CSP Inc.
Q1 2021 Earnings Call Transcript

Published: 12 Feb 2021

[Operator:]

Good day, everyone, and welcome to the CSPI First Quarter 2021 Conference Call. Please note that this call is being recorded. And now it is my pleasure to turn the conference over to Michael Polyviou with EVC Group. Please go ahead, sir.

[Michael Polyviou:]

Thank you, Pasila. Hello, everyone, and thank you for joining us to review CSPi's fiscal first quarter ended December 31, 2020. 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 CSP Inc.'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.

[Victor Dellovo:]

Thanks, Michael, and good morning, everyone. Our first quarter performance continued to demonstrate our success navigating the challenging business climate. Specifically our key objective of migrating to higher-margin products and services is delivering improved gross margins, and we remain well positioned to execute our long-term operating strategies. Despite being nearly a year into the pandemic, the entire CSPi team remains focused on achieving the primary objective of transforming our company into a cybersecurity, wireless and managed service company. CSPi is a nimble company, a distinct advantage that allowed us to develop exciting new offerings from scratch and ensure order, so we can compete with much larger companies. The awards, the accolades in the industry recognition reflects purposeful approach to develop much needed and valued offerings. I also believe that this nimbleness is inherent to our DNA and is why I believe our culture will allow us to emerge from the pandemic a much stronger company with a full complement of offerings to grow top line and deliver a disproportionate level of profitability.

[Gary Levine:]

Thanks, Victor. As Victor mentioned in his opening remarks, our fiscal first quarter revenue was $11.4 million. We reported gross margin profit of $3.4 million compared to gross profit of $4 million in last fiscal year, despite the year-over-year revenue decline, reported gross margin of 29.7% compared to gross margin of 23.9% last fiscal year. This is an improvement of 5.8%, an outstanding achievement. Our engineering and development expense for the fiscal first quarter was $729,000 compared to $672,000 in the year ago period, due to the increase in headcount, offset by reductions in consulting. Our SG&A expenses in Q1 was $3.2 million, approximately $575,000 decreased from the $3.2 million in last year's fiscal Q1 due to the decrease in variable compensation, payroll and travel-related costs, due to the ongoing pandemic limiting on-site meetings and -- with customers and prospective customers. The fiscal 2021 fiscal year first quarter included a onetime income of approximately $2.2 million due to the forgiveness of the Paycheck Protection Program, the PPP loan, under the CARES Act, which we received in the third quarter of fiscal 2020.

[Operator:]

And we will take our first question today from Jonathan Hodnik with

[Unidentified Analyst:]

It's been a long time with investors. Obviously, we've met with you in the past, you're executing on all fronts. The market is realizing it. We've seen it and I just want to salute you on your accomplishments for investors. So thank you so much.

[Victor Dellovo:]

Thank you.

[Gary Levine:]

Thank you.

[Victor Dellovo:]

Appreciate it.

[Operator:]

And we will go next to Joseph Nerges with Segren Investments.

[Joseph Nerges:]

I'm going to ask you a loaded first question. It's an easy one. This is real simple. That you guys -- or either of you guys know of a CEO or a CFO or whoever is responsible for the cost of security, IT security, who's happy with paying the money that they're paying for the -- or the increased cost for them to maintain security?

[Victor Dellovo:]

No.

[Joseph Nerges:]

The answer is nobody is happy to pay that. .

[Victor Dellovo:]

Not at all.

[Joseph Nerges:]

So let me follow up. Point 2, and this comes from your website. On the ARIA ADR program. ARIA ADR gives your SOC, or security operations center, in a box that costs 90% less, requires 1/100th of the manpower and is 100x faster.

[Victor Dellovo:]

No, Joe, to be honest with you, we would think it was -- with everything you said, it popped -- the only thing is -- we've always said this, it's a crowded space with other products and name recognition is the only thing that we're building on. Building in the customer base, getting referenceable accounts, because you do compete with some other players that have been doing it for 10, 15, 20 years or longer. So that's the only time if we -- when we struggled to close a deal, it's because of name recognition, and that's it, to be honest with you.

[Joseph Nerges:]

But again, of course, I go back to -- it's so compelling the -- what you're at least alluding to, the advantages of incorporating and ability to -- I mean, the key there is demand power. I mean that's got to be the biggest thing today where even finding people to hire in that area is got to be pretty expensive. So I just think you should be moving faster, but I guess everybody thinks that. You probably think it also?

[Victor Dellovo:]

I agree with you.

[Gary Levine:]

Yes.

[Joseph Nerges:]

On the -- I think you've answered the question on ARIA Cloud. It's basically slightly less expensive way of implementing the ARIA platform with almost all the same capabilities of the ARIA platform. In other words, there's a few areas where you don't cover it as well through the cloud than you would on the standard ARIA ADR platform. Is that correct?

[Victor Dellovo:]

That's correct. It's the remediation piece that when you don't have the appliance -- in a complete cloud environment, there's no difference. But if it's on-prem, in-cloud, if you want the full remediation, then you would have to put our clients in line.

[Joseph Nerges:]

So there's people out there that could qualify. They wouldn't need the full ARIA platform? And they fit in perfectly with the cloud?

[Victor Dellovo:]

Yes. But if their infrastructure is in one of the major cloud players, then it would fit in perfectly.

[Joseph Nerges:]

Great. Great. That sounds good. On the PR that you issued just recently with the SPE microHSM product line. You've had the microHSM product line out for a couple of years. I mean it -- what's different with the recent news on either this -- by SPE and as well as the StorMagic product?

[Victor Dellovo:]

That's -- you mentioned it the StorMagic piece of it. So there was a smaller company that had helped with our integration and development of the product, and they got purchased by StorMagic. And at that point, the relationship kind of got paused while they integrated it. And now that, that has been done, that relationship is basically kicked back off again. And where we're working different leads and marketing events and trying to...

[Joseph Nerges:]

So is the product more robust with the StorMagic software as opposed to I guess, what is it? Nexus? KeyNexus.

[Victor Dellovo:]

Yes, KeyNexus. Correct.

[Joseph Nerges:]

Has it been upgraded to any extent? Is it better?

[Victor Dellovo:]

The majority of the product is the same, but there is a few things that have changed, but nothing major. At this stage, there is other talks about growing that product and developing it more, but the core is the same.

[Joseph Nerges:]

Well, one thing that -- I looked up StorMagic that -- they have a fairly large customer base.

[Victor Dellovo:]

Absolutely.

[Joseph Nerges:]

Here you have over 1,300 customers.

[Victor Dellovo:]

Correct.

[Joseph Nerges:]

So I would assume -- I don't know, is there a possibility of incorporating some of this into that -- or hope into some of those 1,300 plus customers that they have?

[Victor Dellovo:]

No. We're excited about the relationship. We've got to know the upper management, and there's a lot of things going on in the marketing and talking about working with that customer base, and there's been training with their salespeople to educate them on how the 2 products are joined together where the value is, and that will continue. Salespeople, they don't -- they only listen to a small portion. So there will be multiple trainings over a period of time.

[Joseph Nerges:]

But it would seem that, that market opens up to some areas that they weren't addressing previously?

[Victor Dellovo:]

We definitely -- our product definitely filled a gap in their product line. So yes, that's where the relationship started. But like I said, basically, 6 to 9 months kind of went on pause just due to them integrating the company they purchased.

[Joseph Nerges:]

Okay. And did you say you added 3 channel partners? Is that what you said you added this last quarter or the last...

[Victor Dellovo:]

Yes.

[Joseph Nerges:]

Is that -- okay. I wasn't sure I caught all of that. I appreciate. It sounds like you're moving forward good here. Just the speed of implementation, that's the key.

[Victor Dellovo:]

We're working on it.

[Operator:]

We'll go next to Terry Keratsopoulos with Upstream Investment.

[Terry Keratsopoulos:]

Yes, my question was -- you mentioned cloud-centric companies that you were going to be targeting. What do you think the market potential of that particular markets all would be?

[Victor Dellovo:]

It's a tremendous opportunity for us. There's a lot of small, mid-sized companies that have their full infrastructure into an Azure or an Amazon and -- or a Rackspace that we're going to go after.

[Terry Keratsopoulos:]

And would this be something that's a recurring revenue type? Or is it a onetime?

[Victor Dellovo:]

It just depends on whether they just purchased it and they manage it themselves or whether they allow us to manage it full-time for them, and it's an option that we give our customers. If you want a fully managed solution, we have our stock, we can take care of that. But if you just would like to purchase either -- whether it's cloud, the licensing or if you want the ARIA hardware also with it. And then there's maintenance and support that goes along with that.

[Operator:]

And we will move next to Brett Davidson, private investor.

[Brett Davidson:]

I got a couple of questions. I'm sinking in all of these acronyms. So you're going to have to bear with me or I may twist a couple of these around. But the ARIA HSM, if I'm not mistaken, doesn't that address the largest issue with that SolarWinds hack being able to get in the network and issue keys, more or less to gain access at free will?

[Victor Dellovo:]

Yes. Part of it is that. Not the full thing, but part of it was that. And that's the biggest thing that we're touting, that a lot of these companies are using keys inside a VMware infrastructure, where it's a stationary key, you get in, where we're constantly changing. There's definitely value in what we're positioning. It's just the methodology that the IT people are used to doing it one way.

[Brett Davidson:]

And you guys detach it from that -- I guess the sort of VMware. So it moves to a separate architect -- a separate hardware?

[Victor Dellovo:]

Well, it's just the keys are constantly changing.

[Brett Davidson:]

Yes. Yes. All right. The SPE, I gathered they're a foreign entity?

[Victor Dellovo:]

Correct.

[Gary Levine:]

Yes.

[Brett Davidson:]

And it's kind of hard to get an idea of the size of them. I mean, are they like a medium sized business? Are these guys beginners? Or...

[Victor Dellovo:]

No, they're a medium sized business.

[Brett Davidson:]

And is there, I mean, potential to follow-on with them? Or this kind of like just...

[Victor Dellovo:]

Yes. So what they did, they adopted internally and now they're making it an offering to all their customers or potential customers, especially the ones that they're targeting are the ones up for renewal of their contracts, that this is an added feature that they would like to add on to it. So it's an early relationship right now, but they believe in the technology that they adopted, the technology for their internal purposes right now.

[Brett Davidson:]

Now is this strictly SaaS? Or is this hardware also?

[Victor Dellovo:]

No, it's both. In that particular case, it's a -- it's hardware and software and support that goes along with it.

[Brett Davidson:]

And they'll be providing the support? Or you guys will?

[Victor Dellovo:]

Well, we provide the support for the product that they purchase, and the licensing and everything that goes along with that. But they're in MSSP, so they would be providing their own support and maintenance to their existing account base.

[Brett Davidson:]

So it would be kind of like a layered thing. They come to you for support for their purchase and their...

[Victor Dellovo:]

Right. Correct.

[Brett Davidson:]

So I mean, the next thing that leads me to is the revenues. So how are the revenues accounted for this? So is there a hardware and a software portion of this, and it's going to be accounted for differently? Or -- I'm trying to get a hand around how the revenues are going to show up from this?

[Gary Levine:]

Well, you're pretty much -- it's a bundle. So it's an end package, you're recognizing it under the revenue rules as a -- at that point. And then we'll have the breakout of the maintenance and items like that, that could be spread. And these would be longer-term contracts. So depending how it's set up with each of them. Is there an out or not an out within it. Most of them don't have outs as we're setting them up initially.

[Brett Davidson:]

So does the revenue component change depending on how many of their customers adopt this? Or that has no factor in this?

[Gary Levine:]

That would have a factor. Yes.

[Victor Dellovo:]

It would. Yes. If we're doing the support, then we could recognize it over a period of time, and then if we don't, they're doing everything, then I think it's a onetime event.

[Brett Davidson:]

Got it. So you -- again, going back to that press release that I'd asked about last call, the one where you guys put out the free service for the time period. Have you had any hits on that? Has anybody actually taking you up on that?

[Victor Dellovo:]

We've had some conversations with some clients right now.

[Brett Davidson:]

I'm going to have another direction here. Government, USDA, PSA, it appears a lot of these have been hit by SolarWinds. Have you guys had any contact with any of the government agencies? Or do you have somebody who can exploit context they had previously dealing with some of the government agencies?

[Victor Dellovo:]

No. We don't really -- we're not focusing on the government or state right now. There's something that we've talked to, but it's -- you know the cycle with the government, it -- everything is years. So if something occurs, we'll work on it, but it's not a focus right now. We're trying to stick in the commercial space.

[Brett Davidson:]

All right. I think that's pretty much all I have. And I'm still going to be study in all those acronyms. So...

[Victor Dellovo:]

We'll send you our glossary.

[Brett Davidson:]

Speaking of that, is there something like that on the website? Is there...

[Victor Dellovo:]

No. There isn't. But if you have any questions, Brett, feel free to call.

[Operator:]

We'll go next to James Stewart from Investment Group.

[James Stewart:]

Yes. Congratulations to both Victor and Gary. Boy, you're really knocking the lights out. I think the cloud business seems to be particularly exciting. I assume that it requires less manpower to implement from your standpoint? I know you're poised for explosive growth, but it seems like this is one area where you can really accelerate. And secondly, I had another question. Are there industry meetings or conventions in the IT area where you can get your name spread around quickly, that you plan on attending?

[Victor Dellovo:]

Well, to your first question, yes, we're excited about the cloud-based product, just because we're able to have more conversations. And we're hoping that the adoption will be a lot faster, not -- getting inside of people's data centers has still been a big, big challenge. So we're hoping the POCs will occur and we're able to close at a faster rate. As for shows, we are currently still doing shows now. They're all virtual, but we've been averaging 1 to 2 a month, and we -- the audience is some tire kickers, to be honest with you, and then some that -- there's 1 or 2 leads that do come up to at least have some interesting conversations and having a -- the proof-of-concept moving forward with those. And Gary Southwell, which I know you've met, has talked and has -- they give them a half hour or 50 minutes or half hour to talk to the audience who shows up in -- about ARIA and the technology. So yes, we've done a couple of those. I would -- I don't know if it's 1 a month, but it's 1 every other month or so that he's done these virtual presentations.

[James Stewart:]

Well, that sounds great. Also, I'm one of the -- I'll let you know, I'm going to be pushing real hard to get our group of companies to start looking at your product because we're always faced with people trying to hack into our systems. So again, congratulations. I really appreciate the work you're doing.

[Operator:]

We will go now to Elizabeth Millet, a private investor.

[Unidentified Analyst:]

Just a couple of questions. I'm curious about it seems like you have a wonderful relationship with your managed service customers. So since you have that trusted relationship already in place, if the barriers -- one of the barriers to entry is name recognition, wouldn't that be -- how many of them have taken on ARIA? Or is there a natural sales cycle within that group of customers? Is that...

[Victor Dellovo:]

We are targeting all our MSP customers right now and various conversations that happen to each one. Some of it is still because they're in the small to mid-budget constraints. And then some of them, they're ready to move forward with adoption.

[Unidentified Analyst:]

So then gets me to a question on sort of your sales cycle and your competition. I mean when you get to the point that you're speaking with people, are they deferring the purchase because of the budget? Are they going with someone else? Are they -- who are you seeing as your most likely competitor if they're going with someone else? Like what -- can you explain that sales cycle to us a little more?

[Victor Dellovo:]

It's a little bit of everything, to be honest with you. Some of them have -- they go back to management and they're looking for budgets, and budgets have -- there's 2 or 3 opportunities right now that the budgets were supposed to be in January, they got pushed off. And they're saying that it could be this month or next month for the constraint of budgets and whether the amount that they ask for, they're going to get. Some of them have gone with a lower, cheaper, it doesn't do as much. But they only had cents on the dollar that we offer. We have a very good product at a very good price, but there are other products out there that -- endpoint protection, for instance, right? They just want endpoint protection. Well, we're more than endpoint protection. So they found money at $2, $3 a user. And while we were selling the suite of a product to cover more than just endpoint protection, so we were -- either lost those or they've been put on the back burner to when they get more money, they can get a true sim that they know they need, but they just don't have the budget for right now. And then in a couple of cases, we lost against some of the big players that were out there. I'd rather not mention them, but some of the big PC manufacturers that have their own product, that came in and on the cut significantly, something that it was just really bad business to take the deal.

[Unidentified Analyst:]

And this idea that -- I understand the COVID effect, but at the same time, I don't quite understand why you need to be in-person to make these sales because it's a software play. So can you talk to that a little bit?

[Victor Dellovo:]

It's not strictly a software play. Up until just recently, on the cloud ADR, it was a hardware play with software, and we had to be in line to do the full remediation. So we had our appliance that would go in line with taps, and we'd have to get inside the network to get in line, to do the remediation as the traffic was passing and so that -- they have.

[Unidentified Analyst:]

My last question is on SPE, I googled them and also their CEO, and I can't find anything about them. Could you point us to their website so that we can learn a little bit more?

[Victor Dellovo:]

Sure. We can put something on our website. I don't have it right now, right this second. We're going to put it on our message board or on LinkedIn.

[Unidentified Analyst:]

Okay. Just curious -- because if it's a good -- it's a good recognition, but we can't find anything about them. Then I don't know how good a recognition that is.

[Operator:]

And I am showing that we have no further questions at this time. I'll turn the call back to you, Victor for closing or additional remarks.

[Victor Dellovo:]

Thank you. And as always, I want to thank our shareholders for continued interest and support. We will continue to manage the business and leverage our opportunities where and when they exist. We remain excited about CSPi's long-term growth prospects and the industry dynamics will prompt increased interest in our offering. Gary and I look forward to sharing our fiscal second quarter results in May. Until then, stay safe.

[Operator:]

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