Q2 2024 CSP Inc Earnings Call

Participants

Michael Polyviou; IR; EVC Group LLC

Victor Dellovo; President, Chief Executive Officer, Director; CSP Inc

Gary Levine; Chief Financial Officer; CSP Inc

Joseph Nerges; Analyst; Segren Investments

Brett Davidson

Mike Price

Sergio Heiber; Analyst; Heiber Research

Paul Skoladi

John Krodi

Presentation

Operator

Good morning, everyone, and welcome to CSPI. Second Quarter Fiscal Year 2024 conference call. At this time, all participants are in a listen-only mode and the floor will be open for questions after the presentation. If you do have any questions, we ask that you limit them to one question and one follow-up question. In the interest of time thanks. If anyone should require operator assistance during this conference, please press star zero on your phone. 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, Jenny. Hello, everyone, and thank you for joining us to review CSPI's fiscal 2024 second quarter results, which ended March 31st, 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.
During the Q&A session, we ask participants to limit themselves to one question and one follow-up question and then re-queue if they have additional questions. Statements made by CSPI. As mentioned on today's call regarding the Company's business that are not historical facts may be forward-looking statements as that term is identified in federal securities law. The words may will expect, believe, anticipate, project, plan, intend, estimate and continue as those similar expressions are intended to identify forward-looking state. Forward-looking statements are not viewed 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 those statements and the projections upon which 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 Form 10 K and the quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. Forward-looking statements are based on 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 at 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.
And with that, I'll turn the call over to Victor Dellovo, Chief Executive Officer. Victor, please go ahead.

Victor Dellovo

Thanks, Michael, and good morning, everyone. Early this morning we announced our fiscal 2024 second quarter results, which once again demonstrates the return we are generating from our strategic shift towards higher-margin products and services.
While we continue to invest in the branding, the launch of AZT protect we grew services revenue 23%, increase 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 a year-ago quarter. Daisy T offering is changing how we operate and how the industry perceives CSPI.
It generates significant attention and interest in industry events and conferences. And this interest is from some of the largest global corporations. Despite only bringing being months into easy to launch, we are building traction in the market and the level of customer enthusiasm remains high as does the new business, the pipeline.
During the quarter, we signed our largest contract for AZT., a multimillion dollar agreement with a global pharmaceutical company, which is deploying AGT across its global manufacturing platform and is in the process of taking over 40 facilities in from this growing cyber security threat to operational technology from hostile nations, terrorism and organized crime. Early this week, a case case history of HT. protect was published in the Journal, an award winning publication from Rockwell Automation. We can't begin to tell you how critical 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 messes trends and technologies that protect the in the Industrial Automation segment from cyber security attacks.
A partnership with Racal is expanding as tomorrow. We are co-hosting a webinar titled cyber RX how to audit automatically protect Rockwell OT customers from today's cyber attacks. Gary Southwell, General Manager of CSPIRES. cyber security 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 a V-Flash NGAVI. 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 our SAZT. protect plays a unique and critical role in meeting this need gap. 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 uses 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 in attended several several of the more intimate OTC focus events as we continue to further expand our brand presence within the IoT 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 of opportunities focused on oil, gas, energy and water treatment plants.
Just to name a few of the focus industry to increase shorter term revenue opportunities for AZT. protect. We implemented Phase two of our multiproduct sales strategy and hired three new salespeople to focus on middle market enterprise. As a result of this investment, we have doubled the dedicated AZAZT. sales team to further expand ACT protect market penetration. We are actively expanding exotics existing partnerships and exploring the creation of new ones.
We see this part of our go-to-market strategy as 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' debt. He's going to significantly raise the profile of AZT. offering and build revenue opportunity. We also announced two major awards that ARIA cybersecurity wins, global infosec cyber security product award for ACT, protect at RSA and ARIA cybersecurity winds procedures globally.
Site cyber security protect award for ACT, protect the technology solution or the TS business continues to perform and contribute $11.2 million to a total revenue of $11.8 million a year ago's quarter. During the first fiscal quarter, we announced a 5-year 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 the college critical technology infrastructure, including networks, security and private cloud services. The success of TS continues to be driven by our customers' increased use of implementation, installation and training capability. 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 highly 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 ports worldwide with an extensive global agent network. We have in order for over [40] 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 will add to our monthly recurring revenue.
To summarize, with the successful launch of ZT. offering, I believe we have positioned the Company for sustained long-term growth and success. Our two businesses are growing. The pipelines are growing, and we will translate to increased revenue margins and profitability.
Lastly, we believe the recent two-for-one stock split, increased illiquidity of CSPI. shares, and I believe it will provide greater opportunities for institutional participation, enhance shareholder value. At the time we are broadening our business prospects. We also believe the success of easy to 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?

Gary Levine

Thank you, Victor. For the fiscal second quarter ended March 31st, 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 ACT. 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 31st, 2024, compared to net income of $0.3 million or $0.03 per diluted share for the fiscal second quarter ended March 31st, 2023.
The share amounts were had 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 31st, 2024. We believe our robust financial position allows us to execute our multi-pronged sales and growth strategy for the AZT. offering, as well as product other product and service lines and financials financing, large customer agreements, which have been highly successful in the past for CSPI.
Lastly, the Board of Directors approved the quarterly dividend of $0.03 per share payable on June 12th, 2024 to CSPI shareholders of record on the close of business at May 24th, 2024, with that, I will turn it over to the operator to take your questions.

Question and Answer Session

Operator

Thank you very much. At this time we will be conducting a question and answer session. If you would like to ask a question, please press star one on your phone keypad. A confirmation tone will indicate that your line is in there. You may press star two, if you would like to remove your question from the so any participants using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please pause a moment. Thank you.
Your first question is coming from Joseph Nerges, Segren Investments.

Joseph Nerges

Thank you. Good morning, guys. Have how's everything going? A couple of one question and one follow-up. You were you're going to cut down here. One one question I have going back at 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 sorbent for the IT environment. Is that still in beta testing because that hasn't been released as of yet?

Victor Dellovo

Correct. Yes, we'll lap 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 on two 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.

Joseph Nerges

And how will that enhance what we already have out what that means -- what do we expect a net add on help us with?

Victor Dellovo

We're in the OT space, right up updates and patches are not as important. And that's why our product kind of fits into where protected even without the patches in the IT space, they still wanted 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 ITIT. side of it where like I said, in the OT space. Patching is not as a point of just because you can't really touch the machines in the IT, whether it's a Microsoft patch or any other, you know, Catcher 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.

Joseph Nerges

Okay, and just one quick follow-up here, and that is the 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 managers decision, whether you want to implement the ACT. protect well, you know, the oil sales and the only comes out now I can imagine that process I would make any plant manager would be do you really want to be the plant manager you decide to not implement and yet you were hacked at your plant. I mean that's sort of a clear end or is it going to be a real push X number have implemented it? They're not hacked, and he happens to be that the plant attacked our breach?

Victor Dellovo

Yes, that makes sense. But sometimes common sense is not the thing that people use our time. So --

Joseph Nerges

I certainly wouldn't mind adolescent I would put that in the back of their mind, that's nothing you know --

Victor Dellovo

We always do. We always do.

Joseph Nerges

I'll open it up for other question for other people.

Operator

Just a reminder that if you do have any questions, you can star one on your phone keypad now to join us. It doesn't look like we've got any further questions or we did. We've got a question from Brett Davidson, who's a private investor.

Brett Davidson

Good morning, gentlemen.

Victor Dellovo

Morning, Brett.

Brett Davidson

Regarding those up, have three new salespersons talks about targeting larger mid-market companies. Kind of what does that look like? Are these guys going out and at their locations on what exactly does it mean that they're targeting mid market companies.

Victor Dellovo

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

Brett Davidson

And is there a pipeline right now regarding the Avici product is there, you know, the stuff that Tom is in process, that's not quite to the sales line --?

Victor Dellovo

Yes. So combination of that, yes, 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 Mizuno data, the 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. You know, 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 ARM, they tried 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 the levers the long term relationships they may have that can kind of move, as you know, a get a sense faster, you know, as a smaller company. CSPIO. on compete in are competing with the Apollo's and the name brands. And by leveraging those salespeople in the relationship and that they had 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 trying to get to the next level where POC.

Brett Davidson

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

Victor Dellovo

And 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 some we have seen with some of the initial conversations started and we put in an estimation of X amount of dollars. And as the conversations went on, they've the pipeline actually increased based on other needs and other people we talk to them in the organization. So yes, we are now putting a pipeline in estimation of revenue and that we're managing internally based on the initial conversations that we're having with each and every organization.

Operator

Hey, thank you very much. Your next question is coming from Mike Price. He's a private investor. Mike, your line is live.

Mike Price

Thank you. Good morning and thanks for taking my question here. And I know that you want to have wider distribution of shares and shareholders, but with a $120 million market cap and what you paid in front of you with ACT. and having $27 million in cash, it seems like there's room to be buying shares.
I've asked this question each of the last three conference calls and you have the authorized shares, but you haven't bought any shares. Any thoughts along those lines?

Victor Dellovo

Yes, you know, over the last quarter, or two when the stock was, you know, higher than it is currently, we didn't see the need. But as at this, this price level, we are definitely considering supporting it in buying shares in the upcoming quarter.

Operator

Thank you very much. Your next question is coming from Sergio Heiber, Heiber Research. Sergio your line.

Sergio Heiber

Hi, good morning. Guys and congratulations on a huge improvement on the bottom line. I think you gave investors a head fake in looking at the reaction today to the news that investors are used to seeing improvements on 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 I'll give us some color on bundling area with the major our security products, like, for example, with Palo Alto.

Victor Dellovo

That is definitely an option. We do compliment, you know, if it was a Palo Alto or CrowdStrike or any of the other players we can work in conjunction with all of them, especially where some summer they have their own licenses in the XP. world or Windows seven that they may not be supporting. We can definitely take over any system that's running an older version on some of the customers. They love the power of a CrowdStrike or whoever they're using, they can continue using it and 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 we are not looking to rip and replace any other major players out there on it at this stage of the game.

Sergio Heiber

Super went up bundle directly so that it sold, like, for example, out of will include your the area with the Palo Alto products.

Victor Dellovo

I would love to get that relationship going, if you have any contacts. Could that could how do that, please let us know.

Sergio Heiber

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

Gary Levine

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

Victor Dellovo

So yes, so we went to $0.03.

Sergio Heiber

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

Operator

If you do have a news anymore such I am you can press star one and join back in the queue. Thank you, sir. Your next question is coming from Paul Skoladi, who is a private investor pool. Your line is live.

Paul Skoladi

Hello, gentlemen. Two quick questions. First of all, we constantly see in the news of the government warning against threat that's 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 are getting traction on? Are we getting the government aware that we have one solution to what they're warning about.

Victor Dellovo

To summarize, yes, on all of our parts, we I mentioned, you know, just a few moments ago that we are focusing on the energy, the water treatment, which we've done marketing outreaches to all of them. We've done we've talked to individuals that shows them. And you know, we are mentioned, I mentioned ourself very, very close to signing one of the largest government distributors out there that would allow us to do business directly with these are some these different agencies that would speed up the process because the distributor holds all the necessary contracts that would allow us to go to we'll 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 some of the trade shows.
These folks show up there and we've had conversations with them but as I mentioned to your people, your people going out to the water utilities, if ithey will take a meeting absolutely on it, we're still believe it or not we're still in the world and nobody really goes to work any longer. It mostly everything is overdue. They may go in once once once a week, our twice a week. So a lot of the calls of are over Zoom, but those conversations are happening.

Paul Skoladi

Okay. And then last question with AZT 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 they take time. I mean, do you expect to be in this calendar in this fiscal year 2024 to be closing on AZ key 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 to 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 AZ key contracts continue to be signed in this fiscal year?

Victor Dellovo

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

Operator

Our next question is coming from Joseph Nerges, of Segren Investments. Your line is live.

Joseph Nerges

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

Victor Dellovo

Yes.

Joseph Nerges

Okay,

Victor Dellovo

I think you have 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 because the journal will last will definitely posted on the website that you can go in.

Operator

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

Brett Davidson

Yes, I guess I was getting a little long winded, so I didn't get the Raptor stuff. But getting back to that, what kind of pipeline or how you guys want to refer to it on. Can you just give some character there 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?

Victor Dellovo

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

Operator

Thank you very much. Just as a reminder, if you have any remaining questions, you can press star one on your phone. Your next question is coming from John Crodi, a private investor. John, your line is live.

John Krodi

Yes, thank you. Congratulations, guys. I really want to tell you that was great seeing the award you won, but more importantly, you put out a PR the other day that really has some great information. You mentioned the new industries you had won. And I was wondering if we could just get a little color on you had stated that you had one energy and utility as well as pharma manufacturing that we are aware of the pharma company. But the other three I knew 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 was as well as manufacturing. Thank you.

Victor Dellovo

On the manufacturing in the utilities and the energy or the oil and gas, I can't mention the names, but just dumb that just you know you, you know who they are. They're just some of the big oil that in grid companies that where we're talking to and we met it shows and getting POCs together and trying to get into their labs. So yes, we've met the shows have been really good to get us, you know, two 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.

John Krodi

Right, because it we are aware that the targets that they're coming after in the USB. and the operational infrastructure, electrical grid as well as pipelines. Those are the types of levels of quality we're talking in the industry. You mentioned that you're involved with? Right?

Victor Dellovo

Correct.

John Krodi

Okay. Thank you.

Operator

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

Victor Dellovo

Thank you. As always, I want to thank you. 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.

Operator

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