CSP Inc.

Good morning, ladies and gentlemen, and welcome to the CSP Inc. Fiscal Third Quarter 2022 Results Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Michael Paluvu. Michael, the floor is yours.

Thank you, Tom. Hello, everyone, and thank you for joining us to review CSP Inc's fiscal third quarter, which ended June 30, 2022. With me on the call today is Victor DeLovo, CSP Inc's Chief Executive Officer, and Gary Levine, CSP Inc's Chief Financial Officer. After Victor and Gary conclude their opening remarks, we'll then open the call for questions. Statements made by CSP Inc'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 the federal securities laws. The words may, will, expect, believe, anticipate, project, plan, intend, estimate, 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 statement and the projections upon which the segment and statements are made. 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 in Form 10-K, in the quarterly reports on Form 10Q filed with the Securities 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 CSP, Inc. 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. Victor, please go ahead.

Thanks, Michael, and good morning, everyone. Overall, we had a solid fiscal third quarter, and I believe our team has adapted to the ongoing supply chain inflationary pressure to generate both short- and long-term growth and increasing returns to our shareholders. Our technology solution, or TS business, had another terrific quarter and continues to gain momentum in the marketplace. While the segment's revenue is relatively flat with the year-ago period, the backlog increased to $16 million due to a rising demand for our products and services. Overall, we recorded net sales of $13.3 million for the quarter, which was slightly below year-ago level but represents 11% sequential increase over fiscal 2022 second quarter results. We achieved this 11% sequential growth despite experience very similar macroeconomic events. Services grew 37% compared to a year ago third quarter and was up 30% from fiscal 2022 second quarter. And overall backlog as of June 30th was 20 million and 17.3 million on March 31st, 2022. A key objective for our team is to continue the migration of CSPI's revenue to higher margin products and services. We are executing well to this goal as evidenced by a record gross margin of 37% for the fiscal third quarter. At 37%, the gross margin grew over six full percentage points compared to a year ago gross margin despite relatively flat revenue. The gross margin improved was the chief driver behind the net income for the quarter of 7.7 million or 15 cents per diluted share. We also benefit from favorable currency exchanges. Gary will review with you in a few moments. Before I review our business segment, let me take a few minutes to review the challenges that continue to impact our operations. First, while the global supply chain pressures moderated in May, they remain at high levels. For instance, our overall component delivery timelines from our supplies remain the same compared to a fiscal second quarter. Suppliers are telling us that we should see some shortening of the timeline, but there isn't much clarity. Our solution to this situation is to focus our revenue-generating efforts on higher margin products and services. This strategy has allowed us to build the backlog to record levels. However, our primary objective short-term is converting the backlog to revenue. Therefore, we are aggressively seeking other sources for requiring components so they can deliver finished goods. I'll note that the TS backlog of $16 million is far greater than the revenue we just reported for the entire quarter. We believe this backlog, which continues to grow despite improving revenue conversions, is an unprecedented asset to the company. The second challenge impacting our business is the pressure being put on our costs by inflationary forces in a tight labor market. The pressure is leading to increased wages and employee incentives in certain markets where The unemployment rate is in the 3% range. Employment recruitment and retention are a challenge. And with the increase in work from home policies, we are now competing with out-of-state companies offering well above market wages. Our technology solution, our TS business, generated revenue of $12.6 million in the fiscal third quarter, similar to a year ago level. We did achieve a 16% increase in segment revenue over fiscal 2020. 22 second quarter as we were able to convert some of the older backlog to revenue. As I mentioned earlier, approximately 80% of the backlog is in TS. Despite the older backlog conversion, we still grew the backlog for the segment by $2 million from the fiscal second quarter. A managed service practice, or MSP, has been a stellar performer throughout the past couple of years as we continue to attract new customers while existing customers expand. We're finding that many of the companies still have poor cybersecurity practices in place, making them vulnerable to data loss from attacks. These companies are potential CSPI customers as they gradually recognize that they need to make cybersecurity awareness prevention and security best practice as part of their culture. Regarding the UCAS business, I believe the incremental sales are getting closer and closer to achieving our goal. While we continue to sign smaller companies, it will take a concerted effort on our part to further educate the market on our solution merits if we want to penetrate this market in a meaningful way. Our success over the years of internally developing award-winning business solutions. Regarding the cruise ship industry, it remains surprising quiet for now. However, last month's decision by the Center of Disease Control and Prevention to discontinue its program of tracking cases of COVID-19 aboard cruise ships in the U.S. and reporting the findings to the public can only be viewed as favorable if the operators are more open to freeing budgets for their services. Regarding the high-performance product or HPP division, we reported revenue of $0.7 million, which was below our object for the quarter. We still maintain a multi-million dollar backlog in HPP as the supply chain issue continues to hinder the division's growth. Miracon revenue was lower than expected as we expect much of the same in fiscal Q4. We are also expecting the bulk of the royalty revenue related to E2D program to be recorded in the current quarter as the customer was still in the process of restructuring its business for most of Q3. During the quarter, we announced ARIA Zero Trust Gateway, a next generation network security solution focused on automated 100 gig network response accelerated by the NVIDIA Bluefield 2 DPU. The release and the webinar we hosted on June 7th generated a very positive response from customers and potential customers. We believe the interest generated could lead to significant revenue for ARIA platform as we enter fiscal 2023. The ARIA Zero Trust or AZT gateway is deployed as a compact inline bump in the wire standalone network device that will stop attacks without impacting the delivery of other traffic crossing the wire. To do so, the AZT gateway operates by sitting in line with data traffic, analyzing each packet at line rate, creating analytics for threat analysis while enforcing existing standing protection policies as well as those dynamically written to stop detected attacks. Amy Badani, Vice President of Network at NVIDIA said, ARIA Zero Trust Gateway solves a critical cyber problem for service providers who need a modern approach to protecting their customer's data from attack. We see a lot of value in this product that we can bring to our customers. In addition to the direct sales team, we continue to vet potential partners for the official channel program. As we added a few partners during the quarter, including one in Australia, we currently continue to speak with several others to increase our roster, which ensures a robust channel program and increases our chances for success. We also executed some operational efficiencies to right-size the HVP business that had been in the works for some time. Specifically, we relocated the operations to a smaller space, which resulted in lower rent, due to the fact that many of our employees work from home. Additionally, we are managing salaries and wages through some personnel attrition and filling these voids with consultants to ensure that we have the talent to meet our customers' needs. To summarize, we increased our backlog and recorded record gross margins. Our strategy of focusing on higher margin products and services is yielding solid progress each quarter. Despite converting some of the backlog to revenue, we simultaneously increased the backlog to over $20 million. This demonstrates the strength of our offering, yet it also highlights our continued engagement and customer loyalty during this period since we have not lost a single order from the backlog. We have successfully transitioned our business during the unprecedented period, and today we are an active player in the high growth and margin business. And we believe we have the resources, the wherewithal, and the strategy to realize our potential. With that, I will now ask Gary to provide a brief overview on the fiscal third quarter financial performance.