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CSP Inc.

Q42024

12/20/2024

speaker
Alan
Operator

Greetings and welcome to CSP Inc's fiscal fourth quarter and full year 2024 conference call. At this time, all participants are in a listen-only mode and a question and answer session will follow the form of presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Michael Polivio. Sir, you may begin.

speaker
Michael Polivio
Host, Investor Relations

Thank you, Alan. Hello, everyone, and thank you for joining us to review CSPI's fiscal fourth quarter and full year 2024 financial results, which ended September 30, 2024. With me on the call today is Victor DeLavo, 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. 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 CHPI'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, take, project, plan, intend, estimate, and continue, as well as similar expressions are intended to identify forward-looking statements. Further, the statement 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, that may influence the accuracy of the statement and the projections upon which the segment and statements are based. Actors 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 report on Form 10-Q filed with the Securities and Exchange Commission. Forward look at statements based on the information available at the time of those statements made and management's good faith belief as of the time with respect to future events. All forward look at statements are qualified in their entirety by this cautionary statement and CSPEI undertakes no obligation we revise or update any program 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.

speaker
Victor DeLobo
Chief Executive Officer

Thanks, Michael, and good morning, everyone. Our fourth quarter and four-year financial results came in pretty much as expected when we last talked with you in August. Recurring revenue, which has been an area we have committed to growing, increased 17%, of the total sales compared to less than 5% of sales just a couple years ago. Overall, we finished the year with more than $30 million in cash and cash equivalents as of September 30th, 2024. The technology solution business generated approximately $12.7 million in sales in the fourth quarter of fiscal 2024. We finished the quarter with plenty of momentum. For example, very little of our fiscal fourth quarter revenue came from our cruise ship customers. However, towards the end of the quarter and during the current fiscal first quarter, we've seen a pickup in the business, including the signing of a large order that should be executed during the next fiscal year. It was the first cruise ship order for professional services for our company in many quarters and piggybacks on the continued consistent momentum we built in the ocean Freightliner market. Our Freightliner operation customer continues to add new ships and choose to utilize our managed service offering following the retrofits which have led to increase in recurring revenue. We continue to see increased demand for our cloud clients who want to migrate the consumption of these services to our cloud group. We also have a dozen active cloud-based projects to accommodate the growth. We continue to invest in people in process to provide managed service to assist in our clients with the day-to-day operations of these environments. The pipeline remains very encouraging, so we are optimistic about our opportunities to grow the overall TS sales, especially the recurring revenue piece during the coming fiscal year. On the HPP side of the business, for the fourth quarter of fiscal 2024, we reported revenue of $0.4 million, mostly from ARIA-based customers. As we discussed in the prior conference call, we were in the process of transitioning our AZT Protect sales effort being led by Greg Fisher, an experienced 20-year OT industry sales veteran who joined us in July of 2024, has redirected the organization to maximize our relationships with Rockwell Automation and other distribution partners. In the short amount of time we've made significant progress in building the market for this year, unique product and we entered the new fiscal year with great potential from Rockwell and the other distribution partners that primarily serve the middle market OT customers, which tend to have shorter sales cycles than the larger OT organizations. Our internal team will continue to address the large individual corporate OT buyers with the sales cycles extending up to 18 months while they work closely with the distributors to build a short-term revenue from the middle market customers. An example was a deal we announced with the Fortune 500 electric energy producer that selected Aria Cybersecurity AZT Protect to protect its critical OT infrastructure from malicious cyber attacks. This was the first order of many to come, as it will be a few thousand endpoints over the next three years. We will assist with the rollout as fast as the customer will allow. We believe this approach will result in a noted upturn in AZT Protect sales in fiscal 2025 unfolds. Working with Rockwell Automation and other distribution partners, our sales team has quickly expanded the leads for AZT Protect to over 100. Many of these leads were generated from the Rockwell Automation Fair back in late November of 2024. But Gary Southwell, our Vice President and General Manager of High Performance Products presented an in-depth view of the latest attack techniques and their financial impact. Gary's presentation was one of the show's hits and was a major reason why we generate so many leads from our participation. We also had a booth at the American Petroleum Institute show for oil and natural gas in Houston, where we began a relationship with several large companies We further expanded ACD Protect's awareness in the market by attending the Industrial Control System Security Week show in Atlanta. While we work to convert the leads generated from these activities into ACD Protect sales during the fiscal 2025, we will be supporting additional regional trade shows events with our distributors throughout the year. I strongly believe the interest we are generating at the trade shows is fostering by nine major industry awards from AZT Protect has received since its launch, including the winner of the application security category at the 2024 4RS Cybersecurity Award presented by Business Intelligence Group. Our efforts to sign new distributors and gain new customers has also benefited from the July CrowdStrike update failure that exposed-to-risk continuous cloud updates can have on critical OT applications, including industrial automation industry control systems. There is a recognition from the industrial automation vendors and their distribution channels that the traditional IT-focused endpoint protection methodologies were not meeting their requirements. We believe companies using ADT-protected protection capabilities can prevent zero-day malicious code from taking critical systems down out of the box without having seen it before and then relying on cloud updates to block such attacks. We've proven this capability in the field under real-life operational circumstances. This alternative approach to protect industrial control servers is being received as a welcome news by Rockwell Distributor Partners. The Rockwell show was the mechanism needed to bring this news into the ecosystem. From there, we believe we can expand into other markets. We have one agreement already completed and three others in process with top tier US based Rockwell distributors, allowing our US team to work directly with the distributor sales teams to map out targets accounts to approach together. In summary, when we consider AZT Protect Market Momentum in the emergence of the Rockwell Partnership, the growth of the managed service business, and the pickup in the cruise lines, we have a potential to return growth during the fiscal 2025. With that, I will now ask Gary to provide a brief overview of the fiscal fourth quarter financial performance.

speaker
Gary Levine
Chief Financial Officer

Thanks, Victor. For the fourth quarter ended September 30th, 2024, we reported revenue of $13 million compared to revenue of $15.3 million for the fiscal fourth quarter ended September 30th, 2023. Revenue was relatively flat compared to 2024 fiscal third and second quarters. Service revenue represented $4.4 of overall sales compared to the year-ago service revenues of $4.3 million. Gross profit for the three months ended September 30, 2024, was $3.7 million, or 28.4% of sales, compared to $5.2 million, or 33.8% of sales, reflecting a higher percentage of product sales. Gross margins on our service revenue increased 160 basis points from last year's comparable figures. The company reported a net loss of $1.7 million, or $0.18 loss per common share, for the fourth quarter ended September 30, 2024, compared to net income of $1.4 million, or $0.15 per share for fiscal fourth quarter ended September 30, 2023. We had cash and cash equivalents of $30.6 million as compared to $25.2 million at the end of our 2023 fiscal year. The robust sales The robust balance sheet ensures that the company has the resources to implement the AZT Protect product offering and other growth strategies. During the fourth quarter of 2024, the company repurchased 2,800 shares of stock at a total cost of $34,000. And the Board of Directors has approved the payment of a $0.03 per share quarterly dividend to shareholders of record at the close of business on December 27, 2024, payable on January 15, 2025. For the fiscal quarter, our engineering and development expenses were $793,000 compared to $705,000. The increase was for outside consulting and stock compensation. Our SG&As was $5.5 million compared to $4.8 million in the year-ago fiscal fourth quarter. The increase was based on increased legal, audit, and tax and recruiting expenses. For the full year ended September 30th, 2024, revenue was $15.2 million compared with revenue of 64.6 in the prior year. Gross profit for the fiscal year was 18.9 million, or 34.1% of sales compared to 21.9 million and 33.9% of sales, with the decline largely attributed to product mix. We reported a net loss of $2.3 million or 4 cents per diluted share in the fiscal year ended September 30th, 2024, compared to the net income of 5.2 million or 55 cents of income per diluted share for the fiscal year ended September 30th, 2023. With that, I will turn it over to the operator to take your questions.

speaker
Alan
Operator

Thank you. 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 telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pose for questions.

speaker
Unidentified Participant

Thank you.

speaker
Alan
Operator

Our first question is coming from Joseph Nerges with Seagram Investments. Sir, your line is live.

speaker
Joseph Nerges
Analyst, Seagram Investments

Good morning, guys. How are you today? Good morning, Joe. Just one quick accounting point here. Gary, last year I think you mentioned in our fourth quarter that we had a credit of $2.1 million for an employment retention credit in our reporting of the fourth quarter of last fiscal year. So obviously that number, and when we're comparing fourth quarter this year versus fourth quarter last year, that credit didn't fall into this year. So that's a considerable number.

speaker
Gary Levine
Chief Financial Officer

Absolutely, yes.

speaker
Joseph Nerges
Analyst, Seagram Investments

Okay. I'll go on to the question, but we talked about last year, Victor, quite a bit, what we call proof of concept, and I realize the trade shows that you referred to were very recent. In fact, we were in one last week, I believe, in Oman. Correct. But the Rockwell was last month, and then the Atlanta show, I think, was the month previous, whatever. So I'm assuming there's an enormous amount of leads come out of all those shows, but do we have any proof of concepts? Have we started testing any of these companies or even prior to? Where are we at today with testing? How many people are out there, how can I say, testing AZT Protect today?

speaker
Victor DeLobo
Chief Executive Officer

Yeah, from the shows, you know, the one for Rockwell, It was right before Thanksgiving, and then you had Thanksgiving, and then it's literally only been like 10 business days, you know, that we've been able to contact those. But, yeah, there's been a lot of conversation. But the one that was overseas, we actually are starting a POC, believe it or not, on Sunday. That happened already just in a week. So, yeah, there's been a lot of activity, a lot of conversations, you know, and a lot of people like the POCs will start after the new year. You know, they're kind of already on vacation mode. But there's been a lot of good conversations and a lot of things that we have to follow up on the new year.

speaker
Joseph Nerges
Analyst, Seagram Investments

Yeah, but even prior to that, Victor, we've had proof of concepts ongoing even from earlier this year.

speaker
Victor DeLobo
Chief Executive Officer

Oh, yeah, and those will continue. Maybe I misunderstood your question, but I thought you meant new just from those recent shows. But, yeah, we have probably more than a dozen POCs going on. of various stages. The one that we closed with the energy company recently, that was over a year POC and we finally got awarded and there's some other that we're waiting. The POCs are done and now we're just waiting either for budgets or we're waiting to see if we were the last one standing in the POCs. And a lot of them had said to us that decisions will be made in January. I don't know if that's true or not, if it moves, but we are waiting for a couple very promising things in January. So hopefully they come through.

speaker
Joseph Nerges
Analyst, Seagram Investments

Just to clarify, you've made PRs on this before, but we have three Fortune 500 companies now that are utilizing AZT Protect. A chemical company, the power company that you just referred to, and then pharmaceutical company that we announced earlier this year. Correct. As well as the government, you know, the Western Intelligent Agency that are utilizing AZT Protect. So we're not talking about small customers here that have looked at it and approved it. I just want to clarify that.

speaker
Victor DeLobo
Chief Executive Officer

Yeah. Yeah, and hot off the presses, you'll just keep your eyes out. There'll be something coming out soon. early next week on another nice win.

speaker
Joseph Nerges
Analyst, Seagram Investments

All right. I appreciate that. One other point on the stock buyback. I realize 2,800 shares. All I'm saying is I think you guys and the board ought to get maybe slightly more aggressive. I know we have a little more volume in the shares now than we did a year ago, so we can't. We can buy more shares under the market conditions, but I would think that you guys should be seriously considering maybe upping the amount of shares that can be repurchased under the program. And I'll move on to somebody else's questions now. Thanks again, guys.

speaker
Victor DeLobo
Chief Executive Officer

Thanks, Joe.

speaker
Alan
Operator

Thank you. Our next question is coming from Will Lover with Visionary Wealth Advisors. Your line is live.

speaker
Will Lover
Analyst, Visionary Wealth Advisors

Yeah, guys, just so people can realize and help us get a handle on how much money you guys are putting into this AZT effort for hopefully a huge payoff down the line, what would the earnings have been that division for this year?

speaker
Unidentified Participant

But, you know, it was a loss.

speaker
Victor DeLobo
Chief Executive Officer

So, I mean, we've got... No, he said if you're taking out... If you took out AZT, if it was just TS, it would... Yeah.

speaker
Gary Levine
Chief Financial Officer

Oh, yeah, yeah. Definitely, it would be profitable.

speaker
Victor DeLobo
Chief Executive Officer

It would be very profitable, yes. Yeah, that's one thing that I have to understand. The TS is doing really, really well. They're the cash cow that's paying for all this R&D for AZT. You know, and to grow the cash position... and to have a true startup and, you know, and only have a small loss for the whole year. Um, you know, like I said, people want earnings, they want dividend, they want cash growth, they want everybody, you know, AZT is truly a startup with building, you know, we have to build a whole, um, you know, food chain for distribution. Um, there's a, there's a lot going on right now, but now the end, you know, building the sales team, getting partners, There's a lot going on on that side of it. And then, you know, we had Miracom sales last year. And unfortunately, you know, because that product was, you know, over 20 years old, the big distributor or manufacturer actually that was building the boards no longer will build a board. So all that Miracom business from last year went away. There's some pieces and parts that we still sell, but they're minimal now. So if you really look at it, where we were and where we are, and to Joe's point, our big customers that we have closed are all Fortune 500 customers. And that's where a lot of the testing, it took a lot of time through the POCs. But now we have four customers that are using it that are happy. And now we're just, like I said, building out the food chain to try to get in front of more people. Building our name recognition, which is, like I said on a prior call, is one of the things that, you know, I think is just because of our size and our name, it takes a lot more effort to get that sale over the fence just because, you know, we're competing with some other multi-billion dollar companies in this space.

speaker
Will Lover
Analyst, Visionary Wealth Advisors

Okay. Could you guys put an approximation on it? I mean, could we have earned a dollar a share?

speaker
Victor DeLobo
Chief Executive Officer

Yeah, more than that, yeah.

speaker
Will Lover
Analyst, Visionary Wealth Advisors

More than a dollar a share? Yeah. Okay. My next question was the increase in your recurring revenue as a percentage is pretty impressive. When you look out, say, three, maybe five years down the line, what percentage do you think that could be and what's kind of your internal goals?

speaker
Victor DeLobo
Chief Executive Officer

Um, you know, if, if we could double again in the next 24 months, that would be something that would be, we'd be proud of. And, you know, that's where we're, we're very, very focused on that recurring revenue piece of it, especially in the cloud, the Microsoft business that we're, we're bringing, you know, we're continuing to grow, um, the engineers, the support staff and, uh, you know, the sales staff along with it. And then the MSP, if we could get into the cloud play, the MSP usually comes after that. So they're definitely, you know, they're adjacent to each other. If we can get one, we usually get the other. So, yeah, you know, our goal is to grow that as fast as possible. There's no limits on what we want to do. But at least, you know, at least a 10% to 15% growth minimum, you know, year over year, if not more.

speaker
Gary Levine
Chief Financial Officer

The answer to your question would be about $0.56 per share.

speaker
Unidentified Participant

Okay. All right. Thank you.

speaker
Alan
Operator

Yeah. Thank you. Our next question is coming from John Crotty, who is a private investor. Your line is live.

speaker
John Crotty
Private Investor

Hi. Thanks for taking my call. I want to just say congratulations on the S500 launch. energy company. 18 months is a long POC. I understand I've been involved with a few and good job, especially having the patience. And for us investors, we need to have the patience of a dead person. So we're with you right along with it. Anyway, you've talked a lot about the Rockwell and I read a lot and that really seems like a great partnership with lots of leads. But I want to talk about the other partnerships you have. You have the large one in Australia. You mentioned there was a smaller one in the Middle East. And then we had a larger one that was out in the U.S., I believe, in the East Coast with a lot of clients. Could you give us any feedback on that in terms of are they running proof of concepts? Do they have a large pipeline or any type of any info like that?

speaker
Victor DeLobo
Chief Executive Officer

The partner in Australia, they're not the largest partner, but we do have some POCs going on with them. They are good-sized opportunities in their area. they're not in the commercial sector. So things do take time there, but they are progressing. Um, and yeah, and the partners that we're focused on right now, you know, we, with the Rockwell is because we're really focused on that OT space. And because we have the approval from Rockwell as a certified partner, that's kind of where our focus has been because getting into some of the other, um, manufacturers, It takes time. Rockwell took us almost two years to get approved inside as a certified partner. So we're working with some of the other big manufacturers. We're in different stages of getting approval as a certified partner that can work inside their stack. So, yeah, everything is moving just at different paces, just depending on how fast. And in some of these large organizations, unfortunately, people leave, move, or get fired. And, you know, sometimes you take two steps forward and then, you know, someone leaves and you've got to reeducate the new person. And we've seen that happen in some of these large manufacturing companies.

speaker
John Crotty
Private Investor

Yeah, I agree. Go for the low-hanging fruit because they're pushing you through. I agree. I also want to talk about what you mentioned a couple calls ago, that some of the government win that you had, they had many other divisions or departments or areas. that were waiting for budgets to add it in. Is anything moving along with increasing any of the opportunities with existing customers, especially like you had mentioned with the Western Intelligence?

speaker
Victor DeLobo
Chief Executive Officer

Yeah, there's another opportunity. I think that has moved forward. Timing on that is not, I'm not exactly sure, but there is a deal that I feel like in the next 90 days, we're hoping that will come in. And that's all I can say about that.

speaker
John Crotty
Private Investor

Okay. No, that's fair enough. And I know you have a lot of non-disclosures you've got to be cautious with. No, that was it. That's what I wanted just to follow up. Everything else read through, and I like the response, and I like $0.56 a share on just the TS side. So that's good. All right. Thank you so much. Keep up the good work, guys.

speaker
Victor DeLobo
Chief Executive Officer

Thank you.

speaker
Alan
Operator

Thank you. Our next question is coming from Douglas Johnson, who is a private investor. Your line is live.

speaker
Douglas Johnson
Private Investor

Yes, how large are these AZT contracts you have with these three Fortune 500 companies?

speaker
Victor DeLobo
Chief Executive Officer

Well, I can't disclose exactly, but one of them is in the millions, and the other ones, as I mentioned in the script, we're looking to get adopted inside their infrastructure. And some of these were what was left in the current budget. And then we'll roll out, you know, I mentioned the big energy. They have thousands of systems that they told us it could take up to three years to roll them out. We're hoping to speed that up by us doing or assisting with the installation. But, you know, there are thousands of endpoints. And it's, you know, how they roll out and how fast is kind of up to the customer. Thank you.

speaker
Alan
Operator

Thank you. Our next question is coming from Jeffrey Stevens with Long Pond Capital. Your line is live.

speaker
Jeffrey Stevens
Analyst, Long Pond Capital

What's going on, guys? How you doing? Yeah, good, good. I want to look back a couple years ago. You guys had a relationship with NVIDIA. You guys did a little... A little... announcement with them that they're hardware and they're using your software. Is it possible that have you had conversations with them for AZT?

speaker
Victor DeLobo
Chief Executive Officer

Yes, we definitely have had conversations with them. That was one of the examples where some of the powers to be that we were talking with kind of moved on. So we kind of had to start from scratch a little bit on some of the contacts there. But there's definitely, you know, conversations. They're not moving as fast as we would like. But, you know, we do have, you know, some relationships there. And, you know, we're talking, you know, more in their robotic area. That's kind of where we want to focus on AZT in that area. What comes from it, I can't say. But, you know, that's kind of our goal and our focus with those guys.

speaker
Jeffrey Stevens
Analyst, Long Pond Capital

All right. Well, thank you so much.

speaker
Victor DeLobo
Chief Executive Officer

Thank you.

speaker
Alan
Operator

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

speaker
Brett Davidson
Private Investor

Gary, Victor, happy holidays. How are you, Brett? Same to you, Brett. I'm doing good. I'm going to limit it to one question. It's just going to be a multi-part. I'll link it with and. Is there any legacy stuff at all going on in the E2D program and Can you give a little color on those UCAS contracts that were announced in the last quarterly earnings release?

speaker
Victor DeLobo
Chief Executive Officer

There is going to be a little E2D next year. It was supposed to be in this quarter. They moved it. So we're thinking it's going to be Q1. It could move out, but that's coming, as you know, tomorrow. you know, towards the end, it is at the end of its career, you know, um, but we believe, we believe there'll be one more, um, next year and, uh, in 2025. And then, you know, there'll be some pieces and parts we're guessing over, over, we're not sure exactly. And then, um, and the UCAS, we continue just to grow that, that business, bring in new clients. There's been a few that we, we, um, sold a deal last quarter, but it took some time to implement, and we turned on the billing in this quarter. So it'll continue to grow over time, and these are usually three-year contracts.

speaker
Brett Davidson
Private Investor

Got it. And so that's this quarter, and, you know, any headway since then?

speaker
Victor DeLobo
Chief Executive Officer

Yeah, yeah. You know, the pipeline looks pretty good on UCAS, and we're constantly, you know, we're bringing on one or two customers, you know, consistently every quarter of all sizes, you know, and it's a monthly recurring. So, you know, it's not like you get a big pop, you get, you know, whether it's 5,000 or 20,000 or whatever the number may be, it's on a monthly basis. You know, like I said, we're focused on our recurring revenue at this stage of the game. We'll still sell the product and services as we, You know, we do, and I mentioned we, you know, one of the cruise lines finally gave us a nice, you know, close to a million dollar professional service contract that will roll out over 2025. Yeah, we're focused on either professional services because it's high margin or, you know, any of the recurring revenue. And we try to do like multi-year deals on pretty much everything we do. Microsoft is a little different. You either get one year or monthly deals. but that's because it's a program that they offer.

speaker
Brett Davidson
Private Investor

Got it. Well, thank you very much.

speaker
Victor DeLobo
Chief Executive Officer

Yep, have a good one. Happy holidays.

speaker
Alan
Operator

Thank you. Thank you. Once again, if there would be any final questions or comments, please indicate so now by pressing star 1 on your telephone keypad. Okay. As we have no further questions in queue at this time, I'd like to hand the call back over to Mr. DeLovo for any closing comments.

speaker
Victor DeLobo
Chief Executive Officer

Thank you. As always, I want to thank our shareholders for their continued interest and support. Good things are happening at CSPI and AZT Protect in generating more interest and gaining more and more momentum in the market. The increased activity we are experiencing is exciting, and we look forward to updating you on our next on our progress in February. Until then, best wishes for a healthy, happy holiday season. Thank you.

speaker
Alan
Operator

Thank you, ladies and gentlemen. This concludes today's call, and you may disconnect your lines at this time. And we thank you for your participation.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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