Gary Levine - Chief Financial Officer, Treasurer, Secretary Victor Dellovo - President, Chief Executive Officer, Director

William Kidston - North & Webster

Thank you, Kevin. Good morning everyone, and thank you for joining us.

With me on the call today is Victor Dellovo, CSPI’s Chief Executive Officer. Before we begin, I’d like to remind you that during today’s call we’ll 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 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. During today’s call I’ll discuss the first quarter’s financials, then Victor will provide an update on our business segment and on our strategic progress.

Then we’ll open it up to your question. Revenues declined by 4% to $20.4 million from $21.3 million a year ago, reflecting lower sales in the information technology solutions segment.

Foreign exchange had a negative year-over-year effect of $609,000. Our total cost of sales for Q1 was $16.5 million decreased by $324,000 from the prior year.

Gross profit for the quarter was $4 million compared to $4.5 million a year ago. Gross margins for the quarter were 19.4% compared to 21.2% in the prior year.

The decrease was the result of $1.1 million in the high margin royalty revenues last year and no royalty revenues this year. In the High-Performance Products & Solutions segment we recorded higher than expected revenue from Myricom’s legacy products which offset the lack of revenue from E-2D royalties but obviously did not offset the margin effect.

First quarter engineering and development expense decreased to $0.9 million from $0.6 million a year ago, primarily as a result of the Myricom acquisition and our continued investment in that business. As a percentage of sales, Q1 engineering and development expense was 4.2% compared to 3% last year.

We expect that our engineering and development expense will remain in the range of 3.1% to 4.3% as a result of our ongoing product development initiatives to capitalize on the Myricom opportunity. SG&A expenses were $4 or 19.7% of sales flat with the year ago quarter in line with the target range of 15.5% to 19.8% of sales.

The effective tax rate for the quarter was 54% which was higher than our estimated rate due to no tax expense was recorded for the U.K. due to the expected utilization of our net operating losses and other statutory deductions and benefit for our R&D credit for calendar year 2014 from that portion of the calendar year that was part of our fiscal 2014.

The R&D credit statue was reinstated by current risk [ph] in December for calendar year 2014. The prior year tax rate was very low due to the fact that the bargain purchase was recorded net of the income tax expense.

We expect our tax rate going forward to be approximately 42%. We reported a net loss of $437,000 or $0.12 per share compared with net income of $346,000 or $0.10 per diluted share a year ago.

Cash and short term investments decreased to $11.7 million from $16.4 million at year end. The decrease was primarily due to the change in working capital which included $4.2 million increased in our accounts receivable as a result of high levels of sales received late in the quarter.

Lastly, our board of directors voted to pay a quarterly dividend of $0.11 per share to shareholders of record on February 26, 2015 that’s payable March 12, 2015. We’ll continue to focus on our growth initiatives while improving our bottom line performance by increasing our level of high margin products and maintaining our focus on cost containment across the organization.

I’ll now turn the call over to Victor.

Thanks, Gary. The results were off from last year.

As expected, given that we do not expect to receive any royalty revenue from E-2D until the second half of fiscal 2015. That said, from a strategic perspective it was a very good quarter.

We have executed well on each aspect of our long terms growth strategy. Myricom is performing better than expected and has good potential to help us smooth out the one thing that inherent in our High-Performance Products & Solutions segment.

In the IT Solutions segment we made good progress in growing our managed service pipeline which we expect will enable us to increase our margins and recurring revenue base over the long term. With that, I will get right to segment review, starting with the High-Performance Products & Solutions segment.

Revenue in the segment was up by $0.4 million in the quarter compared with last year. Strong sales of Myricom legacy products more than offset a decline in MultiComputer revenue as a result of lack of royalties compared with a year ago.

In fact, this was the highest revenue quarter for Myricom since we acquired the business. While we are pleased with the performance of the legacy product, there is significant greater potential for Myricom with the next-generation products in new markets.

We are making significant investment to capitalize on these opportunities. Last quarter we mentioned that we expected to shift data Myricom project to target new vertical markets around mid fiscal 2015.

We are on schedule and we have two customers testing data products right now. We should have additional customers and data in the next few weeks and we are looking to formally introduce the initial products in the current second quarter with general availability in Q3.

We expect to continue to push products to the channel as we proceed throughout the year. We anticipate recording meaningful revenue from the next generation products in the fourth quarter of this fiscal year.

Regarding E-2D, we continue to expect revenues for five planes this year. But as we have discussed, all this revenue will come in the third and fourth quarters.

We are in discussion with our customers regarding production schedule. The lumpiness in this business is why it’s so important for us to invest in potential [ph] that Myricom has to smooth out the revenue in the High-Performance Products & Solutions segment.

We made great progress in the first quarter in this regard. Let’s turn out to our IT Solutions segments.

Segment revenues in the quarter were down $1.3 million year-over-year due to lower sales at our U.S. subsidiary.

Germany performed well in the quarter, what’s most exciting right now in Germany is the interest that we’re seeing in the market for managed service offering. Market demand is strong and we’re doing well in building our pipeline of prospect.

We are particularly encouraged that we are starting to get involved in bigger deals and are optimistic about closing some of these down the road. One example of a contract win this quarter with Germany -- German based KWS one of the largest crop breeding companies in the world were revenues of more than €1 billion.

The serial division of KWS reach out to Germany operations because of our many years in the security environment as well as our multi-national footprint and integrating consulting approach. With this engagement we pioneer with McAfee [ph] to introduce a web gateway for more than 70 global locations.

Going forward, we plan to upgrade the existing firewalls and implement an intrusion detection system. One particular special thing that large customers are coming to us for is penetration testing.

We have a hacking specialist engineers on board and customers are coming to us to secure this systems. In the past few quarters we’ve been focused on acquiring engineering talent to enable us to capitalize on these managed service opportunities.

Now we are working on increasing that productivity of these new engineers. Next, we expect to start focusing on hiring in sales areas to better capitalize on demand.

We are seeing [Indiscernible] with that we’re staying into close mode business in the pipeline. Based on our current pipeline we continue to expect that managed services will be key revenue in earnings generated for fiscal 2015.

In the U.S. we started out very slow in the first two months of the quarter, but then reported a record month in December with broad demand across the customer base.

We are pleased to see the return of one of our larger hosting customers during the quarter. Like in Germany in the past few quarters we’ve been focused on acquiring engineering talent enabling in them to capitalize on these managed service opportunities.

Now we are working on increasing the productivity of these engineers. In the U.K.

we performed very well in the quarter that is usually the softest of the year. This was their result of the increasing traction that we are gaining from cross selling, our cross selling strategy.

We look forward to further collaboration from the U.S. Germany and the U.K.

subsidiary. In summary, while our first quarter was expectedly soft, we executed well on every aspect of our long term growth strategy and we are encouraged about the future.

We turned in excellent performance in Myricom as a result of better than expected sales of legacy products. And we are progressing on our next generation products towards commercialization.

We also continued to execute well on our managed service strategy with our pipeline growing in both Germany, in the U.S. and in the U.K.

benefiting from our success from cross-selling effort. Looking at the remainder of the year, we expect our results to improve in the second half of fiscal 2015 as we record revenues from the five E-2D planes.

Our new Myricom products gain traction in the market and our managed service offerings continued to ramp up. As the same time we’re keeping a sharp eye on expense control and we’ll remain committed to driving shareholder value including the continuation of our dividend policy.

With that, Gary and I will take your questions.

Good morning gentlemen.

Good morning.

I noticed in the 10-K as well as on your website that in the High Performance division you no longer have the Series 4000, series listed? Is that – has that been continued and is that been written off?

Right now, we’re sort of we have stopped at least the current development on it and we haven’t taken a write-off on everything there, but we’re analyzing the market conditions, because the demand for it has dropped.

Now the 3000 Series is still ask [ph]?

Yes.

Okay. Thank you.

Last quarter I believe you mentioned that you thought the Myricom could be a real holds on Myricom’s acquisition. What number – how many number of products that we’re introducing here, you’re planning and reducing in the next several months, [indiscernible] one, two, three, four down five different products?

Well, there is one board with two versions, the Window base and a Linux base. And then there is other product that we’re still developing roadmap for.

Okay. I notice you also and that with previous to the last conference, but you did hire new general manager for that?

That’s correct.

And primarily I guess concerned with Myricom, is that particular aspect of the program of the division focusing on Myricom?

Yes. Overall – managing the whole division, but right now, we’re putting a lot of energy and time into that Myricom product line.

All right. And the third question I hope let somebody else ask – the question is, you’ve mentioned about penetration in your IT division -- assuming that means security.

Yes.

Where you’re actually able detect penetration from outside sources, is that correct?

Yes. You’re correct.

It’s all in that security area we’re just doing a lot of pen testing to analyze the customer’s networks and just try to prevent hackers from getting into their network.

And are we doing that also in the U.S., I mean, in other words, can we perform the same sales pitch in U.S. for U.S.

customer too or is that…?

Yes, yes, we can. And we leverage each other’s engineering resources, because Germany has been doing this for many years.

And they have more internal engineers on staff in Germany, so therefore if the U.S. finds opportunities we’ll always try to leverage our German location if possible.

If not, we do have resources here in the U.S. but not to the same – not the same amount as Germany does.

And just one more thing, is the location or monitoring in the U.S. is that where we monitor from, or is there a base place for that, or is it scattered?

Well, we monitor from Germany in Deerfield Beach, Florida.

Okay.

Those are the two major locations.

So, its two locations.

Yes.

Thank you very much. Appreciate it.

Thank you.

Good morning, gentlemen. Wondering if you can comment on Myricom revenues, you said it’s the highest since you purchased the company about a year ago, I guess?

Yes. For the quarter it was almost $2.5 million.

Thank you. Can you breakout segment earnings High Performance Products and IT Solutions and revenue if you could?

Yes. So, the revenues for the IT Solutions was $17.8 and they had a loss of $53,000 at the operating level.

And then, for High Performance Products?

The High Performance Products were $2.5 million and within that there was a loss of at the operating level was $850,000, but that includes corporate expenses. Sam [ph] Hello.

Those are just allocated expenses from the corporate level. You guys allocate those across both of the segments I would assume?

We do, but that’s below the operating line.

Okay. Can you also comment a little bit you mentioned the R&D credit, can you highlight what benefits that is going to bring you guys over the coming years here?

Well, I can’t be – it’s a calculated amount based on what you spend, so going forward. Within that – for last year it would be approximately about $60,000 credit.

Perfect. Thank you.

Over the last couple of years as we followed you guys, we’ve noticed that the DSOs, it seems like when you guys you have no pension you don’t have revenue coming in from the royalty stream related to E-2D. It seems like your day sales outstanding kind of balloon.

Is that because you guys are losing your credit terms to meet revenue goals?

No. We run the business that’s exact same regardless.

The way we extend [ph] credit we have certain policies and we follow those policies quarter after quarter.

All right. That’s good.

And in terms of growth what are you guys projecting for growth for the remainder of the year? You say you’re executing on the growth strategy but overall revenue is down year-over-year.

Can you just comment on that a little bit?

We’ve got a growth strategy, Sam [ph] but we really don’t disclose what that would be. We’re projecting sales will be greater than last year’s sales.

Okay. And then, you talked about hiring to I guess backup that growth strategy.

Can you also comment on expense control a little bit, it seems like especially on the engineering development side year-over-year obviously purchase Myricom, but OpEx has grown and revenues have declined, so.

Well, we look at where we’re making contributions within the organization and we’re putting more resources into the Myricom and we’ve also taken some action where we’ve decreased resources in the old MultiComputer. So we’ve made some personal changes where we had to.

So if people aren’t contributing towards the new growth areas, we’ve had to make changes.

Okay. That sounds great.

And then, my final question, you guys are going to make money next quarter?

It’s still going to be difficult, but we’re working towards that because we see some growth and the opportunities out there. As we said, the second half of the year should be more robust with the royalties but it’s a challenge.

Okay. So on that do you guys when you’re forecasting and planning to run the business do you look at it as ex royalties because you got that in order to have a sustainable business you have to run the company like you’re not going to be receiving 100% gross margin royalties forever.

So can you comment or just touch on that?

And that’s the reason why we are investing heavily on the Myricom products today, so as over the next three, four years we have sustainable business with the new product line that can sell into the government space, but also is very commercialize where those sales cycles are not years. And Sam [ph], we do – we look at each segment of the business and look at the opportunities and do look at where the business is coming from and evaluate that and then put resources where we feel the best opportunity is for us to get growth and profitability out.

And that’s where we’re deploying our assets in that vein. So we’re taking actions where we’re underperforming and mobilizing towards the performance areas.

And that’s way also a bit emphasis has been on the managed service piece of it where it’s more of a recurring revenue model and revenue you can count on a monthly quarterly basis.

Can you just touch on the managed services growth and what that segment was I guess year-over-year and quarter-over-quarter?

Well, two years ago it didn’t exist, so it’s pretty much last year we built it from the ground zero, invested in and back end systems and software that can manage customer’s infrastructure. And then engineering resources and talent to manage it, and both in Germany and in the U.S.

total revenue I got to believe is a little over $1 million now, maybe $1.5 million in growing.

Okay. Perfect.

Thank you. I’ll back out.

Thank you for joining us today and for your support of CSPI. We look forward to speaking with you all again on Q2 call.