CSP Inc.
Q4 2015 Earnings Call Transcript

Published: 16 Feb 2016

[Operator:]

Good day, everyone and welcome to today’s program. 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] Please note this call is being recorded. It is now my pleasure to turn the conference over to Mr. Gary Levine. You may begin, sir.

[Gary Levine:]

Good morning, everyone and thank you for joining us. With me on the call today is Victor Dellovo, CSPI’s Chief Executive Officer. Mr. Dellovo is out of the country on business and if he is dropped from the call, I will continue with his presentation. Before we begin, I would like to remind you that during the call today, we’ll 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 risk includes general economic conditions, market factors, competitive factors and pricing pressures, and others described in the Company's filings with the SEC. Please refer to the section on forward-looking statements included in the Company's filings with the Securities and Exchange Commission. During today's call, Victor will provide an update on our business segments and our strategic progress and then I'll discuss our first quarters financial then we'll open it up to your questions. Victor?

[Victor Dellovo:]

We performed well in the first quarter of fiscal 2016, as many of the strategic changes that we put into expect in 2015 are beginning to come together. Our Myricom product line continues to perform well and the new product rollout scheduled is on track and has potential to smooth out the lumpiness inherit in our high performance product division. In the technology solution division, we have seen growth in our managed services pipeline as well as an increase in sales which include a recurring revenue stream. With that, I'll get into the segment review starting with our high performance product division. Revenues increased 5% for the quarter as we received royalty revenue for one E-2D plane in addition to some miscellaneous E-2D revenue, compared with 58,000 of E-2D revenue royalty revenue a year ago. Looking ahead our expectation is to receive royalty revenues from four more planes in fiscal 2016, all in the back half of our fiscal year. Our Myricom product line continues to perform very well including our legacy product as we've mentioned before we have had expected revenues from the legacy product to decline overtime but we've been able to keep sales at a steady pace. However the long-term strategic opportunity lies with our next generation of product which have the potential to expand the commercial market reach of the division and be the primary growth drive for HPP. You may remember that in Q3 of fiscal 2015, we began to shift early versions of the Myricom 10-gig DBL network adaptor to the financial customers for beta testing. Today customers response have been very positive and we're excited by market potential. In early April 16, we will be placing an updated model of the 10-gig DBL adapter with beta customer we have. We expect it to be available to the general public towards the end of the fiscal year. We also plan on a variation of the same board using our 10-gig Sniffer software get towards the security applicant application of the packet capture. This adapter, to be named Myricom Arc series E Class [ph] delivers customers the critical functionality required for their demanding application in a cost effective package. The network adapter for the financial service market, primarily used in high frequency train are slightly behind the capture packet product in terms of development. But have really exciting potential. Early this month we showcased E Class DBL products at the Intelligence Training summit in London. And the potential customers are providing very positive feedback about its characteristics and value proposition. We expect these next generation products to record meaningful revenue beginning in the third fiscal quarter. Turning now to our technology solution division, quarterly revenues were up 80% year-over-year. Let's walk through our geographic businesses, starting with Germany. Our cost strategy continues to be increasing a higher margin revenues from managed services, we partnered with two establish and well-known European managed service provider, powering our QSC to accelerate our progress in the area. These new foreign partnerships have proven helpful in building our managed service pipeline. We’ve also changed our sales competition structure to focus on our managed service offerings. An attrition testing also continues to be very strong market for us in Germany and we’re seeking more engineers and penetration testes to support the growth. In the U.S. we had a good first quarter across the board, and similar to our Germany counter parts our manage service pipeline continues to grow. We’re particularly excited that we are closing managed service deals at a greater frequency and because of this the portion of sales with a recurring revenue string is growing. We have added additional engineers to focus on manage service to satisfy our current and future demand and continue to actively expand our team. In addition, we’re looking forward to capitalizing our new managed services marketing campaigns that we’ve recently put into place. During the quarter we also close deals for the installation and services around Microsoft Office 365. We are capitalizing on growing trends towards cloud base computing as large enterprises relaying us to move in Microsoft Office applications from their internal exchange service to the cloud. Turning to the UK, we are pleased with the state of the business and are seeing clear progress -- forward progress in sales growth because of the management and strategy change which we put into place. As we mentioned last quarter Frank Puetz is now overseeing the UK business in addition to Germany and he’s already making some significantly changes with tangible results. We focus -- we have refocused our sales team on security products where we see good opportunities and away from the generic data center business. We also have a new system in place and new sales compensation plans to enable a better focus on higher margin business. At the same time we have focus on cost cutting and better efficiencies to drive better profitability out of the business. With that overview of the two divisions, I’ll turn it over to Gary for the financial review.

[Gary Levine:]

Thanks Victor. Revenues increased 16% to 23.7 million and 20.4 million a year ago. Our total cost for sales for Q1 was 18.5 million up 12.2% in the prior year. Gross profit for the quarter was 5.2 million compared to 4 million a year ago. Gross margins increased to 21.9% from 19.4% in the prior year as a result of the mix of product and services in our businesses. First quarter engineering and development expenses decreased to 799,000 from 853,000 a year ago. Primarily as a result of planned turnover of engineering personal, as we hire talent that is in line with our strategic initiatives. As a percentage of sales Q1 engineering and development expenses were 3.4% compared to 4.2% last year. This is just slightly below our expected range of between 3.5% to 4% of sales. SG&A expenses were 4 million for the year -- for the quarter, or 17.1% of sales compared to 4 million or 19.7% of sales in the previous year. Based on our planned investment we expect SG&A expenses to be in the range of 17.8% to 18.2% for fiscal 2016. The effective tax rate for the quarter was 23% compared with 54% in the prior year to expect our overall tax rate going forward to be approximately 39%. We reported net income of 283,000 or $0.07 per diluted share compared to a net loss of 430,000 or $0.12 per share a year ago. Cash in short-term investments decreased to 10.5 million from 11.2 million at year-end as result of the pay downs of accounts payable and accrued expenses of approximately $700,000 and partially offset by cash from other operations. Lastly, our Board of Directors voted to pay a quarterly dividend of $0.11 per share to shareholders of record on February 26, 2016, payable on March 11, 2016. We're aiming to improve our bottom-line performance by focusing our growth initiative, increasing the level of high margin products and aligning cost containment across our organization. I'll now turn the call back over to Victor.

[Victor Dellovo:]

Before we go to questions, let me sum up. In the high performance products division we're making progress with our next generation Myricom product line and expect to see meaningful revenue meaningful revenue from the new network adaptors begin in Q3, we anticipate royalty revenue from four more E-2D planes during latter half of the year in our technology solutions divisions we've planned to increase revenue on a global basis from our managed service offering which we expect to be an excellent driver of growth in recurring sales for the long-term. While we still have much more work to do the most significant changes to experience from the business are in place and we're now focused on the solid execution of our strategy. We have created many opportunities for CSPI and we are looking forward to capitalize on our potential in fiscal 2016 and beyond. Now, we will take your questions.

[Operator:]

[Operator Instructions] And we can take our first question from Sam Kidston with North & Webster. Please go ahead.

[Sam Kidston:]

Just a couple of quick questions on the results here. First of all I know it appears that T&D expense engineering and development was up about 250,000 from last quarter and what's going on there?

[Gary Levine:]

We're ramping up, Sam. I think as we've said that we've been hiring so basically we were down with our expenses in the last quarter and brought in some new personnel to work on our new products. So there has been a shift in personnel, so people have been leaving in the other areas with brought in new people as well as some consultants to help with the transition to the new product line.

[Sam Kidston:]

Got you, so headcount in that area was down last quarter because you were essentially turning over engineering well?

[Gary Levine:]

Correct.

[Sam Kidston:]

Okay great. And then on the E-2D, in the press release you guys said that you received royalty revenue for 1.5 E-2Ds and you have 3.5 what's going in there?

[Gary Levine:]

It's just the way that our integrator takes the product, so we don't really have any to say, they necessarily don't take a full plain all at ones sometime, they may that partial shipments as they ship them off to the integrator. So that's we just get notifications, Sam. So that’s based on that as well as there was I think a small amount of parts that purchased in the first quarter.

[Sam Kidston:]

Okay it's not 1.5 royalty payment, this is?

[Gary Levine:]

Well, it’s the [multiple speakers], it was just the small amount I think of parts.

[Sam Kidston:]

But you took one royalty payments?

[Gary Levine:]

Right.

[Sam Kidston:]

So you still have four more royalty payments?

[Gary Levine:]

Well, see problem is as I said, they do take partial. So [indiscernible] and probably we going to get about 3.5.

[Sam Kidston:]

Royalty payments.

[Gary Levine:]

Correct.

[Sam Kidston:]

Okay, have you guys recognized the half royalty payment before?

[Gary Levine:]

We recognize -- what we do is we base them on board, so as they ship boards that’s how we receive the royalty and they don’t necessarily take a whole point. It’s what we get notification from the integrator as to what was built and then we receive a payment on that and invoice them appropriately. So it's not necessarily a full complement of boards each time, it may be a portion.

[Victor Dellovo:]

They just send us the requisition to bill us for X number of boards.

[Sam Kidston:]

Okay perfect and then just finally on the dividend, I would guess that you guys are getting close to the point where you’re going to need to repatriate cash from aboard that continues to support the dividend given at your paying out more than you earn consistently. When do you expect that to happen?

[Gary Levine:]

Well, I think, we going to have positive cash flow for the year. And we would had some discussions but currently there is no plans going forward considering this dividend that is been funded by the U.S.

[Sam Kidston:]

So you have more than $2 million of cash on hand in the U.S.?

[Gary Levine:]

Yes.

[Sam Kidston:]

Okay great, thanks guys.

[Gary Levine:]

Thank you.

[Operator:]

[Operator Instruction] we will go next to Joseph Nerges from Segrum Investments.

[Joseph Nerges:]

I think you did add for [multiple speaker]. You did add for -- I was wondering about the half year plan, but I don’t recall ever in the past utilizing a partial payment in your reports. But maybe I just have -- I missing out on the past experience on that.

[Gary Levine:]

Joe. It's just a matter of the way that they procure and this was the way it came down, so probably in the past within cut offs, within quarters, we probably had whole planes or approximately whole plane.

[Joseph Nerges:]

Okay.

[Gary Levine:]

But it's really based on the number of boards that are delivered.

[Joseph Nerges:]

Yes, you just mentioned and I just said don’t recall in the past ever having a half a plane or quarter of a plane or whatever the case maybe. On the upgrade, I am talking about Myricom upgrades, your copy in the press release you specifically talking about in the third quarter -- our fiscal third quarter, beginning in April the will return to the quarter beginning in April, the fiscal third quarter, that you’re expecting great revenues from the financial markets.

[Gary Levine:]

That’s our planning.

[Joseph Nerges:]

Okay, and in last conference call I guess we discuss the one of the hang ups possible -- was the fact that he Linux operating system wasn’t fully rolled out yet and I am assuming that that’s been the case now. That we’re going to have a Linux version that’s been tested in the financial market place.

[Gary Levine:]

Yes so both have windows base and Linux. As we mentioned last year.

[Joseph Nerges:]

Okay and the Linux -- in the past we didn’t have Linux.

[Gary Levine:]

That’s correct.

[Joseph Nerges:]

That’s part of the upgrade on the adapter.

[Gary Levine:]

That’s correct.

[Joseph Nerges:]

And also you mentioned about this is security and I assume that in the packet capture area. You are looking for possibly revenues there late in the fiscal year or?

[Gary Levine:]

That’s correct.

[Joseph Nerges:]

Okay.

[Gary Levine:]

Right now as we mentioned on there, it's all in beta. So that would try to give you some information of what our strategy is and as long as all the testing coming back in a timely fashion we -- those are some estimates of when we or hope to see some revenue from these new products.

[Joseph Nerges:]

So the beta testing right now is being done in financial as well as packet capture, and do we have any beta testing being done in the third market area which is a video or not at this point of time?

[Gary Levine:]

Not at this point.

[Joseph Nerges:]

Okay so basically you are testing in both financial and packet capture with the beta test?

[Gary Levine:]

That’s correct.

[Joseph Nerges:]

Okay very good. And on the managed services end, your -- just a little clarification on the in Germany you are talking about you are partnering with QFB [ph] you said were the Clarionate were the two mains that were mentioned, what are they? Are they just another sales or?

[Gary Levine:]

[Multiple Speakers] -- the co-locations where -- they’re basically just providing gear power -- for customers and we’re looking to take over the MSP side of it and manage some of the security needs for the different customers that they currently have out.

[Joseph Nerges:]

Okay so those customers working with their customers in an MSP arrangement?

[Gary Levine:]

That’s correct. It's early stages, but I wanted to mentioned kind of where we are looking for to some new partnering there and to look at their customer base which is pretty big in the thousands of customers and looking to offer our MSP [indiscernible] security management for them and see if we could add value to not only what we are doing but also Clarionate is offering.

[Joseph Nerges:]

That’s a pretty large base customer there. So the possibility should be quite good if we can sell the idea.

[Gary Levine:]

That’s correct.

[Joseph Nerges:]

And are they going to be -- are they being paid a royalty or a commission based on signing their customers? Or just from their standpoint security that providing a service they had provided in the past.

[Gary Levine:]

Exactly, it's -- there is no commission base on it, it's just a service to give extra value what they potentially provide.

[Joseph Nerges:]

Okay begs the question of why would they even -- why do they want to deal with us? I mean what are you getting out of it, I guess, would be my question, what you think you get?

[Gary Levine:]

In Germany for years right, for over a decade we were known for one of the best security organizations around, we handle a lot of large organization security need and have done that successfully, so the reputation that we have in Germany has been second to none. So with our reputation and what we can offer, that’s the value that we are providing.

[Joseph Nerges:]

That’s sounds like an excellent. Sounds like we’re in a great position in Germany, an area that’s critically more important, more than ever. So that’s sounds extremely good. That’s all I have got, great, sounds like we have got a lot of potential going forward on quite a few front. Thanks again.

[Gary Levine:]

Thanks Joe.

[Operator:]

And we also have a follow up from Sam Kidston. Please go ahead.

[Sam Kidston:]

Just for my edification how many boards typically go onto one plane?

[Victor Dellovo:]

55, I think it is right?

[Gary Levine:]

Yes.

[Victor Dellovo:]

About [Multiple speakers] give or take.

[Sam Kidston:]

Okay great thank you.

[Operator:]

And it does appear we have no further questions at this time. I’ll return the call to management for any closing remarks.

[Victor Dellovo:]

Thank you for all joining us today, we look forward to speaking with you again on a next call.

[Operator:]

And ladies and gentlemen, this does conclude today's program. Thanks for your participation. You may now disconnect and have a great day.