CSP Inc.

Good morning, everybody, and welcome to CSPI's second quarter fiscal year 2023 results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Michael Polyview. You may begin.

Thank you, Jenny. Hello, everyone, and thank you for joining us to review CSPI's fiscal 2023 second quarter results, which ended March 31, 2023. 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 determined as 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 several 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 factors section, of the annual report on Form 10-K and the quarterly reports on Form 10-Q, File, 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 CSPI takes 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 they're up. With that, I'll turn the call over to Victor DeLobo, Chief Executive Officer. Victor, please go ahead.

Thanks, Michael, and good morning, everyone. Today, we reported our third consecutive quarter of solid growth with revenue up 11% and earnings per share more than doubled from a year ago. The growth is a direct result of our team's successful effort to build both our recurring revenue customer base and a pipeline of million-dollar-plus business opportunities. Despite an increase in competitive operating environment for the customer's budget dollars, the demand for our services and solutions results in another quarter and backlog of more than $22 million, and we again increased our gross margins from a year ago fiscal second quarter. We are at the midway point of our fiscal year. We believe that we will be able to generate positive results during the third and fourth fiscal quarters. Once again, our technology solution business continued to lead the way with sales growth of 9%. Meanwhile, our high-performance products or our HPP business revenue continued its strong ascent with a growth of 29% compared to a year ago fiscal second quarter. Of particular note for this segment, the Aria product line is gaining traction with customers around the world. We have continually growing our Aria products and our team has more than doubled the pipeline for this product. We could potentially expand our marketing capabilities for this product line in key international markets through the establishment of a reseller agreement. We have signed an Australian MSP, and we have multiple deals that are underway. Turning to some of the financial results, our fiscal second quarter mark the beginning of the budget year for most of our customers and therefore can be a challenging period for our company. Despite this historic seasonality, total revenue for the period grew to $13.3 million from $12.0 million in the year ago fiscal second quarter. Our TS business revenue totaled $11.8 million. The segment of our operation continued to be the driver of by our customers' increased use of our implementation, installation, and training capabilities. Our HPP revenues were $1.5 million compared to $1.1 million in the year-ago fiscal second quarter, and were driven by Mericom and Aria. The Aria customer base continues to grow, and the pipeline is at an all-time high. During the quarter, we continue to manage the business in a cost-efficient, high-return manner. Gross management percentage over the period year... year ago period of 35% continue to expand and reach 38% while we gain leverage from our operations and generating net income of 321,000 or seven cents per common share. While we continue to invest in our programs to build a long-term growth, we are once again paying a cash dividend to shareholders of four cents per share, a one cent increase from prior quarter. We continue to manage our balance sheet to yield optimal returns. We continue to achieve record-setting levels of pipeline for most of our product lines, and the opportunities ahead of us continue to expand. Our focus over the past few years of offering differentiated, value-enhanced solutions for a challenging face by our customers, as well as an increasingly effective go-to-market strategy, are the key factors to our growth. At the same time, we continue to invest in our top-notch engineering team and R&D efforts to enhance the existing offering as well as create new solutions for our customers. ARIA is an example of the result from our development efforts, and we are working to create others in a not-so-distant future. In the cybersecurity space, new threats and challenges are faced by our customers all the time, and our solutions are providing solutions to the adaptable, flexible answers to those threats. While we have strong momentum and our opportunities in the marketplace continue to expand, we do have hurdles to overcome to realize our full potential. The supply chain continues to be a hurdle, and although we have created workarounds for most of these hurdles, gaining acceptance for these solutions often require extensive review by our customers, which delays shipments. Our customers continue to remain loyal to our solutions, often because of our most effective cost-efficient answers to these needs. At the same time, our team constantly interacts with our customers to keep them abreast of supplier timelines and options. The supply chain issue continues to improve, but slower than we would like, and it requires constant attention by our team. At the top of the call, I mentioned an increase in competitive operating environments for the client's budget dollars. The situation in is being driven by customer needs to maximize the return from their technology investments. Across our product lines, we were able to meet this challenge quite effectively. However, the internal process followed by many of our clients is resulting in an extended timeframe for order decisions, which in turn is extending decisions on several major opportunities we are pursuing. Another challenge for us has been the absence of any significant recent revenue from the cruise line industry. We are beginning to see signs that this drought is starting to end as we are currently retrofitting one large ship and several other ships that we could begin work on during the next couple of quarters. To summarize, we have generated substantial growth during the first half of the fiscal year. And if we execute and the market cooperates, we believe the second half of fiscal year performance will be even better. With that, I will now ask Gary to provide a brief overview of the fiscal first quarter financial performance. Gary?

Thanks, Victor. As Victor mentioned in his opening remarks, we had a solid fiscal second quarter, and we continue to achieve our operating and financial objectives. We reported revenue of $13.3 million. and an 11% increase compared to the year-ago fiscal second quarter, which further validates our growth strategy. We were toward a gross profit of $5 million, or 37.6% of sales, compared to $4.2 million, or 35.1% of sales in the year-ago fiscal second quarter. Our engineering and development expenses for the fiscal second quarter were $585,000 compared to $717,000 in the year-ago period. As we discussed previously, the increase is primarily due to higher personnel costs, which includes outside consultants. Our SG&A expenses in Q2 were $3.9 million, compared to $3.5 million in the year-ago quarter due to increased payroll and variable compensation based on higher year-over-year gross profit. We reported net income of $321,000 in the fiscal second quarter or diluted earnings per share of 7 cents per share compared to net income of $156,000 or diluted earnings per share of 3 cents for fiscal 2022's second quarter. As Victor mentioned earlier, this represents a more than double increase in our earnings per share. The cash and cash equivalents was $13.3 million as of March 31st, 2023. The cash and cash equivalents were approximately $10.7 million lower and cash and class equivalents as compared to the September 30, 2022 level, primarily due to moving $3.5 million of cash to short-term held to maturity investments during the second quarter of fiscal 2023, and a large vendor payment made in the second quarter on a large financing customer sale that occurred in the first quarter of fiscal year 2023. In accounts receivable, there is $8.7 million with payment terms which exceed one year. We will be paid $.6 million and $6.2 million in the third and fourth quarter of the fiscal year. We believe this is only possible because the prudent management of our resources, which is allows us to implement our multi year growth. strategy of transforming into a cyber security wireless and managed service company. I also. want to highlight that the Board of Directors approved an increase in the quarterly dividend to $0.04 per share payable on June 13, 2023 to shareholders record on the close of business on May 25, 2023. With that, I will turn it over to the operator to take your questions.

Thank you, Gary. Ladies and gentlemen, the floor is now open for questions. If you would like to ask a question, please press star one on your phone keypad now. A confirmation tone will indicate your line is in the queue. You may press star two if you would like to remove your question from the queue. Anyone using speaker equipment, it may be necessary to pick up your device before pressing the keys. One moment whilst we poll for questions. Thank you. Your first question is coming from Joseph Nerges of Segron Investments. Joseph, your line is live. Thank you.

Good morning, John. How are you today? Good morning, Joe. Good, John. Okay, well, let me first congratulate you guys on the press release from last week, the announcement of their customer, Miami Dolphins has a new customer with, well, I guess it's a Cronus. Is that at the software company that you're tied up with? Yes. That's a pretty high-profile customer in the area, and I assume that doesn't hurt our publicity from the from the locals that we're trying to recruit outside of them.

Yeah, that's part of the goal with the announcement. It's a three-year contract with them, so we're looking forward to developing a strong relationship over the next couple of years.

I noticed in looking up Kronos, they have a pretty dynamic sports team. They have quite a few professional sport teams under contract. And I was wondering if, and, of course, from our market area, from basically Tampa Bay down, there's quite a few sports teams. I'm wondering if we're in contact with any of the other teams in the area.

This conversation is happening.

Okay.

I can't say more than that, but there are other things going on.

Okay, all right. And the cruise industry did say, well, there's been some pretty good publicity of late about their bookings in the cruise industry. You're saying it hasn't yet to any great degree helped us, but we're still talking. Is that basically what you're saying?

Well, yeah, they have actually started spending money because we haven't done a ship in a long time, and we completed one in Spain recently, Last week or the week before, I can't remember now. And there's 11 more we're talking about. So, you know, if we get all those, it'll be a good kickstart to hopefully more, you know, after that. But they're moving slow, but we are moving, which is good news.

Well, like I said, I've read, at least the press releases of late, that their bookings have been pretty strong. So, I mean, hopefully that – They're still watching every dollar.

They've been hit so hard right now that their budgets are still, I don't think, of what they used to be.

No, I understand. I'm just saying that at least from a positive standpoint, their bookings are in good shape. Now, a couple – so from the cash standpoint, you're talking 13.3 cash and cash equivalents. So you're also saying that there was $3.5 million moved to short-term investments. What term do we consider short-term? Is it more than six months?

Six months. Three months, 90 days. 90 days or less.

Okay, so anything that's 90 days and above would be in that category of short-term health and maturity investments. Correct. Okay. From your – on the R&D front, did you say it was $585,000 for the quarter? That's what the R&D spending was?

Oh, $8.58.

Okay.

Yes.

So it's higher than – that's why it's a lower number, $8.58 versus $7.17 last year. Correct. Okay. And your year-end letter, you mentioned about 10 area customers. And, of course, in this press release, you now indicated 14. And am I correct in the assumption in your press release, you talked about the pipeline and some multimillion-dollar potential opportunities. Most of that falls into the area basket, let's put it that way?

No, they're both TSN area.

Both PS and area, okay. And anything new on the Nervidia front? I mean, I know you've had contacts with them and some of their customers in the past, and I didn't know if there was any progress or any discussions going on with any of their base.

There is a different department we started talking to recently. It seems promising on some stuff, but again, in those worlds, things move really, really slow when you're trying to get integrated into a product line of theirs.

So at least there are some discussions that it's not dead in the water, let's put it that way.

Oh, no, no, no, not at all.

Okay. All right, well, that's all I have. Thanks a lot. Again, congratulations moving forward, and certainly congratulations, I guess, really congratulations to me on the dividend. Thanks, Bob. Okay, Joe.

Thank you very much. Your next question is coming from Brett Davidson, who is a private investor. Brett, your line is live.

Good morning. Good morning, Bob. I have a question about the long-term receivable. Is that all with that one large customer from Q4?

There's at least a couple others, too, but primarily with that one customer.

Got it. And do you have a ballpark that you can give me as to when that – resolves itself, or is that going to be a continuing story over the next couple of years? We're going to continue to add to that.

We're hoping it continues. We hope it continues. We've been doing this with them for probably about four years now, maybe five. So as things come up, it keeps us pretty sticky inside the account. So we're hoping it does continue.

moving forward nice um and you know the terms are agreeable on that that you know we're capturing the interest rate increases and uh that's working out to our advantage or yes absolutely absolutely um the other thing i wanted to get was more of a You can talk about the supply chain holding things up, and I know there's that 22 million backlog. Absent supply chain, what portion of that do you think you could ship in the next quarter absent supply chain hiccups?

It's all supply chain hiccups, really, right? Because if the majority is supply chain, it just... Sometimes, you know, if the order is, say, a million dollars, you might get $800,000 worth of gear right away, and then the other $200,000 could be on backlog for six months. And so you can't complete the project until it all comes in. So it's unpredictable, and that's where some of the frustrating points are.

And this is still equipment like firewalls and routers and –

Yeah. A lot of firewalls, you know, you know, servers. It's a mixture of a little bit of everything.

How much of it would you estimate is, uh, you know, chips for area products or is that right now?

It's resolved itself at this point.

Oh, nice. That's good to hear. One thing moving in a positive direction and, uh, And from a hiring perspective, have you guys had, you know, with some of the pressures and some of the other tech industry giants, has that worked your advantage at all as far as hiring goes?

Florida's a hotbed, right? So a lot of people are moving down. So it hasn't really... There's people out there, but it's still very competitive on, you know, the amount we have to pay for salaries and bonuses out there to get the top people that are available.

Interesting. All right. Well, that's all I got. Thanks a lot, guys. And you guys take care. We'll talk to you next quarter. You got it. Have a great day.

Thank you very much. Just as a reminder, if anyone still has a question or a comment, please press star 1 on your phone keypad now. Okay, it doesn't appear like we have any more questions. I'm going to hand back over to Victor for any closing remarks.

Thank you. As always, I want to thank our shareholders for your continued interest and support. We have now reported three consecutive quarters of significant growth, and the momentum we continue to experience in the current quarter excites us for the remainder of the year. We have a solid revenue conversion, a building pipeline, and a product and service portfolio that are generating favorable gross margins. Gary and I look forward to sharing our progress in fiscal 2023 third quarter operating results in August. Until then, be well, stay safe. Thank you. Thank you.

Thank you very much. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.