CSP Inc. (NASDAQ:CSPI) Q2 2023 Earnings Call Transcript May 14, 2023

Operator: Good morning, everybody and welcome to CSPI Second Quarter Fiscal Year 2023 Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Michael Polyviou. You may begin.

Michael Polyviou: Thank you. 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 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 the company’s business that are not historical facts may be forward-looking statements as the term is identified in federal securities laws. The words may, will, expect, believe, anticipate, project, plan, intend, estimate and continue as well as similar expressions are intended to identify 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 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.

Victor Dellovo: 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 customers’ 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 Solutions business continued to lead the way with sales growth of 9%. Meanwhile, the high-performance products for our HPP business revenue continued its strong assumed 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 customers 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 Australian MSP, and we have multiple deals that are underway. 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 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 operations continued to be the driver 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 Myricom and ARIA. The ARIA customer base continues to grow and the pipeline is at an all-time high. During the quarter, we continued to manage the business in a cost-efficient and high-return manner. Gross margin percentage over the year ago period of 35% continued to expand and reached 38%, while we gain leverage from our operations and 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 to shareholders of $0.04 per share, a $0.01 increase from prior quarter. We continue to manage our balance sheet to get 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 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 work around 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 and to serve 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 environment for the clients’ budget dollars, the situation 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 time frame for order decisions, which in turn is in decisions on several major opportunities we are pursuing.

Another challenge for us has been the absence of any significant recent revenue from the Cruise Lines industry. We are beginning to see signs that this drought is starting to end as we are currently retrofitting one log 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 in the market cooperation, 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?

Gary Levine: 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 reported 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 $858,000 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 $0.07 per share compared to net income of $156,000 or diluted earnings per share of $0.03 for fiscal 2022 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 31, 2023, the cash and cash equivalents were approximately $10.7 million lower than cash and cash 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 1-year. We will be paid $0.6 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 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.

Q&A Session

Operator: Thank you, Gary. [Operator Instructions] Your first question is coming from Joseph Nerges of Segren Investments. Joseph, your line is live.

Operator: Thank you very much. Your next question is coming from Brett Davidson, who is a Private Investor. Brett, your line is live.

Operator: Thank you very much. [Operator Instructions] It doesn’t appear like we have any more questions. I’m going to hand back over to Victor for any closing remarks.

Victor Dellovo: 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 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 third quarter operating results in August. Until then, be well and stay safe. Thank you.

Gary Levine: Thank you.

Operator: 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.