CSP Inc. (NASDAQ:CSPI) Q4 2023 Earnings Call Transcript

CSP Inc. (NASDAQ:CSPI) Q4 2023 Earnings Call Transcript December 12, 2023

Operator: Greetings, and welcome to CSPI's Fourth Quarter and Fiscal Year 2023 Conference Call. At this time, all participants are in a listen-only mode, and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. Please note, this conference is being recorded. I will now turn the conference over to your host, Michael Polyviou, IR at EVC Group. Sir, the floor is yours.

Michael Polyviou: Thank you, Alex. Hello, everyone, and thank you for joining us to review CSPi's Fiscal 2023 Full Year Results, which ended September 30, 2023. The -- 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 your 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, estimates 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 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 report on Form 10-Q filed with the Securities and Exchange Commission. Further the 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 event.

All forward-looking statements are qualified in their entirety by this cautionary stated, as 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. Vic, please go ahead.

Victor Dellovo: Thanks, Michael, and good morning, everyone. Earlier this morning, we announced our fiscal 2023 full year results, and I'm pleased to report we achieved revenue growth of 19% compared to fiscal 2022. I believe our strong performance is due to several factors, including the sustained contribution of the Technology Solutions business, our ability to successfully convert a sizable portion of our backlog to revenue and our proactive decision to leverage our strong balance sheet to finance large customer orders. Furthermore, we reported gross margin percentage of 34% and grew EPS well over 100% from prior year, all significant accomplishments that raises our confidence level that we can continue executing our strategy of transitioning the business to higher-margin products and services.

Moreover, we are continuing to experience positive momentum to kick off the 2024 as we already achieved significant achievements in the technology solution and high-performance product businesses. First, let me address the backlog issue, and then I will provide an overview of the TS business and then spend a few minutes highlighting some of our recent and exciting developments within the HPP business. As many of you already know, we entered fiscal 2023 with a level of uncertainty due to well-documented supply chain issues that impacted global economies. Specific to CSPi, the inability to receive key components from suppliers kept us from shipping orders to our new customers, raising our backlog to near record levels in dampening our revenue opportunities.

However, as the supply chain issue began to ease up during the year, we started receiving some of these key components that we're able to ship finished goods and reduce the backlog to a more normalized pre-pandemic level of approximately $7.6 million. I applaud the team's ability to remain engaged with the customers throughout this period. I believe our clients' loyalty demonstrates the value we bring to them because they recognize that the products and solutions are the most effective, cost-efficient answers to their critical needs. Our performance throughout the fiscal 2023 was driven by continued performance of our Technology Solution or TS business, which grew compared to fiscal 2022. The success continues to be driven via customers increased use of implementation, installation and training capabilities.

Regarding the UCaaS, it turned a corner in the second half of fiscal 2023, and it is now a profitable business. We believe we'll continue to see positive developments within the UCaaS as we move forward through fiscal 2024. Now turning to our high-performance products and HPP business, we recorded total revenue of $6.9 million for the fiscal year compared to $3.8 million in fiscal 2022. The results were within our expectations. However, the level of optimism within the business is high and increasingly growing following the recent launch of AZT PROTECT. 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 it's a new generation of endpoint application cybersecurity protection designed for both critical operational technology and IT environments.

The unique panning solution protects a line of organizations endpoints from a full spectrum of cyber attacks and intrusion techniques, including most advanced zero-day attacks, malware, ransomware, supply chain vulnerability, even those threats that are completely unknown to security teams. By deploying artificial intelligence capabilities, AZT, halts attacks before damage occurs, ensuring seamless operations without disruption or downtime. It lowers the risk code base of security vulnerabilities exploits on endpoint devices applications to near zero without the need of constant patching updates. Developed internally, we knew AZT was going to be a game changer for the HPP business. So the team has significantly targeted several high-profile conferences and seminars to raise awareness of AZT, including the 18th Annual API Cybersecurity Conference, which was held in Houston earlier this month for oil and natural gas industry.

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The Rockwell Automation Conference, which was also held last month in Boston was the world's premier industrial automation and digital transformation event. The ICS Cybersecurity Conference, which was held in Atlanta in October is the largest, longest running event series focused on industrial cybersecurity. Since 2000, the conference has gathered ICS cybersecurity stakeholders across various industries and attracts operational and control engineers, IT, government vendors and academics. And then finally, the ManuSec U.S. Summit, which was held in October in Chicago. ManuSec is the premier conference for cybersecurity and manufacturing, addressing sectors drive towards digital and automation and how imperative it is to balance it with security.

We know this is a crowded field, so a visible on-site present at these and other events was critical and allowed the team to engage and communicate with key influencers and prospective clients, including Fortune 500 companies. The impression feedback is quite positive. And the comment we often hear from them is we see the need for something like AZT. Subsequent to the end of fiscal 2023, we received orders from a Fortune 500 chemical manufacturing to protect its critical production application from all forms of attack, enabling production lines to continue running without disruption. We also received an order from a Western Intelligence Agency to protect its critical intelligence gathering and analysis operations from cybersecurity attacks.

This new contract builds on ARIA cybersecurity, proven track record, improve security solutions for military and intelligent agencies around the world. Additionally, we launched our AZT PROTECT solution in Australia via partnership with Logi-Tech a leading local managed security service provider. By adding AZT PROTECT to its portfolio, Logi-Tech can offer a groundbreaking service protecting critical applications and operational technology and IT environments such as manufacturing, mining and government. To summarize, we gathered strong growth in our fiscal 2023 and position the Company for even greater success in coming years. Although the TS business has been the growth driver over the past few years, the emergence of AZT offers -- offering has changed the dynamics and gives us two businesses that can grow side-by-side and provide consistent growth with significant upside potential.

With that, I will now ask Gary to provide a brief overview of the fiscal year's financial performance.

Gary Levine: Thank you, Victor. For the fourth quarter ended September 30, we reported revenue of $15.3 million compared to $16.7 million in the year ago fiscal fourth quarter. We reported a significant revenue increase of 66% in last year's Q4 as we began to work down the record backlog, so the comparability represented a high bar. For Q4, gross profit was $5.2 million or 33.8%, respectively. We also lowered compared to the year ago period. However, whereas the supply chain was responsible for some of the choppiness, we achieved significant annual growth in fiscal 2023 compared to fiscal 2022 as we reported revenue of $6.4 million, a 19% increase compared to $54.4 million in the fiscal year ago. As Victor mentioned, this performance is due to the continued success of converting some of the older backlog, allowing us to deliver product to our customers.

We reported gross profit of $21.9 million or 34% of sales compared to $18.8 million or 35% of sales in fiscal 2022. The slight decrease in gross margin compared to the year ago period was anticipated and due to the business mix and the lower margin products that had been in backlog. We continue to believe our annual gross margin will expand as the business transitions to a higher-margin product and services. For the fourth quarter, our engineering and development expense was $700,000, down $150,000 from the year ago fiscal quarter with a reduction in outside contractors in not filling some open positions. Our SG&A costs for the fourth quarter was $4.8 million, similar to last year. For the full fiscal year, our engineering and development expense for the fiscal year was $3.1 million, relatively flat with comparison to the year ago period.

Our SG&A expenses in fiscal '23 were $16.9 million compared to $15.8 million in fiscal 2022 due to increased variable compensation for bonuses, sales commissions for sales -- higher sales as well as payroll and initial costs associated with unveiling and launching of the AZT which includes conferences, participation and hiring several salespeople. We reported net income of $5.2 million or $1.09 per diluted share for the fiscal year September 30, 2023, and compared to net income of $1.9 million or $0.42 per diluted share for the fiscal year ended September 30, 2022. During the last quarter of the fiscal year 2023, the Company received an employment retention credit, ERC, of $2.1 million net of expenses. The ERC was not available in fiscal 2022.

We had a tax benefit of $0.5 million due to the release of the valuation allowance against our company's deferred tax assets. Included in the net income is stock compensation, a non-cash expense of $1.1 million. The Company had cash and cash equivalents of $25.2 million as of September 30, 2023, compared to cash and cash equivalents of $24 million as of September 30, 2022. The cash and cash equivalents are considerably higher compared to cash and cash equivalents of $13.8 million for the quarter ended June 30, 2023, as significant cash flows were generated through the payment of receivables, including payment from financing sales provided to customers prior to fiscal year 2023. We believe this robust financial position allowed us to successfully implement this approach.

It yielded positive results, and we will entertain certain options if it meets our strictest criteria. I also want to highlight that the Board of Directors approved a quarterly dividend of $0.04 per share payable on January 9, 2024, to shareholders of record on the close of business of December 22, 2023. With that, I will turn it over to the operator to take your questions.

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