Q2 2022 CSP Inc Earnings Call
[music].
Good day, everyone and welcome to today's C. S. P. I second quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
Or you will have an opportunity to ask questions. During the question and answer session.
They registered to ask a question at any time by pressing the star and one Keith on your Touchtone phone.
Please note that this call may be recorded I will be standing by should you need any assistance.
It is now my pleasure to turn today's program over to Mr. Michael Pollinium, Sir please begin.
Thank you Chelsey Hello, everyone and thank you for joining us to review Cspi's fiscal second quarter ended March 31, 2022 with me on the call today is Victor to logo Cspi's, 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 <unk> 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 not be read as a guarantee of future performance or results the.
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 the projections upon which the segment and save them to our base pack.
Factors that may affect the company's results.
But are not limited to the risks and uncertainties discussed in the risk factors section of the annual report on Form 10-K, and our quarterly reports on Form 10-Q filed with 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 of the time with respect to the future events.
All forward looking statements are qualified in their entirety by this cautionary statement and she's P. I 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> CEO Victor. Please go ahead.
Thanks, Michael and good morning, everyone I believe our team performed well during the fiscal second quarter results were better than we had contemplated entering the quarter and I believe the trend in the.
The underlying business is a positive long term indicator for C. S. P I.
We reported solid results across many of our key performance indicators, including sales of 12 million service revenue grew 21% compared to a year ago second quarter.
Backlog as of March 31st with $17 3 million compared to $7 8 million a year ago.
Disciplined approach enabled us to expand gross margins once again this quarter core gross margins were up 4% over the prior year.
It was a major factor behind us generating a profit of three cents per diluted share.
We achieved these results. Despite many of our challenges that have been referenced on prior calls during the past year.
Such as supply chain.
And wage inflation.
Let me review these with you before I share the results of the quarter.
First a global supply chain is disrupting our ability to receive components and deliver finished goods to our customers. However, I want to stress that the interest and demand for our products and services have never been higher as evidenced by our backlog. We believe our backlog represents a substantial undervalued asset.
Team is quite proud that we have not lost a single order in the backlog.
Unfortunately, the supply chain issue is not going to be resolved quickly and in fact signs point to it becoming worse.
Worse than before.
It gets better second we are also managing the effects of a tight.
Labor market, which in our case has caused us to adjust wages to retain staff and help recruit new employees, Florida remains one of the hottest job markets in the U S and with unemployment rates of three 2% the scales are tilted towards high skilled personnel.
The labor market was tight even prior to the pandemic.
Businesses were forced to transform and adopt adapt quickly to the new environment and even now the pandemic is continuing to ease. These visitors are continuing with their investments and implementations.
A report from Gartner shows 58 per cent out of the I T leaves report either an increase or a planned increase in emerging technology investments.
This is a double edged sword in that it hurts us because we're all competing for the same talent. So we're spending nearly $100000 for the six months ending 331 22, our recruiters to help fill the staff needs to meet the demand.
But at this point is a necessity due to the continued growth of MSP business. However.
We also benefit from the lack of customers in house professionals, which drive customers to CSPI, because we have the people to meet their needs.
Third people choosing to work from home, even though the pandemic is easing and the employees employers are welcoming employees back to the office is forcing our team to adopt a go to market strategy prior to the pandemic. Our teams are engaging with customers in person and these multiple touch points along with industry conferences.
We're highly important and generating sales I believe we have successfully adjusted our business model to account for these dynamics.
Say with this with the most confidence because our primary goal pre and post pandemic has been achieved that goal is to migrate to higher margin products and services allowed us to report a solid gross margin of 35% for the second fiscal quarter cause so really higher compared to a year ago gross margin despite the lower Rev.
New year over year.
Our technology solution or T. S business generated revenue of $10 9 million in the fiscal second quarter. This exceeded our internal plans by a wide margin while the backlog remains strong and approximately 75% of the backlog is this business, which has proven to be a reliable indicator of future revenue.
Its due to high conversion rate.
Our managed service practice or MSP.
At a constant consistent strong and reliable performer.
We're not expecting this to slow down anytime soon.
The same dynamic accelerated MSP growth are expected to be around for the foreseeable future.
The continued growth of cloud technology advanced cyber security threats, which have been experienced over the past two years as business went viral virtual.
The shortage of it talent, which I mentioned earlier reduced budgets and organizational infrastructure to drive business growth.
<unk> businesses large and small to outsource it projects.
According to market some markets the market research firm estimates the global managed service market is expected to grow to 300 billion by 2025. Additionally, our cloud business also remains consistently strong while professional services closing deals and growing the pipeline.
All MSP and cloud revenue is an M. R. A monthly recurring revenue and the multi year contracts.
It contributes heavily to the bottom line I truly.
I believe this consistent stable business is not being reflected in the stock price.
Regarding ucas growing this business remains a methodical process very similar to the building the MSA MSP practice I believe we are demonstrating steady improvements each quarter and I believe this progress is getting us closer and closer to our desired outcome.
As you recall, we launched the ucas offering just prior to the pandemic and had been expecting to meet customers in person.
It took us a while to readjust our approach and expectations. However, I believe these added wins and brought our name recognition is going to create an upswell of interests.
I believe the team is on top of things and I expect greater achievement in.
In the coming quarters, as we get more wins under our belt.
Yeah.
Regarding the high performance products are H P. P Division, we reported revenue of $1 1 million.
And continue to build a multi million dollar backlog as the supply chain issues are hindering our revenue growth.
<unk> Com continues to perform well however, most of the expected royalty revenues related to the E. Two D program was pushed out to the second half of fiscal 'twenty 'twenty. Two do you say the customer's restructuring its business.
We are experiencing more and more interest in that area as we sign new customers in the quarter and we remain bullish on the long term contribution.
The monthly income being generated is encouraging and the growing pipeline raises my enthusiasm. In addition to benefiting from a showing sales cycle compared to when we initially launch Eylea. We are looking to hire two additional internal sales reps to pursue mid market accounts to build market share.
To summarize we reported a better than expected fiscal second quarter.
This performance is consistent with our business plan to generate higher margins and profits we have met.
Many challenges these past two years and the value added solutions that position us for future success. We also continue to attract talent. Despite the tight labor market, because we offer them opportunities for growth and success.
In a rising sector, one that is expected to outpace many other industries for the foreseeable future.
The products and surfaces to achieve our own ambitious goals.
During the pandemic, we shared our team was equipped with the tools to succeed in a safe and healthy environment. Our execution is generating returns that.
Is it enabling CSPI to buy back shares as we repurchased nearly 13000 shares at an average cost of $7.51 per share, which I truly feel the stock is undervalued and does not reflect the many positive things we are doing and can potentially achieve in the coming quarters.
With that I will now ask Gary to provide a brief overview on the fiscal second quarter financial performance Gary.
Okay.
Thanks Victor.
As Victor mentioned in his opening remarks, our fiscal second quarter.
It is $12 million we reported.
Gross revenue of $4.2 million or 35% of sales compared to $4.3 million or 31% of sales in the year ago fiscal second quarter, representing a 4% improvement.
Further while service revenue was similar to the year ago, we were quite pleased that the gross margin. The product gross margin was slightly ahead of last year's product gross margin. Despite the year over year decline in product revenue.
Additionally, the product base backlog will also have a more favorable gross margin. So we are making every effort to get these shipments out to customers.
Our engineering and development expenses for the fiscal second quarter were $717000 compared to $762000 in the year ago period.
The decrease is primarily due to lower personnel costs.
Our SG&A expenses in Q2 were $3 $5 million.
A slight decrease due to the lower head count and sales and administration from the year ago SG&A cost of $3.7 million.
We reported net income of $156000 in the fiscal second quarter was three cents per diluted share compared with a net loss of $847000 or 20 cents per share for the fiscal second quarter of fiscal 2021.
We ended the second fiscal second quarter with cash and cash equivalents of $23 million as of March 31 2022.
Which was an increase of $1 million from December 31st 2021.
During the second fiscal quarter, we purchased nearly 13 million shares from the recent rian reactivated stock repurchase program.
You've authorized to buy an additional 181000 shares of CSPI common stock.
We believe the stock at these levels represents value. However, we will continue to exercise prudent expense management to ensure we have the resources to execute our multi year growth strategy of transforming to a cyber security wireless and managed service.
Company.
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. Please press the star and one on your Touchtone phone.
You may remove yourself from the queue at any time by pressing the pound key.
Once again that is star one to ask a question.
Pause for a moment to allow questions to queue.
All right. Our first question will come from Joseph <unk> with the segment investments.
Good morning, guys. How are you today on for Joe Joe.
Great Congratulations.
Did a great job in the quarter.
For all Ralph.
Yes.
Point of getting them getting the product that you need to to.
To deliver some of those products, but let me let me let me start off with.
A brief overview of.
The situation from a stock standpoint currently.
This is my estimates we are currently trading at about 60% of our sales.
What the stock price around $7.
And what.
We're trading at.
Our cash position is around $4.75 a share.
With no debt now.
It's absolutely you know as you stated we're undervalued undervalued unbelievably undervalued and are looking.
We're looking at any scenario and so.
Let me ask you. This only purchased 13000 shares and I realize that the restrictions are difficult and purchasing.
Market when we have so few shares outstanding have you thought about at all going directly to some of the larger or you know.
People who filed.
And asking to buy them.
Block purchases.
510, 15000 shares rather than trying to execute through the Uh huh.
Existing daily Daily markets.
Have you ever looked at this point.
No I'm, but we would certainly take that under advisement and speak with the board about that because obviously some people are trying to liquidate in a couple of thousand here a couple of thousand here.
Right little by little and so there could be individual investors, but in some cases it may be some of the larger owners that are building out the stock because they can't sell 15000 or 20000 shares at a block at a given time. So that's my only point a couple of corrections on your statements.
One the average price we paid 781, not 751, I think Victor metric yeah, not so much.
That's the minus 13.
13000 here, it's not 13 million here, you mentioned that Gary.
We also have 181000 shares left and you said, it's something approximately that that are authorized for repurchase.
Yes.
And subsequent to the end.
To the end of the quarter.
Uh huh.
Since April .
<unk> since April four.
The current.
Current date.
Ah, Yes, we did some chairs and.
You know what you don't have that I'm not very many.
Small.
Okay.
Yeah. It seems like I mean, the volume has picked up a little bit in the stock, but not dramatically. So.
Obviously, you're having difficulty getting.
You know getting the volume necessary.
That's fair that's absolutely true.
One other point have you are you.
Just looking before the call.
Started looking at the Treasury Bill rates.
And our current one month Treasury Bill it's around almost a half a percent I'm wondering if you're able to deploy some of that cash.
I know you have to you need the cash for operations, but.
Some some additional return on our heavy cash position, even though even a minor amount.
Over last year should be.
How are you doing anything in that in that respect.
Definitely definitely are investing and we've been as the rates have moved up we benefited from that but we've got you know.
Fair amount of it.
In the U S that we've have invested okay, well that you know I mean, obviously, we have nothing else like it.
In the current environment, what interest rate you know jumping pretty rapidly I would imagine over the next call.
Unless you Mike Yeah.
Increase that.
A fair amount even on a very very short term rates itself.
Yeah definitely.
Getting back to you're pretty positive on.
What's happened with H B P.
Yeah.
Yes.
Solutions.
As far as the backlogs are concerned and like you said the biggest difficulty is still getting getting our chips.
Necessary as well as the other items necessary to deliver but.
How has.
Or has there been any.
Idea that we might be able to be getting some delivery fell a little bit faster in certain sectors anyway, where.
Or are we still.
Okay.
Where we're working at Joe we're constantly dealing with the distributors and the manufacturers and.
It's just a very difficult situation and yeah. We've looked at is their incentives are things, we can do to do it but most of the manufacturers.
He didn't want a king's ransom to do that or you know, they're still saying that the estimated dates are out there and were in the queue.
Okay, So you're not you're not unique in this almost everybody at Indian industries.
Circumstances right.
That's right.
Okay.
Basically that's it that's all I had it seems like Youre doing what you need to do it.
And about the Ucas.
Thank you were pretty positive about that product line.
Come again and is that or has that been helpful that people more people want to stay at home now even with the increase in energy prices are it seems like people don't even want to commute to work if that we can operate at a heartless because life why why why why spend the added expense.
Going to a place they can do it from home.
Is that help the ucas.
All right.
Product line, our sales force.
Looking to expand and expand that product line in that area.
I I think it's kind of neutral you know because you still need it for both the office and at home I don't think it's adding one way or the other it's just getting in front of customers talking to them and it's a timing issue too where you know if they have other contracts with other ucas provide is a phone companies that well.
We're hitting that timing issue, where they're willing to look at our space on their contract coming up for renewal.
Okay, and so and then you did mention is that did you say that you're expecting some royalties in the second half of this fiscal year.
[noise] program.
We're planning on it but there's no guarantee just because they keep moving things out, but we're hoping that it all comes in the second half you've got you've got more.
Hardly anything in the first half.
Mhm Okay.
Thanks, a lot appreciate it.
Back to you soon Joe we're going the right direction, obviously with cost controls you are able to you know.
State.
Stay profitable, let's put it this way this quarter.
Hi, guys. Thanks, Joe.
Yeah.
Thank you.
Again to ask a question that is star one on your telephone keypad.
Alright. It appears that we have no further questions in the queue at this time I would now.
Now I'd like to turn the program back to Mr. Victor <unk> for any additional or closing remarks.
Thank you.
I wanted to thank our shareholders for your continued interest and support the demand for our high margin products and services is rising and we believe this demand will lead to further gains in our financial performance as we evolve into a more normalized business environment.
We remain committed to growing the business and we believe our backlog represents a substantial undervalued asset.
Gary and I look forward to sharing our progress in fiscal 2022 third quarter operating results in August until then.
Be well stay safe. Thank you.
Ladies and gentlemen, this does conclude today's program and we thank you for your participation you may disconnect at any time.
Yeah.
Yeah.
Yeah.
Yeah.
Okay.
[music].
Yes.
Okay.
[music].
Yeah.
Uh huh.
Okay.
Okay.
[music].
Okay.
Hum.
Uh huh.
Yeah.
[music].
Mhm.
[music].
Uh huh.
[music].
No.
[music].
Hum.
[music].