Q1 2025 CSP Inc Earnings Call
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Speaker Change: Greetings. Welcome to CSPI's first quarter fiscal year 2025 conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Michael Polyviou. Michael, you may begin.
Speaker Change: Thank you, Paul. Hello, everyone, and thank you for joining us to review KSPI's Fiscal 2025 First Quarter Financial Results, as well as Recent Operating Development.
The fiscal quarter ended December 31, 2024.
Speaker Change: Today with me on the call is Victor Dellovo, CSPI's Chief Executive Officer, and Gary Levine, CSPI's Chief Financial Officer.
Speaker Change: After Victor and Gary conclude their opening remarks, we'll then open the call for questions. During the Q&A session, we ask participants to limit themselves to one question and one follow-up question and then re-queue if they have additional questions.
Speaker Change: Statements made by CSPI's management on today's call regarding the company's business.
Speaker Change: that are not historical facts may be forward-looking statements as terms 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.
Speaker Change: A photo look at statements should not be meant as a guarantee of future performance or results.
Speaker Change: The company cautions you that these statements reflect current expectations of the company's future performance or event and are subject to several uncertainties, risks, and other influences, many of which are beyond the company's control, and may influence the accuracy of the statement and the projections upon which the segment and statements are based.
Speaker Change: Factors that may affect a company's 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-5 Securities and Exchange Commission.
Speaker Change: Forward-looking statements are based on information available at the time those statements are made and management's good faith belief as of the time with respect to future events.
Speaker Change: All forward-looking statements are qualified in entirety by this cautionary statement and CSPI undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise after the date thereof.
Speaker Change: With that, I'll turn the call over to Victor Dellovo, Chief Executive Officer. Victor, please go ahead.
Thanks, Michael, and good morning, everyone.
Speaker Change: It has been less than two months since we last talked with you and during the first quarter our business maintained the momentum we described to you back in December.
Speaker Change: We generated an increase in total revenue, boosted by 17% in service revenue, and expanded our gross margins by a healthy 200 basis points while earning 5 cents per diluted common share.
Speaker Change: We finished the quarter with more than $30 million in cash and cash equivalent while continuing to invest in our AZT Protect product line.
Speaker Change: and the Board of Directors authorize another $0.03 per share quarterly cash dividend.
Speaker Change: Our technology solution business once again led the way for us during the quarter, generating approximately $15.2 million in sales.
Speaker Change: We've added a second major cruise line order to the one we mentioned back in December, and we continue to succeed in the ocean freight liner market.
Speaker Change: where we continue to add new ships whose operators are utilizing a managed service offering following the retrofit boosting a monthly recurring revenue
Speaker Change: Another bright spot during the quarter was the increased demand for our cloud-based service from companies wanting to outsource these critical needs to our value-tested platform.
Speaker Change: Overall, service revenue grew 17% during the quarter and drove our gross margins up 200 basis points. We continue to introduce AZT Protect into the operational technology, or OT, markets where the need for enhanced solutions have never been higher.
Speaker Change: We signed up several new customers during the first quarter, and are in the process of increasing both the reputable industries we are addressing, as well as customers for whom we are providing critical cybersecurity solutions.
Speaker Change: We should also note that the large pharmaceutical company that purchased AZT Protector a year ago has renewed their annual six-figure post-contract support agreement and we are glad to report they are completely satisfied with the product and related services.
Speaker Change: An example of how we are building presence for AZT Protect in target operational technology cybersecurity markets is a partnership we announced with Unified Flow Technologies just before the end of the calendar year.
Speaker Change: UFT provides products and system integration services to water and waste treatment facilities located in 40 states.
Speaker Change: Water treatment facilities have hard hit by zero-day malware and ransomware that today's cybersecurity solutions struggle to prevent.
Speaker Change: In addition, these facilities are often targeted by nation-state sponsored attacks that bypass today's leading protection measures.
Speaker Change: We are now working with UFT to implement AZT Protect into water treatment operations to better protect them against cyber attacks, and our first deployment included protecting one of UFT's own operational technology facilities.
Speaker Change: AGT Protect uses AI-based countermeasures to stop categories of attacks as they land on the water treatment facility's most vulnerable critical production control systems.
Speaker Change: These countermeasures lock down critical applications from adulteration while stopping code-based attacks such as malware and ransomware from executing.
Speaker Change: Further, they disrupt any nation-state effort to take control of the facility.
AZT Protect also
Speaker Change: have the ability to drive our high-performance product business and we expect to see increasing levels of revenue from our partnership with the likes of UFT and Rockwell Automation as the fiscal year unfolds.
Speaker Change: As we reported back in December, we had a very successful...
participation in the Rockwell Automation Fair back in late November.
2024.
Speaker Change: with Gary Southwell, our Vice President and General Manager for High Performance, presenting an in-depth review of the LACE ATT&CK techniques and their financial impact.
Speaker Change: Gary's presentation, as well as our participation in the American Petroleum Institute's show for oil and natural gas, resulted in generating approximately 100 leads.
Speaker Change: We've been following up on these leads with several already transitioning into active proposals.
Speaker Change: We are hoping to convert a growing number of these proposals to orders during the next couple quarters with the help of our Rockwell Distribution Partners.
Speaker Change: Along those lines, we have targeted the top U.S. Rockwell distributors having signed up three and hoping to have two more signed by the end of this month.
Speaker Change: Our strategy with the Rockwell Distribution Channel is to focus on the middle market OT customers.
Speaker Change: which tend to have a shorter sales cycle than the larger OT organizations and successfully executing on this strategy will be a major factor behind our performance for the remainder of fiscal 2025.
Speaker Change: With the large OT customers, our internal sales team continues to address the market, which has sales cycles up to 18 months.
Speaker Change: A typical point of entry is through a project for one operation, and then as the installation proves its worth, we are introducing to other opportunities within the corporate entity.
Speaker Change: We are actively working that expansion opportunity as many as the results from AZT Protect are certainly worthy of broader system rollout at these big customers.
Speaker Change: All of our sales and marketing efforts is supported by the nine major industry awards AZT Protect has received since its launch, including the winner of the Application Security category at the 2024 Fortress Cybersecurity Award presented by Business Intelligent Group.
Speaker Change: We continue to benefit from the CrowdStrike update failure of last July.
Speaker Change: with the risk that continuous cloud updates can have on an OT applications including industrial automation industries control systems.
Speaker Change: There was a growing recognition from the industrial automation vendors that their distribution channels that the traditional IT focused endpoint protection methodologies are not meeting their requirements.
Speaker Change: In summary, we are off to a solid start for Fiscal 2025, and we are working to continue this momentum as the year progresses.
Thanks, Victor.
Speaker Change: For the first quarter ended December 31st, 2024, we reported revenue of $15.7 million.
Speaker Change: as compared to $15.4 million for the prior year's first quarter, and $13 million for the fiscal fourth quarter ended September 30, 2024.
service record
Speaker Change: Service revenue represented 4.7 million of overall sales compared to 4 million of overall sales during the year ago period and 4 million of overall sales during the fiscal 2024 fourth quarter.
Speaker Change: Gross profit for the three months ended December 31st, 2024, was $4.6 million, or 29.1% of sales, compared to gross profit of $4.1 million.
Speaker Change: for 26.6% of sales for the quarter ended December 31st, 2024, reflecting the continued execution of the company's strategy to focus on higher margin offerings.
Driven by the improved gross margin
Speaker Change: interest income, and foreign currency exchange, the company reported net income of $472,000.
Speaker Change: or $0.05 per diluted common share for the fiscal first quarter compared to a net loss of $73,000 or $0.01 per diluted common share for the prior fiscal year's first quarter.
Speaker Change: For the fiscal first quarter, our engineering and development expenses were $786,000 compared to $700,000.
The increase was for outside consulting services and stock compensation.
Speaker Change: for SG&A was at 4.1 million dollars compared to 3.7 million dollars in the year ago fiscal quarter.
The increase was marketing expenses,
Speaker Change: for the trade show and travel expenses as we scaled up our conferences and participation for the ACT Protect and for higher commission.
on sales in the TS group.
Speaker Change: The company had a tax benefit from reversal of the valuation allowance related to expiring state and R&D credit and investment credits and benefits from our federal R&D credit.
Speaker Change: The company continues to maintain a robust balance sheet as of December 31st, 2024.
and had cash and cash equivalents of $30.7 million.
Speaker Change: The higher cash balance relative to liabilities enhances the company's resources.
to pay a quarterly cash dividend.
Speaker Change: With that, I will turn it over to the operator for questions. Thank you. At this time we will be conducting a question and answer session.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue.
Speaker Change: We remind participants to limit themselves to one question and one follow-up on today's call. If you wish to ask another question, please press star 1 to rejoin the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys.
Speaker Change: Once again, please press star 1 on your phone at this time if you wish to ask a question.
And please hold while we poll for questions.
Speaker Change: And the first question today is coming from Joseph Nergis from Segrin Investments. Joseph, your line is live.
Speaker Change: All two of the investors that were at the annual meeting last week.
Speaker Change: And I want to start with one question that, this is from off your LinkedIn, the web page.
Speaker Change: It was sort of a summation of AZT protect which it said no updates
No upgrades.
Speaker Change: No daily maintenance, saves time, reduce expenses. This is a sort of a summation of what AZT protect in managing that in the any security we have in managing it.
Speaker Change: Except for one exception there, and you mentioned it at the annual meeting, I think it's important.
Speaker Change: You are currently doing an additional feature upgrade to AZT Protect. You haven't announced it yet, but there is some work on an upgrade. I just wanted to get that on the record.
Mm-hmm, you're correct. We'll announce it soon.
Speaker Change: Okay, very good, thank you. And one other point, I know we've discussed this in the past, you have a number of patents that have already been assigned or awarded to you on the area platform and I'm assuming you have some pending patents too.
Speaker Change: Do you have a summation of that at all, of the total we have on that?
Yes, three have been completed.
Speaker Change: Two more have gone through all office actions by the Patent Office.
Speaker Change: and are expected to issue by year-end. And then two more recent submissions.
Speaker Change: that should be done sometime in 2026. So three issued and four in the middle stages.
Speaker Change: All right, thanks a lot. Appreciate it. I'll leave it open to somebody else on the questions. Thanks, Joe.
Speaker Change: Thank you and once again it is star one on your phone if you wish to ask a question today. The next question is coming from Brett Davidson from InvestLetter. Brett your line is live.
Good morning, gentlemen.
Brett Davidson: questions regarding the AZT sales. I was wondering if you guys could shed some light on what what sales channels those those sales have been coming through and you know I know Victor you indicated that the Rockwell is going to be important the rest of the year. Have any of those sales come through the Rockwell sales channel?
Brett Davidson: No, those have all been the stuff that we've been working on. The Rockwell Channels, we literally have just been setting up contracts with these large distributors. I announced one, I think you guys saw.
CED back a month ago or so.
Brett Davidson: and there'll be another announcement here soon of another one and then the other ones are we're pretty close to signing so I'll announce all those as they they come along but these channels are really really new so some of the sales we've had have been the ones we've been working on for
You know months or years
Speaker Change: So you're anticipating then that some of these Rockwell partners are going to generate sales through the course of the year?
Yes, absolutely, absolutely.
Speaker Change: We're hoping that next quarter if everything goes well because the way we're going to work it is you know We're gonna we're gonna push all this even if sales come directly to us We're gonna start pushing it through the Rockwell channels of some sort so that you know That's our game plan long term is to to fulfill all through the Rockwell channels
Speaker Change: And one other quick question, is there anything that prevents AZP from being sold into overseas markets?
No.
Perfect, all right, thank you very much.
Thank you, Brett.
Speaker Change: Thank you. The next question will be from Mike Price. Mike is a private investor. Mike, your line is live.
Mike Price: Good morning, thanks for taking my question. It was July of 2023 that you first issued the press release calling AZT game-changing technology and a month later you said that CSPI lacks name recognition.
Mike Price: and at that time I asked if you have game changing technology without the name recognition you're better off trying to find a partner that can get this into a market more quickly and in a big way and here it is and you said at that time it's only been 30 days
Mike Price: So here we are 19 months later, and you've won nine awards, which has, I assume, given you visibility and credibility.
Mike Price: and the ACT revenues are not material in an OT market that you have estimated at about $50 billion.
Speaker Change: And the last conference call, the year-end conference call, you said that this is pretty much like a startup, and you're building infrastructure. So the question is.
Speaker Change: Have you gone to somebody with name recognition or has somebody come to you saying you have game-changing technology, we have infrastructure, you don't. We have name recognition, you don't.
Speaker Change: where this could get into the market more quickly in a bigger way, and this isn't seemingly just important to the CSPI shareholders, but it seems to be important for national security.
Speaker Change: The quick answer to that is no one's approached us and, you know, working with these large distributors is our first step into trying to, you know, build a name recognition and get into more feet on the street.
Speaker Change: Okay, but with the larger customers where you say it's harder to get in the door?
Speaker Change: You haven't gone to anybody looking for any kind of partnership to get this done in a big way? Because, you know, when you put out some of these blogs about, you know, 2024 in review and 2025, what's in front of for cybersecurity,
Speaker Change: measures, it's these things all take time and every day that passes there's higher risk to infrastructure, is there not? So it seems like the sooner that ACT gets in the market, the better and the safer it is for everybody.
Absolutely. We're evangelizing that, you know, through our partners.
Speaker Change: with the Rockwell Partners, it's all about training them right now, you know, getting in front of them.
Speaker Change: You know, getting the message out to them on how to position it, where it falls in place, why it's different than the other products that are out there.
Speaker Change: how we complement in case you, you know, come up with some, you know...
issues of, oh, we already have this.
Speaker Change: product You know the messaging and how we you know well There's still faults in those products as you can see there are people getting hacked constantly. This is how we would protect
Speaker Change: and trying to evangelize in as many areas as possible to get that messaging out there.
Speaker Change: And a lot of people still have that. Even with the news as what it is, a lot of people be like, well, I haven't been hacked yet, so I'll be okay right now. You know, and then we have to be like, well, it's only a matter of time when, you know, you won't be saying that.
Speaker Change: Do you see an inflection sometime this year where we see some kind of significant ramp-up in AZT revenues?
Speaker Change: You think it takes place as soon as this year or is it longer out longer? No, we're counting we're counting on this year to have a significant increase in revenue. Yes. Yes. We're budgeting for that Okay. All right. Thank you Yep
Speaker Change: Thank you and once again it will be star 1 on your phone if there were any other questions at this time. That's star 1 if you wish to ask a question at this time.
We did have another question coming in from Mike Price.
Mike Price: Mike, your line is live. Yeah, thanks for taking another question. This comes up every quarter. Joe Nergis didn't ask it, but the question about using some of the cash to buy back shares.
Mike Price: If you are so optimistic about ACT and the future of CSPI, it still seems like a good use of the cash, especially at least to offset any shares that go to management and directors.
Mike Price: Well, last quarter we were in a complete blackout period at Crony and we're actively looking at it to support the stock this quarter and in the future.
Mike Price: Right, but the quarter before, I think you bought, what, 4,200 shares. It's been nominal from one quarter to the next.
Mike Price: Right. Right. Yeah, we're taking a good close look at that, Mike, so we will be purchasing probably more shares going forward.
Speaker Change: Okay and again I know it's a pretty good sized number that that is going to management but you can see if management is getting these these shares and you don't use cash to buy back shares my position everybody else's position in CSPI is somewhat diluted.
Thank you, appreciate it.
Thank you.
Speaker Change: And there were no other questions from the lines at this time. I'll now have the call back to Victor Dellovo for closing remarks.
Victor Dellovo: Thank you. As always, I want to thank our shareholders for their continued interest and support.
Victor Dellovo: Our results in Q1 demonstrated the progress we are making, and this success also highlights the ever-growing market interest of AZT Protect. We look forward to updating you on our Q2 progress in May. Thank you.
Speaker Change: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.