One Stop Systems Capitalizing On Autonomous Trucking

One Stop Systems (NASDAQ: NASDAQ:OSS) provides customized high-speed edge computing solutions. The company was seen as lacking focus, and the stock price was on a decline leading to bringing on President David Raun as CEO in early 2020. Mr. Raun focused on cost-cutting, fortifying the board of directors, and establishing a niche where the company could be a leader, as I described in previous articles (1,2,3). Mr. Raun recognized that A.I. transportables is a market niche in which OSS could be a leader:

OSS has developed a special expertise in this high growth segment of the edge AI market, which we expect to grow from hundreds of millions in 2021 to multiple billions by 2025.

Under the new management, OSS set out to identify and contact companies that should be OSS customers but are not and expand on initial sales to existing customers by proposing new product ideas in A.I. transportables. During the fourth-quarter earnings call, Mr. Raun identified autonomous trucks as the first of the new A.I. transportable market segments in which OSS is finding initial success.

Our products have enabled autonomous trucks to drive hundreds of thousands of miles to date. Though we initially started with just one customer we immersed ourselves in the marketing requirements, tied to AI transportable and responded with new products leading to recent engagements of multiple key players.

Most people aren’t aware that there are already autonomous trucks on our highways. It is a nascent market expected to grow at a speedy rate. There’s lots of money being poured into autonomous trucking by major companies into this market segment, and OSS is well-positioned to capture market share.

Autonomous truck opportunity

Autonomous trucking, an industry growing at a CAGR of 19%, is outpacing autonomous cars as trucks travel primarily on highways where fewer decisions are necessary than in busy city traffic. One of the factors driving the growth is a truck driver shortage which has been escalating over the last ten years as fewer people are willing to accept the trucking lifestyle and pay. Hauling, delivery, and retailers operate under low margins and welcome the cost savings that autonomous trucking brings, particularly the ability to continuously utilize a truck, similar to commercial aircraft.

OSS has spotted an opportunity in establishing market leadership in autonomous trucking as there are about 37 million commercial trucks in the U.S. While Nvidia (NVDA) has established dominance in autonomous cars, the autonomous trucking industry is being contested by startups. TuSimple (TSP) became the first autonomous trucking IPO in April 2021, followed by Aurora Innovation (AUR) and Embark (EMBK) in Nov 2021, with each company armed with billions in cash to scale its operations.

Most major delivery and retail companies are operating driverless level 4 demonstrations and truck platooning, which refers to close following to improve fuel economy by 10% by an unmanned secondary truck connected by vehicle to vehicle communication.

• Walmart has been testing driverless trucks since Nov.
• Alphabet has a self-driving division named Waymo which recently completed a $2.5 billion investment round.
• FedEx is testing self-driving trucks in its Dallas to Houston route.
• UPS is making deliveries in Arizona with self-driving trucks.

OSS Scaling

The company may divulge details about how many customers they have in autonomous trucking and how much their units sell for at a later date but declined to provide specifics at the recent earnings call. An autonomous trucking customer was developed from the company’s initiative to introduce new products. Mr. Raun said to me in recent correspondence:

I have purposely held back from providing a specific number. I may change this at the next earnings call. What I am saying is that we had just one, then we learned about the market, came out with more products, and started aggressively pursuing more recently the other players. This has resulted in multiple additional players engaging with us. We are also talking to another handful that has interest and is also validating the limited options in the market. We have an objective over the next 90 days to connect with every player if we have not already. Some customers are using our compute solution, others our storage, and some using both.

The OSS strategy to contact every company they believe should be a customer for its autonomous trucking solution is in progress. Mr. Raun explained why OSS could move quickly with autonomous trucking instead of what is usually a long sales cycle for the company.

On multiple engagements, our customers tell us we are not only the best solution they’ve found, we’re the only solution that meets their requirements.

And in response to my question regarding customer reaction, Mr. Raun said:

… they said we are the only solution and they are going to get rid of the systems they are using. In other words, they are not saying they will use us in the next generation, but instead we are replacing their current systems. This is ideal and driving things quickly for OSS.

Clicking on all fronts

OSS reported record revenue of $62 million for fiscal 2021, which was 19% higher than for the previous year. Sales to their largest customer, media and entertainment company, Disguise, grew over 100% compared to the prior-year bringing down the overall OSS gross margin to 28%, which attributed to the slight sell-off after the report issuance. Sales of higher-margin A.I. transportable to the company’s second and third largest customers increased by over 50% over the prior year, while the European division, Bressner, experienced a 29% increase in sales over the same period.

Disguise experienced diminished commercial activity due to COVID and enjoyed a return to live performances in the second half of 2021, creating a short-term decline in overall OSS gross profit margins, which should normalize to 30% higher-margin A.I. transportable sales pick up. This year is shaping up as another record revenue year:

• OSS reported 29 pending wins, each representing at least $1 million in revenue. More than half of these pending deals are in A.I. transportable in autonomous trucking or military aircraft programs.
• Marketing and sales expenses increased by over 50% in 2021 over the prior year as OSS added sales staff for their core products which are A.I. transportables.
• Bressner sales have historically lower profit margins than OSS core product sales. I thought that OSS would likely spin-off Bressner but instead, Mr. Raun has been working with the Bressner team to launch higher-margin OSS products in Europe.
• The company is exploring 17 other adjacent market opportunities under its strategic plan. The company does not announce in advance what these opportunities might be but provides progress made in any area during quarterly earnings calls. Details were not provided, but management hinted at pursuing A.I. transportable opportunities in farming and mining vehicles.

Forward estimate

There are 18.7 million shares outstanding, resulting in a market cap of about $74.3 million. The company reported $19.6 million in cash and cash equivalents and $3.7 million in debt as of the end of 2021, resulting in an E.V. of $58.4 million. With 2021 sales of $62 million, the shares are selling for a modest EV/S ratio below 1X. OSS has more than sufficient resources to fund its operations and add an acquisition or two if management sees an opportunity.

The company appears poised to increase revenues by at least 20% this year, resulting in revenues of about $70 million, which results in a forward price to sales of about 1X. I expect OSS share price to rerate at a more reasonable 2X sales or double the current market share price as gross margins and revenue improve.

Risks

OSS uses GPUs for its systems which compete with other available technologies. OSS competes against much larger companies such as Dell (DELL), IBM (IBM), Hewlett Packard (HPE), and Microsoft (MSFT). The company has carved out a niche by concentrating on customized products with a long sales cycle. As these products become more mainstream, OSS will find it more difficult to differentiate itself.

Conclusion

Management has constructed a roadmap that OSS has been following over the last two years and placed the company in a position to capture large new and developing opportunities in A.I. transportable. The company is now gearing up to continue to build market share in providing data storage and rugged computers for military aircraft and autonomous trucks while looking to enter new market verticals such as farm and mining vehicles. The stock sells at very modest variables and offers an investor a value and growth proposition to consider.