CSP Inc. (NASDAQ:CSPI) Q1 2024 Earnings Call Transcript
CSP Inc. (NASDAQ:CSPI) Q1 2024 Earnings Call Transcript February 14, 2024
CSP Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the CSPi's First Quarter Fiscal Year 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Michael Polyviou. You may begin.
Michael Polyviou: Thank you, Holly. Hello, everyone, and thank you for joining us to review CSPi's fiscal 2024 first quarter results conference call, which ended December 31, 2023. With me on the call today 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. 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 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 the statements and 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 it over to Victor Dellovo, Chief Executive Officer. Victor, please go ahead.
Victor Dellovo: Thanks, Michael, and good morning, everyone. Earlier this morning, we announced our fiscal 2024 first quarter results. However, before I ask Gary to review the quarter, I want to spend a few minutes highlighting two developments that were recently announced as I believe these truly demonstrate our growing business prospects and continued optimism with high-performance products in the Technology Solution businesses. To begin, the launch of the AZT PROTECT offering is and continues to be a game-changing development within the high-performance products, or HPP business, because the advancements allow us to offer our customers a giant leap forward in the evolution of cybersecurity solutions. Few days ago, we announced our largest and most significant contract to date for AZT, a multimillion dollar agreement with a global pharmaceutical company deploying AZT across its global manufacturing operation technology, or OT, protecting over 40 facilities in response to the growing cybersecurity threat to OT from hostile nation states, terrorism and organized cybercrime.
This customer appreciates the enormous risk of cybersecurity attacks on the facilities. It could lead to theft of intellectual properties, compromise safety and quality, regulatory fines, and major disruptions to its manufacturing process. However, many other remain extremely vulnerable and are ill-prepared to protect their critical assets from new wave of cybersecurity threats that can bypass network bypass protections in modern cloud-based next-generation antivirus solutions. The second development that was also recently announced was a five year multimillion dollar contract to 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 college critical infrastructure including networking, security and private cloud services.
I believe these two developments are a strong indicator of the future success and is precisely why the Board of Directors had the confidence to raise its quarterly dividend to $0.05 per share. I will spend a few moments highlighting the Technology Solutions or the TS business, and then I will focus the majority of my comments on the AZT offering as it has the potential to dramatically change our growth curve. The TS business performed as planned, and we continue to be excited about the current business as well as the leads being generated on a daily basis from new and existing customers. The TS business accounted for $14.7 million of the overall revenue and its success continues to be driven by our customers' increasing use of our implementation, installation, and training capabilities.
As I stated on the last call, the UCaaS is becoming a profitable business, and we ended the fiscal first quarter with an increase in clients, and based on our current information and leads flow will continue to see an upward swing in the clients' activity as we move throughout the fiscal 2024. As many of you know, it's been a challenging business environment for several years and the team's ability to remain engaged with customers is amazing. I believe the yes, can-do attitude has enhanced our clients' loyalty because they recognize that our products and solutions are the most effective, cost-efficient answer to their critical needs. For example, while our cruise-related business has been relatively quiet during the following of the pandemic, the team has remained on the ready, and we are beginning to see some positive developments.
For example, we received orders for several ships from one of the cruise line operators and the consistent growth of our non-cruise related shipping business is continuing as we currently are working with one of the largest freight operators specializing in containerized ocean exports serving numerous ports worldwide with an extensive global agent network and has become one of our larger MSP customers. Turning now to our high-performance products, our HPP business, my comments will focus solely on the emerging AZT offering as it continues to generate a significant amount of interest in the market that we believe will grow to over $50 billion based on the number of devices that need to be protected across the relevant verticals. We are excited about the industry's positive reaction to AZT.
And we will remain bullish. Our sales funnel is getting larger and is attracting prospects across the Fortune 500. As a reminder, AZT's advancement allows us to offer our customers a giant leap forward in the evolution of cybersecurity solutions. AZT's performance surpasses what's available on the market today and its new generation of endpoint cybersecurity protection designed for critical operation technology environments. For example, and based on the internal testing, we believe AZT would have stopped solar wind Sunburst malware used during the attack after the initial breach. The unique tie-in solution protects aligned organization endpoints from a full spectrum of cyberattacks and attack techniques, including the most advanced zero-day attacks, malware, ransomware, supply chain vulnerabilities.
Even those threats that are completely unknown to security teams. By deploying artificial intelligence capabilities, AZT automatically halts attacks before damage occurs, ensuring seamless operations without disruption or downtime. It lowers the risk of applications code-based vulnerabilities from exploit while running on endpoint devices to near zero. This removes the need for constant security patching updates and associated costs of production downtime. On the last call, I mentioned a number of industry events and conferences the team attended. And that each one, our name and reputation is growing, and we are garnering more and more attention. For example, Gary Southwell, CSPi's General Manager of ARIA Cybersecurity, recently hosted a webinar with retired Pfizer Global Head of Automation Engineering, Jim LaBonty.
They discussed a wide range of challenges manufacturers face in today's new threat landscape. They delved into issues manufacturers need to address ranging from how to select the right technology to best practice to ensure critical manufacturing operations are protected. They focus on how current passive and active cloud-based security solutions are failing to guide against the new era of AI embedded attacks, creating substantial financial, regulatory, and reputational risk in manufacturing sectors such as pharmaceuticals. The webinar demonstrated how ARIA Cybersecurity's breakthrough solutions for OT environments would have stopped the solar winds attack and other recent high-profile attacks on critical infrastructure, where existing defenses have failed.
We are planning additional webinars every quarter going forward. Additionally, we have -- we will be attending several conferences in the coming months, including the CS4CA manufacturing conference in Houston, and the DistribuTECH International Conference in Orlando. Our current customers are very chemical and natural security pharmaceuticals, demonstrating the breadth of our offering. In fact, there is no limit, no industry we can't access through our AZT offering given the wide range of needs of companies dealing with constant attacks on their enterprises. Our goal is to ensure the team remains focused and is able to deliver consistent results, which basically means it's just as important to pursue smaller transactions while still hunting elephants which can take up to several months to close.
Additionally, we have continued to add resellers to leverage their knowledge, expertise, and customer depth to drive greater adoption of ARIA Zero Trust Protect, including the addition this week of a leading cybersecurity of ARIA's firm and reseller, which serves around 6,000 companies worldwide, including a focus on large enterprises in the world. To summarize, we remain cautiously optimistic and continue to position the company for greater success throughout fiscal 2024. We have two stellar businesses, the TS business, which has been the growth driver over the past few years, and the reemergence of the HPP through AZT offering is generating significant buzz throughout the organization and within the industry. With that, I will now ask Gary to provide a brief overview of the fiscal first quarter financial performance.
Gary?
Gary Levine: Thank you, Victor. For the first quarter ended December 31, 2023, we reported revenue of $15.4 million compared to $18.3 million in the year ago fiscal first quarter. The revenue could have been higher. That is if certain contracts were signed as expected towards the end of Q1. However, there were pushouts to the end of the year in the holiday season and signed contracts were signed earlier this quarter and will benefit fiscal Q2 revenue. Our Q1 gross revenue was $4.1 million or 26.6% of revenue compared to $5.8 million or 31.7% of revenue in the same prior year period. The decrease in gross margin compared to the year ago period as anticipated was due to the mix of business and the lower margin products. We continue to believe our gross margin will expand as the business transitions, especially the AZT offering, to higher-margin products and services.
For the first fiscal quarter, our engineering and development expenses were $700,000, $173,000 lower from the year ago fiscal quarter as we reduced outside contractors and elected to not fill some open positions. Our SG&A costs for the fiscal first quarter was $3.7 million compared to $3.6 million in the year ago fiscal first quarter. The slight year-over -- year-over-year increase is attributable to the addition of several salespeople and increased conference participation to help us raise awareness of the AZT offering. We reported a slight net loss of $73,000 or $0.02 per diluted share for the fiscal first quarter ended December 31, 2023 compared to the net income of $1 million or $0.21 per diluted share versus fiscal first quarter ended December 31, 2022.
The company had cash and cash equivalents of $25.6 million as of December 31, 2023, compared to cash and cash equivalents of $25.2 million as of September 30, 2023. We believe our robust financial position allows us to be flexible and successfully implement our operating initiatives, and if necessary, leverage this to finance large customer agreements which have been highly successful in the past for CSPi. As Victor mentioned earlier, the Board of Directors approved an increase in the quarterly dividend to $0.05 per share, payable on March 8, 2024, to shareholders of record on the close of business on February 26, 2024. With that, I will turn it over to the operator to take your questions.
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