CSP Inc.

Good morning everyone and welcome to CSPI's second quarter fiscal year 2024 conference call. At this time all participants are in a listen only mode and the floor will be open for questions after the presentation. If you do have any questions we ask that you limit them to one question and one follow-up question in the interest of time. Thank you. If anyone should require operator assistance during this 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, Michael Poliviu. You may begin.

Thank you, Jenny. Hello, everyone, and thank you for joining us to review CSPI's fiscal 2024 second quarter results, which ended March 31, 2024. 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 will then open the call for questions. During the Q&A session, we ask participants to limit themselves to one question and one follow-up question and then re-queue if they have additional 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 Law. 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 meant 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 and may influence the accuracy of those 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 in the risk factor section of the annual report of Form 10-K and the quarterly reports on Form 10-Q 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 at the time with expected 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 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. Early this morning, we announced our fiscal 2024 second quarter results, which once again demonstrates the return we are generating from our strategic shift towards higher margin products and services. While we continue to invest in the broadening of the launch of AZT Protect, we grew services revenue 23%, increased our gross margins 47%, and realized five-fold increase in net income compared to a year ago fiscal second quarter. Our progress during the first half of the year combined with the building of pipeline of AZT position us for future success. I'll start my review of the operations with our high performance product or HPP, which is benefiting from the growing market interest in AZT offering. During the quarter, HVP contributed $2.5 million total revenue compared to $1.5 million in a year-ago quarter. The AZT offering is changing how we operate and how the industry perceives CSPI. We are generating significant attention and interest in industry events and conferences, and this interest is from some of the largest global corporations, despite only bringing Being months into AZT launch, we are building traction in the market, and the level of customer enthusiasm remains high, as does the new business lead pipeline. During the quarter, we signed our largest contract for AZT, a multimillion-dollar agreement with a global pharmaceutical company, which is deploying AZT across its global manufacturing platform and is in the process of protecting over 40 facilities nationwide. and from the growing cybersecurity threat to operational technology from hostile nations, terrorism, and organized crime. Early this week, a case history of ACT Protect was published in the journal, an award-winning publication from Markwell Automation. We can't begin to tell you how critical and important this is to reach a subscriber base of over 50,000, a targeted audience that is committed to keeping up-to-date with leading-edge technology methods, trends, and technologies that protect the industrial automation segment from cybersecurity attacks. Our partnership with Rockwell is expanding as tomorrow we are co-hosting a webinar titled CyberRx, How to Automatically Protect Rockwell OT Customers from Today's Cyber Attacks. Gary Southwell, General Manager of CSPI Area Cybersecurity, will be joining Thomas House, Life Science Cyber and Digital Consultant. at Rockwell Automation. They will be discussing why the Purdue Model Passive Defense and AV slash NGAV are not stopping the most dangerous attacks. The webinar enables Rockwell to discuss the unique set of requirements that are needed to protect an organization's production applications attack surface and how ARIA AZT Protects plays a unique and critical role in meeting this need. Gary and Thomas, We'll delve into the composition of supply chain attacks and finally hear about a case study of how one of the world's largest pharmaceutical manufacturers uses Aria AZT Protect in combination with Rockwell's industrial automation suite to protect their environment and meet their challenging OT requirements. As we outlined during our last call, we are leveraging the height of the trade show season and attended several of the more intimate OT focus events as we continue to further expand our brand presence within the OT marketplace. This is part of our wider launch strategy, which is to engage with Fortune 500 companies to demonstrate the need for AZT Protect solutions. We believe our approach is building interest with the slower sales cycle customers, and we are building a pipeline of opportunities focused on oil, gas, energy, and water treatment plants, just to name a few of the focus industries. To increase shorter-term revenue opportunities for AZT Protect, we implemented Phase 2 of our multi-pronged sales strategy and hired three new salespeople to focus our middle market enterprise. As a result of this investment, we have doubled the dedicated AZT sales team. To further expand AZT Protect market penetration, we are actively expanding existing partnerships and exploring the creation of new ones. We see this part of our go-to-market strategy as a pathway to address the government segment as we are very close to signing one of the largest government-focused distributors. We believe our direct sales team and the ability to use our partners' depth is going to significantly raise the profile of AZT offering and build revenue opportunities. We also announced two major awards that ARIA Cybersecurity wins Global InfoSec Cybersecurity Product Award for AZT Protect at RSA and ARIA Cybersecurity wins prestigious Globebe Cybersecurity Protect Award for AZT Protect. The technology solution, or the TS business, continues to perform and contribute $11.2 million to the total revenue of $11.8 million a year ago's quarter. During the first fiscal quarter, we announced a five-year multi-million dollar contract to provide managed services for a prominent Florida public College, one of the largest and most diverse institutions of higher education in the nation. We will deliver proactive monitoring, management, and support for the college critical technology infrastructure, including network, security, and private cloud services. The success of TS continues to be driven by our customers' increased use of implementation, installation, and training capabilities. This component of our company remains quite robust as we added New UCAS customers during the quarter. The TS pipeline is currently running above average. The cloud business currently has a record pipeline. This is a highly stable business as we have achieved a customer retention rate of more than 90%. The shipping business remains relatively unchanged from prior quarters. We did sign a new customer, and we are looking forward to fostering a strong relationship over the coming years. As I stated on the prior call, we are currently working with one of the largest freight operators, specializing in containerized ocean exports serving numerous ports worldwide with an extensive global agent network. We have an order for over 14 ships that are expected to be retrofitted over the next few months, and upon completion, we expect to provide our managed services for each of these ships where we'll add to our monthly recurring revenue. To summarize, with the successful launch of AZT Offering, I believe we have positioned the company for sustained long-term growth and success. Our two businesses are growing, and the pipelines are growing, and we will translate to increased revenue margins and profitability. Lastly, we believe the recent two-for-one stock split increased the liquidity of CSPI shares, and I believe it will provide greater opportunities for institutional participation and enhanced shareholder value at the time we are broadening our business prospects. We also believe the success of AZT launch and growing cybersecurity threats are important allow us to now engage in an active investor relations strategy. We will keep you posted as we schedule conferences, participation, and other related events. With that, I will now ask Gary to provide a brief overview of our fiscal second quarter financial performance. Gary?

Thank you, Victor. For the fiscal second quarter ended March 31st, We reported revenue of $13.7 million compared to $13.3 million in the year-ago fiscal second quarter. Our revenue performance was driven by a 23% growth of the service business. Our Q2 gross profit, which was greatly impacted by the higher service revenue, was $6.5 million or 47.3% of revenue compared to $5 million or 37.6% of revenue. For the fiscal second quarter, our engineering and development expenses was $726,000 compared to $858,000 as we reduced outside contractors and elected not to fill some open positions. Our SG&A cost for the fiscal second quarter was $4.5 million compared to $3.9 million in the year-ago fiscal second quarter as we continue to invest in the AZT offering, including building out the dedicated sales team and trade conferences participation. Benefiting from the higher service revenues and higher margin, we recorded net income of $1.6 million or 16 cents per diluted common share for the fiscal second quarter ended March 31st, 2024, compared to net income of 0.3 million or 3 cents per diluted share for the fiscal second quarter ended March 31st, 2023. For sure amounts have been retroactively restated to reflect the two-for-one stock split. Following the two-for-one stock split, we currently have 9.5 million shares outstanding. The company had cash and cash equivalents of $27.1 million as of March 31, 2024. We believe our robust financial position allows us to execute our multi-pronged sales and growth strategy for the AZT offering, as well as other products and service lines and financing large customer agreements, which have been highly successful in the past for CSPI. Lastly, the Board of Directors approved the quarterly dividend of $0.03 per share payable on June 12, 2024, to CSPI shareholders of record on the close of business of May 24th, 2024. With that, I will turn it over to the operator to take your questions.

Thank you very much. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For any participants using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please pause a moment whilst we poll for questions. Thank you. Your first question is coming from Joseph Nerges of Seagram Investments. Joseph, your line is live.

Thank you. Good morning, guys. How's everything going?

Good, Joe. Good morning, Joe.

Okay, one question and one follow-up. You're cutting me down here. One question. I'm going back after the last conference call you did, Victor, and you mentioned that we're close to rolling out a full production line version of AZT for the IT environment. Is that still in beta testing because that hasn't been released as of yet?

Correct, yeah. It should be. May, we're doing some additional testing just to make sure everything is where it needs to be. But we have rolled it out to a few of the customers already with no issues, but we have some enhancements and stuff like that where we're developing right now.

And how will that enhance what we already have out there? In other words, what do we expect that add-on will help us with?

Oh, in the OT space, right, updates and patches are not as important. And that's why our product, you know, kind of fits into where it protects it even without the patches. In the IT space, they still want to do patching. So we needed to allow for that, whether it's manual or automated. So that's where the enhancements came in the IT side of it, where Like I said, in the OT space, patching is not as important just because you can't really touch the machines. In the IT, whether it's a Microsoft patch or any other patch that's out there, we need to allow for that. And that's kind of where we've been developing and making sure it works with all the other products that are out there.

Okay. And just one quick follow-up here, and that is the – I think the last time you mentioned with the chemical company, our 545 on a chemical company where we have multiple sites, but basically it's the plant manager's decision whether he wants to implement the ACG Protect. Well, you know, the old sales on me comes out now. I can't imagine. The approach that I would make to any plant manager would be, do you really want to be the plant manager who decided to not implement and yet you were hacked? At your plant. I mean, that's sort of a career ender, isn't it? He's going to be in real trouble if X number have implemented it and they're not hacked and he happens to be the plant that's hacked or breached.

Yeah, that makes sense. But sometimes common sense is not the thing that people use all the time.

Well, I certainly wouldn't mind. I would put that in the back of their mind, if nothing else.

Oh, we always do. We always do.

Well, I'll open it up for other questions for other people.

Thanks, Joe.

Thank you very much. Just a reminder that if you do have any questions, you can press star 1 on your phone keypad now to join the queue. It doesn't look like we've got any further questions, or we do. We've got a question from Brett Davidson, who's a private investor. Brett, your line is live.

Good morning, gentlemen. Good morning, Brett. Regarding those three new salespersons, talks about targeting... larger mid-market companies, what does that look like? Are these guys going out and meeting at their locations? What exactly does it mean that they're targeting mid-market companies?

Well, instead of looking at the top Fortune 500 companies, the huge gas companies, the companies that definitely have a need but move really, really slow, We're trying to get into that next layer where they're not as large, and we'll be able to target them, and hopefully decision-making can come a lot faster. POCs could go a lot faster. And that's a combination of meeting some of the customers at trade shows, calling them on the phone, visiting them locally, whatever it takes. It's a combination of everything.

And, you know, is there a pipeline right now regarding the AZT product? Is there, you know, stuff that is in process that's not quite to the sales line? Yeah, it's a combination.

Yeah, it's a combination of... We have current POCs going on where they're actually testing the product, whether it's in a lab or whether it's, you know, in their environment. And there's other ones where, you know, that are lower down the line where we started talking to them. And now it's about getting, you know, these large companies all have big labs and getting the authorization and getting the security clearance and getting everything else that gets through so we could go into the lab and get set up. You know, that's a process, a lot of paperwork, a lot of contracts. But, you know, getting into these large, you know, opportunities, you know, that's what we've been focusing on. And we're using the automation partners like the Rockwells of the world and other players that I can't mention to leverage their sales staff to try to get into the relationships that they already currently have. So that's kind of why we brought into, you know, the big, you know, we're trying to work with the big security players that are out there also to leverage the long-term relationships they may have that can kind of move us, you know, a get us in faster, you know, as a smaller company, CSPI, you know, compete, you know, competing with the Apollo's and the name brands, you know, by leveraging those salespeople in the relationship and, that they had for maybe years, we're able to have conversations, you know, with these large companies that might take us, you know, a year just to get a conversation going. We're able to, to have a, an immediate conversation within weeks and try to, you know, get the next level where PLC.

Is there a way to, you know, kind of measure that in, in like a dollar figure, or is that more like a fool's errand at the point we're at and, you know, selling these things or is there a way to measure this pipeline of potential deals?

We have done some measuring internally, which I'm not willing to share, but we look at the initial opportunities based on the conversations we have and we do have a pipeline that we're managing against. Um, we have seen where some of the initial conversations started and, you know, we put in a, an estimation of X amount of dollars. And as the conversations went on, they've, the, the pipeline actually increased based on other needs and other people we talked to, um, in the organization. So, yeah, we, we are, you know, putting a pipeline, an estimation of revenue, um, that we're managing internally based on the initial conversations that we're having with each and every organization.

Okay. Thank you very much. Your next question is coming from Mike Price, who's a private investor. Mike, your line is live.

Thank you. Good morning. Thanks for taking my question. Hey, I know that you want to have wider distribution of shares and shareholders. But with $120 million market cap and what you paint in front of you with AZT and having $27 million in cash, it seems like there's a room to be buying shares. I've asked this question each of the last three conference calls, and you have the authorized shares, but you haven't bought any shares. Any thoughts along those lines?

Yeah, over the last quarter or two when the stock was higher than it is currently, we didn't see the need. But at this price level, we are definitely considering supporting it and buying shares in the upcoming quarter. Okay.

All right. Thank you.

Thank you very much. Your next question is coming from Sergio Heiber of Heiber Research. Sergio, your line is live.

Hi, good morning, guys, and congratulations on a huge improvement on the bottom line. I think you gave investors a head fake in looking at the reaction today to the news. Investors are used to seeing improvements in the top line and not the bottom line, so I think that that's fantastic that you're concentrating on that. And I was wondering if you can give us some color on bundling area with the major security products, like for example, with Palo Alto.

That is definitely an option. We, we do compliment, you know, if it was a Palo Alto or CrowdStrike or any of the other players, we, we can work in conjunction with all of them. You know, especially where, Some of the old licenses in the XP world or Windows 7 that they may not be supporting, we can definitely take over any system that's running an older version. It's up to the customer. If they love the Apollo or the CrowdStrike or whoever they're using, they can continue using it and we'll work side by side. If they see us as a product that they want to fully implement across the platform, we'll be more than happy to take all the business. Yeah, we are not looking to rip and replace any of the major players out there at this stage of the game.

But why not bundle directly so that it's sold? For example, Palo Alto will include the area with the Palo Alto product.

I would love to get that relationship going. If you have any contacts that could help do that, please let me know.

So you have a contact with an unnamed company, which I think is Palo Alto. That's why I'm asking that. I know you can't answer it, so I'll go on to another question. Can you talk about why the dividend was decreased?

Stock split.

Yes, we looked at it from the standpoint that if we put the shares in, it would have been really at two and a half cents.

Yeah, so we went to three cents, yeah.

Okay, and are you going to be giving it?

Apologies, you've had your allotted questions. If you do have any more, Sergio, you can press star one and join back in the queue, all right?

All right, thank you very much. Thank you.

Your next question is coming from Paul Scolade, who's a private investor. Paul, your line is live.

Hello, gentlemen. Two quick questions. First of all, we constantly see in the news the government warning against threats against utilities, water utilities, all utilities. Can you give us some color on are we approaching this industry? Have we approached the industry? Are we getting traction? Are we getting the government aware that we have a solution to what they're warning about?

To summarize it, yes, on all parts. I had mentioned just a few moments ago that we are focusing on the energy, the water treatment. We've done marketing outreaches to all them. We've talked to individuals at shows. And, you know, we are – I mentioned also, you know, very, very close to signing one of the largest government distributors out there that would allow us to do business directly with these different agencies. That would speed up the process because, you know, the distributor holds all the necessary contracts that would allow us to, you know, to – move move through the system as quickly as possible let's put it that way but yeah it's it's all over the news you cannot not see it it's definitely something where we we focused on and you know some of the trade shows these folks show up there we've had conversations with them um but as i mentioned your people your people going out to the water utilities if if if they will take a meeting absolutely Um, it was still, believe it or not, we're still in the world and nobody really goes to work any longer. It mostly, everything is over zoom. You know, they may go in once, once, uh, once a week, uh, twice a week. So a lot of the calls are over zoom, but those conversations are happening.

Okay. And then last question with AZT with AZT, um, We haven't, but can you give us some visibility now that you've been in the market trying to, you know, with these large companies, they take time. I mean, do you expect to be in this fiscal year 2024 to be closing AZT contracts? Or do you think the sales cycle now is going to, this is a longer term story? now that you've been in the marketplace, or do you expect to start closing contracts? You've closed some already. Should we expect to see in this year, and you can't predict the future, but you're the CEO. Do you expect to see AZT contracts continue to be signed in this fiscal year?

Oh, absolutely. You know, of what magnitude, I cannot predict. say for sure, but contracts, absolutely. You know, we are signing contracts, and I know everyone gets excited when we put announcements out there, but, you know, major contracts I will announce, but there are other contracts that we have closed that don't warrant, you know, a public announcement. You know, it could be $100,000 or $50,000, you know, $10,000. You know, there are different levels of contracts that we are closing, but, you know, they don't warrant, you know, a public announcement. So, You know, the major ones that are in the millions, you know, are announced. But, yeah, there are contracts that are closing and will continue to close of, you know, different levels. You know, and if we hit another major one, then, you know, I'll announce it when the time is right.

Okay. Thank you very much. Thank you so much, Paul. Our next question is coming from Joseph Nerges of Seagram Investments. Joseph, your line is live.

Yeah, just one follow-up. You mentioned the webinar tomorrow with Rockwell, and then you mentioned the journal article that Rockwell put out. Will you be putting those on the website? Can we access those on the website?

Okay. Yeah, I think you had the invite already that's out there, right? You can join the webinar tomorrow, right? And then once we get a copy of the – The journal, we'll definitely post it on the website that you can go in.

All right, great. Thank you very much again, guys.

Yep.

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

Yeah, I guess I was getting a little long-winded, so I didn't get to wrap this up. But getting back to that kind of pipeline or however you guys want to refer to it, Can you just give some character to kind of what the size of these deals are potentially? Are we talking hundreds of thousands, millions, tens of millions, all of the above?

Tens of millions, we don't have anything. In the millions and hundreds of thousands, we have in the pipeline, yes. Got it.

All right. Thanks a lot.

Mm-hmm. Thank you very much. Just as a reminder, if you have any remaining questions, you can press star 1 on your phone keypad. Your next question is coming from John Crowdy, who's a private investor. John, your line is live.

Thank you. Congratulations, guys. I really want to tell you that it was great seeing the award you won, but more importantly, you put out a PR the other day that really has some great information in it. You mentioned the new industries you had won, and I was wondering if we could just get a little color on them. You had stated that you had won energy and utility as well as farm and manufacturing. Now, we're aware of the pharma company, but the other three are new, and I knew that you were going after energy companies, especially with the show at Houston. Can you give any color as to what types of utility it was and maybe what type of energy company it was as well as the manufacturing? Thank you.

Oh, the manufacturing, the utilities and the energy are like the oil and gas. I can't mention any of the names, but they're just, um, they're just, you know, you, you would know who they are. They're just some of the big oil that in, in, you know, grid companies that we're, we're talking to and we met at shows and, you know, getting POCs together and, and trying to get into their labs. What, So, yeah, the shows have been really good to get us, you know, in front of different companies and build some relationships a lot quicker. So we will continue to do, you know, the necessary shows that make sense for us.

Right, because we're aware that the targets that they're coming after in the U.S. being the operational infrastructure infrastructure. electrical grid as well as pipelines. Those are the types of levels of quality we're talking in the industry you're involved with, right? Correct. Okay. Thank you. Correct. Yep.

Thank you very much. Well, that appears to be the end of our question and answer session. I will now hand back over to Vic for any closing remarks.

Thank you. As always, I want to thank our shareholders for the continued interest and support. We are entering a period of increased activity and we look forward to sharing our progress in our fiscal 2024 third quarter in August. Until then, be well, stay safe and enjoy the summer.

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