CSP Inc. (CSPI) Q2 2024 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to CSPi's Second Quarter Fiscal Year 2024 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Michael Polyviou. You may begin.

Thank you, Jenny. Hello, everyone, and thank you for joining us to review CSPi's fiscal 2024, second quarter results, which ended March 31, 2024. With me on the call is Victor Dellovo, 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. [Operator Instructions] Statements made by CSPi's management on today's call regarding the company's business that are not historical facts may be forward-looking statements as the term 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 company cautions you that these statements reflect the current expectations about the company's future performance or events and are subject to several uncertainties, risks and other influences, many of which are beyond the company's control that may influence the accuracy of those statements and the projections upon which the 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 Reports 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 of the time with respect to future events. All forward-looking statements are qualified in their 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. With that, I'll turn the call over to Victor Dellovo, Chief Executive Officer. Victor, please go ahead.

Thanks, Michael, and good morning, everyone. Earlier this morning, we announced our fiscal 2024, second quarter results, which once again demonstrates the return we are generating from our strategic shift towards high-margin products and services. While we continue to invest in the broadening the launch of AZT PROTECT, we grew services revenue 23%, increased our gross margins, 47% and realized fivefold increase in net income compared to a year ago fiscal second quarter. Our progress during the first half of the year, combined with the building of pipeline of AZT position us for future success. I'll start my review of the operations with our high-performance product or HPP, which is benefiting from the growing market interest in AZT offering. During the quarter, HPP contributed $2.5 million total revenue compared to $1.5 million in the year ago quarter. The AZT offering is changing how we operate and how the industry perceives CSPi. We have generated significant attention and interest in industry events and conferences, and this interest is from some of the largest global corporations. Despite only being months into AZT launch, we are building traction in the market and the level of customer enthusiasm remains high as does the new business lead pipeline. During the quarter, we signed our largest contract for AZT, a multimillion dollar agreement with a global pharmaceutical company, which is deploying AZT across its global manufacturing platform and is in the process of protecting over 40 facilities and from the growing cybersecurity threat to operational technology from hostile nations, terrorism and organized crime. Early this week, a case history of AZT PROTECT was published in the journal, an award-winning publication for Rockwell Automation. We can't begin to tell you how critical and important this is to reach a subscriber base of over 50,000, a targeted audience that is committed to keeping up-to-date with leading-edge methods, trends and technologies that protect the Industrial Automation segment from cybersecurity attacks. Our partnership with Rockwell is expanding as tomorrow, we are cohosting a webinar titled CyberRx, how to automatically protect Rockwell OT customers from today's cyber-attacks. Gary Southwell, General Manager of CSPi, ARIA Cybersecurity will be joining Thomas House Life Science, Cyber and Digital Consulting at Rockwell Automation. They will be discussing why the purdue model passive defense and AV/NgAV are not stopping the most dangerous attacks. The webinar enables Rockwell to discuss the unique set of requirements that are needed to protect an organization's production applications, attack surface and how ARIA AZT PROTECT plays a unique and critical role in meeting this need. Gary and Thomas will delve into the composition of supply chain attacks and finally hear about a case study of how one of the world's largest pharmaceutical manufacturers use ARIA AZT PROTECT in combination with Rockwell's industrial automation suite to protect their environment and meet their challenging OT requirements. As we outlined during our last call, we are leveraging the height of the trade show season and attended several of the more intimate OT-focused events as we continue to further expand our brand presence within the OT marketplace. This is part of our wider launch strategy, which is to engage with Fortune 500 companies to demonstrate the need for AZT PROTECT solutions. We believe our approach is building interest with the slower sales cycle customers, and we are building a pipeline opportunities focused on oil, gas, energy and water treatment plants, just to name a few of the focus industries. To increase shorter-term revenue opportunities for AZT PROTECT, we implemented Phase 2 of our multipronged sales strategy and hired 3 new salespeople to focus our middle-market enterprise. As a result of this investment, we have doubled the dedicated AZT sales team. To further expand AZT PROTECT market penetration, we are actively expanding existing partnerships and exploring the creation of new ones. We see this part of our go-to-market strategy is a pathway to address the government segment as we are very close to signing one of the largest government-focused distributors. We believe our direct sales team and the ability to use our partners' depth is going to significantly raise the profile of AZT offering and build revenue opportunities. We also announced 2 major awards that ARIA Cybersecurity Wins Global InfoSec Cybersecurity product award for AZT PROTECT at RSA and ARIA Cybersecurity Wins Prestigious Globee Cybersecurity Protect Award for AZT PROTECT. The technology solution or the TS business continues to perform and contribute $11.2 million to the total revenue of $11.8 million a year ago this quarter. During the first fiscal quarter, we announced a 5-year multimillion dollar contract provide managed services for a prominent Florida public college, one of the largest and most diverse institutions of higher education in the nation. We will deliver proactive monitoring management and support for the college critical technology infrastructure, including network, security and private cloud services. The success of TS continues to be driven by our customers' increased use of implementation, installation and training capabilities. This component of our company remains quite robust as we added new UCaaS customers during the quarter. The TS pipeline is currently running above average. The cloud business currently has a record pipeline. This is a highly stable business as we have achieved a customer retention rate of more than 90%. The shipping business remains relatively unchanged from prior quarters. We did sign a new customer, and we are looking forward to fostering a strong relationship over the coming years. As I stated on the prior call, we are currently working with one of the largest freight operators specializing in containerized ocean exports serving numerous sports worldwide with an extensive global agent network. We have -- in order for over 14 ships that are expected to be retrofitted over the next few months and upon completion, we expect to provide our managed services for each of these ships where we'll add to our monthly recurring revenue. To summarize, with the successful launch of AZT offering, I believe we have positioned the company for sustained long-term growth and success. Our 2 businesses are growing and the pipelines are growing, and we will translate to increased revenue margins and profitability. Lastly, we believe the recent 2-for-1 stock split increased the liquidity of CSPi shares, and I believe it will provide greater opportunities for institutional participation and enhance shareholder value at the time we are broadening our business prospects. We also believe the success of AZT launch and growing cybersecurity threats are allow us to now engage in an active investor relations strategy. We will keep you posted as we schedule conferences, participation and other related events. With that, I will now ask Gary to provide a brief overview of our fiscal second quarter financial performance. Gary?

Thank you, Victor. For the fiscal second quarter ended March 31, we reported revenue of $13.7 million compared to $13.3 million in the year ago fiscal second quarter. Our revenue performance was driven by a 23% growth of the service business. Our Q2 gross profit, which was greatly impacted by the higher service revenue was $6.5 million or 47.3% of revenue compared to $5 million or 37.6% of revenue. For the fiscal second quarter, our engineering and development expenses was $726,000 compared to $858,000 as we reduced outside contractors and elected not to fill some open positions. Our SG&A costs for the fiscal second quarter was $4.5 million compared to $3.9 million in the year ago fiscal second quarter as we continue to invest in the AZT offering, including building out the dedicated sales team and trade conferences participation. Benefiting from the higher service revenues and higher margin, we recorded net income of $1.6 million or $0.16 per diluted common share for the fiscal second quarter ended March 31, 2024 compared to net income of $0.3 million or $0.03 per diluted share for the fiscal second quarter ended March 31, 2023. Per share amounts were -- have been retroactively restated to reflect the 2-for-1 stock split. Following the 2-for-1 stock split, we currently have 9.5 million shares outstanding. The company had cash and cash equivalents of $27.1 million as of March 31, 2024. We believe our robust financial position allows us to execute our multi-prong sales and growth strategy for the AZT offering as well as other products and service lines and financial financing large customer agreements, which have been highly successful in the past for CSPi. Lastly, the Board of Directors approved a quarterly dividend of $0.03 per share payable on June 12, 2024, to CSPi shareholders of record on the close of business of May 24th, 2024. With that, I will turn it over to the operator to take your questions.

[Operator Instructions] Your first question is coming from Joseph Nerges of Segren Investments.

How's everything going. Okay. A couple -- one question and one follow-up, where you're cutting me down here. One question. I'm going back after the last conference call you did, Victor. And you mentioned that we're close to rolling out a full production line version of AZT, which sort of -- for the IT environment. Is that still in beta testing because that hasn't been released as of yet?

Correct. Yes. We'll -- it should be May. We're doing some additional testing, just to make sure everything is where it needs to be. But we have rolled it out to a few of the customers already with no issues, but we have some enhancements and stuff like that, where we're developing right now.

And how will that enhance what we already have out there? What do we expect that add-on will help us with...

In the OT space, right, updates in patches are not as important, and that's why our product kind of fits into where it protects it even without the patches. In the IT space, they still want to do patching. So we needed to allow for that, whether it's manual or automated. So that's where the enhancements came in the IT side of it, where, like I said, in the OT space, patching is not as important just because you can't really touch the machines in the IT, whether it's a Microsoft patch or any other patch that's out there. We need to allow for that, and that's kind of where we've been developing and making sure it works with all the other products that are out there.

Okay. And just one quick follow-up here. And that is -- I think the last time you mentioned with the chemical company, are Fortune 500 chemical company, where we have multiple sites. But basically, it's the plant manager's decision whether he wants to implement the AZT PROTECT. Well, the oil sales only comes out now. I can't imagine -- the approach that I would make to any plant manager would be, do you really want to be the plant manager to decide to not implement and yet you were hacked at your plant? I mean that's sort of a career ender isn't it? He's going to be in a real trouble, x number have implemented it, they're not hacked, and he happens to be the plant that's hacked or breached.

Yes, that makes sense, but sometimes common sense is not the thing that people use all the time.

No, I certainly wouldn't mind -- I would put that in the back of their mind, if nothing else.

No, we always do. We always do.

We've got a question from Brett Davidson, who's a private investor.

Question regarding those 3 new salespersons talks about targeting larger mid-market companies, what does that look like? Are these guys going out and meeting at their locations? What exactly does it mean that they're targeting mid-market companies.

When we talk -- the mid -- instead of looking at the top Fortune 500 companies, the huge gas companies, the huge -- the companies that are definitely have a need, but move really, really slow. We're trying to get into that next layer where it's they're not as large, and we'll be able to target them and hopefully, decision-making can come a lot faster. POCs could go a lot faster. So -- and that's a combination of meeting some of the customers at trade shows, calling them on the phone, visiting them locally, whatever it takes. It's a combination of everything.

And is there a pipeline right now regarding the AZT product? Is there stuff that is in process, it's not quite to the sales line? Is it someone...

Yes, it's a combination -- yes, it's a combination of -- we have current POCs going on, where they're actually testing the product, whether it's in a lab or whether it's in their environment and there's other ones where that lower down the line where we started talking to them. And now it's about getting -- these large companies all have big labs and getting the authorization and getting the security clearance and getting everything else that gets through, so we could go into the lab and get set up, that's a process, a lot of paperwork, a lot of contracts, but getting into these large opportunities. That's what we've been focusing on. And we're using the automation partners like the Rockwell's of the world and other players that I can't mention to leverage their sales staff to try to get into the relationships that they already currently have. So that's kind of why we brought into the big -- we're trying to work with the big security players that are out there also, to leverage the long-term relationships they may have that can kind of move us, a, get us in faster as a smaller company, CSPi competing with the Palos and the name brand by leveraging those salespeople in the relationship and that they have for maybe years, we're able to have conversations with these large companies that might take us a year just to get a conversation going, we're able to have an immediate conversation within weeks and try to get the next level where PLC.

Is there a way to kind of measure that in like a dollar figure? Or is that more like a fool's area at the point we're at and selling these things? Or is there a way to like measure this pipeline of potential deals?

We have done some measuring internally, which I'm not willing to share, but we look at the initial opportunities based on the conversations we have, and we do have a pipeline that we're managing against. We have seen with some of the initial conversations started and we put an estimation of x amount of dollars. And as the conversations went on the pipeline actually increased based on other needs and other people we talk to in the organization. So yes, we are putting a pipeline in estimation of revenue that we're managing internally based on the initial conversations that we're having with each and every organization.

Your next question is coming from Mike Price, who's a private investor.

I know that you want to have wider distribution of shares and shareholders. But with $120 million market cap and what you paint in front of you with AZT and having $27 million in cash, it seems like there's a room to be buying shares. I've asked this question each of the last 3 conference calls and you have the authorized shares, but you haven't bought any shares. Any thoughts along those lines?

Yes. Over the last quarter or 2, when the stock was higher than it is currently, we didn't see the need -- but as -- at this price level, we are definitely considering supporting it and buying shares in the upcoming quarter.

Your next question is coming from Sergio Hibar of Hibar Research.

Congratulations on huge improvement on the bottom line. I think you gave investors a head [indiscernible] in looking at the reaction today to the news, investors are used to seeing improvements in the top line and not the bottom line. So I think that that's fantastic that you're concentrating on that. And I was wondering if you can give us some color on bundling area with the major security products like, for example, with Palo Alto.

That is definitely an option. We do complement if it was a Palo Alto or a CrowdStrike or any of the other players, we can work in conjunction with all of them, especially where some of the old licenses in the XP world or Windows 7 that they may not be supporting, we can definitely take over any system that's running an older version. It's up to the customer, if they love the Palo or the CrowdStrike or whoever they're using, they can continue using it and we will work side by side. If they see us as a product that they want to fully implement across the platform, we'll be more than happy to take all the business. So, yes, we are not looking to rip and replace any of the major players out there at this stage of the game.

So -- but we're not bundled directly so that it's sold, like, for example, Palo Alto will include your the area with the Palo Alto product?

I would love to get that relationship going. If you have any context, could that -- could help do that? Please let me know.

So you have a contact with the unnamed company, which I think is Palo Alto, and that's why I'm asking that. I know you can't answer because -- so I'll go on to another question. Can you talk about why the dividend was decreased?

Yes, we looked at it from the standpoint that if we took the shares in, it would have been really at $0.025.

So. Yes. So we went to $0.03, yes.

Okay. And are you going to be giving...

Apologies, you've had your allotted questions. If you do have any more, Sergio, you can press Star 1 and join back in the queue. Your next question is coming from Paul Scolardi, he is a private investor.

Two quick questions. First of all, we constantly see in the news of the government warning against threats, threats against utilities, water utilities, all utilities. Can you give us some color on are we approaching this industry? Have we approached the industry? Are we getting traction? Are we getting the government aware that we have a solution to what they're warning about?

To summarize it, yes, on all parts. We -- I have mentioned, just a few moments ago, that we are focusing on the energy, the water treatment. We've done marketing outreaches to all of them. We've done -- we've talked to individuals that shows -- and we are -- mentioned -- I mentioned also very, very close to signing one of the largest government distributors out there that would allow us to do business directly with these different agencies, that would speed up the process because the distributor holds all the necessary contracts that would allow us to move through the system as quickly as possible. Let's put it that way. But yes, it's all over the news. You cannot not see it. It's definitely something we're -- we focused on and some of the trade shows, these folks show up there, and we've had conversations with them. But as I mentioned...

But your people going out to the water utilities?

If they will take a meeting, absolutely. We still believe it or not, we're still in the world and nobody really goes to work any longer, mostly everything is over Zoom. They may go in once a week, twice a week. So a lot of the calls are over Zoom, but those conversations are happening.

Okay. And then last question, with AZT, we haven't -- but can you give us some visibility now that you've been in the market trying to -- with these large companies may take time. I mean do you expect to be in this fiscal year 2024 to be closing AZT contracts? Or do you think the sales cycle now is going to -- this is a longer-term story now that you've been in the marketplace? Or do you expect this start closing contracts. You closed some already. Should we expect to see in this year and you can't predict the future, but you're the CEO, do you expect to see AZT contracts continue to be signed in this fiscal year?

Absolutely. Of what magnitude, I cannot say, for sure, but contracts, absolutely. We are signing contracts, and I know everyone gets excited when we put announcements out there, but major contracts, I will announce. But there are other contracts that we have closed that don't warrant a public announcement, it could be 100,000 or 50 -- 10. There are different levels of contracts that we are closing, but they don't warrant a public announcement. So the major ones that are in the millions, are announced. But yes, there are contracts that are closing and will continue to close of different levels. And if we hit another major one then, yes, I'll announce it when the time is right.

Our next question is coming from Joseph Nerges of Segren Investments.

Yes. Just one follow-up on you mentioned the webinar tomorrow with Rockwell and then you mentioned the journal article that Rockwell put out. Will you be putting those on the website? Can we access those on website?

Well, yes. I think you had the invite already that's out there, right? You can join the webinar tomorrow, right? And then the -- once we get a copy of the journal, we'll definitely post it on the website that you can go in.

Your next question is coming from Brett Davidson, who's a private investor.

Yes, I guess I was getting a little long-winded. So I didn't get to wrap this up. But getting back to that kind of pipeline or how you guys want to refer to it, can you just give some character of kind of what the size of these deals are potentially are we talking hundreds of thousands, millions, tens of millions or all of the above?

Tens of millions. We don't have anything in the millions and hundreds of thousands, we have on the pipeline.

Your next question is coming from John Crotty, who is a Private Investor.

I really want to tell you that, that was great seeing the awards you won, but more importantly, you put out a PR the other day that really has some great information in it. You mentioned the new industries you had won. And I was wondering if we could just get a little color on them. You had stated that you had won energy and utility as well as pharma manufacturing. Now we're aware of the pharma company but the other 3 are new and I knew that you were going after energy companies, especially with the show at Houston. Can you give any color as to what types of utility it was and maybe what type of energy company it was as well as the manufacturing?

The manufacturing -- the utilities and the energy are like the oil and gas, I can't mention any of the names, but they're just you would know who they are. They're just some of the big oil and grid companies that we're talking to, and we met at shows and getting POCs together and trying to get into their labs. So yes, the shows have been really good to get us -- to in front of different companies and build some relationships a lot quicker. So we will continue to do the necessary shows that makes sense for us.

Right. Because we were aware that the targets that they're coming after in the U.S. be in the operational infrastructure, electrical grid as well as pipelines, those are the types of levels of quality we're talking in the industry you're involved with, right.

Correct.

Thank you very much. While that appears to be the end of our question-and-answer session. I will now hand back over to Vic for any closing remarks.

Thank you. As always, I want to thank our shareholders for their continued interest and support. We are entering a period of increased activity, and we look forward to sharing our progress in our fiscal 2024, third quarter in August. Until then, be well, stay safe and enjoy the summer.

Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

Bye.

Bye.