CSP Q2 2023 Earnings Call Transcript

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May 10, 2023

There are 6 speakers on the call.

Operator

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. Please note this conference is being recorded. I will now turn the conference over to your host, Mr.

Operator

Michael Poli View. You may begin.

Speaker 1

Thank you, Jenny. Hello, everyone, and thank you for joining us to review CSPI's fiscal 2023 Q2 results, which ended March 31, 2023. With me on the call today is Victor Dellovo, 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 Business that are not historical facts may be forward looking statements as determined as identified in federal securities laws.

Speaker 1

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

Speaker 2

Factors that may affect

Speaker 1

the company's results include, but are not limited to, the risks and uncertainties discussed in the Risk Factors section The annual report on Form 10 ks 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 of the time with respect to future events. All forward looking statements are qualified in their entirety by this cautionary statement and CSPI undertakes no obligation to publicly revise or update any forward looking statements whether as a result of new information, future events or otherwise after the date thereof. With that, I'll turn the call over to Victor Dellovo, Chief Executive Officer, Victor, please go ahead.

Speaker 3

Thanks, Michael, and good morning, everyone. Today, we reported our 3rd 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 in a pipeline of $1,000,000 plus business opportunities. Despite an increase in competitive operating environment for the customers' budget dollars, the demand for our services and solutions results in another quarter And backlog of more than $22,000,000 and we again increased our gross margins from a year ago fiscal second quarter. We are at the midway point of our fiscal year.

Speaker 3

We believe that we will be able to generate positive results during the 3rd and 4th fiscal quarters. Once again, our Technology Solutions business continued to lead the way with sales growth of 9%. Meanwhile, our High Performance Products Our HPP business revenue continued its strong ascent with a growth of 29% compared to a year ago fiscal 2nd quarter. Of particular note for this segment, the ARIA product line is gaining traction with customers around the world. We We have continually growing our ARIA customers and our team has more than doubled the pipeline for this product.

Speaker 3

We could potentially expand our marketing capabilities for this product line in key international markets Turning to some of the financial results, our fiscal second quarter marks the beginning of the budget year for most of our customers and therefore can be challenging period for our company. Despite this historic seasonality, total revenue for the period grew to $13,300,000 from $12,000,000 in the year ago fiscal 2nd quarter. Our TS business revenue totaled $11,800,000 The segment of our operation continued to be the driver by our customers' increased use of our implementation, installation and training capabilities. Our HPP revenues were $1,500,000 compared to $1,100,000 in the year ago fiscal 2nd quarter and were driven by Myricom and ARIA. The ARIA customer base continues to grow and the pipeline is at an all time high.

Speaker 3

During the quarter, we continued to manage the business in a cost efficient and high return manner. Gross margin percentage over the period year ago period of 35% continued to expand and reached 38%, while we gained Leverage from our operations is generating net income of $321,000 or $0.07 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 Shareholders of $0.04 per share, a $0.01 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.

Speaker 3

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 in R and D efforts to enhance the existing offering as well as creating 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 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.

Speaker 3

And although we have created workarounds for most of these hurdles, Gaining acceptance for these solutions offer require extensive review by our customers, which delay 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 It's being driven by customer needs to maximize the return from their technology investments.

Speaker 3

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 time frame for order decisions, which in Churn 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 Currently retrofitting 1 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.

Speaker 3

And if we execute and the market 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?

Speaker 4

Thanks, Victor. As Victor mentioned in his opening remarks, We had a solid fiscal Q2 and we continue to achieve our operating and financial objectives. We reported revenue of $13,300,000 and an 11% increase compared to the year ago fiscal 2nd quarter, which further validates our growth strategy. We were toward a gross profit of $5,000,000 or 37.6 percent of sales compared to $4,200,000 or 35.1 percent of sales in the year ago fiscal 2nd quarter. Our engineering and development expenses for the fiscal second quarter were $585,000 compared to $717,000 in the year ago period.

Speaker 4

As we discussed previously, the increase is primarily due to higher personnel costs, which includes outside consultants. Our SG and A expenses in Q2 were $3,900,000 compared to $3,500,000 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 Q2, our diluted earnings per share of $0.07 per share compared to net income of $156,000 or diluted earnings per share of $0.03 for the fiscal second for fiscal 2022's 2nd quarter. As Victor mentioned earlier, this represents a more than double increase in our earnings per share. The cash and cash equivalents was $13,300,000 as of March 31, 2023.

Speaker 2

The cash

Speaker 4

and cash equivalents were approximately $10,700,000 lower than cash and cash equivalents As compared to the September 30, 2022 level, primarily due to moving $3,500,000 of cash To short term held to maturity investments during the Q2 of fiscal 2023 And a large vendor payment made in the 2nd quarter on a large financing customer sale that occurred In the Q1 of fiscal year 2023. In accounts receivable, there is 8,700,000 With payment terms which exceed 1 year, we will be paid $600,000 6 $200,000 in the 3rd Q4 of the fiscal year. We believe this is only Possible because the prudent management of our resources, which allows us to implement our multiyear growth Strategy of transforming into a cybersecurity 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.

Operator

Thank you, Gary. One moment whilst we poll for questions. Thank you. Your first question is coming from from Neuez of Seguin Investments. Joseph, your line is live.

Speaker 2

Thank you. Good morning, Keon.

Speaker 3

How are you today? Good morning, Joe.

Speaker 5

Good morning,

Speaker 2

Joe. Okay. Well, let me first congratulate you guys on the press release from last week, the Announcement of the customer Miami Dolphins has a new customer with the well, I guess it's Cronos. Is that at the software company that you're tied up with? That's it.

Speaker 2

Yes. Pretty high profile customer in the area and I assume that doesn't hurt our Publicity from the locals that we're trying to recruit outside

Speaker 3

of them. Yes. That's part of the goal is with the announcement. It's a 3 year contract with them. So We're looking forward to developing a strong relationship over the next couple of years.

Speaker 2

I noticed in looking up Cronos, they have a Pretty dynamic sports program. 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, we've there's quite a few sports teams. I'm wondering if we're In contact with any of the other teams in the area?

Speaker 3

This conversation is happening.

Speaker 2

Okay.

Speaker 3

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

Speaker 2

Okay. All right. And the cruise Cindy, you 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?

Speaker 3

Well, yes, they have actually started spending money because we haven't done a ship in a long time and We completed 1 in Spain last week or the week before, I can't remember now. And there's 11 more we're talking about. So if we get all those, it'll be a good kick start to hopefully more after that. But They're moving slow, but we are moving, which is good news.

Speaker 2

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

Speaker 3

Yes. They're still watching every dollar. They've been hit so hard right now that their budget Still, I don't think of what they used to be.

Speaker 2

No, I understand. I'm just saying that at least from a positive standpoint, our bookings are In good shape. Now a couple of quick and so from that one, from the cash standpoint, you're talking $13,300,000 in cash and cash equivalents. So you're also saying that there was $3,500,000 move to short term investments. What term do we What do we consider short term?

Speaker 2

Is it more than 6 months or?

Speaker 3

6 months. 6 months.

Speaker 4

3 months, 90 days.

Speaker 3

90 days or

Speaker 2

less. Okay. So anything that's 90 days and above would be in that category of short term The Health and Maturity Investments?

Speaker 4

Correct. Correct.

Speaker 2

From your year end on the R and D front, You say it was $585,000 for the quarter, that's what the R and D spending was? 858 Oh, 858, okay.

Speaker 3

Yes.

Speaker 2

So it's higher than that's why it's lower. No, 858 versus 717 last year. Okay. In your year end letter, you mentioned about 10 area customers. And of course, in this press release, you now indicated 14.

Speaker 2

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?

Speaker 3

No, they're both TS and ARIA.

Speaker 2

Both TS and ARIA, okay. And anything new on the Navidea front? I mean, I know you've had contacts 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?

Speaker 3

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

Speaker 2

So at least there are some discussions that it's not dead in the water, let's No,

Speaker 3

no, no. Not at all. Okay.

Speaker 2

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.

Speaker 2

Okay, Joe.

Operator

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

Speaker 5

Good morning.

Speaker 3

Good morning.

Speaker 5

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

Speaker 4

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

Speaker 5

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

Speaker 4

Well, we keep

Speaker 3

We're hoping it continues. We hope it continues. Yes, there we've been doing this with them for Probably about 4 years now, maybe 5. So as things come up, it keeps us pretty sticky inside the account. So we're hoping it does continue moving forward.

Speaker 3

Nice.

Speaker 5

And the terms are agreeable on that, that We're capturing the interest rate increases and that's working out to our advantage or

Speaker 3

Yes. Absolutely.

Speaker 5

The other thing I wanted to get was more of a Qualitative. You can talk about the supply chain holding things up, but I know there's that $22,000,000 backlog. Absent supply chain, what portion of that do you think you could ship in the next quarter absent Supply chain hiccups.

Speaker 3

It's all supply chain hiccups really, right? Because if the majority is Supply chain, it just sometimes you if the order say $1,000,000 you might get $800,000 worth of gear right away and then the other 100,000 could be on backlog for 6 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

Speaker 5

are. And this is still equipment like firewalls and routers and

Speaker 3

Yes, a lot of firewalls, servers. It's a mixture of a little bit of everything.

Speaker 5

How much of it would you estimate is Chips for ARIA Products.

Speaker 3

Or is it Right now. Yes, it's resolved itself at this point.

Speaker 5

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

Speaker 3

Florida is 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 the amount we have to pay for salaries and bonuses out there to get the top Top people that are available.

Speaker 5

Interesting.

Speaker 3

All right.

Speaker 5

Well, that's all I got. Thanks a lot guys and you guys take care. We'll talk to you next quarter.

Speaker 3

You got it. Have a great day.

Operator

Okay. It doesn't appear like we have any more questions. I'm going to I hand back over to Victor for any closing remarks.

Speaker 3

Thank you. As always, I want to thank our shareholders for their continued interest and support. We have now reported 3 consecutive quarters of significant growth and the momentum we are continuing to experience in the current quarter excites us for the remainder of the year. We have a solid revenue conversion, a building pipeline in the product and service portfolio that are generating favorable gross margins. Gary and I look forward to sharing our progress in fiscal 2023 3rd quarter operating results in August.

Speaker 3

Until then, be well, stay safe. Thank you. Thank you.

Operator

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

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Earnings Conference Call
CSP Q2 2023
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