CSP Inc. (CSPI) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to CSP Inc.’s third-quarter fiscal 2011 conference call. My name is [Operator name], and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference call. (OPERATOR INSTRUCTIONS.) I would now like to turn the call over to Mr. Gary Levine, CSP’s chief financial officer. Please proceed, Gary.

Thank you, [Operator name], and good morning, everyone. With me on the call today is our chairman, president and chief executive officer, Alex Lupinetti. I’ll take you through our third-quarter financial results, and then Alex will review our operations before we take your questions. But first, our safe harbor statement. During the call, we will take advantage of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements that may be deemed to be forward-looking under the Act. The Company cautions that numerous factors could cause actual results to differ materially from forward-looking statements made by the Company. Such risks include general economic conditions, market factors, competitive factors and pricing pressures, and others described in the Company’s filings with the SEC. Please refer to the section on forward-looking statements included in the Company’s filings with the Securities and Exchange Commission. With that, let’s get right into our financial review. Our financial results this quarter reflect difficult comparisons in both our Systems and Service and Systems Integration businesses. Total sales were $19.7 million compared with $28.6 million in the third quarter a year ago. The revenue decline is primarily attributable to a 31% decrease at our Service and Systems Integration segment. This was the result of significantly reduced sales to a major hosting customer. As we have been discussing on the past few calls, that customer had acquired one of our largest competitors in 2010. I should note that this was slightly offset by an increase in revenues at our German subsidiary. We reported a 28% decrease in revenues at our Systems segment, primarily due to $1.6 million in royalty revenues in the year-ago quarter from Lockheed Martin related to the E2D Advanced Hawkeye aircraft. We only reported a half million dollars from Lockheed…

Thanks Gary. And welcome to our call this morning. With Gary’s financial review as background, I’d like to talk for a few minutes about the opportunities we see in each of our business segments and then turn the call over to you for questions. Let’s start first with our Systems segment, which consists of our MultiComputer business. This business sells exclusively to the major prime contractors that sell to the U.S. Defense Department. The Systems business reported revenues of $1.5 million compared with $2.1 million in the third quarter last year in which we benefited from $1.6 million in royalty revenue. On last quarter’s call we discussed the budget approval of 10 new E2D Advanced Hawkeye intelligence, surveillance and reconnaissance aircraft. These aircraft are part of phases 3 and 4 of the Low Rate Initial Production Phase, or LRIP. We expect to begin benefiting from the production of these aircraft in 2012. The E-2D is the Navy’s aircraft for “Early Warning and Battle Management Command and Control.” The E-2D analyzes information from internal and external sensors, disseminates the information to Joint Forces, and enables tactical decision making. Our multicomputers are an important component of the intelligence, surveillance and reconnaissance, or ISR, taking place on board the E-2D. Going forward, we will continue to invest in technology to position CSP to capitalize on the military’s focus on ISR. Let’s turn now to our Service and Systems Integration segment, which includes our MODCOMP subsidiary. This segment provides solutions and services for complex IT environments focusing on storage and servers, network security, unified communications, and consulting and managed services. As Gary mentioned, while sales were down 31% in this segment, the lower sales actually obscure the excellent progress we’re making on our strategy to attract higher-margin consulting, as well as solutions and managed…

Thank you for joining us today. We look forward to speaking with you on our Q4 call.