CSP Inc.
Q1 2020 Earnings Call Transcript

Published: 12 Feb 2020

[Operator:]

Good day everyone and welcome to CSPi Fiscal 2020 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions].And it's my pleasure to turn the conference over to Michael Polyviou. Please go ahead.

[Michael Polyviou:]

Thank you, Keith. Hello everyone and thank you for joining us to review CSPi's fiscal first quarter ended December 31, 2019. With me on call is Victor Dellovo, CSPi's Chief Executive Officer and Gary Levine, CSPi's Chief Financial Officer.Before we begin, I would like to remind you that during today's call, we will take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements that may be deemed to be forward-looking under the act. The company cautions that numerous factors could cause actual results to differ materially from forward-looking statements made by the company. Such risks include general economic conditions, market factors, competitive factors and pricing pressures and others described in the company's filings with the Securities and Exchange Commission. Please refer to the section on forward-looking statements included in the company's filings with the SEC. After Victor and Gary conclude their opening remarks, we will then open the call for questions.With that, I will turn the call over to Victor Dellovo, Chief Executive Officer. Victor, please go ahead.

[Victor Dellovo:]

Thanks Michael and good morning everyone. Since this is our first call since 2020, I would like to wish everyone a happy new year. To begin, total revenues for the fiscal quarter was $16.6 million, compared to $19 million. Slightly ahead of our internal projections and despite the business mix, I'm pleased that our gross margins improved compared to year ago quarter, despite a $2.4 million revenue decrease. I believe this reflects the investments we have made over the past couple of years to develop higher-margin products as we remained focused on driving profitability. Additionally, we continue to make progress on a unified communication as a service or UCaaS and ARIA, a platform driving our topline growth with higher-margin offerings will have a disproportionate benefit to our bottom-line. In a few minutes Gary will discuss our first quarter financial results in greater detail. But first, I will review our business segments, and I'll begin today with our Technology Solution business.For the quarter, our TS revenue was $15.5 million, our managed service practice or MSP performed well as we continue to expand our customer base as well as our current customers monthly spend on new services due to a high customer satisfaction, which is something we track closely. As someone who has been in industry for a long time, it's difficult for our investment to achieve this high level let alone maintain but we do this on a consistent basis so hats off to our entire team.Other areas of growth such as the cruise industry represents significant revenue opportunity. And we currently have commitments to the next two quarters.The Microsoft practice is a steadfast performance as we experienced a 247% increase in the number of licenses in 2019. And I believe we can surpass that growth rate in fiscal 2020. Based on our current trend line, in addition to exploring ways to further strengthen our Office 365 business. Our UCaaS which is an all in one service for hard and soft phones, including 24/7 security and technical support with redundant data centers located in Florida and Texas.I believe we have developed something unique, a testament to our innovative startup mentality. Everyone at CSPi is eager to get this underway so we can capture our piece of the pie and participate in this growing market, which is an estimated to reach 79 billion in a few years. This is in market dominated by a few large players. However, I believe that cookie cutter offering leaves a big portion of the adjustable market open to CSPi to service.This provides an opening for smaller, nimble and more customer centric companies such as CSPi. We continue to have the strong pipeline both new and existing customers, as they appreciate our secure products. Not to mention, they can be customized to fit their specific needs. As we mentioned, on the Q4 conference call, we have two companies performing beta testing each over 1,000 users.I'm pleased to report one of them has signed the contract and the other ones we feel confident will sign in a few weeks. From the earliest days, we have recognized that we had developed something special so we made sure our infrastructure can support the expected demand. I look forward to providing progress updates over the coming few months.Now I'll move over to our high performance product division. Revenue for the quarter was 1 million and reflects a decline in the product revenue, primarily Myricom. However, we do expect our legacy business to improve throughout the year, which also includes anticipated royalties in the second half of the year for foreign military E2D.In terms of new offerings ARIA, our award winning next generation cybersecurity platform gives us reason to be optimistic about the growth potential for ACP business segments. We have several discussions in various phases of the sales funnel, including a few that would categorize as being leader for advanced stages.In fact, we are well positioned within a leading cable company and believe this could be two multi-million dollar opportunities. As you would imagine, it's a small tight knit community and they all know what the other is up to. So this has open discussions with other similar companies. In addition to our direct sales team, we continue to vet potential partners for official channel program.We currently have a partners and we are speaking with other several others to increase our roster, which ensures a robust channel and increase our chances for success. In addition, you will see multiple announcements from integrations with go-to-market partners in the coming weeks. These are security vendors whose solutions benefit from our capabilities. These integrations will increase our solution impact as well as our market reach by leveraging access to these partners, customer base and prospects.In summary, and I was staring the foreign exchange and anticipated ramp up HPP business. There were no surprises and Q1 was a solid quarter. We made progress and launched our new UCaaS offering. So we expect to see improvements over the remaining quarters of fiscal 2020 especially in the second half of fiscal year.With that, I'll ask Gary to provide a brief overview on our fiscal first quarter financial performance.

[Gary Levine:]

Thanks, Victor. As Victor mentioned, our first quarter revenue was $16.6 million, compared to $19 million in the year ago fiscal first quarter. The decrease in revenue is the result of a $1.2 million decrease of product revenue in our UK division and equal declines of $500,000 in Myricom and multi-computer products.Our gross profit of $4 million, which was slightly lower compared to the year ago quarter is due to the lower sales. However, despite our gross margin of 24% was up 100 basis point compared to the year ago gross margin of 23%, due to higher combined service revenues from the TS and HPP business segments. For our fiscal first quarter engineering and development expense continue to trend lower at $672,000, compared to $750,000 a year ago. This is due to a reduction in contract labor required last year to help and build out the foundation of the ARIA software platform and a recovery of consulting expenses where the services were not completed.Our SG&A expenses in Q1 were $3.8 million, compared to $3.6 million in last year's fiscal Q1, a slight increase is due to additional sales personnel for ARIA as we prepare to launch the product this year. Due to the strength of British pound relative to the U.S. dollar and the euro during Q1, we were negatively impacted by non-cash charge of $335,000 in the quarter, compared to a favorable impact of $7,000 in the year ago fiscal Q1. We had a tax benefit of $70,000 for the first quarter, compared to a minimal tax expense in the year ago fiscal quarter. The effective tax rate for the current quarter was 11.4%. The lower effective tax benefit rate was due in part to no tax benefit recorded for the UK for the foreign exchange adjustments. We reported a net loss of $540,000 or $0.14 per share in the 2020 fiscal Q1, compared to net income of 50,000 or $0.01 per share for the fiscal first quarter of 2019. We ended the first quarter with cash and short-term investments of $17.6 million. Our Board of Directors has voted to pay a quarterly dividend of $0.15 per share to the shareholders of record on February 28, 2020, payable on March 13, 2020. In summary, we have a solid financial foundation and continue to manage our costs. We remain focused on driving our bottom-line performance and to boost sales of our higher-margin products.With that, I'll turn it over to the operator to take your questions.

[Operator:]

[Operator Instructions] And we take our first question from James Stewart with CSPi.

[James Stewart:]

Yes, I have a question for Victor. I know the significance of a lot of the businesses and local governments who have been hacked and either and data stolen or actual funds. And it's a serious problem. But I'm kind of curious as to where your main focus is going to be. I know you're doing a collaboration with Palo Alto Networks. But are you going to be focusing also on direct end users as the primary strategies and there's so many of them and if so. Are you going to be gearing up with traditional sales people this year?

[Victor Dellovo:]

We are looking to and we are currently talking to direct customers either through direct contacts that we have with our current sales people or through the channel partner program that we have set up and brought on channel partners that focus in the security area so we could have more reach. So it'll be a combination of bringing on more of these security partners and hiring internal sales people also, it'll be a combination of both.

[James Stewart:]

Do you have any plans to do any other collaborations with other IT providers in addition to Palo Alto?

[Victor Dellovo:]

Yes. As I mentioned in script a few minutes ago, we'll have some new announcements coming in the next couple of weeks.

[Operator:]

Our next question is from Joseph Nerges with Segren Investments.

[Joseph Nerges:]

Just a couple of quick questions. You did say you signed a contract for UCaaS just recently. So I'm assuming some of that revenue will start the current quarter. And of course, continue through the remainder of the year. Am I correct?

[Gary Levine:]

Correct. Yes. As I said, these are companies with over a 1,000 users, we will over the next 12 months be bringing on different offices as they request. So it'll roll out over the next year and then the contracts either a 1, 3 or 5-year contracts that we try to sign with that.

[Joseph Nerges:]

And basically you're saying that we find one now. And you anticipate the possibility of the second beta test site, if you want to call it that. Signing in not too distant future?

[Gary Levine:]

That's correct. We're hoping within the next couple of weeks and we probably have another dozen or so in the pipeline right now at various stages that are looking promising.

[Joseph Nerges:]

Can you just add, just a teeny bit more color? You mentioned that in the UCaaS product launch or you have some unique, develop some unique capabilities. Can you just elaborate, just slightly on what's unique that you think you've added?

[Victor Dellovo:]

Well, where we use it, the Cisco foundation for the back-end. There are customers that have custom applications that they would like to integrate into their phone system, whether it's financial or automakers for instance. We're able to do that integration and customize it to their needs, where some of the other players out there that kind of need to fit into three different categories. We're able to do that customization. So, basically it's truly mimicking our phone system that they would have on their own premise. They don't have to worry about the support or the maintenance or the security around it, any of those issues.

[Joseph Nerges:]

Have we integrated any of the ARIA security into this product line at all? I mean, this is not really.

[Victor Dellovo:]

No. Not into the UCaaS.

[Joseph Nerges:]

Okay. And I know this is too early to probably call us, but you said you have a number of people into the pipeline here, looking at this product line. But, do you have any feel for how many people might want customization? Do you know, I mean, some will go at the standard package I'm assuming. But, does it look like something that might be 50% or 25% or you have no idea?

[Victor Dellovo:]

To be honest, I have no idea. We can still offer what everyone else does, but what kind of separates us from everyone else is that, customization.

[Joseph Nerges:]

I understand and that's why I'm reaching for a number of it. If more people want customization.

[Victor Dellovo:]

You'll be surprised. You know when it's offered, they need it. So, that's kind of selling.

[Joseph Nerges:]

Okay.

[Victor Dellovo:]

But in some cases, it’s truly just a cookie-cutter. They just need the phones and they needed to ring in and that's it. So, that's the case. We will be more than glad to help them out also.

[Joseph Nerges:]

That's great. And, of course, in your press release you talked about the carrier and slowing and you are anticipating a lean cable company. I assume that's the carrier MSO market we have been referring to the last several conference calls. Is that correct?

[Gary Levine:]

Yeah, correct. That's correct.

[Joseph Nerges:]

And you are anticipating hopefully something in the next not-too-distant future on that being signed.

[Gary Levine:]

That's correct.

[Joseph Nerges:]

Also, I think you referred to because other people seem to be aware of what you were doing here that other people are inquiring, as a result of this contact that you've made with the cable company. Or am I correct did I read that wrong?

[Victor Dellovo:]

Not inquiring. We're targeting based on what we do with one of the leaders in the industry. We're able to reach out and you know kind of let know what other people are doing and because as I've mentioned, they all know each other. It's the conversation that started a lot easier for the second and third company than it was initially with the first one. So, just because they all kind of follow each other in that area.

[Joseph Nerges:]

Alright. Terrific. So, I'm just assuming was there a lot of customization involved here with this Kalo company. I assume there might be quite a bit of that.

[Gary Levine:]

Well, I'll give more color. If everything goes well, the way I'll give more details. Let's put it that way.

[Joseph Nerges:]

Okay. Alright. Thank you. I appreciate it. Things starts to move along and I seems to be, there is no change from the last conference call. You are still anticipating most of this revenue will start to generate in the second half of our fiscal year.

[Victor Dellovo:]

Correct.

[Joseph Nerges:]

Alright. Thanks a lot guys. I appreciate it.

[Operator:]

We will take our next question from Private Investor, Brett Davidson. Please go ahead.

[Brett Davidson:]

Just got one quick question this morning regarding the channel partners have there been any of that ARIA sales through any of the channel partners here?

[Victor Dellovo:]

No, we're just bringing them on board educating them right now.

[Brett Davidson:]

Got it. So that hasn't kicked into gear yet. And so obviously then with the guiding set with that type of stuff was start occurring in the second half of the year?

[Victor Dellovo:]

We're hoping, the things that pipeline is growing with the partners and we're talking to customers. Some of the customers they brought us into our very large organizations. So as you know, those take a little longer than some of the big market or smaller. But they're talking to us and they're interested. So right now we're, like I had mentioned we're in different phases of each sales, depending on who the customer is different phases of where we are, and each particular customer.

[Operator:]

[Operator Instructions]. We're going to next to Jonathan [indiscernible] Private Investor.

[Unidentified Analyst:]

Hi guys thanks for the information and I wanted to ask a question about the stock, which is, like the higher end of a 3-year range. Do you think it's overvalued? Is the stock undervalued? Where do you get a sense of how the stock is being valued in the marketplace? I know it's not terribly liquid, but what's your comment on valuation? And why if you could kind of go into a beta on that in terms of where the markets evaluating the company right now? Thank you.

[Victor Dellovo:]

Well, I think Jonathan, we believe it is certainly undervalued because I think we've got a lot to offer here. But we're in a startup phase. So I think what we're doing is looking to get more information out to the public going forward as we have these successes going on. And we will reap the benefits within the upside of the company. So as we talk about these new product lines.So we believe these are intriguing areas where there's good growth and opportunity for us. But we're not known in these areas. So we're going through an educational process of educating the market of who we are and what we can do.

[Operator:]

And it does appear we have no further questions. I will return the floor to our speakers for any additional closing remarks.

[Victor Dellovo:]

Thank you. As always, I want to thank our shareholders for the continued interest and support. Our core business remains strong in the launching of our game changing UCaaS in our offerings extremely exciting. Financially and organizationally, we are much stronger position and we will continue to focus on the bottom-line performance in dry sales of higher margin products, while managing costs to meet our objectives for our fiscal 2020. Gary and I look forward to sharing our progress with you on the next fiscal Q2 conference call in May. Thank you.

[Operator:]

This will conclude today's program. Thank you for your participation. You may now disconnect and have a great day.