CSP Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Dec 2020

[Operator:]

Good day, everyone. And welcome to the CSP Inc. Fiscal 2020 Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions. Please note this call is being recorded. And now, it is my pleasure to turn the conference over to Mr. Michael Polyviou. Please go ahead, sir.

[Michael Polyviou:]

Thank you, Leo. And hello, everyone, and thank you for joining us to review CSPi's fiscal fourth quarter and full year ended September 30, 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'll then open the call for questions.

[Victor Dellovo:]

Thanks, Michael, and good morning, everyone. We hope you and your families have not been impacted by ongoing COVID-19 pandemic. Despite the impact of the COVID-19 on your operations and our customers operations, since March, we have remained focused on executing our key objectives to ensure CSPi is positioned for long-term success. I would like to devote most of my prepared remarks to reviewing our progress on reaching these objectives and the adjustments we have made in our new fiscal year. One objective since the pandemic hit and begun impacting our ability to aggressively pursue our marketing plans has been to maintain a full workforce. We have used government programs to help achieve this objective, as we consider an essential element to CSPI's maximizing its long-term marketing opportunities. We've adjusted our operations and continue to do so as a situation's merit to ensure our employees are working in a safe environment. But those working remotely, we have given them the tools to continue to operate at a 100% efficiency.

[Gary Levine:]

Thanks, Victor. As Victor mentioned in his opening remarks, our fiscal fourth quarter and fiscal year revenue was $14.3 million and $61.8 million, respectively. Our results also reflect the pursuit of higher margin business. We reported gross profit of $4.4 million and $17.2 million in the fourth quarter and fiscal year, respectively, resulting in gross profit margin improvement in both periods. The Q4 gross margin was 31%, improved by approximately 8%, while the fiscal year gross margin is 27.8%, improved by 5%. Our engineering and development expenses for the fiscal fourth quarter was $717,000, compared to $691,000 in the year ago period. For the full year, this was approximately $2.8 million, which is flat with the year ago expense level. Our SG&A expenses in Q4 was $4.2 million, approximately $400,000 decrease from the $4.6 million in last year's fiscal Q4, due to the decrease in variable compensation costs.

[Operator:]

We'll take our first question from Joseph Nerges of Segren Investments. Your line is open.

[Joseph Nerges:]

Good morning, guys. And Happy New Year to you, guys.

[Victor Dellovo:]

Same to you, Joe.

[Gary Levine:]

Thank you, Joe.

[Joseph Nerges:]

One quick thing you did say that, I guess there were no revenues from the E2D program in the fourth quarter. Is that correct?

[Gary Levine:]

There was some, Joe. We had some royalties in the fourth quarter.

[Joseph Nerges:]

Okay. And then you said you're expecting some in the first-half of the year too. Is that the first half…?

[Gary Levine:]

Yes, some rolled over. What we expected was some that has rolled into the first quarter.

[Joseph Nerges:]

Okay. So, you didn't get as much revenue as you thought in the fourth quarter, some rolled into the first quarter of the next year?

[Gary Levine:]

Right. Assuming go away here, right.

[Joseph Nerges:]

Okay. I assume you did see or I don't know whether you're aware that the evidently the Taiwanese -- we're receiving royalties on the foreign purchases. Is that correct? That's basically where the revenues are coming from?

[Gary Levine:]

Correct.

[Joseph Nerges:]

And the Taiwanese, I see they contracted for four planes in the fourth quarter, in your fiscal fourth quarter. So that's coming down the road, little by little, one plane a year, whatever, but still added revenue sometime in the future?

[Gary Levine:]

Correct.

[Joseph Nerges:]

You did see that or you didn’t? I assume you did?

[Gary Levine:]

Well, the problem we have is we don't --

[Joseph Nerges:]

Now that’s far since the contracts being awarded.

[Gary Levine:]

Yes, we saw that.

[Joseph Nerges:]

Okay. I realized you don't know when you're going to get it, but at least it's out there, we know that. Let me go back to the press release a week ago and the free three month offer that was on the solar winds platform that is strictly for solar winds customers and organizations, in other words, we're not offering a three months free for other customers, is that correct?

[Victor Dellovo:]

Right, that was just targeted to solar winds right at this point.

[Joseph Nerges:]

I know it's really early, because we just offered it last week. But have you got any kind of feedback or response on that offer? I mean potential people or customers?

[Victor Dellovo:]

Not yet, Joe. And plus with the holidays and stuff everything is really, really slow like .

[Joseph Nerges:]

Yes, I realized. The best week in world.

[Victor Dellovo:]

Yes.

[Joseph Nerges:]

To try to get people to get back to you on. And that's a fairly large base of people. We're talking about 18,000 or that you had mentioned in the press release something 18,000 to 30,000, I've seen is figures on that.

[Victor Dellovo:]

Yes. That's right.

[Joseph Nerges:]

Are we -- do we have some sort of a -- how could I say it better, a hit list of who we can contact on that? Do we know, who several organizations that have that currently that are using it?

[Victor Dellovo:]

We don't, but we're talking to marketing companies to see if we can get that list of who has solar winds or we can just start calling and ask if they currently have it. That's sometimes it's just roll up your sleeves.

[Joseph Nerges:]

Usually that does bear on the database someplace. People might e-mails targeting certain customer basis. So I just was curious, that is strictly for the -- the three months offer is strictly for the solar winds platform?

[Victor Dellovo:]

Yes, if someone else has an opportunity it's for something else and we can help them and it makes sense financially, I'll leave it open to some, because right now in these trying times of budgets are just being allocated, if we have to give them a little bit 90 days or so to get things rolling for a three-year contract, it will make sense in the long-term.

[Joseph Nerges:]

One of the interesting things in the press release, at least from my standpoint was the mention that, I guess Gary Southwell mentioned that, we often and we're talking about ARIA platform, often we placed legacy security information systems and other security tools. In other words, the ADR platform or the area platform, in some cases, customers or potential customers don't need all of what they have currently. We can -- generally is that correct that by implementing ARIA, we can sometimes eliminate some of their oldest stuff older security tools?

[Victor Dellovo:]

Well, yes. Sometimes, it depending on what they have, or we could take sometimes three different manufacturers and cut it down to one. So you have one management platform and one tool managing everything.

[Joseph Nerges:]

And I'm guessing in some cases, the costs of even maintaining the existing legacy systems can be substantial. And in the fact that we can not only really replace some of the older stuff. So implementing area, it might not be -- we could be pretty competitive by eliminating even some of the older stuff.

[Victor Dellovo:]

Correct.

[Joseph Nerges:]

So that -- I mean, your return on investment or what areas is extraordinary and I'm a stumped on is why we're not getting a little more. I realized we had the whole pandemic thing, it's difficult. But the traction that we should be getting and that should be substantial going forward. And more and more people I assume are aware of it now that it's been out there for what, six, eight months now, you're at least talking to customers about it.

[Victor Dellovo:]

Yes. We're doing the trade shows. And right now it's name recognition. We got to get our name out there and get more and more eye balls and getting more and more wins.

[Joseph Nerges:]

Well, you mentioned at the beginning about the platform and continues to generate enthusiasm. So I'm assuming people are interested as the matter of whether or not they're spending the time or have the opportunity to let us in to help with the implementation.

[Victor Dellovo:]

Exactly.

[Joseph Nerges:]

Okay. And we did mention the R&D for there about $2.8 million for the year, approximately. Right. Any resolution have you guys submitted the PPI loan to the government? You did that paperwork for the PPI loan?

[Gary Levine:]

The one that we received. Yes, we did and we --

[Joseph Nerges:]

Yes, it was a $2.1 million. And I'm assuming you got no response from the government as of yet?

[Gary Levine:]

Yes, we have. We received response just before Christmas and it's been forgiven.

[Joseph Nerges:]

Okay. That might've been interesting to at least mention, because I think that we don't want to have it hanging out there, but it has been forgiven we got that information. All right, great. Okay.

[Victor Dellovo:]

From Q1 we'll share more information in Q1.

[Joseph Nerges:]

Okay. Because it fell into Q1.

[Victor Dellovo:]

Correct.

[Joseph Nerges:]

Forgive me. Well, at least going forward that's a very positive I think. All right, thanks. I'm going to step back and let somebody else to ask the question.

[Victor Dellovo:]

Thanks, Joe.

[Operator:]

We'll move next to Brett Davidson . Your line is open.

[Unidentified Analyst:]

Good morning, gentlemen.

[Gary Levine:]

Good morning, Brett.

[Unidentified Analyst:]

I've got a couple of questions. I'm kind of split like Joe is here a little bit between the financials and the press release. The headline on the press release talked about record new business pipeline. I was wondering if you could just give a little color on what exactly that means.

[Victor Dellovo:]

Well, just the amount of events we're doing. We're talking to customers and we’re trying to quote that we already put out to the various prospects. It's built the pipeline 3-4 x from where it was a few months back.

[Unidentified Analyst:]

And is that like spread across the board? Or is it focused more on one area than another?

[Victor Dellovo:]

No, everything we do, we're focused on, as I mentioned in the past, was based on recurring revenue models, whether it's UCAS, MSP, cloud base or ARIA. So if you look at those four funnels, those that's where the increase across the board kind of came from. And it varies percentage wise, but it's all been favorable across those recurring revenue funnels that we try to build up. We always have the products and services behind it, which is still a big piece of the business, which in a lot of cases we're trying to position everything. We'll sell the product, we'll put -- service it, we’ll install it, maintain it, and then we'll try to get them as an MSP client and so we can manage it for them on a monthly basis. So, that's kind of the model that we're looking at. And that can go across the board for UCAS, or could go for cloud, anything with Azure or whether it’s ARIA.

[Unidentified Analyst:]

And is any area represented by a larger dollar amount than other areas or again it's kind of like evenly split?

[Victor Dellovo:]

No, the cloud base and the MSP is a little heavier right at this point, just because we've been doing it a little longer. UCAS is increasing and ARIA as you know, we're positioning it right now, as both they can buy it and manage it themselves, as I mentioned in the past, so we can fully manage it for them, of course, at a cost.

[Unidentified Analyst:]

And that’s why I might swing to Gary a little bit here. The operating lease assets and liabilities, I'm assuming that relates to some of the either the managed service or the UCAS. Maybe you could give some color on how that is split up and what it represents?

[Gary Levine:]

Well, there's a new pronouncement relative to putting leases up on the financials, so that there's obviously certain aspects with some of the longer-term contracts that we have, as well as just the standard leasing that we have to disclose now within the financial statements Brett.

[Unidentified Analyst:]

Got it. So it's not necessarily something new, it's just change in reporting?

[Gary Levine:]

You're right, it's the reporting requirements under the accounting rules.

[Unidentified Analyst:]

Got it. And is that split kind of evenly between some of these different lease activities that are going on? Or is it dominated by certain area?

[Gary Levine:]

Some of the -- with the long-term commitments we've got on financing some of these sales, but also just with standard leasing obligations that we have that has to be recognized within the financial statements. And that's why you've got a long-term aspect to it in that.

[Unidentified Analyst:]

Got it. Now switching back to that press release, I generated some questions from that. So, what exactly does the use of the ARIA advanced detection response entail? Is it all software? Or is it combination software and hardware?

[Victor Dellovo:]

Both, correct. If you want to install it and you don't want it to automatically fix it, then it can be software only. But if you want to put taps in and put the appliance in line, then you can set rules to where as you see things happening inside, either the network in or out through the firewalls, then it could automatically based on the rules you set, it could automatically fix them and then you could look at the logs the next day. I talked about it on the last conference call that you look at the logs, and you can either reverse back if you don't want it, or you can let it go through and it would automatically fix it based on the rules you had set.

[Unidentified Analyst:]

And is that based on like a signature of the activity that's going on? Or is it more like IP-based?

[Victor Dellovo:]

It's IP-based. It's taking all the data that's coming in, so we actually sell it per IP, we license it per IP. So if someone has 600 IPs, then we would have to sell 600 licenses, and then it depends if it's redundant. And then if then the second aspect of it is if you want us to manage it and monitor a 24/7 or you'll do it in internally.

[Unidentified Analyst:]

Alright. And inside the press release, indicated that ARIA ADR stops the activity associated with that SUNBURST detect. And my first thought was, well, okay, how do you guys know that?

[Victor Dellovo:]

That's why we have our engineers internally that we tested this. The way -- it monitor -- how it exactly does, that's what the engineers figure out. But the way we look at all the data and the changes the team is, like I said, very confident that it stops all the ransomware and everything else going through.

[Unidentified Analyst:]

I mean has this been tested and proven out? Or is this theoretically it stops all the activity?

[Victor Dellovo:]

No, it's tested in labs, and we work with other companies that some of the big players too, in conjunction with their firewalls. You name the big players and we have tons of lab gear and software, and everything that goes across. We're integrated partner. So we get a lot of feeds from these manufacturers, and we have to test a lot of this stuff. No, we're not just saying it.

[Unidentified Analyst:]

Got it. So this is proof of concept you guys have actually gone out and enabled to demonstrate that. So more or less, it's just the traffic related. If you're knocking these people off the network, does that meant from user and whatever it is that they're using to get in and out.

[Victor Dellovo:]

One of the biggest things that we do and like I said, I had mentioned it prior is we're looking at East to West traffic inside the network. Everybody looks north to south, in and out the firewall coming from outside in. We're looking across the traffic, so the way it analyzes it, when you have something that could be inside the network that shouldn't be there. That's why things get -- they put these little probes inside there, and then they start festering inside. And there could be there for months and months a month gathering data. So the way we analyze that is east to west traffic and I think that's why, we're different than a lot of players out there.

[Unidentified Analyst:]

And that's where the AI component comes in?

[Victor Dellovo:]

Correct.

[Unidentified Analyst:]

So, yes. I guess I know, Joe had asked this, if there's anybody that's taken advantage of this. And have you guys received like, any kind of feedback? Is that how this release has been received, or still too early?

[Victor Dellovo:]

Still too early.

[Unidentified Analyst:]

All right. Well, that's all I got for now. Thank you very much. And I'll see you guys soon.

[Victor Dellovo:]

Have a good one.

[Gary Levine:]

Have a good one.

[Operator:]

We'll move next to James Stewart . Your line is open.

[Unidentified Analyst:]

Good morning, gentlemen.

[Gary Levine:]

Good morning.

[Unidentified Analyst:]

My only question is really directed towards Victor at the moment. I want to congratulate you first on execution, you've done on moving forward on new products, but also on the phenomenally high margins that you're getting. My question is, our company our investment firm has a screener for all the companies in the U.S. And CSPi was always in the top 10 as far as being undervalued. And I know you're working within one of the primary as your ARIA products are proven and award winning. And I'm sure that the cybersecurity firms that you're working with, it's not going unnoticed that you have such high margin and a product that works. Are there any discussions at all on further joint ventures or possible acquisition? Because obviously, the acquisition of CSPi would be accretive to any company that bought you. Just wondered if you could discuss any of those things you might be looking at in the future?

[Victor Dellovo:]

Well, everything's always on the table, right, whether if someone comes to us to purchase us or if there's other things that I could see that would be accretive immediately. We do talk to other companies constantly. And if something happen to make sense we would bring it to potential shareholders to vote on or whatever wouldn't be needed. But right now, we're just focused on building the product, trying to generate sales and then go from there. But, everything's on the table both ways.

[Unidentified Analyst:]

Well, again, I congratulate you. I think you've done a both -- your entire team has done a phenomenal job.

[Victor Dellovo:]

Thank you very much. I appreciate it.

[Gary Levine:]

Thanks, James.

[Operator:]

We'll move next to Jonathan Haine . Your line is open.

[Unidentified Analyst:]

Good morning, gentlemen. Happy New Year and congratulations also on these really encouraging results. I'm a longtime holder of this stock. And I'm just kind of curious, given the strong transformation, is there any way you can explain to me for years CSPi outperformed a lot of the small cap indices, the microcap index. And now the Russell is at all-time highs, the microcap index has rebounded. So I'm wondering if there's just any explanation you might have of why the stock given a strong fundamental transformation, the stock is so such an underperformer as of late? Thanks again, and Merry Christmas, Happy New Year.

[Victor Dellovo:]

Merry Christmas. Happy New Year.

[Gary Levine:]

Well, that's kind of a difficult thing. There is such low volume in it. And I think it's a thing that we're really trying to do is more to get out there to get CSPi now. And I think once we start getting more success with the high performance group, as well as the TS new products, I think the story will start to resonate more. Obviously, we've got the strong margins and are pursuing those things. And I think we'll do more of the IR once the story starts to germinate. Do you have any further comments, Victor?

[Victor Dellovo:]

No, you summed it up. I think, I believe it's undervalued too, where there's a lot of aspects of CSPi that we've been working on for years that are actually showing great profits. You'll see it in the margins. One thing about the story from years past was the margins were always very low. On the TS group, we have fixed that to where we get the recurring revenue model, we have products and services that all tie together, the messaging is unified now on both sides of the house, bringing the security products into play also. And now just getting that ARIA piece of it which like I said, it hasn't been long and the pandemic kind of I think, put the brakes on it a little bit, as fast as we like to get more and more success with that. But I think the messaging, the strategy all makes sense. It's unified, and it all ties together. And with that being said -- go ahead.

[Unidentified Analyst:]

I think one quick follow up before I know my time is very limited. And it's great to hear Victor, you say that you think the stock is undervalued. I think from a markets perspective, any regular and frequent insider purchases, however small, 1000 shares, 2000 shares I know as investor sends a real signal to the market that you guys are bullish on the future. And I will I will cease my mic and thank you once again.

[Operator:]

And we have time for two more questions. We'll take that first question from Douglas Johnson . Your line is open.

[Unidentified Analyst:]

Thank you. Question on the balance sheet, the notes payable of $2.5 million. Is that all PPP?

[Gary Levine:]

Yes, by now.

[Unidentified Analyst:]

Okay.

[Operator:]

And we'll take our final question from Terry . Your line is open.

[Unidentified Analyst:]

I was kind of curious on the ARIA software. What do you believe the total adjustable market size potential for that particular product would be? I think in 2020 global cybersecurity was estimated to be about $167 billion spend? What do you think the ARIA market is?

[Victor Dellovo:]

It's in the billions, $20 billion to $30 billion of that could fit, because we hit a lot of silos of that overall market. So, conservatively $20 billion, $30 billion.

[Unidentified Analyst:]

Okay. That sounds great.

[Operator:]

And that concludes our question-and-answer session. I'd be happy to return the call over to Mr. Victor Dellovo for any concluding remarks.

[Victor Dellovo:]

Thank you. As always I want to thank our shareholders for their continuing interest and support. We are excited about our long-term growth prospects and I believe therefore based on progress we made this year, we'll drive our revenue and profitability in the coming years. Gary and I look forward to sharing our fiscal first quarter results in February, until then stay safe and Happy New Year.

[Gary Levine:]

Thank you.

[Operator:]

This does conclude the CSP Inc. Q4, 2020 earnings conference call. You may now disconnect your lines and everyone have a good day.