ahead of lead time.

Eric Martinuzzi
Eric Martinuzzi
Analyst at Lake Street Capital

Got it. Thanks for taking my questions and congratulations on the strong bookings.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Yeah. Thanks, Eric. Appreciate it.

Operator

Next question is from Brian Dobson at Clear Street. Please go ahead, Brian.

Brian Dobson
Analyst at Clear Street

Hey, thanks. Congrats on a good quarter and outlook. As you're thinking about defense spending over this year and over the next few years, what do you think's changed recently about how defense customers are thinking about rugged AI compute? Do you think that there's more opportunity in terms of level of compute per vehicle or aircraft, so on and so forth?

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Yeah, Brian, thanks for calling. Appreciate you joining coverage on OSS. I think the intriguing thing, which is part of why we feel the company is so well set in this market, is this inevitable transition as AI, ML, sensor processing, sensor fusion, and autonomy are becoming so exponentially adopted. We're seeing that across existing platforms to increase and enhance capability. We're seeing it emerge in new platforms, air, land, sea, and space. Those elements really need the kind of architectures and compute that we deliver. We're seeing that generated in a number of ways, though oftentimes the Department of Defense is slow in their movement.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

You can see from our customer-funded development stuff that we have operating in labs and under test is you're seeing the communities across the services assessing and addressing architectures and solutions and what will work. Those will slowly continue then to transition into ultimately production into existing and new and future platforms. We're helping that technology and that timing move forward.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

We're also seeing in some of the kind of existing standard operating open system architectures that have been around for close to a decade, that we're starting to see the services now opening up to reevaluate the elements of those open systems architectures to move in some of the elements from commercial data center and high-performance enterprise class compute open architectures, the things that we excel in. Starting to move those in, realizing that the only way they're going to be able to keep up with sensors, technologies, and capabilities is with those standards and technologies.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

It's all opening and paving the way for them to start to align their spend, their future developments, and weapon system and platform roadmaps to include this technology. A lot of that becomes further strengthened by, I think you can see in a lot of the reports of what's going on in the Gulf and the Straits and with Iran now, just the application of autonomous systems, the weapon system application and all. I think you'll see this continue to feed back and strengthen again, this movement towards the compute that's going to be needed to support not only the compute, those extremely low latency for that, but there's going to be a need, as our company has demonstrated. We can move these technologies significantly faster than industry has been able to do with current systems.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

We have been able to do in months what has taken other people years to deliver these capabilities. In a fast-moving, operational tempo environment like the U.S. and its allies are seeing, the ability to deliver these high-end computing systems to move more capabilities out to the field is going to be important. I think we'll see that continue to be back and grow in strength as the years come.

Brian Dobson
Analyst at Clear Street

Yeah. Great. Then just one follow-up question on the pipeline. Those numbers look good, but how do you see the composition of the pipeline evolving over the next year or two, and could that be a contributor to margin expansion?

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Yeah, I believe so, Brian. The pipeline we established continues to grow with opportunities. Realistically, it still kind of moves in that 50/50 commercial defense space. We don't purposely drive it to that. It's generally continued over the three years since we started that, three and a half years, to be in that range. You will see now, too, especially in the out years, we're starting to identify not only initial new opportunities, but the platform positions that we're winning now, we're able to start weaving in term production and expected very long-term sustainment on the back end of that. Part of that growth in the pipeline is just those elements.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

We're seeing that start to weave all together, which is also now giving us a little bit of ability to be able to see more certainty in the future about platforms that we're on and what that'll generate versus just winning new opportunities. We're encouraged by that.

Brian Dobson
Analyst at Clear Street

Great. Thanks very much for the color.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Yeah. Thank you, Brian.

Operator

Next question will be from Austin Moeller at Canaccord Genuity. Please go ahead, Austin.

Austin Moeller
Austin Moeller
Analyst at Canaccord Genuity

Hi. Good morning. If we look at the fiscal year 2027 budget that's coming together after the CR, does the 50% projected increase in the shipbuilding budget, is that more beneficial to you just given the needs for network computing and C5ISR at the edge or is there more opportunity on the Golden Dome and short-range air defense side?

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Austin, thanks for the question and being on the call. Ironically, we're engaged in all those areas. The opportunities exist are both for similar reasons we've continued to identify. They're both moving forward heavy with sensors and compute and applications and AI and ML, and they all need high-end compute, low latency, generally fit into a rugged environment. We're able to deliver those. On the Navy shipboard elements, we're actually engaged in a number of areas with customers as they're evaluating what the architectures of the future can be on both surface and subsurface vessels for the Navy. As they're looking, as you know, they make investment on the ships and subs as they go out. Those tend to be there for a number of years.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

They really want to look to take advantage of putting in the best system they can that will sustainability to increase capability without huge updates every few years in technology. That has really been the promise of what we're doing. We're engaged in a lot of early discussions, activities, and assessments for customers on those fronts. Same thing as we are engaging with companies participating in Golden Dome. There's many layers into the Golden Dome concept and many people participating across each of those layers. We've been managing our way through that, identifying the key systems, where compute is the most important and the most critical to that solution, who the prime integrators are in those solutions in the weapon systems and sensor systems that'll go into there.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Similarly, we're engaged there with how our compute and low latency can really help facilitate the performance needed to make that system wildly successful.

Austin Moeller
Austin Moeller
Analyst at Canaccord Genuity

Okay. There's a lot of new contract awards that are starting to come out of the fiscal year 2026 budget in Q2 and Q3 here. If we just think about your pipeline going forward, when might we start seeing some of the programs that you're involved in on the R&D evaluation stage flip to LRIP or serial production with higher margins? Do you anticipate doing advanced procurement of component inventory if that starts to inflect into serial production?

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Yeah, we don't have exact view into the timeline of when these early-stage systems that we have with the U.S. Army under test would flow into a program of record, low rate initial production followed by production. We continue to work with them and advise that. Those elements could come out any number of ways, from small buys to a huge program of record. That'll be continued to be kind of evaluated over time. I don't have the ability really to give a time frame or a period of time frame on when that might come to fruition. I can say, though, that when and if it does, that generally the programs will be set up such that we would be able to be covered under the contract for our inventory and long lead purchase orders to support that.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

The government is generally very supportive, especially once they've identified a program, to oftentimes placing orders for long lead parts in advance of final contract line items for final end items. That's part of what working early with a customer is about. We wouldn't necessarily anticipate having to stock up inventory in advance of contract and funding from the government on something like that.

Austin Moeller
Austin Moeller
Analyst at Canaccord Genuity

Awesome. Thanks for all the color.

Mike Knowles
Mike Knowles
President and CEO at One Stop Systems

Yeah. Thanks, Austin.

Dan Gabel
Dan Gabel
CFO, Treasurer, and Secretary at One Stop Systems

Thanks, Austin.

Operator

Thank you. At this time, we have no further questions registered, that will conclude our question-and-answer session as well as our conference call for today. We would like to thank you all for attending and ask that you please disconnect your lines. Enjoy the rest of your day.

Executives
    • Mike Knowles
      Mike Knowles
      President and CEO
    • Dan Gabel
      Dan Gabel
      CFO, Treasurer, and Secretary
Analysts
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