CSP Inc. (NASDAQ:CSPI) Q4 2023 Earnings Call Transcript

CSP Inc. (NASDAQ:CSPI) Q4 2023 Earnings Call Transcript December 12, 2023

Operator: Greetings, and welcome to CSPI’s Fourth Quarter and Fiscal Year 2023 Conference Call. At this time, all participants are in a listen-only mode, and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. Please note, this conference is being recorded. I will now turn the conference over to your host, Michael Polyviou, IR at EVC Group. Sir, the floor is yours.

Michael Polyviou: Thank you, Alex. Hello, everyone, and thank you for joining us to review CSPi’s Fiscal 2023 Full Year Results, which ended September 30, 2023. The — 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 your 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, estimates and continue as well as similar expressions are intended to identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results. The Company cautions you that these statements reflect current expectations about the Company’s future performance or events and are subject to several uncertainties, risks and other influences, many of which are beyond the Company’s control, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may affect the Company’s results include, but are not limited to the risks and uncertainties discussed in the Risk Factors section of the annual report on Form 10-K and the quarterly report on Form 10-Q filed with the Securities and Exchange Commission. Further the statements are based on the information available at the time those statements are made and management’s good faith belief as of the time with respect to future event.

All forward-looking statements are qualified in their entirety by this cautionary stated, as CSPI undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, after the date thereof. With that, I’ll turn it over to Victor Dellovo, Chief Executive Officer. Vic, please go ahead.

Victor Dellovo: Thanks, Michael, and good morning, everyone. Earlier this morning, we announced our fiscal 2023 full year results, and I’m pleased to report we achieved revenue growth of 19% compared to fiscal 2022. I believe our strong performance is due to several factors, including the sustained contribution of the Technology Solutions business, our ability to successfully convert a sizable portion of our backlog to revenue and our proactive decision to leverage our strong balance sheet to finance large customer orders. Furthermore, we reported gross margin percentage of 34% and grew EPS well over 100% from prior year, all significant accomplishments that raises our confidence level that we can continue executing our strategy of transitioning the business to higher-margin products and services.

Moreover, we are continuing to experience positive momentum to kick off the 2024 as we already achieved significant achievements in the technology solution and high-performance product businesses. First, let me address the backlog issue, and then I will provide an overview of the TS business and then spend a few minutes highlighting some of our recent and exciting developments within the HPP business. As many of you already know, we entered fiscal 2023 with a level of uncertainty due to well-documented supply chain issues that impacted global economies. Specific to CSPi, the inability to receive key components from suppliers kept us from shipping orders to our new customers, raising our backlog to near record levels in dampening our revenue opportunities.

However, as the supply chain issue began to ease up during the year, we started receiving some of these key components that we’re able to ship finished goods and reduce the backlog to a more normalized pre-pandemic level of approximately $7.6 million. I applaud the team’s ability to remain engaged with the customers throughout this period. I believe our clients’ loyalty demonstrates the value we bring to them because they recognize that the products and solutions are the most effective, cost-efficient answers to their critical needs. Our performance throughout the fiscal 2023 was driven by continued performance of our Technology Solution or TS business, which grew compared to fiscal 2022. The success continues to be driven via customers increased use of implementation, installation and training capabilities.

Regarding the UCaaS, it turned a corner in the second half of fiscal 2023, and it is now a profitable business. We believe we’ll continue to see positive developments within the UCaaS as we move forward through fiscal 2024. Now turning to our high-performance products and HPP business, we recorded total revenue of $6.9 million for the fiscal year compared to $3.8 million in fiscal 2022. The results were within our expectations. However, the level of optimism within the business is high and increasingly growing following the recent launch of AZT PROTECT. AZT’s advancement allows us to offer our customers a giant leap forward in the evolution of cybersecurity solutions. AZT’s performance surpasses what’s available on the market today, and it’s a new generation of endpoint application cybersecurity protection designed for both critical operational technology and IT environments.

The unique panning solution protects a line of organizations endpoints from a full spectrum of cyber attacks and intrusion techniques, including most advanced zero-day attacks, malware, ransomware, supply chain vulnerability, even those threats that are completely unknown to security teams. By deploying artificial intelligence capabilities, AZT, halts attacks before damage occurs, ensuring seamless operations without disruption or downtime. It lowers the risk code base of security vulnerabilities exploits on endpoint devices applications to near zero without the need of constant patching updates. Developed internally, we knew AZT was going to be a game changer for the HPP business. So the team has significantly targeted several high-profile conferences and seminars to raise awareness of AZT, including the 18th Annual API Cybersecurity Conference, which was held in Houston earlier this month for oil and natural gas industry.

The Rockwell Automation Conference, which was also held last month in Boston was the world’s premier industrial automation and digital transformation event. The ICS Cybersecurity Conference, which was held in Atlanta in October is the largest, longest running event series focused on industrial cybersecurity. Since 2000, the conference has gathered ICS cybersecurity stakeholders across various industries and attracts operational and control engineers, IT, government vendors and academics. And then finally, the ManuSec U.S. Summit, which was held in October in Chicago. ManuSec is the premier conference for cybersecurity and manufacturing, addressing sectors drive towards digital and automation and how imperative it is to balance it with security.

We know this is a crowded field, so a visible on-site present at these and other events was critical and allowed the team to engage and communicate with key influencers and prospective clients, including Fortune 500 companies. The impression feedback is quite positive. And the comment we often hear from them is we see the need for something like AZT. Subsequent to the end of fiscal 2023, we received orders from a Fortune 500 chemical manufacturing to protect its critical production application from all forms of attack, enabling production lines to continue running without disruption. We also received an order from a Western Intelligence Agency to protect its critical intelligence gathering and analysis operations from cybersecurity attacks.

This new contract builds on ARIA cybersecurity, proven track record, improve security solutions for military and intelligent agencies around the world. Additionally, we launched our AZT PROTECT solution in Australia via partnership with Logi-Tech a leading local managed security service provider. By adding AZT PROTECT to its portfolio, Logi-Tech can offer a groundbreaking service protecting critical applications and operational technology and IT environments such as manufacturing, mining and government. To summarize, we gathered strong growth in our fiscal 2023 and position the Company for even greater success in coming years. Although the TS business has been the growth driver over the past few years, the emergence of AZT offers — offering has changed the dynamics and gives us two businesses that can grow side-by-side and provide consistent growth with significant upside potential.

With that, I will now ask Gary to provide a brief overview of the fiscal year’s financial performance.

Gary Levine: Thank you, Victor. For the fourth quarter ended September 30, we reported revenue of $15.3 million compared to $16.7 million in the year ago fiscal fourth quarter. We reported a significant revenue increase of 66% in last year’s Q4 as we began to work down the record backlog, so the comparability represented a high bar. For Q4, gross profit was $5.2 million or 33.8%, respectively. We also lowered compared to the year ago period. However, whereas the supply chain was responsible for some of the choppiness, we achieved significant annual growth in fiscal 2023 compared to fiscal 2022 as we reported revenue of $6.4 million, a 19% increase compared to $54.4 million in the fiscal year ago. As Victor mentioned, this performance is due to the continued success of converting some of the older backlog, allowing us to deliver product to our customers.

We reported gross profit of $21.9 million or 34% of sales compared to $18.8 million or 35% of sales in fiscal 2022. The slight decrease in gross margin compared to the year ago period was anticipated and due to the business mix and the lower margin products that had been in backlog. We continue to believe our annual gross margin will expand as the business transitions to a higher-margin product and services. For the fourth quarter, our engineering and development expense was $700,000, down $150,000 from the year ago fiscal quarter with a reduction in outside contractors in not filling some open positions. Our SG&A costs for the fourth quarter was $4.8 million, similar to last year. For the full fiscal year, our engineering and development expense for the fiscal year was $3.1 million, relatively flat with comparison to the year ago period.

Our SG&A expenses in fiscal ’23 were $16.9 million compared to $15.8 million in fiscal 2022 due to increased variable compensation for bonuses, sales commissions for sales — higher sales as well as payroll and initial costs associated with unveiling and launching of the AZT which includes conferences, participation and hiring several salespeople. We reported net income of $5.2 million or $1.09 per diluted share for the fiscal year September 30, 2023, and compared to net income of $1.9 million or $0.42 per diluted share for the fiscal year ended September 30, 2022. During the last quarter of the fiscal year 2023, the Company received an employment retention credit, ERC, of $2.1 million net of expenses. The ERC was not available in fiscal 2022.

We had a tax benefit of $0.5 million due to the release of the valuation allowance against our company’s deferred tax assets. Included in the net income is stock compensation, a non-cash expense of $1.1 million. The Company had cash and cash equivalents of $25.2 million as of September 30, 2023, compared to cash and cash equivalents of $24 million as of September 30, 2022. The cash and cash equivalents are considerably higher compared to cash and cash equivalents of $13.8 million for the quarter ended June 30, 2023, as significant cash flows were generated through the payment of receivables, including payment from financing sales provided to customers prior to fiscal year 2023. We believe this robust financial position allowed us to successfully implement this approach.

It yielded positive results, and we will entertain certain options if it meets our strictest criteria. I also want to highlight that the Board of Directors approved a quarterly dividend of $0.04 per share payable on January 9, 2024, to shareholders of record on the close of business of December 22, 2023. With that, I will turn it over to the operator to take your questions.

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Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Joseph Nerges with Segren Investments. Your line is live.

Joseph Nerges: See you must have shook up the market today because the market — the stock is down like 3 points. So, it’s in your press release. Let me explain what I think is going on. With a big drop in the backlog, people think that, obviously, sales aren’t there going forward. That’s the concern. Yet in your press release, you issued you said that you thought there was Technology Solutions, which, of course, is the bulk of our sales right now is expecting a major contribution this year in ’24. You’re looking for good business with new customers and expanded existing customers. Is that what you’re trying to convey that you’re expecting — expanding technical service — Technology Solutions business segment?

Victor Dellovo: Yes, that’s correct, Joe. We budgeted for a significant growth in 2024.

Joseph Nerges: So in effect, the drop in the backlog from last year to this year is not really going to cause a problem when you were expecting for ’24 growth, at least in that segment of the — in that division going forward?

Victor Dellovo: That’s correct.

Joseph Nerges: The backlog in effect — granted, it’s down — what was it 20 — I forget what it was last year, it was $20 million or something like that, that we had because of the — we couldn’t get the — a lot of the orders through the supply channel. That’s number one. So, we’re really not concerned. The backlog may be low, but businesses

Victor Dellovo: It’s back to pre-pandemic levels. Basically, we were just trying to talk about where the backlog was, where it is because now it’s not a factor any longer moving forward. It’s pretty much business as usual for 95% of the products that we sell, and we’re probably not going to be discussing it any further moving forward.

Joseph Nerges: And a point I guess I’m asking you, even though it’s back to pre-pandemic levels, it has no effect on what we think is going to be business ’24. We think it’s sufficient to grow the business in that — at least in the TS division.

Victor Dellovo: Correct.

Joseph Nerges: Second point on the of course the AZT product, that’s dynamic product, and I don’t think people realize how much that can contribute to the future of this company. You said you added salespeople and they’re responsible for bringing in new business? Are we talking about new business beyond the two press releases were issued one on the chemical company, one on the Western Intelligent Agency business? Do we have questions beyond that?

Victor Dellovo: They’re growing the pipeline right now, Joe.

Joseph Nerges: Okay. So we have a lot. And when we’re talking about the pipeline, are we talking about customers that are testing the product at their facilities? I assume

Victor Dellovo: Some of them are doing POCs already. They’re large Fortune 500 companies. They are the largest companies out there, so the sales cycle might be a little longer, but they’re quite engaged right from the beginning. A lot of them met him at the show. We talked to them and within a week or two, they wanted to discuss the product further and some of them are already looking to set up a POC either testing. Yes, yes, proof of concept. But with the holidays, some of it’s getting pushed a little bit to the first quarter just because of Thanksgiving and Christmas, but they’re quite engaged, right from day one when we met him at the shows.

Joseph Nerges: Okay. Great. Well, that’s understandable. Just the time of year we’re at right now. Talking about the existing now, in the two press releases you issued, you never talked about the size of the contract. And I assume that most of these people are going to be paying on a monthly basis. That’s the type of over a period of a number of years, do they contract it out. Is that correct? We’re talking about not upfront payment for the software, mostly on a monthly basis?

Victor Dellovo: No, there — the first units that we put in there were just to buy it outright. And then as we expand, these companies are so large, Joe, that 170 locations and it was whether we boil the ocean and try to take all 170 down, and that would take about a year to two years, they said, to get that processed? Or do we start seeding it in one or two of their locations and expand from there? Like one of the government agencies were already talking to seven different locations. Some of them have had some money left over and they wanted to cut POs right away. So right now, it’s about customer engagement, getting them to test it, buy it and evangelize when we need references moving forward?

Joseph Nerges: So in both cases, they’re rolling out the software in segments, let’s put it that way. You said in one case, you talked about 170 plants well.

Victor Dellovo: Unfortunately, we have to talk to all 170 plants because they all have separate budgets. So, we’re going to knock one down at a time. But to get our product inside their environment, saying it’s running, it’s working, was one of the most important factors and we did it quickly, right, with less than 60 days from beginning to end.

Joseph Nerges: I guess going back in from an idea from a charge standpoint, I’m assuming we build on the basis of how many items are being — how many devices are being protected or in the case of what you call endpoints, the more endpoints we protect the higher the bill?

Victor Dellovo: Correct .

Joseph Nerges: Okay. So, as we roll it out little by little supposedly the bill of increasing little by little, let’s put it that way, as they expanding within their divisions.