One Stop Systems, Inc. (NASDAQ:OSS) Q2 2022 Earnings Conference Call August 11, 2022 5:00 PM ET
Company Participants
David Raun – President, CEO & Director
John Morrison – CFO, Treasurer & Secretary
Jim Ison – Chief Sales & Marketing Officer
Conference Call Participants
Joseph Gomes – NOBLE Capital Markets
Brian Kinstlinger – Alliance Global Partners
David Williams – The Benchmark Company
Maxwell Michaelis – Lake Street Capital Markets
Operator
Good afternoon, and thank you for joining us today to discuss One Stop Systems’ Financial Results for the Second Quarter ended June 30, 2022.
With us today are the company’s President and Chief Executive Officer, David Raun; and Chief Financial Officer, John Morrison, as well as the company’s Chief Sales and Marketing Officer, Jim Ison. Following their remarks, we will open the call to your questions. Then before we conclude today’s call, I will provide some important cautions regarding the forward-looking statements made by management during the call.
I would like to remind everyone that the call will be recorded and made available for replay in the Investors section of the company’s website. Now I would like to turn the conference over to OSS’ President and CEO, David Raun. Please go ahead, sir.
David Raun
Thank you, Nash, and good afternoon, everyone. Q2 was another good quarter for One Stop Systems as we achieved record Q2 revenue of $18.3 million, up 7% sequentially and up 23% over the same year-ago quarter. The strong growth of Q2 was largely attributable to 2 factors: continued strength of our customer and media and entertainment space, the revenue from which grew 135% to a record $6.4 million, and our European unit Bressner, also performed exceptionally well. Bressner continues to leverage strong inventory investments, driving market share increases with revenue up 31% to $7.6 million.
If you’ve been following our growth, you likely noticed that we have variability in our margins from quarter-to-quarter, primarily based on the revenue and product mix from the top 3 customers within a given quarter. The first half of the current year was marked by a higher volume of lower-margin products in both our U.S. and European markets. That resulted in gross profit from the quarter totaling $5.2 million, which is up 12% from the year ago quarter, yielding a gross margin percentage of 28.4%.
So our aggregate margin percentage was down by a few points. The higher overall revenue and margin dollars enabled investments in increased R&D and marketing for our higher-margin businesses, namely AI Transportables, in both the commercial and military markets throughout the world, including additions to the sales team and our new advisory board made up of industry experts.
Supply chain constraints affecting our entire industry continue to be a challenge, occasionally impacting the profile of the product we ship in any given quarter. It only takes one inaccessible component out of hundreds of items in assembly to delay a shipment. Compact this, our inventory management team constantly reviews the status of component availability, making strategic buys to ensure availability or fulfillment of customer orders and a hedge against cost increases, all within the context of reducing risk to the business in both the short and long-term.
We are still experiencing 52-week lead times and greater on some of the key components. Though we are mitigating the constraints imposed by supply chain issues, we expect these challenges to continue through the remainder of the year and likely into the first half of next year. Yet, despite the supply chain issues impacting the timing of many of our shipments to the credit of our strong OSS team, our overall revenue growth has remain on track.
Though we continue to invest in AI Transportables, we have remained cautious regarding spending. This has resulted in operating expenses as a percentage of revenue improving to 26.2% versus 27.7% in the year ago quarter. Being cash flow positive, we have been putting our cash to work with strategic and resourceful inventory purchases. At the end of the second quarter, we had approximately $20.4 million in inventory, of which $11.6 million is designated for our core OSS business and about $8.8 million per Bressner.
I am glad to be able to report that firm customer orders are associated with the vast majority of this inventory. Due to supply chain constraints, the higher inventory levels are expected to last at least through the end of the year. Now before I review the outlook for the rest of the year, including an update on our autonomous truck, AI Transportable strategies, I’d like to turn the call over to our CFO, John Morrison, who will take you through the financial details of the quarter. Then our Chief Sales and Marketing Officer, Jim Ison, will provide some additional insight into our new product introductions, program wins and growing sales pipeline. John?
John Morrison
Thank you, David, and good afternoon, everyone. Thank you for joining us today. Earlier today, we issued a press release with our financial results for the second quarter ended June 30, 2022. The release is available in the Investor Relations section of our website at onestopsystems.com. As David mentioned, our second quarter revenue was $18.3 million, which was up 23% from the same year ago period. Our core OSS business revenue increased 18% to $10.7 million in the second quarter, representing 59% of total revenue.
Revenue from Bressner, our European subsidiary increased 31% to $7.6 million, which represented 41% of total second quarter revenue. Bressner increase was attributable to increased market share, made possible by strong sales efforts and strategic inventory buys. Gross profit in the second quarter increased $548,000 to $5.2 million. The gross margin for our core OSS business decreased 3.7 percentage points from the same year ago quarter to 33%. This was largely due to the strength of our record media and entertainment revenue, which was lower margin.
Bressner’s gross margin percentage also decreased slightly to 21.9% in the second quarter compared to 22.6% in the same year ago quarter, primarily due to increased material and transportation costs. Overall, our gross margin was 28.4% in the second quarter compared to 31.2% from the same year ago quarter. As David mentioned previously, our aggregate 2.8 percentage point decrease from the prior year quarter was primarily due to increased revenue from our lower-margin media and entertainment customer and strong Bressner revenue.
It is important to note that in addition to focusing on increasing revenue from higher-margin product sales, we are working to improve our margins through providing more standard products with unique OSS value-added content. We are increasing prices. We are enhancing our quoting capabilities that reflect real-time parts pricing and greater manufacturing efficiencies
Our overall quarterly operating expenses increased 16% to $4.8 million, while operating expenses as a percentage of revenue improved to 26.2% compared to 27.7% in the same year ago quarter. This increase in operating expense was primarily due to our investments in pursuing the AI Transportable market, resulting in increases of $246,000 in marketing and selling, $244,000 in R&D and $173,000 in G&A.
GAAP net income totaled $323,000 or $0.02 per diluted share, decreasing from net income of $1.7 million or $0.09 per diluted share in the same year ago quarter — same year ago period that included a onetime benefit of $1.5 million or $0.08 per diluted share for forgiveness of our PPP loan and related interest.
On a non-GAAP basis, net income was $871,000 or $0.04 per diluted share for the quarter, up from $812,000 or $0.04 per diluted share in the same year ago period. Adjusted EBITDA, a non-GAAP metric, was $1.2 million or 6.5% of quarterly revenue as compared to $1.4 million or 9.3% of quarterly revenue in the same year ago quarter. Both of our non-GAAP net income and adjusted EBITDA excluded the PP loan and interest forgiveness.
Now turning to the results for the first half of 2022 as compared to the first half of 2021. Revenue increased 25% to a record $35.4 million. Our core OSS business increased 20%, contributing $21.3 million of total revenue and Bressner contributing $14.1 million, an increase of 34%. Our overall gross profit improved $1.3 million to $10.3 million or 29.2% of revenue. This compares to $9.1 million or 32.2% of revenue in the first half of 2021.
Gross margin for our core OSS business decreased to 34.3% as compared to 37.3%. This is largely due to the 80% year-over-year revenue increase from our media and entertainment customer. Bressner’s gross margin decreased to 21.5% due to higher transportation and material costs as compared to 23.6% a year ago. For the second half of 2022, we expect margins to be slightly above, but substantially consistent with the first half.
Our total operating expenses increased 12% to $9.3 million. This increase is primarily due to an increase of $549,000 in selling and marketing expense resulting from marketing, trade shows and travel and an increase in R&D expense of $656,000 for the development of new standard products for the AI Transportable market. And these expenses were partially offset by a decrease of $210,000 in G&A expenses. Operating expense as a percentage of revenue decreased to 26.3% compared to 29.4%, reflecting ongoing cost containment efforts.
Income from operations increased $260,000 to $1.1 million compared to $792,000 in the first half of 2021. Net income on a GAAP basis was $902,000 or $0.04 per diluted share compared to $1.7 million or $0.09 per diluted share, which included a onetime benefit of $1.5 million or $0.08 per diluted share due to forgiveness of our PPP loan and related interest. After giving effect to this one-time benefit on a pro forma basis, this results in a year-over-year increase of $618,000.
Non-GAAP net income totaled $1.8 million or $0.09 per diluted share as compared to $1.5 million or $0.08 per diluted share in the same year ago period. Adjusted EBITDA totaled $2.6 million or 7.3% of revenue compared to $2.5 million or 8.7% of revenue in the first half of 2021. Both non-GAAP net income and adjusted EBITDA excluded the PPP loan and interest forgiveness.
Now turning to our balance sheet. On June 30, 2022, cash and cash equivalents totaled $2.9 million, with short-term investments of $11.5 million for a combined total of $14.4 million. This compares to $15.8 million on March 31, 2022. During the second quarter, we have invested an additional $4 million in inventory. Our cash position provides us stability and flexibility to be responsive to supply chain issues with investments in inventory, changes in our business and issues imposed by external global economic influences such as inflationary pressures and the Federal Reserve’s interest rate increases.
This completes our financial review for the quarter and the first half of the year. I would like to now turn the call over to our Chief Sales and Marketing Officer, Jim Ison. Jim?
Jim Ison
Thank you, John, and good afternoon, everyone. In Q2, we added 4 new major program wins, including 2 AI Transportable wins, one for a mobile shelter application and the other for an autonomous surface ship program. The remaining 2 program wins were in commercial aerospace and medical imaging markets. We also added 5 new pending major programs during the quarter, 2 of these opportunities are AI Transportable programs for telecommunications and military data storage units.
For reference, we expect our pending major programs to generate revenues of $1 million or more over 4 years with a 60% or greater expectation of closing. Our current pipeline of pending major programs totals 32 with 1/2 of these involving AI Transportable applications due to our focused efforts in this market.
During the quarter, we also participated in 4 industry events focused on autonomous trucks and AI Transportable applications in military and commercial aerospace. Aligned with our strategy to bring more standard products to the AI Transportable market, we shipped Centauri Systems that we announced in April to one of our autonomous truck customers. Centauri is a PCI Express Gen 4 NVMe rugged storage solution, offering high capacity and a proprietary compact, hot-swappable canister, that is ideal for capturing and transporting the vast amounts of data generated in autonomous vehicles.
Also on the technology front, we are one of the first developers to ship PCI Express Gen 5 technology key to our AI Transportable and technology leadership strategy. This advancement doubles the performance of PCI Express Gen 4 and is expected to be deployed in multiple additional OSS products over the coming quarters. This includes our next innovative product to be announced at the ADAS in Autonomous Vehicle Technology Expo in San Jose, California in September.
On the thought leadership front, we released several AI Transportable expert articles in white papers in Q2. Topics included AI Transportable design, autonomous driving and PCI Express acceleration for high-performance applications. In industry magazine, aerospace and defense technology featured our article entitled Designing Transportable, high-performance AI systems for the rugged edge in their June 1 issue.
Now I’d like to turn the call back over to Dave.
David Raun
Thank you, John and Jim. Our teams at OSS continue to execute, generating solid results primarily from our traditional customer base and applications. Although our value proposition in some of the established businesses like, media and entertainment and Bressner in Europe, may not generate the margin percentages that we seek in the future years. These generate positive margin dollars and income for OSS.
We are pleased that this part of the business continues to grow and helps pay for our investments in AI Transportables. This year, we validated the multibillion dollar opportunity for AI Transportables, while remaining cash flow positive, profitable and not taking on domestic debt. We have done this during an unprecedented time in history, and our cash position has allowed us to invest in higher inventory levels, additional sales personnel and industry leaders on our new advisory board to ensure growth and prosperity for OSS.
Our objective is clear: leadership in the fast-growing AI Transportable market. Currently, OSS is supplying compute and storage — and/or storage solutions to 3 of the leaders in the Level 4 and 5 long-haul hub-to-hub autonomous truck market. Our products work in conjunction with our software to gather, store and/or process data from multiple sensors embedded around the vehicle, including LiDAR, radar and cameras.
We believe that all 3 of these customers could end up being our top 10 customer list in 2022 and over time, could be some of our largest accounts. Although our relationship and what we supply varies, we continue to learn and lead the market as we define next-generation products. Beyond autonomous trucks, we’ve also seen interest and activity with other vehicles, including shuttles, buses and ships.
We have commented in the past that we expect the opportunity for AI Transportables to be significant in the armed forces throughout the military theater. These applications will take significant time to close and even more time to generate revenue, but we are now engaged with multiple high-profile programs, which include drones, aircraft, ships and land vehicles. These applications are perfect for disruptive solutions from OSS, where we provide the highest performance without compromise and compact rugged form factors.
We look forward to sharing more on this front in the future as these become wins. Whether it’s a military theater, autonomous truck or other AI Transportable application, OSS takes the technology and the highest performance normally found in the environmentally protected data center out to the very edge. This is in contrast to the common approach of bringing rugged lower performance embedded solutions to this space.
Although there are many solutions in high-performance computing, OSS is unique at the high end, bringing performance without compromise to the demanding AI and autonomous applications in some of the most harsh environments within this AI Transportables. To help navigate and accelerate the progress in the multibillion-dollar AI Transportable space, especially with the complexity of the armed forces, we mentioned earlier that we formed a Strategic Advisory Board during the past quarter.
The advisers include retired high-ranking military officers and corporate executives with decades of experience in AI and unmanned vehicles, technology, high-performance computing, cooling technology and M&A. The advisory members are now providing us valuable insight into product and market strategy, as well as helping us create relationships and gain access within targeted organizations and in the armed forces.
Now looking to the outlook. The revenue outlook for the third quarter of 2022 is $18.5 million. This represents 16% growth over the same quarter a year ago. We believe the future growth of OSS will be driven by our focus on AI — high-performance AI transportable platforms for commercial, military and industrial applications. The strength of our balance sheet enables us to invest in new product development and secure the stability of our business while affording us the flexibility to be responsive to changes in business climate.
I would like to extend my appreciation to all of our OSS team members for their contribution and unwavering commitment to quality, productivity and strong financial performance. I would also like to thank our stockholders and customers for their continued support as we continue to focus on this large opportunity.
Now with that, I’d like to open up the call to address your questions. Nash?
Question-and-Answer Session
Operator
[Operator Instructions]. We’ll take the first question from Joe Gomes, Noble Capital.
Joseph Gomes
So the first one, I want to lead off here is on the inventory. You mentioned since I think the middle of last year, Bressner’s performance because of the availability to inventory. Just maybe you can square the circle, so to speak, and why Bressner seems to be able to get all the inventory, have that strong availability, but you’re not able to get some of the other products for some of — inventory for some of your other products? I mean, is that the supply chain that different for the type of inventory that you’re getting there for Bressner versus the other core OSS? And maybe you could just — will give us a little more color or detail into that, please?
David Raun
Yes, this is Dave. Thanks for the question. I think the first thing to keep in mind is that since Bressner is more of a value-added reseller in addition to what they do for us in OSS, they’re able to pick up market share. So that’s what’s helpful. When we make an investment, we can put products there that other distributors might be able to sell whatever. In the case of One Stop Systems, they’re either buying our product or they’re buying phone else’s entirely. So it’s not like if we build a product that you can go buy from somebody else. So that’s the one dynamic. So that gives us an ability to grow the business by stealing market share basically and really good sales. In our case, I think for the most part, we’ve been able to continue to grow every quarter. We’ve beaten guidance, and that’s because we’ve had a good inventory in place. We don’t ship everything. That’s for sure. And we know that going into the quarter. But at the end of the day, we get enough of the door to hit the numbers.
Joseph Gomes
Okay. And maybe you could talk a little bit, it looks like we haven’t been seeing much on the military customers doing much in the way of sales this year. Is that accurate? And do you expect that to be a second half of the year event?
David Raun
Yes. So on that, first of all, on the design front, we have more military activity than we’ve ever seen, which is just very exciting. These are very large programs we’re proceeding on. But as far as revenue today, paying the bills today, in the first half of the year, we had kind of a normal military type revenue profile. What we normally have is a stronger second half. And going into the year, we had some of our large military customers very strong, but some of that forecast has gone out in time. Fortunately, we haven’t lost the business and we expect next year to be a very strong military year. But the rest of this year, it’s going to be kind of more like what we’ve had the rest of the first 6 months, and that reflects in John’s comments about the margins being similar for the rest of the year.
Joseph Gomes
Okay. And you talked last quarter and John, you mentioned it about production line efficiencies. Just wondering what exactly are you talking about there? What are you being able to do where kind of do you stand on those and implementing those to help drive efficiencies on the production line?
John Morrison
So we’re going to be doing subassemblies basically doing some of the manufacturing in Mexico. One of the reasons for that is there are other opportunities elsewhere, but we are concerned on making sure that it gets delivered with the constraints of shipping and restrict and air travel and the high cost of transportation, we will be doing these subassemblies in Mexico.
Joseph Gomes
Okay. And then one more, if I may here, also last quarter on the AI Transportables, you had mentioned or it was mentioned about the ag space and the mining verticals. Didn’t mention anything really heard today. Can you kind of give us an update on those 2 verticals?
John Morrison
Yes. I mean we’ve commented on them, I think, really as being potential verticals in the future that could leverage of actually, what we’re learning in the autonomous truck space. They haven’t progressed any since that last meeting nor we focusing on them much, it would be with the number of resources we have, we’re focused on things that are happening today. In the case of the mining one, we’re starting to engage with it, but that’s really early, and I don’t have really much to comment on. I think the big thing that is blossoming in the last 90, 100 days is the military of these big programs. So that’s where we’re really excited right now.
Joseph Gomes
Great. I’ll get back in queue. Thanks for taking the questions.
Operator
[Operator Instructions]. We will take the next question from Brian Kinstlinger, Alliance Global Partners.
Brian Kinstlinger
Sorry if I am repeating as I joined a little bit late. I heard, I think, that you have 3 customers, I think I heard right on the Level 3 and Level 4 or Level 4 and Level 5, sorry, autonomous vehicle space that are generating revenue and in some form, is it pilot or testing? First of all, can you talk about how much revenue has been generated in the second quarter from those? And then moreover, maybe you can talk about over the next 12 to 18 months, how many customers do you think will progress to move forward to be in a similar space? And maybe how you see that line of sight over the next 18 months in terms of goal points?
David Raun
Yes. So first of all, we’ve elected not to specify the exact revenue from that part of the business, but I will say that it’s increased quarter-over-quarter. We expect it to continue too. We’ll do more in the second half than we did in the first half. And I go back to my statement that we could have possibly all 3, maybe 2, maybe 3 of them end up in our top 10 list. That means — top 10 list means that we believe the $1 million approximately, maybe more. And they all have the potential that when these go to higher volumes. So these are very low volumes generating those dollars, there could be an inflection point somewhere on time, whether it be later in ’23 or ’24, where they could become our largest accounts in the company bigger than the ones we talk about today. As far as additional ones, we’re pursuing, additional ones having this ongoing discussion with others. And I believe we will add some. I don’t know how many, but there’s definitely other ones to pursue than the 3 we have.
Brian Kinstlinger
Okay. And then I think, you and I had a lot of conversations over time about some of your — one of your top customers, who generate a little bit lower margin revenue. First, with that customer, are you able to increase pricing as material costs are going up? And then second, how do you think about over time? And when might you have the opportunity to think about renegotiating price with them?
David Raun
So first of all, we do have a contract. The contract has dynamics as far as price increases and price decreases. There’s a lag effect with it. And so we are able to do that and we have done that, where we’ve done other things just try to be more efficient at building their product. And I want to stress that one of our strategies when we implement this AI Transportable strategy was we wanted to stop just taking any business that showed up. And if a business is not strategic to our future, we are passing on most of it. In the case of this large customer, the engineering and R&D requirements are very low, the revenue is good and the profitability overall, of course, is solid. So eventually, that contract will come up. There’s probably an opportunity to push it to some degree. But our value to them is probably not as high as what we will be selling to an AI Transportable where we’re much more complete solution. We have software layering in a number of things to bring our value up over time.
Brian Kinstlinger
Great. My last question related to government. Is there a theme that’s causing a few projects to get delayed, such as a continuing resolution? I just like to understand better why the second half of the year won’t be a material pickup based on delays what the possible theme is there?
David Raun
Yes. So first of all, it’s not 100% clear that it’s due to budget or economic reasons. What we do know is that one of the key customers will make up a significant part of the business. We have a multiyear contract. The multiyear contract is coming to close this year. And their initial plan was to buy everything they expected to within that contract, but they didn’t have all the orders from their end customer like the Navy and Air Force. But we are in the process of getting the new contract. The good news is it looks like the remaining business is still somewhere between everything we’ve ever shipped to doubling that. So we’re talking about a new contract coming in place that will extend this one. And as a result, they’ll be catching up from this year and also kicking off next year. So as of right now, it looks like next year could be a really good year for us with that particular customer. And then on top of that, the activity I told you about in the military space, a number of those are in a position where if things go as expected, they might buy a couple of units from us, but that could be a $1 million order here and there where they’re putting them in their labs. So even though they’re not in production yet, that could be very sizable and good margin for us also.
Jim Ison
There is another point just on that. We are the sole source provider on that contract.
David Raun
Correct. Yes. So that’s not something we have a risk of losing or whatever. It’s really a timing thing. It hasn’t gone away. They still plan to implement it in all these aircraft. And it’s unfortunate it looks like it’s moved out. I will say, there’s other military programs that we’re pursuing that we’re trying to turn for the year, and that’s our objective. But we want to be conservative in our position with you guys.
Operator
[Operator Instructions]. We will take the next question from David Williams from Benchmark.
David Williams
Congrats on the progress in the revenue growth. And forgive me, I jumped on a little bit late, but I wanted to ask a little bit just about your big contract or excuse me, your big customer in the media and entertainment space. And just kind of how long do you think that, that will — that strength will remain in terms of just kind of the top line? Should we see that maybe trim down a bit next year? And just how do you think about that revenue for Q3?
John Morrison
They’re doing very well. We had an exceptionally large quarter this past quarter and we purposely shared it with the market, which we normally don’t to help explain the dynamics of the quarter. And — but we expect them to remain strong the rest of the year, but we’d say that quarter is an anomaly probably go back more to the kind of things we’ve seen in the quarters before that.There — I will give you a little more color on it as we understand it, their virtual products, which was driving all the revenue last year, it continues to be the strongest growth. They started selling the large gathering products this year, but they’ve had some false starts because of different dynamics in the world. The U.S. market is pretty good. Japan is pretty good, but places like China, Russia, Europe have not been as good, but we’re still doing pretty good numbers without much of that.
David Williams
Okay. And then just color, I know that I heard a little bit earlier about Bressner and just the inventory investments there to end the market share expansion. But is there any color maybe just around that? Anything in particular you think that’s driving that business and the growth for Bressner?
David Raun
Well, I’ll say one thing. We’ve got a very talented team there, a very good leader, positioned well in the marketplace, a good name. And we’ve spent a lot of time working with the group to do these strategic buys and put these positions in. And hopefully, this is market share that we can continue over the long term. Anything else you want to add to that, John?
John Morrison
There was one large long-term contract that takes them through 2024, which we made strategic investment fund to make sure we’re able to fulfill that order through 2024.
David Raun
Because they require the same product or something right [indiscernible]
David Williams
All right. Great. And then maybe from a market perspective, just kind of give us some of the dynamics where we’ve seen — it seems like at least the end market demand is slowing on the consumer side, are you starting to see maybe a little better availability of products and maybe just how you think about how that’s going to play out the rest of the year for you.
David Raun
Yes. I mean it’s an interesting question. You read in papers like I read the other day about DRAM and stuff, but that doesn’t tend to be the type of products we need. And our products tend to be the GPUs, the PCI Express switches, a number of those products are some of the big things, and they’re still running the long lead times. And we haven’t seen a change on those front — that front. Most of my career has been in the semiconductor space. So we’ve seen cycles. So — but we haven’t really seen much of it yet. We keep watching. And that’s all I can really say in that process. Yes. We’re watching it very closely, though.
David Williams
All right. Very good. And are GPUs the primary area? Or what other areas are you seeing the biggest, I guess, hurdles?
David Raun
Well, I think the switches are one of the biggest for us because we have a switch in almost every product of ours. If you think about our core and our strength above what fragmented competitors is we’re very good at PC Express and be linked from NVIDIA and those type of technologies. And as a result, pretty much every product we ship has a switch on it, and these are high ASP, high demand products and they’re sitting at the 52-week lead time. So that’s one of the big ones. Any other ones you asked about.
David Williams
Is that big one?
David Raun
Yes.
Operator
[Operator Instructions]. We will take the next question from Max Michaelis from Lake Street Capital Market.
Maxwell Michaelis
Nice job on the quarter, nice job on the outlook. A few questions here. First one is just on your major opportunities that are pending. Can you share the mix of that of which is autonomous trucking and where you expect that to trend?
David Raun
So of the 32 outstanding projects that we have right now, there’s 4 in autonomous trucking that are in the pipeline. Those are ones that have not closed. That doesn’t include the ones that did. So everything is about 50-50 from the AI Transportables, so about half of our pipeline right now.
Maxwell Michaelis
Okay. And then just kind of on the Advisory Board. I’m wondering if you could go just a layer deeper, maybe some of the things you’re hoping to accomplish? And then some of the strength you’re seeing, I know you guys are kind of going into different industries. I’m just wondering maybe some areas that you guys are seeing, you can highlight the strengths and just go a little deeper into the Advisory Board.
David Raun
Yes. So when we put this together, the #1 priority was the navigation of the armed forces. And that’s why I brought on some very highly ranked people there and people with background. So I think 7 of the 9 actually have backgrounds in the military that are helping us in that front. And that ranges anything from identifying places that we were not aware of that are making some decisions like think tank areas to looking at advanced technologies that are influencing maybe some of the people we’re talking to. It is to getting to — maybe we’re selling something to a Raytheon, but we didn’t know who they were selling to, the Air Force, some of these guys know that. So it’s connecting that type of thing. And then just general navigation, making introductions, saying things like I’m aware of this going on, you should go check it out.
One of the interesting things about this group, but just to give you a little color, is that a number of them are extremely passionate about getting technology into the military. In fact, one of them commented the fact that he oversaw 600 marines, 5 of it didn’t come back because the military wasn’t using technology that was available in the commercial segment. So these guys have a lot of motivation to see our product, which they also recognize, boy, this is the high performance we need. And so it’s been a good experience in the military then we have a guide from the oil and mining area that’s helping us. And we don’t have anybody on that group when the autonomous truck, but I have somebody on the side on that space also. Do I miss anything else? I mean it’s been a great group refreshing to work with, and they take calls from anybody on the sales team, marketing team, myself, of course, and just been a great thing. It’s definitely helping us.
Maxwell Michaelis
Okay. And then just my last one, going to the outlook for Q3, I don’t know if I misheard you, but what is driving that outperformance next quarter?
David Raun
Outperformance, so it was driving the 18.3%.
John Morrison
I mean 18.5% is that pricing will remains strong. Our large media and entertainment guy is strong, but not at the level currently, but we’re — the rest of the customer base looks pretty good for the quarter. So where we were a little light in some of the rest of the customer base in Q2, some of that was tied to a number of supply issues. So a number of our key customers outside of those 2 segments, it’s Bressner and the media and entertainment, some of those got pushed into the quarter because of supply issues but will ship in the quarter.
Operator
It appears that we have no more questions. I’d like to turn the conference back to our speakers for closing remarks.
David Raun
Sorry, I misunderstood you. Thank you, Nash. And thank you, everyone, for joining us today. We believe the best is yet to come, and we look forward to meeting with all of you again in November and reporting on our progress as we pursue these many opportunities ahead. Meanwhile, please continue to stay safe and healthy, and please reach out to Jim, John or myself at any time. So Nash, why don’t you wrap up the call?
Operator
Thank you, sir. 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 that statements in the presentation are not a description of historical facts but are forward-looking statements. These statements are based on company’s current beliefs and expectations. Such forward-looking statements include those regarding the company’s expectations for revenue growth generated by new products, design wins or M&A activity. The inclusion of such forward-looking statements and others should not be regarded as a representation by OSS that 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, that the market for our products is developing and may not develop as we expect; military conflicts, global pandemics and other disasters or public health concerns, including COVID-19 in regions of the world where we have operations, customers or source material or sell products may affect such market.
Our operating results could be negatively impacted by inflationary pressures, supply chain constraints, increase interest rates 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. Our ability to successfully integrate the operating systems, technologies, product offerings and personnel with acquired companies, if any, may prove difficult and adversely affect our financial results. Our products are subject to competition, including competition from the customers to whom we may sell and competitive pressure from new and existing companies may harm our business sales, growth rates and market share.
Our future success depends on our abilities to develop and successfully introduce new and enhanced products that meet the needs of our customers. The likelihood of our design proposals becoming design wins is uncertain and revenue may never be realized. Our products fulfill specialized needs and functions within the technology industry, and such needs or functions may become unnecessary or the characteristics of such needs and functions may 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 the limited number of suppliers to support a manufacturer design process, and we cannot protect our proprietary design rights and intellectual property rights, our competitive position could be harm or we could incur significant expenses to enforce our rights.
Our international sales and operations subject us to additional risks that can adversely affect our operating results and financial condition, and we fail to remedy material weaknesses in our internal controls or financial reporting. We may not be able to accurately report our financial results and other risks described in our prior press release and in our filings with the Securities and Exchange Commission, SEC, including under the heading Risk Factors in our Annual Report on Form 10-K and any subsequent filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the conference call, 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 the entirety of 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 through August 25, 2022. Please refer to today’s press release for dial-in and replay instructions available via the company’s website at ir.onestopsystems.com.
Thank you for joining us today. This concludes our conference. You may now disconnect.
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