CSP Inc.

Good morning, ladies and gentlemen, and welcome to the CSPI's fourth quarter and fiscal year 2022 financial and operating 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 Poliview. Sir, the floor is yours.

Thank you, Matthew. Hello, everyone, and thank you for joining us to review CSPI's fiscal fourth quarter and full year results, which ended September 30, 2022. With me on the call is Victor DeLovo, CSPI's Chief Executive Officer, and Gary Levine, CSPI's Chief Financial Officer. After Victor and Gary conclude their opening remarks, we'll 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 overlooking statements. Overlooking 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 Form 10-K and the quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. Public statements are based on the information available at the time those statements are made and management's good faith believe as of the time with respect to future events. All overlooking statements are qualified in their entirety by this cautionary statement, and CSPI undertakes no obligation to publicly revise or update any overlooking 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. This morning, we reported an exceptional finish to our fiscal year 2022. We were able to ship a sizable portion of our record fiscal Q3 backlog, which contributed to revenue growth of 67% in the fiscal fourth quarter compared to prior year quarter. At the same time, the TS business segment hit on all cylinders and we achieved 31 cents per diluted common share in earnings for the fiscal year fourth quarter while continuing to generate new orders. As a result, we finished the year with a backlog at a near record level, and $24 million in cash, a solid momentum across all product lines and services offerings as we entered fiscal 2023. When we last talked with you in August, I made a comment that our team had started to turn the corner on meeting the challenges presented by ongoing supply chain inflationary pressure. While we still have challenges in our supply chain, we've been able to work around some of them. During the past year and a half, the supply chain challenges have been a big factor behind the growth in our backlog, and some of our critical components for our product and systems have taken a full year to be shipped. The fact that we have not lost a single order from our backlog during the period is a testimonial to the unique features and exceptional performance of our solutions, as well as critical role they play for our customers. As our team worked to elevate some of the most critical supply chain issues, we were able to accelerate deliveries and revenue growth. Our revenue growth during the fiscal fourth quarter was driven by our technology solutions, or the TS business, and its managed service practice. We generated revenue of $15.8 million, an 80% increase from the prior year quarter. We are winning new customers while earning increased business from existing customers. prior year quarter and was driven by our customers' increased use of our implementation, installation, and training capabilities. The managed service practice growth during the quarter came from existing customers who rely on CSPI to meet critical systems needs. During recent quarters, we have experienced modest growth from existing customers, so expanding business from this critical component is both welcome and exciting. At the same time, we also generate MSP revenue growth from our new customers who are initiating relationships with our team, and this contribution to our financial performance is also highly valued. While our view of the cruise line business remains unchanged from the prior quarter, any upside during the year will be seen as a boost to the overall performance and our internal goals. We remain ready to pursue new opportunities as they arise, as we have maintained the staffing need for this business as they have been reassigned to other projects within CSPI. Regarding the UCAS practice, we secured additional UCAS orders during the quarter, and the current pace is encouraging. Before I move on, I want to congratulate the TS team, as CRN, a brand of the channel company, named Technology Solutions to its 2022 Solution Provider 500 list. Sierra's annual solution provider, 500, ranks North America's largest solution providers by revenue and serves as a gold standard for recognizing some of the channel's most successful companies. Our high-performance products, our HPP segment, which also impacted by ongoing supply chain issues during the quarter, reported revenue of approximately $0.9 million above fiscal Q3 and below the year-ago fiscal Q4 amount. However, the story with the segment is momentum. As we expanded this segment's backlog, and we believe we have entered a phase of increased customer interest and activity. We believe fiscal 2023 is going to be an exciting year for the segment. During the quarter, we added two new ARIA customers, a consistent level of performance over the past few quarters. I mentioned earlier that our new business pipeline continues to build. and we finished with a near record backlog at the end of the fiscal year. We had one large sale with a financing arrangement in the fourth quarter with a total payment of $12.8 million to be received in three installments with the last occurring in fiscal 2024. This revenue was recorded net. As a testimony to the strong balance sheet of the company, we will realize a sizable portion of the $24 million in cash $24 million in cash at September 30, 2022, for the cost of the sale in fiscal 2023's first quarter. We have successfully executed similar type of orders for this customer. A key objective for our team is to continue the migration of CSPI's revenue to higher margin product and services. For the full year, we executed this goal as evidenced by our gross margins of 34.6%. Our gross margin for the fourth quarter was 36.2%, which resulted from a strong 24% revenue growth of our managed service practice and mix of business. Our overall revenue growth was the chief driver behind our net income for the quarter of $1.4 million, or $0.31 per diluted share. We also benefited from a favorable currency exchange, which Gary will review in a few moments. Back in August, we noted the pressure being put on our costs by inflationary forces that in the tight labor market. This pressure led to increased wages and employment incentives. During the fourth quarter, we began to experience some relief from this pressure. Don't get me wrong, it's still there, but the upward pressure has abated somewhat, and we have been able to meet our staffing needs within our business model. To summarize, we had a great finish to our fiscal year. Our strategy of focusing on higher margin product and services that met customer demand is yielding solid progress each quarter. Despite converting some of the older backlog revenue, we increased the backlog from the third quarter. 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 with all and the strategy to realize our potential. With that, I will now ask Gary to provide a brief overview of the fiscal fourth quarter financial performance. Gary?

Thanks, Victor. Thank you, Victor. As Victor mentioned in his opening remarks, our fiscal fourth quarter revenue was $16.7 million. a $6.7 million or 67% increase over the year ago fiscal fourth quarter. We reported gross profits of $6 million or 36.2% of sales compared to 4.2 million or 41.7% of sales in the year ago fiscal fourth quarter. Service revenues grew 25% compared to the year ago fourth quarter. and was up from our fiscal third quarter, which is a combination of the growth in the MSP as well as a higher average selling price. Our engineering and development expenses for the fourth quarter were $865,000 compared to $700,000 in the year-ago period. As we have discussed previously, The increase is primarily due to higher personnel costs, which include outside consultants. Our SG&A expenses in Q4 was $4.8 million, up $1 million from the year-ago fiscal fourth quarter, due to increased variable compensation and bonuses from hitting key operating objectives for the full year. We reported net income of $1.4 million in the fiscal fourth quarter or 31 cents per diluted share common compared with our net income, which was net income of 0.8 million or 19 cents a share per diluted share for the fiscal 2021 fourth quarter. The 2022 fourth quarter results reflected a 0.9 million dollar gain from the impact of foreign currency exchange rates while the prior year period included a gain from the sale of discontinued operations of $0.5 million or 11 cents per diluted common share. We ended the fourth quarter and full year with cash and cash equivalents of nearly $24 million as of September 30th, 2022, which was an increase of $4 million from September 30th, 2021. primarily due to the receipt of an installment payment for a large financing order in the fiscal 2022 fourth quarter. During the fiscal year 2022, we purchased 22,000 common shares from the stock repurchase program. We have authorization to buy an additional 172,000 shares of CSPI common shares as of September 30, 2022. We continue to believe the shares at the current price level represent value, especially when you factor in the margin expansion we are generating and the growing backlog. I also want to highlight that the Board of Directors approved a quarterly dividend of $0.03 per share, payable January 6, 2023, to shareholders of record on the close of business on December 21st, 2022. Before I conclude my remarks, I want to highlight what Victor mentioned earlier, how we have had an opportunity to leverage the strength of the balance sheet to offer CSPI financing for customer orders. This is two-fold benefit for us. It will enable us to accelerate the top-line growth while attractive interest rates will allow us to achieve greater profitability. However, I want to stress this will not change our prudent expense management, and we will be vigilant to ensure that we have the resource to execute the multiyear growth strategy of transforming to a cybersecurity, wireless, and managed service company. With that, I will turn it over to the operator to take your questions.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold lollipop for questions.

Thank you. Your first question is coming from Brett Davidson.

Your line is live. Good morning, Gary Victor.

I hope things find you well. I got a couple questions. Hey, thanks. I wasn't able to keep up with that installment payment. So I got the balance sheet side of it, the income statement side of it, That sales was booked in the fourth quarter?

Yes.

Okay, so that's already run through. So was that the final installment payment, or are there additional payments coming?

The first installment payment will be in Q1, hit Q1. And then the remaining will be, you know, year two and three. So it will be on month 13 and then month 14. 25 let's say okay so it'll you you said it'll be january the first the next one no we had to pay it in full okay because net 60 and then the next next uh october will be the next payment and then the following october will be the final payment okay and they're going to be similar amounts correct You take the $12 million, divide it by three.

Got it. The area products, I know that there's still some kind of supply chain impact. Did that impact the shipments of those, or is that finally starting to ease?

Starting to ease. So we should see some shipments in Q1. Got it.

And do you have a ballpark of what the backlog on that is?

Are we talking a couple million?

Are we talking, you know, eight million?

Yeah, a couple million.

Got it.

I think a total of is like a little over three million total.

Got it. And, you know, you said you're going to ship in Q1. Does that mean that's all the product you have available to ship right now, or that's just what's scheduled to ship in Q1 and you're going to be able to ship additional in, you know, the remaining quarters of the year?

Correct. Yeah, it'll go to Q1 and Q2.

Got it. All right. That's pretty much all I got. You guys have a good holiday, and we'll talk to you next quarter.

Thanks, Brett. Have a great one. Happy holidays to you, too. Yeah.

Thank you. Your next question is coming from Joseph. Your line is live.

Good morning, guys. How are you doing today? Good, Joe.

Hey, Joe.

You had a very good first quarter here, or last quarter, last year. A couple of quick questions. One, on the last conference call, you talked about expecting delivery requests or an October delivery timeframe for that large $1.8 million government cybersecurity order. Is that still in line for October or past October? But was that delivered in the first quarter?

Yes.

Or is that being delayed?

No, it was delivered in the first quarter.

So it wasn't in the fourth. It will be reflected in the next report then, the next – The fiscal first quarter. Okay, that's great. Correct. An interesting point was your comment about you're expecting an exciting year in the HPP division this year, hopefully. Am I assuming correctly that some of the excitement is generated from that webinar you did with NVIDIA back in June and maybe some progress on the on the amount of interest you had from that webinar?

I think it's a combination of a lot of sales activities that we're doing, not just from the NVIDIA. The stuff with those large organizations, as you know, Joe, take a while to get embedded into their product line. So we're making progress, but it's slow, but it's moving forward.

Okay, so they're still working from that webinar. The lead group with that, that takes a lengthy period of time is what you're saying.

Yeah. They're NVIDIA's customers that we're talking with, so they're pushing the sales cycle more than we are. So we're just a piece of the overall solution.

Well, that's all right. NVIDIA's got a lot of customers. Again, in the last conference call, you mentioned about adding some channel partners, or you're progressing on that level. Have we added any additional partners since that last conference call?

Not exactly sure, but I would say probably three to five new ones that we've been talking with, and I think three signed.

Okay. Okay. So we're progressing on that level, too, even the channel partner level. Yeah, definitely. Okay, and I guess in the last conference call you also mentioned that you thought that the E2D royalty revenue would be included in the last quarter, the fourth quarter of last year. Was that the case, or are we expecting any in the first quarter of this fiscal year?

We had some in the fourth quarter, and we're expecting some more in the first and second quarter.

Okay, so you're expecting more down the road. All right, well, that's pretty good. Sounds pretty exciting. Hopefully, if we can solve the backlog, the quarters going forward will be a lot better than even this report, which was a very good quarter. So thanks a lot again, guys, and, again, have a good holiday. Yeah, you too, Joe. Okay, thank you, Joe.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star, then 1 on your phone at this time. Please hold while we poll for questions.

Thank you. That concludes our Q&A session.

I will now hand the conference back to CEO Victor DeLovo for closing remarks. Please go ahead.

Thank you. As always, I want to thank you. Thank our shareholders for the continued interest and support. Fiscal 2022 was not without its challenges, pandemic, supply chain issues, inflationary pressure. Yet we grew revenue and gross margins while ending the year with a record backlog and strong enough balance sheet to secure orders that will further drive our revenue and gross margins. Gary and I look forward to sharing our progress in fiscal 2023 first quarter operating results in February. Until then, enjoy the holiday season. Be well. Stay safe.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.