Feb 9, 2022
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Operator
00:09 Good day and welcome to the CSPi Fiscal Q1 2022 Earnings Conference Call. Currently, all phone lines are in a listen-only mode.
Later, there will be an opportunity to ask questions during a question-and-answer session. [Operator Instructions] Please be advised today's program may be recorded.
00:26 It is now my pleasure to turn the program over to Michael Polyviou. You may begin sir.
Michael Polyviou
00:33 Thank you, Aaron. Hello, everyone and thank you for joining us to review CSPI's first -- fiscal first quarter ended December 31, 2021.
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'll then open the call for questions.
00:56 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. 01:22 The company cautions you that these statements reflect current expectations about the company's future performance or events and are subject to a number of 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 segment and 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 Forms 10-K and the quarterly report on Forms 10-Q filed with the Securities and Exchange Commission. 01:57 Forward-looking statements are based on the information available at the time when 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. 02:23 With that, I'll turn the call over to Victor Dellovo, Chief Executive Officer.
Vic, please go ahead.
Victor Dellovo
02:30 Thanks, Michael and good morning, everyone. We reported solid fiscal first quarter performance as we achieved many of our objectives.
For example, revenue of $12.4 million increased 9% year-over-year and 24% sequentially. Service revenue grew 23% year-over-year.
During the quarter, we continue to manage through a variety of issues during the quarter. 02:55 Some of the key factors continues to be the impact of COVID-19 Omicron variant.
We had multiple internal COVID outbreaks during the quarter, which slowed us down from completing certain projects. Then of course, the supply chain issue which has delayed many customer orders and with that backlog increasing to over $15 million under a normal environment we would have -- had a significant profit for the quarter.
03:20 We also had to give our employees raises to keep that turnover at a minimum. The Florida job market is one of the hardest in the U.S., so there are many options for our employees.
We also had recruiting fees in the tune of $80,000 for the quarter, with the labor market being so tight, we had to hire multiple recruiting companies to help, backfill some of the open positions, and as well as new positions because of the growth in the MSP division. Despite the challenges, we were able to generate growth during the quarter as well as build our backlog.
03:57 Our performance during the first quarter resulted from our continued high engagement with our customers and suppliers to proactively resolve and work through issues, a team is quite proud that today we have no loss of single order in the backlog. Additionally, being nimbler than our larger peers, we have been able to quickly shift gears to refocus our resources to the services side of the business, which has not been nearly as impacted by us a plain chain issues and have captured meaningful revenue opportunities during this period of certainty.
04:32 Our primary goal of migrating to higher margin products and services continues to be achieved, as we reported solid gross margins of 29.1%, similar level compared to a year ago fiscal first quarter, despite heading into a period of tougher year-over-year comparison and facing inflationary pressures with our cost. We do believe at this point, we should be able to make further progress with our overall gross margin as compared to Q1 as the year progresses.
05:00 Our Technology Solution, or TS business generated revenue of $11.3 million in the fiscal first quarter, an outstanding results that exceeded our plan. Our managed service practice or MSP remains a bright spot because business is a challenge to retain or attract internal talent.
I don't expect this dynamic to change much in the coming year, so we will continue to dedicate the necessary resources to capture our share of this market to build our portfolio of service contract customers. 05:33 Moving on to the cruise line business.
The team is currently deployed and working in -- is progressing on four ships as I mentioned in Q4 call. While the Omicron variant has lowered the [indiscernible] optimism regarding the timing of additional retrofits.
There is another set of ships that could be awarded later this quarter or early Q3. As a reminder, this business provides CSPi with an attractive business opportunity and we got decisively on winning additional business, as our fiscal year progresses.
06:09 Regarding UCaaS we added several new customers during the quarter and I'm encouraged with our progress. We do face continued obstacles that are hindering our ability to maximize the revenue potential of this offering, name recognition is always an issue and we also have a smaller sales force than compared to our larger peers.
06:27 Regarding the High Performance Product or HPP division, we reported revenue of $1.1 million as a Myricom business performed better than expected. This growth was offset by lower than expected royalty revenue related to the E-2D program, approximately 50% of the royalty expected revenue was recorded in Q1.
With the remaining balance now expected to be recorded in the second half of fiscal 2022. While ARIA remains the primary growth engine for this business segment.
07:00 In December, we announced the availability of the Myricom ARC-C TxO network interface adapter designed to act as a secure unidirectional network bridge. This product has already been deployed in organizations, including a large public cloud operator and government applications requiring a network gateway that allows one way data transfer between classified and unclassified networks.
While we don't expect this product to significantly change the upward trajectory of Myricom business, it does demonstrate our ability to respond to an increased demand from our OEM and large customers to create a one-way data path. 7:38 With regards to ARIA, the emergence of Omicron in the timing of holiday slowdown the momentum, as we had experience earlier in the quarter.
However, we did manage to close a few MDR customers in the revenue contributed from these commenced in the current fiscal Q2. As of today, we continue to grow our ADR customers generating recurring monthly revenue and the team is working hard to sign new contracts.
08:06 The orders in the backlog along with deals we are pursuing are sizable and we will dramatically transform the revenue landscape for the HPP business. Although, the timing to bring these opportunities across the finish line is unpredictable at this point.
08:22 To summarize, we increased our backlog demonstrating the high interest for our products and services that we are -- and also due to the supply chain issue, which has limited our sales growth, we continue to implement and execute on the initiatives aim to improve a near-term performance, such as focusing on service business while strengthening our long-term interest as we continue to make progress with the UCaaS and ARIA, a bit at a slower pace than we would like. Gary and his financial team has excelled over the past two years and the prudent expense management that have implemented allowed us to maintain our resources to execute a multi-year growth strategy of transforming to a cyber security wireless and managed service company.
09:06 With that, I will now ask Gary to provide a brief overview on the fiscal first quarter financial performance. Gary?
Gary Levine
09:14 Thanks, Victor. As Victor mentioned in his opening remarks, our first fiscal revenue, first quarter revenue was $12.4 million representing an increase of 9% year-over-year and 24% compared to Q4 fiscal 2021.
We reported gross margin of $3.6 million or 29.2% of sales compared to $3.4 million or 29.7% of sales in the year ago fiscal first quarter. Although, we are entering a period of tougher year-over-year gross margin comparisons as the pandemic related conditions allowed us to record a disproportional level of higher margin service revenue.
We had previously started that -- stated that our near and short-term goal is to maintain an annual gross margin in the mid to high-'20s, which was achieved. 10:22 Our engineering and development expenses for the fiscal first quarter was $627,000 compared to $729,000 in the year ago period.
The decrease is primarily due to lower personnel costs. Our SG&A expenses in Q1 was $3.4 million, a slightly increase due to the increased payroll and commissions in the TS segment from the year ago SG&A costs of $3.2 million.
We reported a net loss of $366,000 in the fiscal first quarter or $0.09 loss per diluted share compared to net income $1.2 million or $0.26 per diluted share for the first fiscal quarter of fiscal 2021. 11:22 If you recall, the 2021 fiscal first quarter included a gain on a debt forgiveness of the Paycheck Protection Plan SBA loans at the TS and HPP segments totaling $2.2 million, which was established as part of the CARES Act.
Excluding the gain on the debt forgiveness of the Paycheck Protection Plan SBA loans the company would have reported a net loss of $1.9 million or $0.26 loss per diluted share for the first quarter of fiscal 2021. We ended the first fiscal quarter with cash and cash equivalents of $19.3 million as of December 31, 2021, a decrease of over $700,000 from the September 30, 2021.
12:19 In late December 2021, we reactivated the stock repurchase program with authorization to buy up to 194,000 shares of CSPi common stock. We did not purchase any shares in the first fiscal quarter ended December 31, 2021.
As a common practice, we will update on a quarterly basis as the program is executed. We will continue to exercise expense management to ensure we have the resources to execute the multi-year growth of our transforming to a way cybersecurity, wireless and managed service company.
13:05 With that, I will turn it over to the operator to take your questions.
Operator
13:09 [Operator Instructions] And we can take our first question from Scott Caldwell (ph), who is a Private Investor.
Unidentified Participant
13:33 Yes. Good morning.
Thank you very much. I'm a long-time shareholder.
Can you just box-in the aggregate cost of being a publicly traded company on an annual basis please?
Gary Levine
13:51 That's probably, I don't have the numbers right off hand, but in the past, it's been about $1.8 million to $2 million a year.
Unidentified Participant
14:01 Okay. Has the Board explored any potential to put the company up for sale?
Gary Levine
14:12 We've explored that over the years. We have talked to a number of companies or remind 10 year here at the company, there is no active program to do that at the moment.
Unidentified Participant
14:27 I'm concerned by the fact that you mentioned that we are not as substantial as some of our competitors and that puts it at a severe disadvantage in the marketplace.
Gary Levine
14:42 Yeah. I understand that.
Yes.
Unidentified Participant
14:45 Well I'd certainly like to encourage you to explore opportunities because $2 million of cost it's seems to be completely out of whack.
Gary Levine
15:03 Thank you.
Operator
15:05 [Operator Instructions] And we can take our next question from Mike Price (ph), who is a Private Investor. Your line is open.
Unidentified Participant
15:24 Good morning, Victor, Gary. Thanks for taking my call.
I just have a quick question about the share repurchase that you announced and the way the press release was worded it's at management's discretion. Can you provide the shareholders some assurance that the manager -- management's discretion to buy shares does not coincide with management's potential sale of shares?
Victor Dellovo
15:58 Well, I mean, basically, no one in the management group at this point has sold and you have a very limited period of time that we don't have blackout periods, but at least at this point and then I can't answer for the rest of the management team, but I don't see us selling large amounts of shares.
Unidentified Participant
16:24 Well, obviously, the stock is very liquid and if I go to sell 10,000 or 15,000 shares. I'm going to affect the price of the stock.
So the question basically is management has the discretion to buy shares with corporate cash that if you decide to sell 20,000 shares, you don't have the liquidity that I would not have that's basically the question?
Victor Dellovo
16:51 Well, our intent is not to support the management team buying shares. I mean, to go out and buy shares if they are actively selling not for sure so.
Unidentified Participant
17:05 Okay. That's it.
Thanks.
Victor Dellovo
17:08 Yeah.
Operator
17:11 [Operator Instructions] We'll go next to Joseph Nerges with Seagram Investments. Your line is open.
Joseph Nerges
17:20 Hi, guys. How are you?
I didn’t think my questions were being answered here. I didn't know if a star one was working on my phone.
A couple of quick things, on your press release you talked about increasing the managed services in the quarter and I had a brisk pace, I guess this way you stated it versus because of talent train at on the smaller company. So, I am assuming that means a lot of the smaller companies can attract the talent that even what so secured and outsourcing most of their IT work outside the -- their traditional in-house staff.
Am I correct on that?
Gary Levine
18:00 It's partially that but they can attract them at times, but they're not staying long enough and then you have a training process of X amount of months and then outside and before you know it they're leaving for a higher salary or bonus structure, whatever it may be in and they have to start from ground zero again that's been one of the driving factors of some of the -- where they hire us not that we don't have the same issue, but at least we have a lot of people that they can count on not just one or two.
Joseph Nerges
18:36 And obviously, so outsourcing becomes an option that a lot of times, they may not have considered in the past and they are considering it today, that's [Multiple Speakers].
Gary Levine
18:46 Correct.
Joseph Nerges
18:50 On the second part of the press release you talked about the UCaaS. I think you mentioned something that a foreign point that there would have been a significant profit.
Are you referring to specifically UCaaS here?
Gary Levine
19:03 No, overall. Yeah.
Joseph Nerges
19:05 If you could have supplied a sufficient and I assume a lot of -- and you mentioned that in the last conference call about, you can side up UCaaS customer but if you can deliver to telephones or you can't deliver it some of the hardware and required. You can obviously --
Gary Levine
19:24 It's not just for UCaaS, it's for everything. The UCaaS is just a small piece of the overall backlog.
It's hardware -- the software that goes along with that we could deliver it but without the hardware, was it going. And then the services that go along with it to install it.
Joseph Nerges
19:47 So let me rephrase my question, if this was three years ago and there were no supply chain issues -- essentially there wasn't supply chain, this was three years ago, I assume. We are pretty much, pretty normal, let's put it that way.
You're saying that we were considerably profitably on a normal schedules, let's -- two issues, one, the supply chain obviously and the virus. Absent those two things, we have been pretty profitable because of normal delivery schedules.
Gary Levine
20:13 Yeah. We've never had a $15 million backlog like that ever.
It's been half or less than that historically.
Joseph Nerges
20:22 So obviously wouldn’t take much to increase the quarterly sales if we didn't have the backlog or the supply problem. So I think, no.
On the cruise business, you said that you are working on cruise is now, and then you expect more orders down the road. Is there that --
Gary Levine
20:39 Yeah. We are working on the next set of ships.
Just things are moving a little slower. I think just with the uncertainty, with the cruise line the decisions I normally take months taken a little longer, but the conversations are there.
Joseph Nerges
20:57 And did we have some [Operator Instructions] royalty in the first quarter or you're expecting more later in the year.
Victor Dellovo
21:06 Yeah. That’s probably in the third and fourth quarters.
Joseph Nerges
21:10 The remainder of the E-2D. Okay.
One, let me just go back to the press release you had in December, and that's the one on the new product the data diode the one way transmit product that either it is Myricom. And in that press release you specifically -- you talked about existing customers or I guess data center’s user or cloud providers using it or somebody is using it, and the government agencies?
Gary Levine
21:41 Yeah.
Joseph Nerges
21:42 Now, so it has been beta tested or it has been --
Gary Levine
21:46 No, that's been, we've actually the beta is over. We actually sold it.
Joseph Nerges
21:53 Okay.
Gary Levine
21:54 Yeah.
Joseph Nerges
21:55 And also on that call -- in that press release, you also mentioned potential use by OEMs, OEMs for this product. Have you implemented any of that or is that being tested by them or to whether or not they one incorporated into your --
Gary Levine
22:13 Well, the testing phase is over. We've been awarded a couple of large opportunities, but we can get the boards to deliver it.
Joseph Nerges
22:22 That was going to be next million dollar question. I mean how –
Gary Levine
22:26 A multi-million dollar question, actually and we can't ship.
Joseph Nerges
22:32 I got you. Okay.
So, that's great. So in a way it's good if you got the opportunity, but the pending delivery of product as opposed to not being able to -- not having a product acknowledged and accepted by the OEMs.
So what do we talking about on board, how, what does it take to get Myricom Board time wise is that like three months?
Gary Levine
23:03 It's a moving target. I could tell you today and it will change tomorrow.
So I rather just not give you a delivery date because it is changed like three times already.
Joseph Nerges
23:15 And of course, and the Board is some key chips that you're utilizing but -- so the -- are these OEMs pretty sizable type customers, I assume from the backlog, it is, are re talking about some pretty big companies?
Gary Levine
23:37 Yeah, absolutely. So I don't know -- I don't know exactly what the rollout is, there are little hesitant to give us a rollout schedule moving forward considering, we will not share the first set of delivery but we're hoping that it continues.
I'm not only on the opening orders into the future.
Joseph Nerges
24:02 But you mentioned that you would have some considerable -- you thought a considerable volume revenue, if you could deliver the Board.
Gary Levine
24:14 We have budgeted to put that the orders in this share and it's up in the year whether it all in, in this year or next year. It's just that we have no control of where we're talking to them constantly, we're pushing, but in the scheme of things on the totem pole, I'm not sure where we stand to be to be completely honest with you.
Joseph Nerges
24:40 Okay. Well, very good.
Thank you very much. I appreciate it.
It sounds like we're making progress absent what we can control. Let's put it that way.
Gary Levine
24:48 Definitely.
Joseph Nerges
24:48 Thanks a lot.
Operator
24:52 [Operator Instructions] We do have another question. It comes from Brett Davidson (ph), a Private Investor.
Your line is open.
Unidentified Participant
25:12 Good morning. I'm looking for just a little color on a couple of items.
The receivables show as about quarter-and-a-half is that -- as the move to the managed service thing, is there any insight that may start to contract?
Gary Levine
25:39 Well, Brett. Let me just clarify some things to remember that a lot of the revenue that we have is booked net not gross, but the receivable is gross.
So that can be a little deceiving within taking some of that. And I’ll let Victor follow on.
Vic didn't mean to interrupt you.
Victor Dellovo
26:04 No, go ahead Gary.
Gary Levine
26:06 No. And that's what I was just trying to say within the receivable there are those items.
So that's could us skews it off from that standpoint, Brett.
Unidentified Participant
26:18 Got it. And the ship business, maybe you can add, some detail as to how that whole process work.
So you guys land the contract. I mean are these multi-hundred thousand contracts and are you out there for two weeks, two months, six months.
What does it take to complete one of these contracts?
Victor Dellovo
26:47 There's different contracts for a different -- one of them could be where we just go on four, five ships all over the world and we will do a sitemap of where all the new APs and wireless needs to go. That's Phase 1.
Then Phase 2 is you get the order delivering of the Aps. They have their own set of individuals that actually put them, where they go and then we'll come back on and usually while the ship is sailing, we will be -- the guys will be on their configuring them and then making sure that it's fully covered all over the ship.
Any interference because of the metal walls, they take care of all that. 27: 36 And then they come back and then another Phase 3 is to write that all up into a full description of where everything is.
The configurations, all the paperwork that goes along with it. So it's in different stages and it doesn't happen all the time.
And then there is the retrofit where they doc of the water and we'll come in and do the site map and everything will be done. It has to be done in two weeks, they literally worked 18 hours a day for two-week straight just because it has to be done wallets on dry-dock.
So there is different things that happen. It just depends on the customer and their needs.
And that usually get four ships at a time and it just depends and the size of the ship matters to do right there is usually three different sizes and it just each one is the bigger the ship, the more cost to do it.
Unidentified Participant
28:39 Yeah. And these are multi-hundred thousand dollar jobs or million dollar jobs or?
Victor Dellovo
28:42 No, hundreds of thousands.
Unidentified Participant
28:45 Got it. And so from billing standpoint are each phase being billed separately or just wait till the end and it's all we --
Victor Dellovo
28:54 That's how we kind of separated them. So we're now waiting to the end because it could be months and between.
So we've kind of try to separate them stages. So we can get paid as we go.
Unidentified Participant
29:09 Got it. All right.
I want to switch gears to the E-2D thing. Are we still bring in any revenue for spares for the American planes?
Are we just limited to the floor and content now?
Gary Levine
29:26 It's primarily the foreign content. There may be a few spares that has done for the Americans.
But they're shifting over to newer technology.
Unidentified Participant
29:35 Got it. So even the spare stuff is drying up.
Gary Levine
29:40 Yeah.
Unidentified Participant
29:40 Got it. All right.
Thank you very much. And you guys have yourself a good afternoon.
Gary Levine
29:48 Yeah. You to Brett.
Operator
29:50 [Operator Instructions] There are no additional questions at this time. I'd like to turn the program over to Victor Dellovo for any additional remarks.
Victor Dellovo
30:05 Thank you. As always, I want to thank our shareholders for your continued interest and support.
These remain challenging times, however, we are executing on our plan to deliver near short term and long-term results as we remain committed to growing the business. Gary, and I look forward to sharing our progress in fiscal 2022 second quarter operating results in May.
Until then be well and be safe.
Operator
30:34 Thank you for your participation. This does conclude today's program.
You may disconnect at any time.