CSP Inc.
Q4 2021 Earnings Call Transcript

Published: 8 Dec 2021

[Operator:]

Good day, everyone and welcome to the CSPI Fourth Quarter and Full year 2021 Results Conference Call. At this time, all participants have been placed in a listen-only mode. Later you will have an opportunity to ask questions during the question-and-answer session. Please note this call may be recorded. It is now my pleasure to turn today's program over to Michael with EVC Group.

[Michael Polyviou:]

Thank you, Emma. Hello, everyone. And thank you for joining us to review CSPi's Fourth Quarter and Full Year ended September 30, 2021 Financial Results. With me on the call today is Victor Dellovo, CSPi's Chief Executive Officer, and Gary Levine, CSPi's Chief Financial Officer. After Richard and Jerry 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 a number of 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 Forms 10-K and the quarterly report on Forms 10-Q filed with the Securities and Exchange Commission. Forward - looking statements are based on the information available at the time when 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. Vic, please go ahead.

[Victor Dellovo:]

Thanks, Michael. And good morning, everyone. Even though significant supply chain issues at several of our component suppliers crimped our product sales during the quarter, our team continued to build business in orders. As a result, we ended fiscal 2021 with a record backlog of $13 million, up a 165% from September 30th, 2020 level. The backlog growth reinforces our view that CSPi will emerge from these challenging times a stronger and more formidable Company. Our team also firmly believes that our award-winning product and service portfolio is enabling CSPi to compete for the increased market share. While the backlog is an encouraging development, our short-term revenue generation has been impacted by the pandemic and supply chain issues. Unfortunately, these factors will make it difficult to project quarter-over-quarter performance. We are however confident with our fiscal 2022 yearly projections. We are working with our customers and suppliers to resolve and mitigate these issues as quickly as possible. We're taking every step to build revenues in the areas where external forces aren't having as much of an impact. For an example, we are increasing the resources we devote to our software sales since these products and services can be delivered near-term revenue in higher-margin, and are delivered remotely. We grew our fourth quarter service revenue by 27% year-over-year as we continue to add new customers. Our goal of migrating to higher margin products and services is being achieved as we reported our eighth consecutive quarter of year-over-year gross margin growth, despite tougher year-over-year comps. The product mix being sold, amount of revenue recorded in overall margin in the product are contributing to this increase from the prior year. The improved product gross margins as a percentage of revenue have been focused in fiscal 2021, particularly in the TS-segment. Technology Solutions or TS businesses, again, led the way with revenues of $8.8 million in the fiscal fourth quarter. Our managed service practice or MSP, continues to be a reliable source of growth and exceeded our internal expectations as we added new larger and several mixed customers in the retail and consumer space. We remain focused and committed to build our recurring revenue business, which is contributing significantly to the bottom line. Now let me say a few words on the cruise line activity, which has steadily increased over the past few months. In fact, today we're all bullish on this business compared to any other time during the COVID -19 pandemic, which effectively stopped our cruise activity. We received orders for 4 ships in Q4, which we expect to complete during the next few quarters. Aside from the revenue opportunity, this is a highly profitable business for CSPi in our decision to maintain our cruise-related workforce early in the pandemic, despite there not being much work for them, is proving to be prudent because it is allowing our team to react quickly and meet the operator's timelines. However, the first and foremost is the health of our team. So, we are taking all necessary precautions in adhering to local protocol to ensure a safe working environment. Now, turning to our UCaaS offering. I'm pleased to report we experienced better than expected activity in the fourth quarter and momentum has carried into the current first quarter. In fact, we have doubled the size of the business over the past few months, which is a big deal since we launched 2 years ago and just prior to the worst of imaginable business environment. Our goal in fiscal 2022 is to complement the team's progress with smaller accounts and pursue larger accounts. Regarding the High-Performance Products or HPP division, we reported revenue of $1.2 million, which is slightly higher than compared 2 fiscal Q3 revenue. While The Myricom Business has steadily picked up royalty revenue related to E-2D was lower than expected. So, we anticipate the balance will be recorded in the first half of fiscal 2022. Aria remains the primary growth engines for this business segment. And we closed several deals in the quarter and recently announced the receipt of a multimillion-dollar multi-site sale of ARIA SDS solutions from a National Intelligence Agency. The ARIA SDS product will be a critical component of the Government Solution to improve network visibility, our networks vital to national security to detect communication performance in cybersecurity -related issues, which are and will continue to be on the rise. The ARIA SDS approach is ideal for this application. Given its design for high bandwidth processing, exceptional Packet analytics and real-time Packet filtering capabilities. The ARIA SIA will easily the data up to 120 gigs from the multi-10-gig network found in over 40 sites. Upon the ARIA Packet Intelligence application performs specified filtering to isolate traffic of interest. This traffic is then directed to variety of cyber security tools, such as an IDS for further threat hunting and investigation. We're especially pleased because ARIA SIA impacting Intelligence application was envisioned for exactly this purpose, to provide complete real-time visibility of the entire network for Cyber security threat hunting. We were able to close several new Aria deals that were included in Q3 sales funnel. But we also managed to grow the sales funnel as our messaging and marketing education efforts is yielding positive results. During Q4, we signed additional ARIA ADR customers in a team that's highly engaged with the prospects -- their primary objective is to get late-stage opportunities over the finish line. We all recognize that this has the potential of generating significant topline growth with a disproportionate benefit to the bottom line. To summarize, we ended the year with a record backlog that was up 165% from the prior year level. The manufacturing and supply chain issue remains a challenge, however, we are doing everything possible to get orders out, revenue, and margins up. We continue to have a solid foundation even during these turbulent times, and we are laser-focused on business execution and exploring new opportunities that strengthen our long-term growth and profit ambitions. I expect for at least the foreseeable future that we will maintain a prudent expense management that will allow us to have the necessary resources to execute multi-year growth strategies. With that, I will now ask Eric to provide a brief overview on fiscal fourth quarter financial performance.

[Gary Levine:]

Thanks Victor. As Victor mentioned in his opening remarks, our fiscal fourth-quarter revenue was $10 million and still reflects a challenging business environment. However, we managed to report gross profit of $4.2 million or 41.7% of sales, compared to $4.4 million or 31% of sales in the year-ago fiscal fourth quarter. This represents the 8th consecutive quarter of gross margin expansion as we continue to sell a mix of higher margins service business. The higher gross margin is due to product mix being sold, amount of net revenue recorded, an overall margin product contributing to this increase from prior year. The gross to net adjustment for sales and cost of sales for the year and the fourth quarter were $4.6 million and $12.7 million. Our near and short-term goal is to maintain an annual gross margin in the mid to high twenties and move this up as higher margin products become a larger contributor to the top line. Our engineering and development expenses for the fourth quarter was $696,000 compared to $717,000 in the year-ago period. This decrease is primarily due to lower ARIA development costs, compared to the year-ago quarter. Our SG&A expenses in Q4 were $3.8 million, a slight decrease from the year ago, SG&A cost of $4.2 million. The Company had a tax expense for the year, which was due -- which was primarily driven by a full valuation allowance against our deferred tax asset offset by the exclusion of the income from the forgiveness of the Paycheck Protection Program loans. The exclusion of the gain of the German subsidiary under UK law. And current year federal R&D credits and benefit of federal carry-back of net operating losses in years in which the statutory federal rate was 34%. We reported net income from continuing operations of $353,000 in the fourth -- in the fiscal fourth quarter, or $0.08 per share, compared with net income of $36,000 or $0.01 per share for the fourth quarter of fiscal 2020. Also, in Q4, we reported a one-time gain of $465,000 from the sale of our discontinued German operation which was previously disclosed, and reported net income was $818,000 or $0.19 per share for the fourth fiscal quarter of 2021. We ended the fourth fiscal quarter with cash and cash equivalents of $20 million as of September 30, 2021, an increase of over $700,000 from September 30, 2020, we believe the measures we implemented during fiscal 2020 and maintained fiscal -- throughout fiscal 2021 included the suspension of quarterly dividend and stopped our stock buyback program, in addition to the PPP loan proceeds enabled us to preserve our cash and maintain a robust balance sheet throughout the pandemic. We will maintain a similar prudent cash preservation posture for the foreseeable future or until such time that the economy and the business has resumed normal operations. With that, I'll turn it over to the operator to take your calls -- your questions.

[Operator:]

And we'll pause a moment to allow questions to queue. . And we will take our first question from Joseph Nerges with Segren Investments.

[Joseph Nerges:]

Good morning gentleman how are you today?

[Victor Dellovo:]

Good, Joe. How you doing?

[Joseph Nerges:]

Congratulations on the fourth-quarter. Considering that the revenue is considerably less than we would like, but come out with an operating profit that's really admirable in this environment. Let's put it that way. A couple of quick questions. I think the last conference call you indicated quite a few people were value

[Victor Dellovo:]

In some we lose and we have new ones that get into the funnel.

[Joseph Nerges:]

And you're basically saying you signed a few since the end of the year as well as in the fourth quarter?

[Victor Dellovo:]

That's correct.

[Joseph Nerges:]

And -- on the contract that was announced early last month, the government contract, the $1.8 million, I think you indicated in that press release that the revenues would not be -- or at least the implementation will be to the second half of next year of 2022? Is that correct?

[Victor Dellovo:]

That's what we're shooting for.

[Joseph Nerges:]

And --

[Victor Dellovo:]

Right now, we still struggle with getting some of the components for some of our --

[Joseph Nerges:]

That was going to be my question. What was delaying it? Was it the component part of it? It's certainly not the software. You could release software.

[Victor Dellovo:]

No. Yes. Correct. Correct.

[Joseph Nerges:]

So --

[Victor Dellovo:]

These chips that we need from some of the chipmakers that the lead times keep moving in not, in the right direction. Put it that way.

[Joseph Nerges:]

So, what you are saying is hopefully, hopefully sometime next year, we can roll that out. So right now, we're not getting any revenue whatsoever. Obviously, we haven't implemented anything on that contract.

[Victor Dellovo:]

That's correct.

[Joseph Nerges:]

And just to just follow up a little bit on the press release, you issued a couple of weeks or so go on the NVIDIA. I guess they have launched their Morpheus platform. They announced it in April. The latest is that -- was that a Software inc. upgrade on that Daka Software? Is that what they announced in early November?

[Victor Dellovo:]

Well, they're coming -- they have software, AI software, that constantly being released. But we're also working with their boards also to port our software onto their new boards that are out there currently and the new ones that are coming out scheduled for April. So that's a constant wheel that we're always on trying to work with what they have.

[Joseph Nerges:]

These are upgraded boards. Is that for the --

[Victor Dellovo:]

Is the new version.

[Joseph Nerges:]

New version of their board.

[Victor Dellovo:]

Yeah.

[Joseph Nerges:]

So, are they beta testing that now? They indicated in their press release early that they are working with partners and we're one of the partners.

[Victor Dellovo:]

You saw what they did, they announced about ten of their key partners that they work with, and we happen to be one of them which was considering the thousands of partners they have, it was an honor to be mentioned as one of their top ones.

[Joseph Nerges:]

Was it in their initial press release in April, they not really announced us, they linked this ARIA Cyber website? So obviously that was a positive way to issue a press release. We didn't issue the press release they did. But are we able to get involved? They mentioned partners and customers, so I'm assuming they've released some of this -- some of their customer base to try to test the possibilities. Are they already beta testing that with some of their customers, this whole platform.?

[Victor Dellovo:]

Well, there are actually -- what they're doing directly, I'm not sure but they are working with us and there's a few customers, large customers that we're talking to. The customers that we talked to want some customization and that's kind of where we come in.

[Joseph Nerges:]

Okay.

[Victor Dellovo:]

We are taking their boards, potentially their software in some cases by our software to take full functionality of their boards and that's kind of where our partnership is the strongest.

[Joseph Nerges:]

Well, that's great because now we're like with some pretty sizable customers that would want to customize, and as we customize, then can we get the job -- business, I would hope.

[Victor Dellovo:]

Yeah, that's our OEM play that we integrate into their boards that would be integrated into other customer's products or services.

[Joseph Nerges:]

And have we seen a fair amount of interest on that standpoint -- on that group or is it by request? I know --

[Victor Dellovo:]

It's a work in progress, but there is a couple of things that their boards that they were supposed to have out is been slow rolling just because, I'm guessing, some of their component issues that they've had. So, some of the boards that we were supposed to get early to do some of the development on have been dragged out on delays. Everything right now is being pushed out a little bit, but it's moving and we do have customers meetings within Nvidia and ourselves.

[Joseph Nerges:]

Okay. Great. Did you say that we did not or we got minimal E-2D revenue in the fiscal year? And we're expecting more at this first half of this fiscal year.

[Victor Dellovo:]

Correct some of it the planes get pushed.

[Joseph Nerges:]

Okay. Do we get any revenue in the fourth quarter, EtoE revenue?

[Gary Levine:]

Very small amounts of --

[Joseph Nerges:]

Very small.

[Gary Levine:]

have to get some more in and out .

[Joseph Nerges:]

All right. I guess that's basically it. You mentioned that we -- in the press release about we anticipate some dramatic changes in revenue in HPP down the road as we roll out more of the ARIA -- as you give more ARIA customers is encouraging. One more thing -- one more question, and that is the question of -- the last conference call, you indicated that, of course, we're working with the ARIA ADR managed under our -- via Technology Solutions and Service contracts. Has that been -- have we moved -- have prior digital customers in that area?

[Victor Dellovo:]

Yeah, I think all the customers have been ADR except for one. Yeah, so mostly everything is being managed.

[Joseph Nerges:]

All right. So, I mean, last time we had introduced it, got it out there. And so, we're progressing from that -- in Florida, but let's put it that way with the customer base. Alright, thanks a lot, guys, appreciate it and let's hope this supply situation ends sooner rather than late, thank you.

[Victor Dellovo:]

Absolutely.

[Gary Levine:]

You could say that.

[Operator:]

We'll go next to Brett Davidson, a private investor.

[Brett Davidson:]

Good morning. It's good to be here. I've got a couple of questions, hoping you guys can help me with. The press release, that was welcome. Do you anticipate any more of those coming in the near future?

[Victor Dellovo:]

Absolutely. As soon as we have something of value, we will definitely let them put them out there, Brett.

[Brett Davidson:]

Okay. That's good to hear. The 27% increase in service revenue, can you just give a feel for how much of that is represented by ARIA and how much of the increase is from UCaaS? Is one of them a bigger contributor than the other?

[Victor Dellovo:]

Well, the majority, I would say, of the service revenue on that side came from the TSI. And that's a mixture of professional services, of MSP services and UCaaS services overall.

[Brett Davidson:]

Is one of those driving that 27% increase or that's more or like an across-the-board thing?

[Victor Dellovo:]

It's pretty much across the board, all the services we do are a much higher rate and is kind of where we've been trying to concentrate as much as we can on building that service business.

[Brett Davidson:]

Yeah, recurring revenue stream

[Victor Dellovo:]

Yeah, absolutely.

[Brett Davidson:]

The backlog. I mean, it's not something that were usually see reported. So, I'm just trying to I'm trying to get a handle on what exactly backlog represents. So, I'm thinking something like UCaaS doesn't really.

[Victor Dellovo:]

No, it's not UCaaS. No, because we've already built that platform. The stuff that's there right now, the MSP and the UCaaS, the MSP does get affected, because we have a large customer that we've been rolling out 50 plus sites and to get a whole, we have to get their infrastructure to a place to manage it. So, we're waiting for firewalls we are waiting for switches, we are waiting for whatever else, PCs, servers. And so, part of that backlog of getting this product to get the customer to a point that we can actually manage them is slowing down some of the billing of the recurring revenue on the MSP side of it. By now, we were hoping to have 50 locations rolled out and I think we have approximately maybe 20. And so, until that gig comes in, I can't do the upgrade and I can't stop billing up for the MSP on that. The other thing on the UCaaS which hasn't been a huge factor right now, but it does affect it to a small percentage, is that the phones that customers need on their desk when they move over to our platform, they are so far backlogged right now that we're actually implementing softphones. And if the customer is willing to do that, and then use the Hodge phones when they come in. But right now, the Cisco phones -- the same March, April, May. That's just giving you an idea of how long it takes. So, we're asking customers to go with cell phones now, get it implemented, and then as the phones come in, roll it out. And then the other piece of it is whether it's other products, major products like some of the big players that have firewalls, service. The professional services to install that. I can't add higher-margin. I can't bill for something I haven't installed yet. So that's slowing down some of that also. And it's across-the-board. You name the manufacturer right now and there's a delay.

[Brett Davidson:]

Got it. So, hardware is converting some of these software-as-a-services to backlog, which in normal supply chains wouldn't necessarily land there.

[Victor Dellovo:]

Correct.

[Brett Davidson:]

Got it. Is there any -- what generally makes up the component of backlog? I guess now there's some of the UCaaS stuff that could possibly like the example you gave. What other --

[Victor Dellovo:]

MSP side of it I mentioned that how that backlog does that and then normal professional services. So, if I'm rolling out 50 firewalls or 500 firewalls, and these services that go. There is a big deal that we closed last quarter for. I think it was just under $2 million with services of a significant amount. But we're waiting for all the gear which I don't know when it's going to rollout. So, I can't recognize $300,000, $400,000, $500,000 of services until I get this all implemented

[Brett Davidson:]

Yeah. Does the

[Victor Dellovo:]

It's affecting every aspect of our business right now.

[Brett Davidson:]

Got it. Does the cruise ship and the E-2D staff also land in the backlog total?

[Victor Dellovo:]

Well, no. The E-2D, as soon as we get the PO there's a delivery data.

[Gary Levine:]

They do have some in there, Brett. There is some E-2D because we're expecting some to be in December. And there's others that have been given for the year, but they haven't released. So, it's they give us a PO -- we get a PO for x number of units and then they roll them out. So, we were getting a lot of them at the end of the year, but we have a fair amount for royalties right now.

[Brett Davidson:]

Okay. And some of those are folded into the backlog total?

[Gary Levine:]

Absolutely. Those are having order.

[Brett Davidson:]

All right. And how about the time frame for the for -- chewing through this backlog, is this like next quarter, next two quarters, next year extend greater than a year. What kind of time frame is going to take to work that ordinarily work that through. I realize supply chains might impact that. But ordinarily how quickly we're going to churn through this?

[Victor Dellovo:]

Under normal circumstances, everything is a couple of weeks on the -- if there was no -- the most you would ever wait is 6. Now, everything is 12-15 weeks minimum and everything.

[Brett Davidson:]

[Victor Dellovo:]

Yeah. In some cases, yeah. On the chips that we're waiting for on the ARIA side, it's 26-52 weeks.

[Brett Davidson:]

Oh, wow.

[Victor Dellovo:]

Yeah.

[Brett Davidson:]

That's crazy. Let's see. Oh, UCaaS generating enthusiasm in Q1. Does generating enthusiasm in Q1 include adding new customers during the quarter?

[Victor Dellovo:]

Yeah, absolutely. We've been consistently adding new customers every month in UCaaS. So, our various sizes and some of our customers that we actually just signed end up being an MSP customer, a UCaaS customer and an ARIA customer, they did the tri -factor and bought. So, you know, in the perfect world, all our customers would move in that type of environment. But we're -- we're pushing.

[Brett Davidson:]

Have you had many costumers where you've backed up and cross-sold some of these products and added them as customers to one of the other services?

[Victor Dellovo:]

We try and sometimes they take 2 of them, sometimes they take all 3. We're trying to push them into definitely to try to all 3 of them it would be like I said, the perfect scenario and we pushed it. And in some cases, it takes a little time. There will be like, oh, let us bring U.S. and MSP first let's see how you guys do. We want to make sure before we put everything in one basket that we're comfortable with your services and that could take 6 months, it could take a year. And then when the renewal comes up, we'll be like, hey, listen we've done a good job over the year. Can we add another service and then you quote it out and it's timing on a lot of this stuff too? But yes, our goal is to get that recurring revenue on those 3 assets.

[Brett Davidson:]

Now as these things are then rolled out for a little while, I would imagine that opportunity is going to increase during this calendar year?

[Victor Dellovo:]

That's our goal. That's our goal. It took a few years for our MSP to really pick up stride and get those customer references. And we're building up the UCaaS references. And of course, ARIA, we're building up some references there too. So little by little, we are moving in the right direction.

[Brett Davidson:]

Got it. And the last thing I want to touch on is the cash balance back up to $40 million. And I'm guessing the timing might not be right currently, but I know there was talk about re-instituting the dividend after a couple of profitable quarters. The buyback program is on hold. I'm just wondering what the current bond process is there seeing the cash just keeps swelling?

[Gary Levine:]

I think we have numerous discussions at the board level and obviously we bring it up every board meeting. So, it's something we're scrutinizing. And I think once we get some continuing quarters, right? we will take a good hard look and consider implementing, but we need to get profitability on a consistent date.

[Brett Davidson:]

Has there been any talk about making the buyback program active again? They've changed at all?

[Gary Levine:]

We have that as part of that discussion, so I -- we can address that also.

[Brett Davidson:]

All right. That'd be good.

[Gary Levine:]

Yeah.

[Brett Davidson:]

That'd be good to take a look at, I think at this point. Might be able to strategically go in there and grab some shares on the cheap, and might work out well.

[Gary Levine:]

Yeah.

[Brett Davidson:]

All right. That's all I got. Thanks. Thanks so much for the insight.

[Gary Levine:]

Okay. Thanks.

[Victor Dellovo:]

Have a great one.

[Brett Davidson:]

You too.

[Operator:]

There are no further questions within our program. Back over to Victor for any closing additional remarks.

[Victor Dellovo:]

Thank you. As always, I want to thank our shareholders for your continued interest and support. Rest assured that your management team is committed to success and is diligently working to grow the business. Gary, and I look forward to sharing our progress in fiscal 2022, first-quarter operating results in February until then be well, stay safe and enjoy the holidays

[Operator:]

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

[Michael Polyviou:]

Yeah, bye.