CSP Inc.
Q2 2021 Earnings Call Transcript

Published:

  • Operator:
    Good day, everyone, and welcome to today's CSPi Fiscal Second Quarter 2021 Operating and Financial Results Conference Call. . It is now my pleasure to turn today's program over to Michael Polyviou. Please go ahead.
  • Michael Polyviou:
    Thank you, Britney. Hello, everyone, and thank you for joining us to review CSPi's Fiscal Second Quarter ended March 31, 2021. 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.
  • Victor Dellovo:
    Thanks, Michael, and good morning, everyone. Our second quarter performance again highlights the type of success we can achieve even during unprecedented business climate. In addition to maintaining our business and migrating to a higher-margin product and services, we have also had the wherewithal to develop innovative solutions from the ground up to meet today's growing security concerns. This is becoming CSPi's trademark. We continue to advance the primary objective of transforming CSPi into cybersecurity, wireless and managed service company, and I believe the positioning will enable us to execute our long-term operating strategies. For example, our team has remained engaged with customers in the new business prospects and this continuous touch strategy during the pandemic. With a sizable customer base in Florida, I would expect CSPi to emerge from pandemic disruption quicker than most competitors as the state returns to a more normal business climate. Total revenue for the fiscal second quarter was $14.1 million. I am pleased with the overall performance as we experienced some positive indications such as new accounts, new product lines within some existing customers and a growing pipeline of new opportunities. I continue to believe we will emerge from the pandemic in a more formidable company with an expanding complement of offerings to grow top line. And consistent with previous quarters, the revenue mix, in pursuit of higher-margin offerings, allowed us to report our sixth consecutive quarter of year-over-year gross margin improvement with a 4% increase over fiscal Q2 2020.
  • Gary Levine:
    Thanks, Victor. As Victor mentioned in his opening remarks, our fiscal second quarter revenue was $14.1 million. While the year-over-year decline is primarily related to COVID-19, the 24% increase compared to fiscal 2021 first quarter, as the company demonstrates our success, continues to navigate the impact of COVID-19. We reported gross profit margin of $4.4 million or 31% of sales compared to $4.5 million or 27% of sales in the year ago fiscal second quarter, reflecting improved product gross margin percentage plus a mix of higher margin services business. This is an improvement of 4%. Our engineering and development expenses for the second quarter was $762,000 compared to $716,000 a year ago - in the year ago period. The increase is due to a higher headcount of 2, which was offset by a reduction in consulting services. Our SG&A expenses in Q2 was $3.7 million compared to $3.9 million in last year's fiscal Q2 due to a decrease in payroll, benefits, travel and stock compensation. The $723,000 of income tax expense was primarily driven by an increase in valuation allowance for our deferred tax asset, which is a noncash item, offset by a benefit for the effects of a change in the tax law, allowing immediate deductions of the covered expenses through the PPP loan.
  • Operator:
    . And we will take our first question from Joseph Nerges.
  • Joseph Nerges:
    By the way, great report. Finally, we seem to be moving forward with ARIA, and this has been a long time coming, but that makes me very happy about this, the long-term nature of this possibilities we have. Maybe a couple of quick questions off your press release. You mentioned that quite a few purchase orders for - have come in, I guess, on the ARIA product line in the last 30 days. So that was subsequent to the end of the quarter. So most or all of that revenue would be going forward. Is that correct? We're talking third and fourth quarter revenue.
  • Victor Dellovo:
    Actually, over the next - it's on a monthly basis, Joe, because they're - it did - there are three-year deals. So we recognize over 36 months because they're managed, right? So not only are we selling product, we're doing managed services. So that's built on a monthly basis.
  • Joseph Nerges:
    So we're talking about purchase orders in Technology Solutions division in that department, not in high-performance products?
  • Victor Dellovo:
    No, it's a combination of both, Joe. So we sold ARIA, but the goal was to build up the recurring revenue business, and that was both in the MSP. So we tie the 2 divisions together to where, when ARIA is sold, we sell it as a managed service. So not only are we getting the product, we're getting the maintenance, the support and then we're tying it into the managed service. It won't always occur like that, Joe. But in the last couple of deals that we have sold, we sold it as a complete managed service on the both umbrellas, the HPP and on the TSI. So revenue will be - some revenue will be on both sides of the house.
  • Joseph Nerges:
    All right. Well, it has been offering areas of managed service and Technology Solutions division. So that's what you're saying that through that division, you're getting the area sold as well as the managed services attached.
  • Victor Dellovo:
    Correct.
  • Joseph Nerges:
    Okay. On the next question, on the two large or leading manufacturing organizations, are we talking Fortune 500 type companies here? Or are we talking to somebody very large?
  • Victor Dellovo:
    No, not that large, not Fortune 500. But they're tied into large organizations as subcontractors. I can't - we can't mention who they are, Joe.
  • Joseph Nerges:
    No, I understand that. I'm just trying to understand, are we talking about ARIA here? Or are we talking about managed services here or a combination of both?
  • Victor Dellovo:
    Both, Joe. Both.
  • Joseph Nerges:
    Okay.
  • Victor Dellovo:
    In a perfect world, Joe, there will never be an ARIA sale with our managed services in a perfect world.
  • Joseph Nerges:
    But the managed services would be coming out of Florida, not out of Massachusetts?
  • Victor Dellovo:
    Correct.
  • Gary Levine:
    Correct. Yes.
  • Joseph Nerges:
    What type of...
  • Victor Dellovo:
    But we will be selling the product out of Boston, and the support and maintenance out of Boston. But the support will come out of Florida managed service piece of it, yes.
  • Joseph Nerges:
    What are we talking about? Because you said multiple facilities, are we - what are we talking about time of implementation on this. So is that pretty quickly? Or is this over the next - over the course of the next couple of months, 6 months, whatever on these large...
  • Victor Dellovo:
    No. It could be as fast as the customer allows us to get into their setup.
  • Joseph Nerges:
    Okay. A couple of quick things. So you mentioned about the 2 awards that you got for - the Gold awards you got for both the ADR as well as the Pack Intelligence in the quarter. Who votes on these awards? Because they're both gold awards. How large a voting group was involved with that? Do we know?
  • Victor Dellovo:
    No, I have - I don't know exactly.
  • Joseph Nerges:
    Okay. No problem there. But this is more than once now that we've been recognized for both ADR and the Pack Intelligence operations.
  • Victor Dellovo:
    Yes. Every year, you have to apply for them - for the awards. And I guess, there's industry experts that vote on this.
  • Joseph Nerges:
    Okay. And another one, which I consider a major announcement this quarter, and that is the NVIDIA release of their Morpheus platform in April, which supposedly expand various capabilities in identifying cybersecurity attacks. Am I correct in that?
  • Victor Dellovo:
    Yes. We partner with NVIDIA because they make some of the boards we use when we port over our software, and we work hand in hand. And the nice part about that announcement is if you look at the CA, they had an NVIDIA conference or asset, I think, just about a week, and they mentioned some of the security partners they work closely with. The CEO announced, there was a few other major brands that are out there in the security space, but they mentioned CSPi, ARIA as one of their key partners of integrating their platform with ours.
  • Joseph Nerges:
    Well, beyond that, not only did they mention us, they provided a link area on their press release, their press release. They didn't provide a link to anybody else except us, which at least, from my standpoint, says that the narrative that we've been trying to say for the next couple of years is a narrative that they're buying into wholeheartedly with this platform.
  • Victor Dellovo:
    Yes, absolutely. We're working - that's a lot of the stuff we're working with them is with the cable companies that we have mentioned in the past and there's some other 5G providers on the OEM side of the house. Nothing that we've - it just takes a long time to get integrated with some of these large organizations. But once you do, it's opportunity that lasts for years. So it's - no, we were very happy with the progression we're making with NVIDIA as such one of the large key players that are out there.
  • Joseph Nerges:
    But one last point I'll make on this, and you've mentioned this on several conference calls, and that is because CSPi is basically fairly unknown in the cybersecurity industry by a lot of major players, the idea that NVIDIA would link to your website should take a lot of the - who you are out of the equation, but that's how I'm looking at it anyway. It's very positive to have a big company tie-in CSPi's ARIA platform.
  • Victor Dellovo:
    Yes. I agree with you, Joe.
  • Operator:
    . And we will take our next question from Brett Davidson.
  • Brett Davidson:
    Well, I'm glad to be here this morning. I got a couple of questions for you guys. I'm looking at that press release yesterday, the HP ProLiant servers, and I'm not entirely sure what that means. Let me just run this past you. So if I were to go on HPE site and look to order a ProLiant server, there'd be a drop-down offering ARIA equipment. Is it - am I somewhere on the right track?
  • Victor Dellovo:
    No.
  • Brett Davidson:
    Okay.
  • Victor Dellovo:
    Yes. So what we've done is we're working with their OEM team to help integrate the ARIA technology. So when we're selling an appliance, we were using Supermicro, and also, now we're using the HP platform. That's a possibility because some of the major brand - companies, they don't want to use a third-party OEM like maybe a Supermicro. So we teamed up with HP. They will be promoting our product along with it to some of the OEMs, but it's more that we were able to get them to work with us on the design and the pricing model that makes it attractive for us. So when we do sell it, it will be profitable for CSPi.
  • Brett Davidson:
    So is this kind of like a seal of approval that says that your stuff works with the HP equipment? Or...
  • Victor Dellovo:
    Correct.
  • Brett Davidson:
    Okay. Got it.
  • Victor Dellovo:
    Yes, yes. And the next step potentially could be what you're saying, but we're not at that point yet. We're at step 1 of the relationship.
  • Brett Davidson:
    Got it.
  • Victor Dellovo:
    In a perfect world, it would be what you suggested if we could do that on the cybersecurity on the HP, but we're not at that stage yet. Not that it's out of the question, we're just not there yet.
  • Brett Davidson:
    Is it kind of like the proven type phase where you guys had to get new stuff on some of their equipment in the...
  • Victor Dellovo:
    Yes. We're still dating. We're still dating, Brett. We're not in the marriage stage yet.
  • Brett Davidson:
    Well, it comes with a lot of pits. So I'm okay with that. So on those purchase orders, can you add a little color as to - I know I got from Joe, the 3-year deals and the size of these. I mean, are we talking like tens of thousands of dollars? Are we talking 6 figures? Or...
  • Victor Dellovo:
    With the German contract, they're hundreds of thousands.
  • Brett Davidson:
    Nice. That's - yes, that's exactly the type of color I was looking for. So that works good. I do have a question that's probably more pointed to Gary here. And there is a big jump in a long-term receivable and likewise similar increase in noncurrent liabilities. Can you add some color as to what that represents?
  • Gary Levine:
    Yes. Some long-term purchases with one of our customers, and we've done these over the years. So that - and there are 3- and 5-year deals. So that's what we're doing, is putting that on the balance sheet.
  • Brett Davidson:
    And that's equipment software installed, that type of deal?
  • Gary Levine:
    Yes. So those kind of items, right.
  • Brett Davidson:
    Yes. And that also is the noncurrent liability?
  • Gary Levine:
    Right.
  • Brett Davidson:
    Got it. Okay. That's both sides of it. All right, I got it. Yes, I think that's about all I got. So yes, I don't - so this isn't going to be like a huge splash. This isn't going to be where all of a sudden, $5 million in revenue shows up on the income statement. This is all going to be incremental because, like you said, in a perfect world, you're going to capture both the hardware and the management side of this. Correct?
  • Victor Dellovo:
    Correct. That's correct. Yes, we're trying to build our recurring revenue model, as I've been saying. And it's - it took a few years with the MSP to build up a decent-sized percentage of the overall revenue. And we're hoping, if we could stay on the same track that we did with the MSP in UCaaS, it would be in another 12 to 18 months that will be significant revenue that you can count on quarter-over-quarter for years to come.
  • Brett Davidson:
    Yes. And it's not as sexy as a big $5 million increase in revenues, but it sure probably has a lot more value to it. So I'm all...
  • Victor Dellovo:
    Well, the multiple on recurring revenue is definitely - the onetime hits, it's worth something. But the recurring revenue, you get a 10 to 15x factor on top line. So you definitely...
  • Brett Davidson:
    Are you guys going to start breaking that out in the quarterly, the amount that is from recurring revenues?
  • Gary Levine:
    When it gets to be a significant portion of it, we will.
  • Operator:
    And there are no further questions at this time. I will now turn the program back over to Victor Dellovo.
  • Victor Dellovo:
    Thank you. As always, I want to thank our shareholders for the continued interest and support. We have maintained our focus throughout the current climate. We have the resources and product and service portfolio to grow the business. Gary and I look forward to sharing our progress in the fiscal third quarter operating results in August. Until then, stay safe.
  • Gary Levine:
    Yes. Thank you.
  • Operator:
    This does conclude today's program. Thank you for your participation. You may disconnect at any time.

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