Q1 2021 CSP Inc Earnings Call
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Again.
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Good day, everyone and welcome to the C. S. P. I first quarter of 2021 conference call.
At this time all participants are in a listen only mode.
You will have the opportunity to ask questions.
Please note that this call is being recorded.
And now it is my pleasure to turn the conference over to Michael Powell of you with the a B C group. Please go ahead Sir.
Thank you per show up.
Hello, everyone and thank you for joining us to review C. S. P I.
First quarter.
Fiscal first quarter ended December 31, 2020 with me on the call today is the extra day level. She.
The S. P is chief Executive Officer, and Gary Levine, Cspi's, Chief Financial Officer, After Victor and Gary conclude their opening remarks, we will then open the call for questions.
Statements made by ex U S. P ex management on today's call regarding the company's business that are not historical facts may be forward looking statements as determined is identified in federal securities laws.
The words May will expect believe anticipate project plan intend estimate and continue as well as similar expressions are intended to identify forward looking statements.
Forward looking statements should be should not be read as a guarantee of future performance of 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 that may influence the accuracy of the statements and per.
Rejections on which the segment and 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 Exchange Commission.
Forward looking statements are based on the information available at the time those statements from age and management's good faith belief as of the time with respect to the future events.
All forward looking statements of qualified in their entirety by this cautionary statement and she S. P. Inc. 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 the call over to Victor <unk>, Chief Executive Officer Richard.
Please go ahead.
Thanks, Michael and good morning, everyone. Our first quarter performance continued to demonstrate our success navigating the challenging business climate, specifically, a key objective of migrating to higher margin products and services is delivering improved gross margins and we remain well positioned to execute our long term operating strategies.
Despite being nearly a year into the pandemic the entire CSPI team remains focused on achieving the primary objective of transforming our company into a cybersecurity wireless and managed service company.
C. S P I as a nimble company a distinct advantage that allowed us to develop exciting new offerings from scratch and in short order. So we can compete with much larger companies. The awards the accolades in the industry recognition reflects purposeful approach to develop much needed and Val.
You'd offerings.
I also believe that this nimbleness is inherent to our DNA and it's why I believe our culture will allow us.
To emerge from the pandemic a much stronger company with a full complement of offerings to grow topline and deliver a disproportionate level of profitability.
Our managed service has continued to perform well.
So we added new customers and the level of interest and are you kind of an army offerings is encouraging.
Total revenue for the quarter.
11.4 million down year over year, but in line with our internal projections I also wanted to add that last year's Q1 was the last full quarter prior to the Covid pandemic for the further the revenue mix and pursuit of higher margin offerings allowed us to report our fifth consecutive quarter.
Of year over year gross margin improvement nearly 5.8 percentage points over fiscal Q1 'twenty 'twenty.
Given this gross margin performance I would anticipate steady improvement in the coming years as the portion of new higher margin offerings contribute more heavily to the top line.
I've repeatedly said on these calls the pandemic has exposed the weakness and limitations of out of.
Of network infrastructures.
The pandemic did not create the issue is only accelerating and exacerbated the underlying concern of security.
Experts, we are already experienced record rents ransomware phishing attacks and this past December 80000 organizations, where potentially impacted by some birth enables cyber attacks. The cyber infrastructure security agency classify the attacks that impacted it does at the age of say three states and hundreds of commercial organization as the of.
Vance persistent threat or a P T.
Yeah.
For those of you that enough familiar.
Once the penetrating penetrating the organization the or agency via some burst hack to the Orion coats. The bad actor actively use of the network to access as many vulnerable systems as possible are using techniques to try and hide their actions the area of advanced detection and response of our Adi solution was designed to the.
<unk> such of tax as well as ransomware malware, which is a constant threat to all organizations.
Out of the box ARIA E D. I requires no special configuration and is purpose built to automatically find the stopped all forms of attacks, including a P teeth with the over 73 of models pre loaded into a solution that can detect any attack is the action and behaviors.
Making a highly effective threat detection and response solution the.
Our ATI Leverages advanced machine learning to pick up these behaviors by monitoring all network data that's the security in I T architect and deployed applications. It use the artificial intelligence to find bad actors verifies the activities and correlates to their actions before declaring.
Take care of firm threat to date.
Adi has been targeted at mid size organizations. This market has been budgeted.
<unk> seen budget heavily impacted by Covid pandemic of restricting budgets and my thing sales cycles just.
When these customers most need a solution and response, we had just released the latest version of ARIA E D I called ARIA Cloud ADR.
Ari of cloud Edr solution helps in two ways first of all it allows us to sell the solution to companies that are cloud centric second it creates a lower price point for entry for midsized customers prospects as we can.
The premise remote workers as well as their cloud presence.
Cyber security threats.
Serious issues and cost of organization of valuable time and resources to remedy and keep secure mid sized customers are finding the ransomware attacks typically costs of 100000 of more to clean up at the end of the spectrum. Several articles placed the cost to clean up the sun burst of it.
<unk> as high as of 100 billion it could take months to fully resolve the issue.
So I no longer believe it's a matter of if or when companies of all set aside I just didn't commit resources to avoid such issues in the future.
For the quarter of technology solution of T. S revenue was $9 8 million, we continue to receive orders from some of our larger customers. However, the COVID-19 related impact has caused some budget delays and our current and potential of small and mid sized customers.
Our managed service practice has remained the bright spot and continues to expand as we sign new cloud base and your cash customers, including in Latin America as customers are seeking to expand the bandwidth to meet the growing demand in the region.
The cruise ship industry remains an important market for C. S. P. I of course, it is still feeling the effects of the pandemic and they continue to push out the expected return of operations. We have been told the larger vessel may start operations in the second quarter, while gaining access to the ships remain an obstacle we continues.
You have regular schedule of communication with the operators.
We are maintaining some of the team members. So we can move forward quickly when the offer of his gave us the green light.
We continue to add new your cash customers during the fiscal first quarter, we have been increasing the number of virtual product demonstrations in each quarter, the new business opportunity pipeline is higher than the previous quarter. We are confident that we will continue converting these opportunities and capture a piece of the pie, which is expected to grow from $15 8 billion in 2000.
The 19 to 24.8 billion in 2024.
Moving to our high performance product or H P. P revenue for the quarter was $1 6 million, we remain excited about IRA and the URL and earlier. This month, we signed the new customer S. P. A managed service provider for the health care and telecommunication industries selected the area of micro HSM solution and the key management server force.
Carrying its internal VM environment, but those that are not familiar the area of micro H S generates hundreds of encryption keys per minute and give the S. P. A powerful low cost zero footprint and highly scalable K M S solution.
It also enables <unk> to expand its managed service portfolio to offer its customers critical asset remote encryption services.
While we remain well positioned within the leading cable companies and have created other OEM opportunities for Ari of the pandemic is delaying physical deployment evaluation and decisions I believe.
The recent hack in the S. P engagement will help raise the awareness of our brand, which will be critical and critically important as we move forward. In addition, our direct sales team. We continue to of that potential partners for the official channel program and during the quarter, we added three.
In the U S and EMEA market.
Currently have over a dozen partners and we are speaking to several of us to ensure the robust channel program and increase that channel.
Chances for success.
Summarized the markets. We serve are enormous opportunities for C. S. P. I and the recent external factors reinforced that transitioned to cybersecurity wireless and managed service company.
We have a solid base of recurring revenue and a diverse customer base and portfolio of products and services that ensure we are positioned for success. Our goal is to increase the pipeline close customer transactions and deliver stellar performance with that I will now ask Gary to provide a brief overview on our fiscal first quarter financial.
<unk>.
Thanks, Victor as Victor mentioned in his opening remarks, our fiscal first quarter revenue was 11 4 million.
Torrid growth margin profit of $3 4 million compared to gross profit of 4 million in last fiscal year.
Despite the year over year revenue decline reported gross margin of 29, 7% compared to gross margin.
Of $23 nine last fiscal year.
And the improvement of five 8% and outstanding achieved.
Our engineering and development expense for the fiscal first quarter of $729000 compared to $672000 in the year ago period.
Due to the increase in head count offset by reductions in consulting.
Our SG&A expenses in Q1 was $3 $2 million approximately $575000 decrease from the $3 2 million in last year's fiscal Q1 due to the decrease in variable compensation payroll and travel related.
Cost due to the ongoing pandemic limiting on site meetings with customers and prospective customers.
The fiscal 2021 fiscal year first quarter included a one time income of approximately $2 $2 million due to the forgiveness of the paycheck protection program. The PPP loan under the cares Act, which we received in the third quarter of fiscal 2020.
We reported a net income of $1 2 million in the fiscal first quarter compared to a net loss of $540000 in the year ago of fiscal quarter.
The company's income tax expense for the fiscal first quarter was 110000.
The tax expenses, primarily related to the write off of deferred tax assets as a result of the change in the tax law.
Allowing for the immediate deduction covered expenses incurred through the PPP loan associated with.
With the associated changes in the valuation of one of them against our deferred tax assets from the prior period.
Offset by the forgiveness of the PPP loans for which the income is excluded from tax for cash purposes.
We believe the measures we've implemented during fiscal 2020, including the suspension of our quarterly dividend and stopping our stock buyback program along with the PPP loan proceeds have enabled us to preserve our cash.
We ended the first quarter with cash and short term investments of 99.
9 million.
Approximately $660 higher compared to the cash at the end of fiscal 2020.
We will maintain a similar cash preservation posture for the foreseeable future, allowing us the resources to execute our business plan.
Our objective is to be positioned to benefit from the investments that we've made over the past couple of years and leverage our business development efforts.
With that I will turn this over to the operator to take your questions.
Okay.
At this time, if he would like to ask a question. Please press the star and one on your Touchtone telephone you may remove yourself from the queue at any time by pressing the pound key.
Again to ask a question. Please press the star and one on your Touchtone phone.
And we will take our first question today from Jonathan Huneck with compound partners. Your line is open.
Hi, Victor and Gary I, just wanted to congratulate you Paul of being a longtime investors. Obviously, we met with you in the past Youre executing on all fronts. The market is realizing it we've seen it and just wanted to alert you on your accomplishments for investors. So thank you so much.
Thank you. Thank you I appreciate it.
And the way we'll go next to Joseph <unk> Swiss Secret <unk> investments your line is open.
Good morning, guys how are you today.
The drilling.
Asking of loaded first question is an easy one that says this is real simple. The you guys. The either of you guys know of the CEO or CFO of whoever is responsible for the cost of security IP security Who's happy with paying the money that you're paying for the or the increased cost for them.
True to maintain security.
No.
Nobody's Happy day.
[laughter] out of it all so let me follow up the point too and this comes from your website.
On the Aerie ADR program area ADR.
Here the <unk>, our security operations center in a box.
That cost of 90% less.
[noise] requires 100 of the manpower.
And it's the one.
100 times faster.
Now I've been in sales all of my life, but any one of those three.
One of those three existed I should be able to sell this thing I should have a lineup of PS.
We're ready to implement it.
And I understand the pandemic.
Caused a lot of the turmoil for people to get around but.
You're offering your offering so much the advantage.
Corporate this it's hard to believe.
It hasnt taken hold more.
Earlier.
Okay and do you have any other reason for why what those type of Advair.
Advantages.
No Joe to be honest with you you know we would think it was.
With everything you said it would it popped the only thing as you know we've always said this is a crowded space with all the products of name recognition is the only thing that you know we're building on you know building of the customer base.
Now getting reference of all accounts because you know you do compete with some other players that have been doing it for 10 15 20 years of longer.
That's the only time, if we when we struggled to close the deal is because name recognition and that's that's it to be honest with you.
But again of course I go back to it's so compelling.
What's your at least the alluding to the advantages of incorporating <unk> and the ability to I mean the.
The key there is the manpower.
I mean, that's got to be the biggest.
Thanks.
Or even finding people to hire in that area. It's got to be pretty expenses. So yeah. I. Just think you should be moving faster, but I guess everybody thinks of that.
You're probably thinking also I agree with you.
Yes.
I think you've answered the question on the area of cloud it's basically.
Slightly less expensive way of.
Implementing the area of platform.
With almost all of the same capabilities of the theory of platform in other words are.
There's a few areas, where you don't cover it as well from the cloud than you would on the.
The standard area ADR platform does that correct. That's correct. It's it's the remediation piece that you know when you don't have the appliance.
And in a complete cloud environment, there's no there's no difference, but if it's the on Prem and cloud. If you want the full remediation then you would have to put out of clients in line.
So there's there's people out there that could qualify they wouldn't need the.
Platform.
They've had in perfectly with the cloud.
Yeah, but if their infrastructures and one of the the major cloud players then it would fit in perfectly.
Greg It sounds like on.
On the.
The PR that you wish you just recently with the S. P E.
Mike Michael hate to S M product line.
You've had the micro hate to send the product lineup for a couple of years.
Got it.
What's different with what the recent news on either the this.
Bye bye sbe and as well as of the store magic.
That's it.
And at the start of Magic piece of it. So there was a smaller company.
That had helped with you know our integration and development of the product and.
They've got purchased by still of Magic and at that point the relationship kind of a pause while the integrated it and now that that has been dying of that relationship. You know is basically kick back off again and where we're working.
Different leads our marketing events and you know China is.
Is the is the part of the product more of a robust with the store magic.
Software as the first.
I guess it was what does the nexus.
<unk> access correct, yeah, hasnt been upgraded to any extent.
Is it better the majority of the products the same but there is a few things that that of data of change, but nothing major at this stage. There is all of the talks about you know.
Growing that product and developing it more of it but the core is the same.
Well the one thing that.
You know I looked up the score of magic to it.
I have a fairly large customer base kind.
Absolutely I have over 1300 customer correct.
I would assume I don't always has the possibility of incorporating some of their sense of that.
And so some of the 1300 plus customers that they have no. We're excited about the relationship which as you know we've got to know the the upper management and there's a lot of things going on you know in the marketing and talking about you know working with the with that customer base and there's been training.
Their salespeople of.
Oh to educate them on how you know the two products of joined together where the value is.
Okay and that will continue you know the salespeople they don't they only.
The only listen to you now.
From a small portion so the there'll be multiple trainings over over a period of time.
But it would seem that the that that market opens up.
There's some areas that day.
Addressing previously.
We definitely are product definitely.
Fills the gap.
And in their product lines. So yeah, that's where the relationship you know.
I had started.
But you know like I said, it basically six to nine months kind of went on pause just due to the integrating.
The company they purchased Okay and did you say you added three channel partners is that what you said you added this last quarter of the last yes.
Yes, okay.
I wasn't sure I caught all of that.
Thanks, a lot of appreciate no problem. So that's actually the move of floor of good here.
The speed of implementation that's the that's the key.
Well, we're working on it.
A lot.
Thanks, Joe.
And as a reminder, if you would like to ask a question today. Please press star and the one well go next to the Terry Carrots Atlas with upstream investment your line is open.
The other question was you mentioned cloud centric companies that you were going to be targeting what do you think the market potential of that particular.
Market for you all would be.
Oh, it's a tremendous opportunity you know for US a you know there's a lot of.
Small mid sized companies that have the falling interest infrastructure into an azure or an Amazon and Oh of rack space that we're going to you know go after.
And would this be something that's of recurring revenue type or is it a one time.
It just depends on whether they are they.
They just purchase it and they manage it themselves or whether they.
Oh allow us to manage it full.
The full time for them and that's an option that we give all customers. So if you want a fully managed solution. We have a sox we can take care of that but if you just sort of like the purchases.
Other it's cloud the licensing or you know if you want the Ara already of hardware also with it.
And you know and then there's maintenance and support that goes along with that.
Okay. Thank you.
Youre welcome.
Tim do you want may of next to Brett Davidson private Investor Your line is open.
Good morning, good morning, Brad.
Hey, I think kind of.
Couple of questions.
I'm thinking in all of these acronyms.
So the bear with me here I mean twist the couple of things around but the net.
The area H S M.
Yeah.
If I'm not mistaken doesn't that address of the largest issue with the solar wins here.
Being able to get in the network and issue keys.
The more or less of the gain access the free will.
Yeah.
Yes part of it is that it's not that the full thing, but part of it was that and that's the biggest thing that were touting you know that you know a.
A lot of these companies are using keys inside of the M, where you know infrastructure, where it's at the stationary key you get in where we're constantly changing you know this.
There's definitely value in what we're positioning it's just that the methodology that that the I T people I'm I use of doing it one way.
And you guys detach it from that.
Forget the sort of Vmware.
The moves to a separate the separate architect you know separate hardware.
Well, it's it's just the keys of constantly changing.
Yeah, Yeah, yeah yeah.
Alright.
The S T E.
I gather the therapy of foreign entity.
Correct, Yeah, and it's kind of heard the get an idea of the the size of them.
I mean, I think like a medium size business or are these guys you know of behemoths there.
No they are of medium size business.
And is there I mean potential to follow on with them or you know this is kind of like just.
Yeah, so what they did they adopted the internally.
And now they're making it an offering to all of their customers or potential customers, you know, especially the ones that the targeting of the ones up for renewal of their contracts that this is an added feature that they would like to add on to it. So it's in the early relationship right now, but they believe.
The technology that they adopted you know.
The technology for their internal purposes right now.
Now is this strictly SaaS or is this a hardware also no it's both.
In that particular case, it's a it's a it's hardware and software and support that goes along with it.
And they'll be providing the support are you guys as well.
Well, we provide the support for the product that they purchased you know and the licensing and everything that goes along with that and but they are an M. S. S. P. So they would be for providing their own support and maintenance to their day.
Our existing account base.
It would be kind of like of layered thing they they'd come to you for support for their purchase.
So they're kind of correct correct.
So I mean, the next thing is lead leads me to is.
The revenue so how are how are the revenues accounted for this so is there are you know of hardware and a software portion of this and it's it can be accounted for differently or I'm trying to get a handle around how how the revenue is going to show up from this.
Well it's.
Youre pretty much of it's above.
Bundle some of its it.
And package, you're recognizing in under the revenue rules as it at that.
And then we'll have.
The breakout of the maintenance and items like that that could be spread.
And the other would be longer term contracts so the.
The pending how it's set up with each of them is there and how are not out within the most of them don't have the house as we're setting them up initially.
So does the the the revenue component change depending on how many of their customers adopt this or there is no factor of it.
That would have a factor of Haywood yeah yeah.
Yes.
Because if the if we're if we're if we're doing the support then we can recognize it over a period of time.
And then if we don't they're doing everything then you know I think if it's a one time event.
Got it.
Uh huh.
So you you again going back to that press release that I'd ask you about last call. The there of one where you guys put out the of the free service for for the same period.
Have have you had any hits on that as anybody actually taking you up on that.
We've had some conversations with some clients right now.
I'm the head in another direction here government.
Our U S D a.
Yesterday.
[noise] appears a lot of these have been hit by solar winds have you guys.
He had any contact with any of the the government agencies or do you have somebody who are you know.
Can exploit contacts they had previously deal with some of the.
The other government agencies.
No. We don't really we're not focusing on the government of stay right. Now there is something that we've talked to but it's you know the the cycle with what the.
With the government. It everything is years. So we you know if something occurs the well will work on it but it's not a focus right now we're trying to stick in the commercial space.
Got it.
Alright, I think thats pretty much all I have thanks. Thanks, a lot of the answers I'm still going to be studying all of those acronym so [laughter] day in storage.
All of a send you a glossary.
Speaking of that isn't something like that of the website.
[laughter] no there isn't but if you ever have any questions feel free to call.
Good morning.
[laughter] alright.
Have a good one.
Yeah, you too bye bye.
Oh.
And the once again, if he would like to ask a question today. Please press star and the one well go next to James Stewart from investment Group. Your line is open.
Yes, congratulations to both the Victor and Gary and what are you really knocking the lights out.
Hum I think the cloud.
Cloud business seems to be particularly exciting.
The.
I assume that it requires less manpower to implement.
From your standpoint, I know you're pause for the explosive growth.
But it seems like.
This is one area, where you can really accelerate and secondly, I had another question.
Are there industry meetings or conventions in the I T area, where you can get your name spread around quickly.
The plan on attending.
Oh, well to your first question.
Yeah. We're we're excited you know about the cloud base product.
Just because we're able to you know to have more conversations and we're hoping that the adoption will be a lot faster not you know getting inside of the People's data centers, there's still been a big Big challenge. So we're hoping the P. O sees it will you know occur in way, but of close at a faster rate.
As fish shows we are currently still doing shows now they're all virtual but we've been averaging one to two a month in.
And we you know.
The the audience is some tire kickers to be honest with you and then some that you know there's one or two leads that do and come up to to at least have some interesting conversations and and I'm, having a proof of concept moving forward with those and Gary South of all of which I.
No you've met has.
Talked and has you know they give them a half hour of 15 minutes of half hour to talk to the audience, who shows up and Ah about ARIA and the technology. So yeah. We've done a couple of those I would say I don't know if it's one of the month by its one every other month of so that he's done these.
Virtual presentations.
Well that sounds great.
Also I'm one of the let you know what I'm kind of be pushing real hard to get our.
The group of companies to start.
Start looking at your product.
Because we're always faced with.
People trying to hack into our systems some of them.
And again congratulations.
We appreciate the work you're doing.
Okay, great. Thanks.
We will go now to Elizabeth Miller, a private Investor Your line is open.
Hi, I just had a couple of questions I'm curious about it.
It sounds like you have a wonderful relationship with your managed service customers. So thank.
Since you have that trusted relationship already in place.
The barrier of one of the barriers to entry of the name recognition wouldn't that be how many of them have taken an area or is there a natural sales cycle within that group of customers.
Yes.
Todd.
Targeting we are targeting all of our MSP customers right now in various conversations of happened to each one some of it is still because they are in the small to mid budget constraints and then some of them there are they're ready to move forward with adoption.
So then yes, we do question of sort of your sales cycle and and.
Your competition I mean, when you get to the point that you're speaking with people are they deferring the purchase of the budget are they going with someone else or they you know who are you seeing as your most likely competitor if theyre going with someone else like what can you explain that sales cycle to us a little more.
It's a little bit of everything.
Everything to be honest with you of some of them have.
You know they go back to management and they are looking for budgets and budgets have there's two or three opportunities right now that the budgets were supposed to be in January they got pushed off and you know they are saying that it could be either this month of next month for the constraint of budgets and weather.
The amount that they as far as they're going to get some of them have gone with a low of cheaper.
Doesn't do as much but they only had you know cents on the dollar that we offer you know we have a very good product at a very good price, but there are other products out there that endpoint protection for instance, right that they just want of endpoint protection, but we're more than endpoint protection. So they found money at two $3 of user.
And you know, while we were selling the suite of of all of a product to cover them more than just the endpoint protection. So we we were either lost those or they've been part of on the back burner to when they get more money. They they can get a true Sim you know that they know they need but they just don't have the budget for right now and then in a couple of.
Cases, we lost against some of the big Big players that were out there I'd, rather not mention them, but you know some of the big PC manufacturers they have their own product that they came in and you know on the kite significantly something that it was just really bad business to take the deal.
This and this idea that the I understand the COVID-19 effect, but at the same time like I don't quite understand why you need to be in person to make the sales because it's the software play so it's not strictly of software play.
Up until just recently on the cloud or it was the hardware play with software and we had to be in line to do the full remediation.
Okay. So we had our appliance or you know we had our appliance ever go in line with taps and we'd have to get inside the the the network you know to get in line to do the the remediation as the traffic was passing and you know.
So that that yes. It is.
Hi.
E I googled them and also their CEO and I can't find anything about them could you point of their websites of weekend.
Learn a little bit more share.
Sure we can put something out of our website I don't have it yeah right now like the second.
We kind of put it on the message boards are on Linkedin.
Okay, just curious because if it you know of good.
And the good recognition, but I can't we can't find anything about them and then I don't know how good of recognition that is you know mhm.
Well, thank you very much and.
For taking my questions.
I have a great day.
And I am showing that we have no further questions at this time I'll turn the call back to you Victor for closing or additional remarks.
And as always I wanted to think of shareholders for continued interest and support we will continue to manage the business and leverage our opportunities.
Where and when they exist we remain excited about CSP is long term growth prospects in the industry dynamics of what prompt increased interest in our offering Gary and I look forward to sharing our fiscal second quarter results in May until then stay safe.
Yeah.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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