Q4 2020 CSP Inc Earnings Call
Good day, everyone and welcome to the CSP incorporated fiscal 2024th quarter Conference call. At this time all participants are in the 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 of turn the conference over to Mr. of.
Michael poll of you please.
Please go ahead Sir.
Thank you Leo.
Hello, everyone and thank you for joining US true you see us piece.
<unk> fiscal fourth quarter and full year ended September 32020 with me on the call today is Victor Dellovo CSP ice Chief Executive Officer, and get rid of line CSP ice Chief Financial Officer after.
After victory when Gary conclude the her opening remarks, we'll then open the call for questions.
Statements made by <unk> management on today's call regarding the company's business that are not historical facts, maybe forward looking statements as the term is identified in federal Securities Laws. The award May will expect believe anticipate project plan intend estimate and continue as well the similar trends are intended to identify.
The forward looking statements.
Were looking statements should not be read as the 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 a number of uncertainties risks and other influences many of which are beyond the company's control than the influence the accuracy of the sales in the projections upon which the.
Segment income statements are based.
Factors that may affect the Companys results include but are not limited to the risks and uncertainties discussed in the risk factor section of the annual report on form 10-K, and the quarterly report on form 10-Q filed with the Securities and Exchange Commission.
Forward looking statements are based on the information available at the time those statements are made and management's good faith belief as at the time with respect to the future of event Oh total look statements are qualified in their entirety by this cautionary statement and she is P. I <unk> undertakes no obligation to publicly revise or update any forward looking statement whether.
As a result of new information.
Future events or otherwise after the day, they're up with that I'll turn the call over the Victor Love The Chief Executive Officer Dr. Please go ahead.
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 cold the 19 on your operations and our customers operations since much of we have remained focused on executing.
Our key objectives to ensure our CSP I is positioned for long term success.
I would like to devote most of my prepared remarks.
True reviewing our progress on reaching these objectives and the adjustments we have made in our new fiscal year.
[noise] one objective since the pandemic hit and begun the impacting our ability to aggressively pursue our marketing plans has been to maintain a full work force. We have used government programs to help achieve this objective as we consider it a central element to CSP ice maximizing its long term marketing opportunities.
We have adjusted our operations and continue to do so as the situations merit to ensure our employees are working in a safe environment.
But those working remotely we of giving them the tools to continue to operate at 100% efficiency.
The broader objective of transforming CSP ice to cyber security wireless and managed service company is progressing and yielding encouraging results as we continue to expand our managed service customers and the launch of our Ucas in our offerings, we are delivering on gross margin improvements.
Total revenue for the fiscal fourth quarter was 16.1 million and for the full year, we reported 62.3 million. These.
These are not the levels that we had expected when we entered the fiscal 2020 as the year over year declines in both periods continued to impact Breakover 19, the pandemic.
Further the focus on higher margin products and services allowed us to report robust gross margin improvements of a percentage of 5% in Q4 of full year, respectively. In fact this is the fourth quarter, we have reported year over year gross margin improvement demonstrating our effect.
Activeness despite the lower revenue figures further I want to emphasize as we continue to transition.
This process to cyber security wireless and managed service markets companies and continue to work for even greater gross margins and 2021.
The pandemic continues to expose the weakness and limitations of the network infrastructures as the remote workers ever I missed the leading to increase instances of the REIT and ransomware in fact, the according to some published reports spear phishing attacks reached a net seven fold increase since the pandemic began.
I believe the new and positive.
Perspective cars, we are having with customer demonstrates the seriousness of this issue is creating opportunities for CSPI.
We are hopeful that accompany the setting aside budgets and 2021 to resolve it.
Well COVID-19 may have brought some of the security issues to the forefront the underlying weakness in vulnerabilities worry there as why we elected to devote resources and entering this market segment.
As we have highly experienced team in less than two years, we were able to develop our offering internally I believe the numerous industry awards and accolades validate the strength of breast up our offering in support of our view that ARIA and unified communication to the service our positive.
Position to address todays critical network issues.
For the quarter, our technology solutions or Ts revenue was 12.5 million for the full year was 55.9 million received orders from larger customers and we would expect the pace to pick up once COVID-19 related impacts lessen so small and medium size customers out of the budget. The proceed with new purchases.
As you know this is a transactional business and we still need to be out in front of our customers.
And the service practice continues to expand as we sign new cloud based customers and you cash customers, including in the educational area, which is seeking to enhance the systems are in this current climate.
By continuing to address our customers needs, especially during these challenging times, we are demonstrating our value to them daily bottom line. The professionalism commitment and dedication of our team is why we continue to grow our customer base.
Separately the cruise ship in the share.
Remains one of the Industrys greatly impacted by the pandemic and when we spoke last August the crews I International Association had announced that its ocean going cruise line members had voluntary extended the suspension of the cruise line operations from the U.S. Sports told mid September 2020, however, given the severity of the impact in the.
Not surprisingly they pushed it back to March 2021, further Europe is experiencing a sharp price in cases, and new measures of being imposed by several European countries. The rent the us the already limited restart of the crews in the Mediterranean other regions.
Although the travel restrictions have hampered our ability to gain access to the ships. Our teams have had regular schedule communication with the operators.
Reassigned the team members to work on the other projects that require assistance.
With the goal to keep them engaged and ready to proceed at the moments notice. This preparedness on our part has proved to be pivotal during the fourth quarter as we gain access the two ships at dry dock to perform upgrades.
The procedures in the safety protocols of a rigorous it it was worth it to ensure the well being of our personnel.
Yes, it's a small step but also the positive signal because we're moving in the right direction and there is light at the end of the tunnel remember the cruise line operators have already purchased the equipment. So the ships that are giving us a backlog that will need to be dealt with.
Turning to our Microsoft practice, it continues to perform well and we are receiving tremendous amounts of interest. So I believe the momentum will continue.
It to generate strong results in 2021 during the quarter, we continued to gain positive traction with our ucas offerings, we added new customers and we are in the price of expanding sites with the current customers as a reminder of the ucas market the expected grow from 15.8 billion.
In 2019 to 24.8 billion by 2024, despite our efforts being limited because of the pandemic, we're continuing to increase the number of idle.
Product demonstrations on a weekly basis in fact, the new business pipeline is higher today than compared to the fiscal third quarter.
Moving onto our high performance product or HBP division revenue for the quarter was 1.7 million below our internal projections as rose the revenue related to the to the program was pushed out. However, we do expect to recognize in the first half of fiscal 2021.
We remain excited about the area in our award winning next generation says cyber security platform that helps organizations protect themselves from hop harmful hitting the tax without human intervention.
We have a few installations both in the U.S. <unk> and internationally, we continue to be well positioned with within a leading cable company that has created the other OEM opportunities for area well.
While the current pandemic is delaying physical deployment of valuation and decisions. We believe that there are indications that the parsed. It could change in the next few months as budgets the new projects once frozen because of over 19 could be freed up as early as of January.
By raising our awareness at the vital trade shows and throughout the marketing campaigns. We have the solid lead flow. This is going to be meaningful revenue contributor for the company.
To summarize I believe we have successfully adapted our operations since March to sustain our business and grow our prospects. We have a solid base of recurring revenue and diversified customer base essentially ingredients to manage through the current market.
Further the interest in our products and services remain high the pipeline continues to grow and it's.
As a leading indicator for future periods for exceptional performance.
With that I will now ask Gary to provide a brief overview on the fiscal fourth quarter and full year financial results.
Hey, Victor as Victor mentioned in his opening remarks of fiscal fourth quarter and fiscal year revenue was 14.3, moving and 61.8 million respectively.
Our results also reflect the pursuit of higher margin business.
We reported a gross profit of 4.4 million and $17.2 million in the fourth quarter and fiscal year, respectively.
Resulting in growth.
Profit margin improvement in both periods the.
The Q4 gross margin was 31%.
The improved by approximately 8% when all of the fiscal year gross margin was 27.8% improved by 5%.
Our engineering and development expenses for the fiscal fourth quarter was $717000 compared to $691000 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 MSG and the expenses in Q4 was $4.2 million approximately $400000 decrease on the flow.
The point Sixmillion in last years fiscal Q4 due to the decrease in variable compensation costs.
We reported a net income of $36000 in the fourth quarter compared to a net loss of 334000 in the year ago fourth quarter the.
The company's income tax benefit for the fourth quarter of $725000. The tax benefit was due to a partial valuation allowance against the U.S. deferred tax assets that are more likely to be partially realized offset by current year Federal research and development.
Credits and the benefit resulting from the carry back of the federal net operating losses.
For the fiscal year, we reported a net loss of $1.1 million compared to a net loss of $371000.
The measures, we implemented earlier, including the suspension of our quarterly dividend stopping our stock buyback program in PDP loan proceeds.
Preserved our cash we ended the fiscal year with cash and short term investments $19.3 million net.
Nearly identical to the our cash at the end of Q3.
The pandemic has been immense impact to how our economy and the effects will continue into the 2021.
Therefore, we will maintain similar cash preservation posture for the foreseeable future, allowing us the resources to execute our business plan and to be positioned to benefit from the investments we made over the past couple of years and leverage our business development efforts.
With that I will turn it over to the operator to take your questions.
At this time, if you would like to ask a question press Star one now one of your Touchtone phone again that is star one on your Touchtone phone one of them it won't be Q.
And again that is the star one on your Touchtone phone.
Well take our first question from.
Joseph Nerges of sick Ren investments your line is open.
Good morning, guys and happy New year can guide.
To do their job.
One quick thing you did say that I guess there were no revenues from the two the program in the fourth quarter is that correct.
There were some Joe we had some royalty.
In the fourth quarter.
And then you say you're expecting some of the first half of the year too is that it's the first African yeah. Some rolled over what we expected with some of that has rolled into the first quarter.
Okay. So you didn't get as much revenues you're caught in the fourth quarter some of role than the reported first quarter of the next right. It didn't go away right. Okay. I I assume you did see.
Or I don't know, whether you're aware of that the.
Evidently the Taiwanese where were receiving royalties on the corn corn purchases that is that correct. That's basically what we're right where the revenues are coming from and.
The Taiwanese that I see they contracted for four planes.
And in the <unk> in the fourth quarter there in.
And your fiscal fourth quarter, So that's coming down the road little by little I want plenty or whatever but it still.
At revenue sometime in the correct.
Correct.
You did see that or you didnt I shouldn't be debt well the problem we have of we don't.
Yeah, I don't know I'm quite simply the contract.
The war like that.
Yeah, we saw that okay, I I realize you don't know what you're going to get it but it but at least it's out there we know that.
Uh huh.
[music].
Let me let me go back to the <unk>. The press release of a week ago, you up your the of the the free cream on the offer that.
With that all of the solar wind platform.
Oh that is strictly for solar when a customer as an organization.
Operating the three three month free for other customer is that correct.
That was just talking to so the ones right at the point I know, it's it's really early because of just offered at last week, but have you got any kind of the feedback or response on that offer I mean.
Peck of people.
Our customer.
[noise] na na JA channel no I M plus with the holidays. The south everything is yeah, I realize really really good all right. Good of so that's the best we can the world [laughter], Yeah. The try to get people the I get back the line.
And that's a fairly large base of people right now we're talking a lot of organ or 18000 or the.
The you had mentioned in the press release, something the 18 to 30000 I've seen the figures on that sort of yeah, you just on the right.
Are we owe the we have a some sort of a.
How kind of said better I hit list of Oh, we can contact all of that or do we know who several several organizations that have that currently.
I don't know, but what it will look talking of marketing companies to see if we can get down the list of who has.
You know so of the wins or we can you know just start calling it asks you know yeah.
If they currently have it that's the you know sometimes it's just the rule I'm just out of house here on the database someplace Oh.
People make.
Emails are targeting certain customer basis. So I just was curious that is strictly for the pretty much the opera strictly for the solar winds up HM platform, though.
Yeah, if someone else has an opportunity is for something else and we can help them in that make sense financially I you know I leave it open to.
Now some of you know because right now of these trying times of budgets are just being allocated if we have to give them a little bit you know 90 days of so you have to get things Rolling you know for a three year contract. It it will make sense in the long term one of.
Of the interest and things in the press release at least from my standpoint was the the mentioned that I guess, the Gary Selco mentored that debt, we often and were talking about the area of platform offered replace the legacy security information system and the other security tools in other words.
The the 80, our platform or the the area of platform.
In some cases.
The customers or potential customers don't need all of what they have currently we can literally is that correct. The day weekend bye.
By implementing area, we can sometimes eliminates some of the all the stuff all of their plan the current cool.
Yeah, sometimes it depending on what they have or we could take sometimes three different manufacturers and kind of down to one. So you have one management platform and one tool you know <unk> managing everything.
And I'm I'm guessing in some quite cases or the the cost of even maintaining the existing legacy system can.
Can be substantial and and the fact that we can go to replace some of the some of the older stuff. So.
So implementing area of might not be.
We could be pretty competitive.
By eliminating some of the older stuff.
That's correct.
So the.
I mean, your return on investment or what areas is extraordinary and I'm, you know I'm, a little but some part of why we're not getting a lot more I realized he had the whole pandemic thing or it's a difficult lots out but the traction that we should be getting and that should be substantially the going forward.
And and more and more people I assume are aware of but now that the house here for like six or eight months now you're at least.
The talking to other customers about it.
[noise], Yeah were doing the trade shows and you know the right now its name recognition you know where you got to get our name out there and get it more and more E bells and <unk>.
And getting more and more wins and well the let you you know you mentioned the at the beginning about Uh huh.
The platform continues to generate enthusiasm to I'm, assuming you know people are the interest that a matter of whether or not they're they're they're selling the time or have the opportunity of let us in the <unk> and and to help with the implementation exactly.
[noise] okay.
[noise], we didn't mention the R&D for the about 2.8 million for the year approximately right any any resolution have you guys. The met at the PPI long because the government.
The the paperwork for the PPI long.
The one that we received yes, yeah other than we might one of the 1 billion of.
And I really mean, you got no response of the government as of yet.
Yes, we have we received responses just before Christmas.
And it's been forgiven Oh, okay.
It might have been net interest income <unk> [laughter] metric because I think that you know.
We don't want to have it hanging out there, but it has been forgiven, we got that information alright, great.
Okay, well I guess the talk on Q1 will share more information in in Q1 cash Okay, I'm kind of it because it fell into Q1 correct. The forget rather we did yeah, Greg well at least that ER going forward that that's the that's a very positive or the alright, thanks kind of the stepped back and let somebody else. The asked the question.
Thanks, Jeremy.
And once again that is the star one task of question well move next to Brett Davidson. Your line is open.
Good morning, the gentlemen, the.
Good morning.
I've got a couple of questions I'm kind of split like Joe is here a little bit between.
The financials in 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.
Well just the amount of of events, we're doing we're talking to customers and for China to quotes that we put out to the various prospects of.
It's built the pipeline you know three fourx.
From where it was a few months back.
The average.
And there is that its debt like spread across the board or is it focused more in one area than another.
No you know everything we do we're focused on as I mentioned in the past was based on recurring revenue models, whether it's ucas M.S.P. cloud based or ARIA.
So it's you don't if you look at those four finals those.
Those that's where the increase across the board kind of came from and it varies it percentage wise, but it's all been it's all been favorable and you know across those recurring revenue.
Finals that we try to build up you know the we always have the product and services behind it which is you know it's still a big piece of the business, which you know in a lot of cases, we're trying to.
Physician everything you know, we'll sell the product will put you know service they will install it maintain it and then you know we'll try to get them as an MSP client and you know so we can manage it for them on a monthly basis. So that's kind of the model that where we're looking at and that can go across the board for Ucas Orca Gulf of cloud.
Anything wiser or.
At the ARIA.
And it is any area you know represented by a large the dollar about the and then the other areas are again, it's kind of like evenly split no. The the cloud based on the MSP is is a little heavier right at this point I'm, just because we've been doing it a little longer you cash.
This is increasing and you know area as you know where we're positioning it right now as both they can buy it and manage it themselves as I mentioned the past all we can do for the fully manage it for them.
Of course, the other cost.
And that's all of my like swing area, a little little bit here, the the operating lease asset liability I'm, assuming that relates to the.
Some of the use of the managed service or the Ucas.
Well the maybe some cash.
Color of how bad it went up and what it represents.
Well, there's a new pronouncement relative to putting leases up on the huh.
Financials.
So that there's obviously certain aspects with some of the longer term contracts that we have as well as just the standard of meaning that we have to disclose now within the financial statements but.
Got it so it's not necessarily something new it's just change the reporting.
You're right, it's the reporting the requirements under the accounting rules.
Got it.
And is that split kind of.
Evenly between some of these different.
The.
Lease.
Okay activities. The you know that are going on or is it the dominated by certain air force.
Some of the.
The day, a long term commitments, we got on the.
Financing.
Some of these sales, but also just your standard leasing.
Obligations that you have the has to be recognized within the financial statements made its way of got long term aspect to it in.
In there.
Got it.
Now switching back to the press release.
Generated some questions from from that so.
What exactly.
Does the use of the Ari.
Ah advanced the text detection response entail.
Is that all software or is it combination software and hardware both.
Both correct.
So when the if if you want to install it and you don't want it to automatically fix it.
The and it can be software only but if you want if you want to put taps in and and not put the appliance. In line. Then you can set of rules to where I as you see things happening inside.
Either the network in or out through the firewalls then he can automatically based on the rules you set it could automatically fix some you know and then you can look at the logs. The next day I talked about it on the last conference call that you know you look at the logs and you can either reverse back if you don't want it all you can let it go through and.
Or you know it would automatically.
Fix the based on the rules yet set [noise].
And is that based I like the signature of the activity that's going on or is that more like IP base.
It's the IP base, it's taking it you know all from all the data that's coming in so we actually sell it per IP, we license it per I.P. So someone asked 600 I piece than we would have to you know sell 600 licenses and then it depends if it's sort of done day and then is if the in the second aspect.
The the is if you want us to manage and monitor a 24 by seven or you will do it in internally.
Alright, and inside of the press release, the indicated that ARIA 80, our stuff.
The activity associated with the Sun burst of the ticket and my first thought was well okay. How do you guys know that.
That's why we have our engineers and turn the way that that would would test of this the way. We you know it's a monitor how exactly does that's what the engineers you know figure I'll fight it the way we look at all the data and the changes you know the team is like.
I said very confident that it stops all the ransomware and everything else going through.
Have you I mean, it has this been tested and proven out or is this the theoretically it stops all the activity no. It's tested in labs, and we work with all the companies that some of the big players to in conjunction with their firewalls. You know you named the Big players and we have you know.
Tons of lab gear and software.
And everything that goes across you know, we you know kind of how.
Where integrator partner, so we get a lot of feeds from these manufacturers and we asked the test a lot of the stuff now we're not just saying it.
Got it. So this is proof of concept you guys have actually gone out and the nimble and demonstrate that <unk>.
Yes.
So so more or less it's just the traffic related if you're not getting these people off the network [noise].
The from.
Using whatever it is that they are using to get in and out [noise] yeah.
The other one of the biggest things that we do in the <unk>, Yeah I got you.
I said I had mentioned that Pryor is we'll look at east West traffic inside the network right everybody looks north to south the in the out the firewall coming from outside and we're looking across the traffic and a lot. So the weight of the analyzes the when you have something that could be inside the network that shouldn't be there. That's why would you know.
If things get.
They put these little probes inside there and then they start festering inside and you know and they could be there for months of month to month gathering data. So the way we analyze the is the east to west traffic and you know I think that's why you know with different than a lot of players out there.
And that's where the a couple of the Cubs the correct.
So.
Yeah, I guess I know Joe that's the if there's anybody the.
Taking advantage of this and have have you guys received like any kind of feedback is the how the releases gun received or still too early still.
It's still too early.
[laughter].
All right well, that's all I got for now thank you very much and the like you guys. The.
Have a go on the good one but line.
And once again to ask a question that is star one.
Please be advised the.
You May ask one question and one follow up well move next to James Stewart. Your line is open.
Good morning, gentlemen, my only question is really directed towards Victor at the moment.
I want to congratulate you first on the execution you've done on.
Moving forward.
On the new products, but also on the phenomenally high.
The margins that you're getting.
My question is you know arc the company on the investment firm.
[noise] has the screener for all of the companies in the U.S. and.
Yes, the on it was always in the top 10 as far as being undervalued.
Yeah, I know, you're working with and one of the.
Prime areas, you're already of products are the.
The reason and award winning.
And I'm sure that the cyber security firms that you're working with.
It's not going unnoticed that you have such high margin and of product the worse are there.
Any discussions at all.
On the further joint ventures or possible acquisition because.
Obviously, the the acquisition of she has the I would be accretive to any company. The Batu I just wondered if you could discuss any of those things you might be looking at in the future.
Well everything is always on the table right you know where the if someone comes to US. The you know to purchase of so if there's other things that I could see that would be accretive immediately.
You know, we do talk to other companies constantly and if something happened to to make sense, we wouldn't bring it you know.
It's too you know potential share holders or you know to vote on or whatever would be needed, but right. Now. We're just focused on you know building the products trying to generate sales and and go from there but.
Everything's on the table both ways.
Well again I congratulate you I think you've done a both.
Your entire team kind of phenomenal job.
Thank you very much appreciate it thanks.
Well move next to Jonathan Hennig Your line is open.
Good morning, gentlemen, happy new year congratulations.
So on these really encouraging results I'm, a longtime holder of the stock and I'm just kind of curious given.
The strong transformation how is there any way you can explain the need for years. The S.P.I. outperformed its a lot of the small cap indices, the micro cap and the index and the and I know the Russell that all time highs the micro cap in the index has rebounded. So I'm wondering if there's just any explanation you might have of why the stock given the strong.
The fundamental transformation the stock here, so such an underperformer as of late Thanks, again, and Merry Christmas Happy New year, Merry Christmas Happy New year.
Well, that's kind of a difficult the [laughter] things, there's the such a.
Low volume in it and I think it's a yeah.
Yeah. The thing that we're really trying to do is more to get out there to to get CSPI known and I think once we start getting more success with the high.
Hi performance group as well as the the T.S. new products I think the story will start to resonate more obviously, we've got the strong margins and our.
We are pursuing those things and I think we'll do more of the IR once the story of starts to Germany.
You have any further comments Victor.
I believe it's on the value to you know where.
There's a lot of aspects of CSPI that we've been working on for years that are actually you know [noise] showing you know the great profit so you'll see the in the margin do you know one thing about the story from years past was the margins were always very low on the T.S. group, we have fixed that's the way we got the recurring revenue model, we have products and services that all.
Tied together the messaging is unified down on both sides of.
The house working in the security products into into into play also and now just getting that ARIA piece of it which like I said it hasn't been long in the pandemic kind of how I think put the brakes on it a little bit as fast as we will you know like to get more and more success with that but I think the messaging.
The strategy all make sense, its unified and die it all ties together and with that being said Oh God I say, one quick follow up before I know what my time is free unlimited and it's great to hear Victor you say that you think the stock is undervalued I think of my markets perspective, any regular and frequent insider purchases. However.
The small you know thousand shares.
2000 shares I know as investors sends a real signal to the market that are.
You guys are bullish on the future and I will I will keep my Mike and thank you once again.
Yep.
Yeah.
And we have time for two more questions.
We'll take that question first question from Douglas Johnson Your line is open.
Oh. Thank you a question on the balance sheet. The notes payable of two now familiar in the satellite PDP.
Ah yes.
Primarily.
And we'll take our final question from Terry Carrot sample of this your line is open.
So it was kind of curious on the ARIA software what do you believe the total addressable market size potential for that particular product would be I think and.
In 2020 global cyber cyber security was estimated to be about $167 billion spend what do you think the are here the market is.
Oh, you know.
It's in the billions I would you know 20 or 30 billion or that could fit you know because we hit a lot of silos.
Of that overall market. So you know conservatively you know 20 30 billion.
Okay that sounds great.
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.
Thank you as always I want to thank our shareholders for the your continuing interest in the support we are excited about the long term growth prospects and I believe the font stay strong progress. We made this year will drive our revenue and profitability in the coming years, Gary and I look forward to sharing our fiscal first quarter results in February.
Until the end stay safe and happy new year.
Thank you.
This does conclude the CSP incorporated.
Q4, 2020 earnings conference call.
You may now disconnect your lines and everyone have a good day.
[music].