Q2 2020 Earnings Call
Good day, everyone and welcome to the B C. S. P. I'd say school 2022nd quarter Conference call.
At this time, all participants are in listen only mode.
They do you have the opportunity to ask question during the question answer session.
You may registered asking question that anytime by pressing star one on your Touchtone phone.
You made the call yourself really Q by parsing out Mickey.
Please note this call is being recorded.
We'll be standing by you shouldn't read any interesting.
And it's now my pleasure to turn the conference over to Mr., Michael Polyviou E. B C group Besides there.
Thank you Tony Hello, everyone and thank you for joining US true you see S.P. <unk> fiscal second quarter ended March 31, 2020 financial and operating results with me on the call todays Victor Dellovo, C.S.P. <unk>, Chief Executive officer, and carried into buying C.S.P. <unk> Chief financial officer for weight.
Again like to remind you that during today's call will take advantage of the safe Harbor provisions are the private Securities Litigation Reform Act 90 95.
Respect to statements that may be deemed to be forward looking.
The company cautions that numerous factors could cause actual results to differ materially.
Statements made by the comedy such risks include general economic conditions market factors competitive factors pricing pressures and others, describing the company's filings.
Securities and Exchange Commission.
Please refer to this actually not broken statements included the company's filings with the FCC.
After Victor and Gary.
<unk> opening remarks, well open the call for questions with that I'll turn the corner Victor Dellovo Chief Executive Officer that please go ahead.
Thanks, Michael Good morning, everyone. We appreciate your interest in support of CSPI.
Before we begin I want to acknowledge the impact of the krona virus pandemic and express our hostile concerned to those who I've been affected.
The safety of our employees customers partners is that for most concerned we continue to take every precaution to ensure that well being during this difficult time.
To minimize the business disruption, we quickly adjusted our operations to comply with local federal requirements and currently over 90% of the team is working remotely.
Importantly, we have been able to build our contact with customers as well as potential customers via remote methods.
Despite the operating restrictions brought on by regulations and guidelines to the car.
Contain corona 19, we made solid progress during the quarter doubled our sales in our service segment increased gross margins.
Total revenue for the fiscal second quarter was 16.1 million compared to 16.4 million.
However, notwithstanding Kobe 19, I'm quite certain the Q2 revenue would have surpassed a year ago level. It business were committed to operate normally.
Nevertheless, I focused on high margin products, a lot us to report improved gross margins, despite the lower year over year revenue.
Despite the current business disruptions I also want to reaffirmed the progress we are continuing to experience a growing interesting area unified communications as service business as we continue to transition to a cyber security wireless managed service company.
We are currently conducting an average of five new product demonstrations, a week and I can say without hesitation that interested I knew product lines in services at the highest level.
More importantly, we are engaging with all our prospects validates the strength of offerings and as of today, we have numerous proof of concepts to perform with customers. However, performing the proof of concepts required the ability for C.S.P. ice team to physically be on the cost of our promise. Therefore, the timing is too uncertain given the.
Local.
Stay regulations.
So while we hope the near term revenue impact is short lived and minimal how long term prospects are positive for CSPI as the remote working environment has exposed an increase threat to global digital infrastructure.
The mode. Many corporations are using today to conduct their business.
For the quarter technology solution or T. S revenue was 14.6 million.
We entered the corridor with plenty of momentum in the first two months of the carnival going like Gangbusters. However, the impact to covert 19 pandemic caused a slowdown in our cruise line business in some professional service engagements.
Although we finished my strong due to the receipt of a few large orders is too early to tell if Q3 will be affected our managed service practice or MSP is performing well and we increased number of customers in the quarter in Q3 is off to a good stock.
We have not lost a single costs, not which demonstrates the high customer satisfaction, which is something we are keenly focused on that CSPI.
To ensure we maintain our high customer satisfaction, we expanded our engineering team even in this economic climate as we view is vital to the overall performance and growth.
Separately the cruise ship industry is being severely impacted by the Kobe 19 pandemic, but many operators looking to resume cruising during the summer months. Therefore, the revenue opportunities, which we expected to incurred this quarter have now been pushed to later in the year when travel restrictions have been lifted and <unk>.
Team can gain access to the ships.
Our Microsoft practice had another stellar quarter and we continue to believe we will achieve.
A greater growth rate this year compared to a full year growth rate of 140% we achieved in 2019.
I believe this is a combination of actions we have taken to strengthen our office 365 business and increase the demand due to cope with 19.
For those that that are new to the story Ucas is an all in one service for hotter saw phones, including 24 by seven security and technical support with redundant data centers located in Florida, and Texas. This market segment is estimate to reach 79 billion in a few years and based on the continue interest. So we are experienced.
It is quite evident that is no longer a matter it if or when do we will get off the share of the revenue.
Now I will move onto a high performance product or H.P.P. Division.
Revenue for the quarter was 1.5 million and reflects the expected decline in mirror com, which was partially offset by slightly higher than expected multicomputer royalties.
We continue to expect the legacy business to improve throughout the year, which includes an anticipated royalties before on each Judy military planes.
Turning to our Ari offering in the vision Our award winning next generation Cyber security platform gives us reason to be optimistic about the growth potential for H.P.P. business.
We we will recognize their cyber security Excellence award held in much the annual competition honors individuals and companies that demonstrate excellence innovation and leadership and information security.
CSPI ARIA Cyber security solution took home for awards in the following categories.
First was encryption, which recognizes our key management server proven ability to auto automatically generate and distributing Christian keys to manage all managed lifecycle.
Cycle requirements.
The second was network detection and response, but demonstrating that our it could successfully enable faster better and more comprehensive threat detection investigate response and immediate network right containment, all without impacting network or application performance.
<unk> GDR p. compliance ARIA showed that they can validate any type of intrusion, while it may be happening and immediately notified the appropriate teams. This helps any company improve compliance with GDR P. P C.
The Esas and other regulations and finally, the fourth was threat detection.
Intelligence and response, which recognizes the ARIA STS platform for its ability to orchestrate in protect any organizations environment I improving visibility into all network traffic.
He asked D.S. helps modern security teams fine threats that may normally be mess and using surgical precision stop them without disrupting valuable operations.
Along with validating our decision to put the time energy and resources in developing area. The recognition isn't by our peers will likely force prospective clients to slow down decisions. They are having with someone else and looking out directions, yeah, well prepared as we spent the better part of the past few months to build out the organization.
Additional infrastructure.
Despite the covert 19 pandemic, our staffing level is the same and the continuity within the team will benefit our customers.
Well, we remain well positioned within a leading cable company the development during the quarter positions us for even greater success in the future.
For example, introduced the new ARIA advanced detection and response 80, our application.
Which automatically get tax and stop Cyprus.
Cyber security attacks without requiring high train security staff.
Additionally, we integrated ARIA cyber security solutions with Juniper networks.
Juniper secure analytics platform provide providing deep network visibility as well as accelerate incident response needed to disrupt cyber security threats before extensive hom can be done.
With all we also integrated ARIA.
Cyber security solutions with sumo logic continuous intelligence platform to provide security teams with cloud Native real time security intelligence and insight you have to help stop that were born threats, including those involved with Aiotv Orient Internet of things devices without.
Interfering with the business operations. These and other integrations will increase our solutions impact as well as a market reach by leveraging access to these partners customer base and prospects.
In closing I want to reiterate that our business was executing on all fronts. Prior to the Kobe 19 pandemic wanted to thank CSP ice team for adjusting to the difficult period. They are doing a phenomenal job and their continued commitment. During this most difficult of times for the strength and CSPI.
With that I will now ask Eric to provide a brief overview on the fiscal second quarter financial performance Gary.
Thanks, Eric.
Nick mentioned in his opening remarks or fiscal second quarter revenue was $60.1 million compared to $16.4 million in a year ago quarter.
Our gross profit was $4.5 million approximately 20% compared to last years Q2 gross margin.
3.7 million.
Even on a slightly lower revenue base.
Our gross margin of 27.9% improves several hundred basis points compared to the year ago gross margin of 22.9% due to the favorable mix of higher margin business.
As expected our fiscal second quarter engineering and development expenses continue to trend lower at $716000 compared to 781000, a year ago due to a reduction in contract labor required last year to help in building out the foundation.
Of the ARIA software platform and a recovery of a consulting expense, where the services were not completed.
Our SGN expenses.
Q2, or 3.9 million, which is slightly which increased slightly compared to the 3.7 million in last year's fiscal Q2.
Due to bad debt reserve additional staff at T.S. and additional sales personnel for the ARIA, which we continue to launch in this fiscal year.
We had income before taxes is 437000 in Q2 compared to a loss of 761000 prior year.
We had a significant foreign exchange gain from our cash position in euros and U.S. dollars in the UK.
During the quarter, we had income tax expense of $1.2 million, primarily from recording a valuation allowance against our deferred tax asset.
We concluded that a portion of our deferred tax asset will not be realized considering recent financial results, the corona virus and Dennis and the results and economic follow.
The current quarter in year to date income tax expense.
Net of tax benefits anticipated from the carry back of current and prior year Federal net operating losses as allowed under the recent reacted Corona aid relief and economic Security Act known as cares act to recover federal taxes paid in prior.
For years.
The prior year.
Quarter had a tax benefit.
Hundreds of $142000.
In the second quarter.
With cash and.
In short term investments of $15.2 million, which includes nine point.
9.9 million in the UK, where we have a pension liability of $5.3 million.
As we face the challenges posed by the Covance 19, we are focusing on liquidity cost containment prudent cash management. So we have suspended our share repurchase program in cash dividend.
Sure financial resources.
Working capital purposes.
We also applied for and the C two loans.
Totaling less than $2.2 million from the Paycheck protection program included in the care Zack the P. P. P was asked was established to help small business suit with under 500 employees.
Yes, the I has approximately 116 employees.
No time did we lay on furlough any employees because they are vital to our future success.
During the current situation it was unlikely that we could access to public equity markets to raise cash to help make up for the experiences during the first quarter of 2020.
And likely to continue into the second quarter of 2020.
In summary, we remain focused on driving our bottom line performance and boosting sales of our high margin products with that I'll turn it over to the operated and take your questions.
Great. Thank you if he would like to ask your question you may do sell by pressing the star and one on your Touchtone telephone and if at any time, you wish to be removed from the Q simply press the pound E again that star in one to ask your question and we'll pause one moment tool.
Those questions to Q.
And we can take our first question from Joseph I guess with.
Great investments. Please go ahead your line is open.
Morning, guys how are you today.
Morning, Joe Israel.
We got a little bit they hit here with this dividend caught on your stock, but let me get some clarification here you did you say, what's the employee count that you just mentioned Gary.
Right now hundred 1600 16.
Right.
Yes, it is that could that that's.
Pretty much what we had last quarter last year I, probably a little.
No it's consistent within what we've had over the last year I mean, we had much higher when we had Germany.
Okay Alright.
Obviously, you have to Germany now on the on the capturing back of.
Uh huh income taxes snack <unk>.
It appears that are we gonna be able to capture some of that in this third quarter or am I missing.
I'm trying to get the L. here, it's already been I mean, we've done.
A preliminary calculation on any so you know in the numbers that.
We reported so that benefit is offsetting what their write off of the deferred tax.
Okay. So that that was reported in this this quarter can get reported now.
Right. Yeah, you had to show all the effect of the they care Act within this quarter.
Okay.
On the I'm still chronic causes it to me and $180000 or one or second quarter, we're getting from the care Act. That's approximately that's what the numbers right 108, I guess I'm.
Well some of the employee.
Salaries being corrected on that.
These are <unk> subtract that from the Hum along let's put it that way in and warrant wonderfully incorporated in this current quarter or am I wrong there too.
Or is that already been replay will be the effect of that well what happens is that the ended the period. They they have 60 days to review it and get back you. Okay. That's gonna be.
You're not going to be you get forgiveness of that okay. So that so that you're saying that 60 days who will be after.
After I can we carried out here that middle or.
It was hardly a b, we probably won't get an accounting until the fourth quarter fourth quarter alright. So any any end result, but won't be affected our year end reporting that's what it that way.
Most likely right.
All right now.
Lets get back to some other quick quick questions. Here did you say that the table that Victor said that the table.
Customer is still the data for that is still pending.
Right, Okay cable customer.
Hi has that that it's just been <unk>. It's just been pushed out just due to you know Dick.
They concentrating on keeping their internal customer service going and they had everything's kind of on whole temporarily I'm, hoping you know things pick back up in June.
Oh with them, Okay, well I from the out from what I understand a their R&D group out of Denver is rolling out there working out that pendry rollout so I'm assuming.
If I'm correct a lot lot of that's maybe revolve blog.
Shifting their wireless up.
Product line down the road.
I am I correct in that or am I [laughter].
Yeah fishing, okay on that one yeah, well when doing with them I. It's a you know, it's an internal project, which.
<unk> it stays internal but everything that we're working with them as is just been just tabled for a month or two but nothing has you know stopped you know that the interest is still there yet, but you indicated in the last conference call.
That that the other cable companies.
You know some of what you're doing.
Let's say customer aim is applicable to other customers within this group.
And that has some interest or at least you were talking to somebody other we're still talking to all of them. Okay.
On your on on the most recent.
Area beauty our application.
It is quite up.
That's quite a dynamic product if it works as advertised.
And as I understand listening to the Webinars.
A lot of cases, it can automatically correct or the problem is that may be involved with happening.
That's going to this is what out what out even and any intervention rubber from their security.
Oh right when you when you yeah with the with the weights ARIA set up it would you say you policies and you could literally be sleeping at night and it would make all those you know changes automatically and then you can review in the next day, if you don't have a full.
24 by seven Soc monitoring it you know you could come in the next day in see all the changes and.
Easily on doing them. If there was anything that you don't you want they set back to normal after inspection.
But yeah, that's the magic sauce that you know I think separates us is that AI built and that can do this you know seamlessly while not monitoring a 24 by seven so that's where the interesting you know when we show them. What it can do people are very very interested in it and Ah, yes things are going really well gain.
Changing stuff right now, but I wouldn't you can refer to in August likes as long as I'm not going to prolongs, but when you look further five new product demos per week are you referring to some of the this area. Some of it connected with that you gas. There are a combination of no data that was just common that was.
Just a 80 are what I was talking about it has nothing to do with the additional ucas demos and everything else that we're doing that strictly 80 are okay. That's that's great, but we are saying as a you would need to get access to their facility for proof concept is it or in other words, you're right you.
We the people on site really helping them get integrated.
Correct, we need to put the ARIA product in line. It if they want you know if you don't put it in line ARIA inside their network. It can't do the automatic you know you know fixing in adjustments and and blocking Ah. So it could also just monitor and then they could feed that information to someone and they can make the you know.
Manual changes, but if you want a full line plc, which they do because they you know of course, they want to see it working we need to get our product in mining set it up for them. So we're scheduling things right now for you know for June if we can get in and then you know if I asked the move out then we'll move it out.
Right now we are scheduling the PEO Ses for for June.
Okay and ER.
And I'm, assuming the time it takes to incorporate that would be based on the size of the customer.
That's correct the larger more complex would be more more.
Work like what that from our standpoint.
Well I appreciate I mean, we seem to have the right products. Unfortunately, the pandemic is.
Oh, holding us back in many areas.
That's correct.
Thanks, Joe Thank you.
Thank you and as a reminder, if you'd like to ask your questions simply press star and one on your Touchton telephone well pause momentarily to allow for their questions to Q.
Yes.
And it appears we have no further questions at this time I'll turn the conference back over to Mr. to logo for any closing comments.
As always I want to thank our shareholders for the continue interest and support despite the koby 19 pandemic <unk> core business remains strong and you can't carry offering offerings point to a bright future Gary and I look forward to sharing our progress with you on fiscal Q3 conference call in August. Thank you.
Thank you.
Thank you. This does conclude today's conference you may disconnect in half a great day.
Yeah.
[noise] [noise].
[music].