CSP Inc. (NASDAQ:CSPI) Q2 2024 Earnings Call Transcript

CSP Inc. (NASDAQ:CSPI) Q2 2024 Earnings Call Transcript May 11, 2024

CSP Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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 opened for questions after the presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Michael Polyviou. You may begin.

Michael Polyviou: 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 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. 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 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 the 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 those statements and the projections upon which the 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 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. Earlier 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 the launch of AZT PROTECT, we grew services revenue 23%, increased our gross margins, 47% and realized fivefold 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, HPP contributed $2.5 million total revenue compared to $1.5 million in the year ago quarter. The AZT offering is changing how we operate and how the industry perceives CSPi. We have generated significant attention and interest in industry events and conferences, and this interest is from some of the largest global corporations. Despite only 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 and from the growing cybersecurity threat to operational technology from hostile nations, terrorism and organized crime.

Early this week, a case history of AZT PROTECT was published in the journal, an award-winning publication for Rockwell 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 methods, trends and technologies that protect the Industrial Automation segment from cybersecurity attacks. Our partnership with Rockwell is expanding as tomorrow, we are cohosting a webinar titled CyberRx, how to automatically protect Rockwell OT customers from today’s cyber-attacks. Gary Southwell, General Manager of CSPi, ARIA Cybersecurity will be joining Thomas House Life Science, Cyber and Digital Consulting at Rockwell Automation.

They will be discussing why the purdue model passive defense and AV/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 PROTECT plays a unique and critical role in meeting this need. Gary and Thomas will 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 use 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-focused 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 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 multipronged 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 is 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 Globee 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 this quarter. During the first fiscal quarter, we announced a five-year multimillion dollar contract 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 UCaaS 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 sports worldwide with an extensive global agent network. We have – in 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 2-for-1 stock split increased the liquidity of CSPi shares, and I believe it will provide greater opportunities for institutional participation and enhance shareholder value at the time we are broadening our business prospects.

We also believe the success of AZT launch and growing cybersecurity threats are 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?

Gary Levine: Thank you, Victor. For the fiscal second quarter ended March 31, 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 costs 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 $0.16 per diluted common share for the fiscal second quarter ended March 31, 2024 compared to net income of $0.3 million or $0.03 per diluted share for the fiscal second quarter ended March 31, 2023. Per share amounts were – have been retroactively restated to reflect the 2-for-1 stock split. Following the 2-for-1 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-prong sales and growth strategy for the AZT offering as well as other products and service lines and financial financing large customer agreements, which have been highly successful in the past for CSPi. Lastly, the Board of Directors approved a 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.

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Q&A Session

Operator: Thank you very much. At this time we will be conducting our question-and-answer session. [Operator Instructions] Thank you. Your first question is coming from Joseph Nerges of Segren Investments. Joseph, your line is live.

Joseph Nerges: Thank you. Good morning, guys. How’s everything going?

Victor Dellovo: Good, Joe.

Gary Levine: Good morning, Joe.

Joseph Nerges: Okay. A couple – 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, which sort of – for the IT environment. Is that still in beta testing because that hasn’t been released as of yet?

Victor Dellovo: Correct. Yes. 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.

Joseph Nerges: 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…

Victor Dellovo: In the OT space, right, updates in patches are not as important, and that’s why our product 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.

Joseph Nerges: Okay. And just one quick follow-up here. And that is – I think the last time you mentioned with the chemical company, are Fortune 500 chemical company, where we have multiple sites. But basically, it’s the plant manager’s decision whether he wants to implement the AZT PROTECT. Well, the oil sales only 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 to decide 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 a real trouble, if x number have implemented it, they’re not hacked, and he happens to be the plant that’s hacked or breached.

Victor Dellovo: Yes, that makes sense, but sometimes common sense is not the thing that people use all the time.

Joseph Nerges: No, I certainly wouldn’t mind – I would put that in the back of their mind, if nothing else.

Victor Dellovo: No, we always do. We always do.

Joseph Nerges: I will let. I’ll open for other question for other people. Thank you.

Victor Dellovo: Thanks, Joe.

Operator: Thank you very much. [Operator Instructions] We’ve got a question from [Brett Davidson], who’s a Private Investor. Brett, your line is live.

Unidentified Analyst: Good morning, gentlemen.

Victor Dellovo: Good morning, Brett.

Unidentified Analyst: Question 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?

Victor Dellovo: When we talk – the mid – instead of looking at the top Fortune 500 companies, the huge gas companies, the huge – the companies that are definitely have a need, but move really, really slow. We’re trying to get into that next layer where it’s 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. So – 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.

Unidentified Analyst: And is there a pipeline right now regarding the AZT product? Is there stuff that is in process, it’s not quite to the sales line? Is it someone…

Victor Dellovo: Yes, it’s a combination – wehave current POCs going on, where they’re actually testing the product, whether it’s in a lab or whether it’s in their environment and there’s other ones where that lower down the line where we started talking to them. And now it’s about getting – 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, that’s a process, a lot of paperwork, a lot of contracts, but getting into these large opportunities. That’s what we’ve been focusing on. And we’re using the automation partners like the Rockwell’s 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 the big – 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, a, get us in faster as a smaller company, CSPi competing with the Palos and the name brand by leveraging those salespeople in the relationship and that they have for maybe years, we’re able to have conversations with these large companies that might take us a year just to get a conversation going, we’re able to have an immediate conversation within weeks and try to get the next level where PLC.

Unidentified Analyst: Is there a way to kind of measure that in like a dollar figure? Or is that more like a fool’s area at the point we’re at and selling these things? Or is there a way to like measure this pipeline of potential deals?