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spk00: Good day, everyone, and welcome to CSPI fourth quarter and full year 2021 results conference call. At this time, all participants have been placed in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. I will be standing by should you need any assistance. Please note, this call may be recorded. It is now my pleasure to turn today's program over to Michael with EBC Group.
spk04: Thank you, Emma. Hello, everyone, and thank you for joining us to review CSPI's fourth quarter and full year-ended September 30, 2021 financial results. With me on the call today is Victor DeLobo, CSPI's Chief Executive Officer, and Gary Levine, CSPI's Chief Financial Officer. After Victor and Gary conclude their opening remarks, we will then open the call for questions. Statements made by CSPI's management on today's call regarding the company's business that are not historical facts may be forward-looking statements as the term is identified in federal securities laws. The words may, will, expect, believe, anticipate, project, plan, intend, estimate, and continue, as well as similar expressions are intended to identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results. The company cautions you that these statements reflect current expectations about the company's future performance or events and are subject to a number of uncertainties, risks, and other influences, many of which are beyond the company's control, that may influence the accuracy of the statements and the projections upon which the segment and statements are based. Factors that may affect the company's results include but are not limited to the risks and uncertainties discussed in the risk factor section of the annual report on Forms 10-K and the quarterly report on Forms 10-Q filed with the Series and Exchange Commission. Forward-looking statements are based on the information available at the time those statements are made and management's good faith belief as of the time with respect to future events. All forward-looking statements are qualified in their entirety by this cautionary statement and CSPI undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date thereof. With that, I'll turn the call over to Victor DeLobo, Chief Executive Officer. Vic, please go ahead.
spk01: Thanks, Michael, and good morning, everyone. Even though significant supply chain issues at several of our component supplies crimped up product sales during the quarter, our team continued to build business and orders. As a result, we ended fiscal 2021 with a record backlog of $13 million, up 165% from September 30, 2020 level. The backlog growth reinforces our view that CSPI will emerge from these challenging times a stronger and more formidable company. Our team also firmly believes that our award-winning product and service portfolio is enabling CSPI to compete for the increased market share. While the backlog is an encouraging development, our short-term revenue generation has been impacted by the pandemic and supply chain issues. Unfortunately, these factors will make it difficult to predict quarter-over-quarter performance. We are however confident our fiscal 2022 yearly projections We are working with our customers and suppliers to resolve and mitigate these issues as quickly as possible. We are taking every step to build revenues in the areas where external forces aren't having as much of an impact. For example, we are increasing the resources we devote to our software sales since these products and services can be delivered near-term revenue in higher margin and are delivered remotely. We grew our fourth quarter service revenue by 27% year-over-year as we continue to add new customers. Our goal of migrating to higher margin products and services is being achieved as we reported our eighth consecutive quarter of year-over-year gross margin growth, despite tougher year-over-year comps. The product mix being sold, amount of revenue recorded, and overall margin in the product are contributing to this increase from the prior year. The improved product gross margin as a percentage of revenue has been focused in fiscal 2021, particularly in the TS segment. Technology Solutions, or TS Business, again led the way with revenues of $8.8 million in the fiscal fourth quarter. Our managed service practice, or MSP, continues to be a reliable source of growth and exceeded our internal expectations as we added new, larger, and several niche customers in the retail and consumer space. We remain focused and committed to build our recurring revenue business, which is contributing significantly to the bottom line. Now let me say a few words on the cruise line activity, which has steadily increased over the past few months. In fact, today we are more bullish on this business compared to any other time during the COVID-19 pandemic, which effectively stopped our cruise activity. We received orders for four ships in Q4, which we expect to complete during the next few quarters. Aside from the revenue opportunity, this is a highly profitable business for CSPI, and our decision to maintain our cruise-related workforce early in the pandemic, despite there not being much work for them, is proving to be prudent because it is allowing our team to react quickly and meet the operator's timelines. However, the first and foremost is the health of our team, so we are taking all necessary precautions and adhering to local protocol to ensure a safe working environment. Now turning to our UCAS offering, I'm pleased to report we experienced better than expected activity in the fourth quarter and momentum has carried into the current first quarter. In fact, we have doubled the size of the business over the past few months, which is a big deal since we launched two years ago and just prior to the worst imaginable business environment. Our goal in fiscal 2022 is to complement the team's progress with smaller accounts and pursue larger accounts. Regarding the high performance product or HPP division, we reported revenue of $1.2 million, which is slightly higher than compared to fiscal Q3 revenue. While the Miracom business has steadily picked up, royalty revenue related to E2D was lower than expected, so we anticipate the balance will be recorded in the first half of fiscal 2022. ARIA remains the primary growth engine for this business segment, and we closed several deals in the quarter and recently announced the receipt of a multimillion-dollar multi-site sale of ARIA SDS solutions from a national intelligence agency. The ARIA-SDS product will be a critical component of the government's solution to improve network visibility on networks vital to national security to detect communication performance in cybersecurity-related issues, which are and will continue to be on the rise. The ARIA-SDS approach is ideal for this application, given it's designed for high-bandwidth processing, exceptional packet analytics, and real-time packet filtering capabilities. The ARIA SIA will easily aggregate the data up to 120 gig from the multi-10 gig network found in over 40 sites. Upon ingest, the ARIA packet intelligent application performs specified filtering to isolate traffic of interest. This traffic is then directed to a variety of cybersecurity tools, such as an IDS, for further threat hunting and investigations. We're especially pleased because ARIA SIA and packet intelligence application was envisioned for exactly this purpose, to provide complete real-time visibility of the entire network for cybersecurity hunting. We were able to close several new ARIA deals that were included in Q3 sales funnel, but we also managed to grow the sales funnel as our messaging and marketing education efforts is yielding positive results. During Q4, we signed additional ARIA ADR customers, and the team is highly engaged With the prospects, their primary objective is to get later stage opportunities over the finish line. We all recognize that this has the potential of generating significant top line growth with a disproportionate benefit to the bottom line. To summarize, we ended the year with a record backlog That was up 165% from the prior year level. The manufacturing and supply chain issue remains a challenge. However, we are doing everything possible to get orders out, revenue in, and margins up. We continue to have a solid foundation, even during these turbulent times, and we are laser-focused on business execution and exploring new opportunities that strengthen our long-term growth and profit ambitions. I expect for at least the foreseeable future that we will maintain a prudent expense management that will allow us to have the necessary resources to execute multi-year growth strategies. With that, I will now ask Gary to provide a brief overview on the fiscal fourth quarter financial performance.
spk02: Thanks, Victor. As Victor mentioned in his opening remarks, our fiscal fourth quarter revenue was $10 million. still reflects a challenging business environment. However, we managed to report gross profit of $4.2 million or 41.7% of sales compared to $4.4 million or 31% of sales in the year-ago fiscal fourth quarter. This represents the eighth consecutive quarter of gross margin expansion as we continue to sell a mix of higher margin service business. The higher gross margin is due to product mix being sold, amount of net revenue recorded, and overall margin products contributing to this increase from prior year. The gross to net adjustment for sales and cost of sales for the year in the fourth quarter were $4.6 million and $12.7 million. Our near and short-term goal is to maintain an annual gross margin in the mid to high 20s and move this up as higher margin products become a larger contributor to the top line. Our engineering and development expenses for the fourth quarter was $696,000 compared to $717,000 in the year-ago period. This decrease is primarily due to lower ARIA development costs compared to the year-ago quarter. Our SG&A expenses in Q4 were $3.8 million, a slight decrease from the year-ago SG&A cost of $4.2 million. The company had a tax expense for the year, which was due which was primarily driven by a full valuation allowance against our deferred tax asset, offset by the exclusion of the income from the forgiveness of the Paycheck Protection Program loan, the exclusion of the gain of the German subsidiary under UK law, and current year federal R&D credits and benefit of federal carryback of net operating losses in years in which the statutory federal rate was 34%. We provided net income from continuing operations of $353,000 in the fiscal fourth quarter, or $0.08 per share compared with net income of $36,000, or $0.01 per share, for the fourth quarter of fiscal 2020. Also in Q4, we reported a one-time gain of $465,000 from the sale of our discontinued German operation, which was previously disclosed and reported net income was $818,000 or 19 cents per share for the fourth fiscal quarter of 2021. We ended the fourth fiscal quarter with cash and cash equivalents of $20 million as of September 30th, 2021, an increase of over $700,000 from September 30th, 2020. We believe the measures we implemented during fiscal 2020 and maintained fiscal throughout fiscal 2021 included the suspension of quarterly dividend and stopped our stock buyback program, in addition to the PPP loan proceeds, enabled us to preserve our cash and maintain a robust balance sheet throughout the pandemic. We will maintain a similar prudent cash preservation posture for the foreseeable future or until such time that the economy and the businesses resume normal operations. With that, I'll turn it over to the operator to take your calls, your questions.
spk00: At this time, if you would like to ask a question, please press star 1 on your touch-tone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and 1 to ask a question, and we will pause a moment to allow questions to queue. And once again, that is star and one to ask a question. And we will take our first question from Joseph Negris with Certain Investments.
spk03: Joseph Negris Good morning, gentlemen. How are you today? Good, gentlemen. How are you doing? Congratulations on the fourth quarter, considering that the revenue was considerably less than we would like. But to come out with an operating profit that's really admirable in this environment, let's put it that way. A couple of quick questions. I think the last conference call you indicated, quite a few people were evaluating area at that time. And is that the same situation today? Do we have quite a few people that are with contracts, proposals out there that are evaluating the situation?
spk01: Yeah. Yeah. Some we win, some we lose, and then we have new ones that get into the funnel.
spk03: And you're basically saying you've signed a few since the end of the year as well as in the fourth quarter. Mm-hmm. That's correct. And on the contract that was announced early last month, the government contract, the $1.8 million, I think you indicated in that press release that the revenues would not be, or at least the implementation would be until the second half of next year, 2022.
spk01: Is that correct? That's what we're shooting for. Right now we still struggle with, you know, getting some of the components to some of our – yeah, to some of our – That was going to be my question.
spk03: What was – is it the component part of it? It's certainly not the software. You could release software.
spk01: No. Yes, correct, correct. But there's chips that we need from some of the chip makers that the lead times keep moving and not in the right direction, put it that way.
spk03: So what you're saying is hopefully sometime next year we can roll that out. Right now we're not getting any revenue whatsoever. Obviously we haven't implemented anything on that contract. That's correct. And just to follow up a little bit on the – press release you issued a couple weeks, a week or so ago on the NVIDIA. I guess they have launched their Morpheus platform. They announced it in April. The latest, was that a software upgrade on their DACA software? Is that what they announced in early November?
spk01: Well, they're coming – you know, they have software, AI software that's constantly being released. But, you know, we're also working, you know, with their boards also to port our software onto their new boards that are out there currently and the new ones that are coming out, you know, scheduled for April. So that's a constant, you know, wheel that we're always on, you know, trying to work with their – These are upgraded boards?
spk03: Is that for the – It's their new version.
spk01: Yeah, the new version.
spk03: So are they beta testing that? They indicated in their press release that they're working with partners, and we're one of the partners.
spk01: Yeah, if you saw what they did, they announced about 10 of their key partners that they work with, and we happened to be one of them, which was considering the thousands of partners they have, it was an honor to be mentioned. as one of their top ones, you know.
spk03: Well, in their initial press release in April, they not only announced us, but they linked our area cyber website. So obviously that was a positive way to issue a press release. We didn't issue the press release. They did. But are we able to – They mentioned partners and customers, so I'm assuming they've released some of their customer base to try to test the possibilities. Are they beta testing that with some of their customers, this whole platform?
spk01: Well, they're actually – What they're doing directly, I'm not sure, but they are working with us, and there's a few customers, large customers that we're talking to. But the customers that we talk to want some customization, and that's kind of where we come in. You know, we're taking their boards, you know, potentially their software in some cases, but our software to, you know, take full functionality of their boards, and that's kind of where our partnership is. is the strongest.
spk03: Well, that's great because now we're talking with some pretty, I assume, pretty sizable customers that would want to customize. And if we customize, then we get the business, I would hope.
spk01: Yeah, that's how OEM, you know, play that we, you know, integrate into OEM. into their boards that would, you know, be integrated into other customers' products or services.
spk03: And have we seen a fair amount of interest from that standpoint on that group or is that, you know,
spk01: It's a work in progress, but there's a couple things that, you know, their boards that they were supposed to have out has been slow rolling just because of, I'm guessing, some of their component issues that they've had. So some of the boards that we were supposed to get early to do some of the development on have been dragged out. You know, on delays, everything right now is kind of being pushed out a little bit. But it's moving, and, you know, we do have customer meetings with NVIDIA and ourselves, you know.
spk03: Okay, great. And did you say that we did not or we got minimal ETD revenue in the fiscal year, and we're expecting more the first half of this fiscal year?
spk01: Mm-hmm. Correct. Some of it, the planes got pushed.
spk03: Okay. Did we get any revenue in the fourth quarter, E2D revenue?
spk02: Very small amounts. We'll have to get some more in this month.
spk03: All right. I guess that's basically it. You know, you mentioned that, you know, in the press release about the We anticipate some dramatic changes in revenue in HPP down the road as we roll out more of the area, as we get more area customers is encouraging. One more thing, one more question, and that is the last conference call you indicated that, you know, of course, we're working with the area ADR managed via technology solutions. and service contracts. Have we acquired additional customers in that area?
spk01: Yeah, I think all the customers have been ADR except for one.
spk03: Okay.
spk01: Yeah, so mostly everything is being managed.
spk03: All right. I mean, the last time we had introduced it, got it out there, and so we're – We're progressing from that, in Florida, let's put it that way, with the customer base. All right. Thanks a lot, guys. Appreciate it. And let's hope this supply situation ends sooner rather than later. Thank you.
spk01: Absolutely. Let's do that.
spk00: Once again, that is Star and One to ask a question. And we'll go next to Brett Davidson of Private Investor.
spk05: Good morning. It's good to be here. I've got a couple of questions hoping you guys can help me with. Press release, that was welcome. Do you anticipate any more of those coming in the near future?
spk01: Absolutely. As soon as we have something of value, we will definitely let them put them out there, Brett.
spk05: Okay. That's good to hear. The The 27% increase in service revenue, can you just give a feel for how much of that is represented by ARIA and how much of the increase is from UCAS? Is one of them a bigger contributor than the other?
spk01: The majority, I would say, of the service revenue on that side came from the TS side, and that's a mixture of professional services, of MSP services, and UCAS services overall.
spk05: Okay. Is one of those driving that 27% increase, or that's more like an across-the-board thing?
spk01: It's pretty much across the board. All the services we do are at a much higher rate, and that's kind of where we've been trying to concentrate as much as we can on building that service business.
spk05: Yeah, that recurring revenue stream.
spk01: Yeah, absolutely.
spk05: All right, the backlog. I mean, it's not something that we usually see reported. So I'm just trying to get a handle on what exactly backlog represents. So I'm thinking something like UCAS doesn't really – No, it's not UCAS.
spk01: No, because we already built that platform. The stuff that's there right now, the MSP and the UCAS, the MSP does get affected because we have a large customer that we've been rolling out, 50-plus sites. And to get a whole – we have to get their infrastructure – to a place to manage it. So we're waiting for firewalls. We're waiting for switches. We're waiting for whatever else, PCs, servers. And so part of that backlog of getting this product to get the customer to a point that we can actually manage them is slowing down some of the billing of the recurring revenue on the MSP side of it. By now, we were hoping to have 50 locations rolled out, and I think we have approximately maybe 20 And so until that gear comes in, I can't do the upgrade, and I can't stop billing it for the MSP on that. The other thing on the UCAS, which hasn't been a huge factor right now, but it does affect it to a small percentage, is that the phones that customers need on their desk when they move over to our platform, They're so far backlogged right now that we're actually implementing soft phones. And if the customer is willing to do that and then use the hot phones when they, you know, when they come in. But right now the Cisco phones are, you know, they're saying March, April, May. That's just giving you an idea of how long it takes. So we're asking customers to go with soft phones now, get it implemented, and then as the phones come in, roll it out. And then the other piece of it is whether it's other products, major products, like some of the big players, you know, that have firewalls, servers, the professional services to install that, I can't, you know, at a higher margin, I can't bill for something I haven't installed yet. So that's slowing down some of that also. And it's across the board. You name the manufacturer right now and there's a delay.
spk05: Got it. So hardware is converting some of these softwares and services to backlog, which in normal supply chains wouldn't necessarily land there.
spk01: Correct.
spk05: Got it. Is there any, you know, what generally makes up the component of backlog in this, you know? I guess now there's some of the UCAS stuff that could possibly, you know, like the example you gave. What other?
spk01: Well, the MSP side of it, I mentioned that, how that backlog does that, and then normal professional services. So, you know, if I'm rolling out, you know, 50 firewalls or 500 firewalls and there's services that go, you know, there's a big – There's a big deal that we closed last quarter for, you know, I think it was just under $2 million with services of a significant amount. But, you know, we're waiting for all the gear, which I don't know when it's going to roll out. So I can't recognize $300,000, $400,000, $500,000 of services until I get this all implemented. It's affecting every aspect of our business right now.
spk05: Got it. Does the cruise ship and the E2D stuff also land in the backlog total?
spk01: Well, no. The E2D, as soon as we get the PO, the delivery data.
spk02: We do have some in there, Brett. There is some E2D because we're expecting some to be in December, and there's others that have been given for the year, but they haven't released yet. So they give us a PO. We get a PO for X number of units, and then they roll them out. So we were getting a lot of them at the end of the year, but we have a fair amount for royalties right now. Okay, and some of those are folded into the backlog total.
spk05: Absolutely. Those are high order. All right. And how about, you know, the timeframe for royalties? chewing through this backlog? Is this like next quarter, next two quarters, next year, extend greater than a year? What kind of timeframe is it going to take to ordinarily work that through? I realize supply chains might impact that, but ordinarily, how quickly are we going to churn through this?
spk01: Well, on the normal circumstances, everything is a couple of weeks. If there was no You know, the most you would ever wait is six. You know, now everything's 12 to 15 weeks minimum, you know, on everything. So, yeah. In some cases, yeah. On the chips that we're waiting for on the ARIA side, it's, you know, 26 to 52 weeks.
spk05: Oh, wow.
spk01: Yeah.
spk05: That's kind of crazy. Yeah. Let's see. Oh, all right. UCAS generating enthusiasm in Q1. So does generating enthusiasm in Q1 include adding new customers during the quarter?
spk01: Absolutely. Absolutely. Yeah, we've been consistently adding new customers every month in UCAS of various sizes. You know, and some of our customers that we actually just signed end up being an MSP customer, a UCAS customer, and an ARIA customer. You know, they did the trifecta and bought all three. So, you know, in a perfect world, all our customers would move in that type of environment. But, you know, we're pushing.
spk05: Have you had many customers where you backed up and cross-sold some of these products and, you know, handed them as customers to one of the other services?
spk01: Yeah, you know, we try. You know, sometimes they take two of them. Sometimes they take all three. You know, we're trying to push... you know them into definitely you know to try to all three of them it would be like i said the perfect scenario and we push it and in some cases it takes a little time you know it'd be like oh you know let us bring you as an msp first let's see how you guys do You know, we want to make sure before we put everything, you know, in one basket that we're comfortable with your services. And that could take six months. It could take a year. And then when the renewal comes up, we'll be like, hey, listen, you know, we've done a good job over the year. Can we, you know, add another service? And, you know, then you court it out. And, you know, it's timing in a lot of this stuff, too. But, yeah, no, our goal is to get that recurring revenue on all three facets.
spk05: So now that these things have been rolled out for a little while, I would imagine that that opportunity is going to increase, you know, during this calendar year.
spk01: That's our goal. That's our goal. You know, it took a few years for MSP to really pick up stride and get those customer references. And, you know, we're building up the UCAS references. And, you know, of course, ARIA, we're building up some references there, too. So little by little, we're moving in the right direction.
spk05: Got it. And the last thing I want to touch on is the cash balance back up to $20 million. And I'm guessing the timing might not be right currently, but I know there was talk about reinstituting the dividend after a couple of profitable quarters. The buyback program is on hold. I'm just wondering what the current thought process is there for seeing the cash just keep swelling.
spk02: Well, I think we, we have numerous discussions at the board level and, uh, obviously we bring it up, uh, every board meeting. So it's something we're scrutinizing. And I think once we get, uh, you know, some continuing quarters, Brett, we will take a good hard look and could, you know, consider implementing, but we need to get profitability. on a consistent date.
spk05: Yeah. Has there been any talk about, um, you know, making the, uh, buyback program active again? Has that changed at all?
spk02: Uh, we have that. That's part of that discussion. So I, we can address that also.
spk05: All right. That'd be good. That'd be good to take a look at. I think at this point, I'd be able to strategically go in there and grab some chairs, chairs on the cheap and, uh, All right, that's all I got. Thanks so much for the insight. Okay, thanks.
spk01: Have a great one.
spk05: You too.
spk00: There are no further questions within the program. Back over to Victor for any closing additional remarks.
spk01: Thank you. As always, I want to thank our shareholders for your continued interest and support. Rest assured that your management team is committed to success and is diligently working to grow the business. Gary and I look forward to sharing our progress in fiscal 2022 first quarter operating results in February. Until then, be well, stay safe, and enjoy the holidays.
spk00: This does conclude today's program. Thank you for your participation. You may disconnect.
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