CSPI - NASDAQ

Good morning, everyone, and welcome to CSPi's Second Quarter Fiscal Year 2024 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Michael Polyviou. You may begin.

Thank you, Jenny. Hello, everyone, and thank you for joining us to review CSPi's fiscal 2024, second quarter results, which ended March 31, 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. [Operator Instructions] 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 the 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 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 the call over to Victor Dellovo, Chief Executive Officer. Victor, please go ahead.

Thanks, Michael, and good morning, everyone. Earlier this morning, we announced our fiscal 2024, second quarter results, which once again demonstrates the return we are generating from our strategic shift towards high-margin products and services. While we continue to invest in the broadening the launch of A

Thank you, Victor. For the fiscal second quarter ended March 31, 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 A

[Operator Instructions] Your first question is coming from Joseph Nerges of Segren Investments.

How's everything going. Okay. A couple -- one question and one follow-up, where you're cutting me down here. One question. I'm going back after the last conference call you did, Victor. And you mentioned that we're close to rolling out a full production line version of A

Correct. Yes. We'll -- 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 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.

And how will that enhance what we already have out there? What do we expect that add-on will help us with...

In the OT space, right, updates in patches are not as important, and that's why our product kind of fits into where it protects it even without the patches. In the IT space, they still want 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 IT side of it, where, like I said, in the OT space, patching is not as important just because you can't really touch the machines in the IT, whether it's a Microsoft patch or any other patch 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.

Okay. And just one quick follow-up here. And that is -- 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 manager's decision whether he wants to implement the A

Yes, that makes sense, but sometimes common sense is not the thing that people use all the time.

No, I certainly wouldn't mind -- I would put that in the back of their mind, if nothing else.

No, we always do. We always do.

We've got a question from Brett Davidson, who's a private investor.

Question regarding those 3 new salespersons talks about targeting larger mid-market companies, what does that look like? Are these guys going out and meeting at their locations? What exactly does it mean that they're targeting mid-market companies.

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

And is there a pipeline right now regarding the A

Yes, it's a combination -- 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 that 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, 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 try 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, to leverage the long-term relationships they may have that can kind of move us, a, get us in faster as a smaller company, CSPi competing with the Palos and the name brand by leveraging those salespeople in the relationship and that they have 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 try to get the next level where PLC.

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

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

Your next question is coming from Mike Price, who's a private investor.

I know that you want to have wider distribution of shares and shareholders. But with $120 million market cap and what you paint in front of you with A

Yes. Over the last quarter or 2, when the stock was higher than it is currently, we didn't see the need -- but as -- at this price level, we are definitely considering supporting it and buying shares in the upcoming quarter.

Your next question is coming from Sergio Hibar of Hibar Research.

Congratulations on huge improvement on the bottom line. I think you gave investors a head [indiscernible] in looking at the reaction today to the news, investors are used to seeing improvements in 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 give us some color on bundling area with the major security products like, for example, with Palo Alto.

That is definitely an option. We do complement if it was a Palo Alto or a CrowdStrike or any of the other players, we can work in conjunction with all of them, especially where some of the old licenses in the XP world or Windows 7 that they may not be supporting, we can definitely take over any system that's running an older version. It's up to the customer, if they love the Palo or the CrowdStrike or whoever they're using, they can continue using it and we 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 not looking to rip and replace any of the major players out there at this stage of the game.

So -- but we're not bundled directly so that it's sold, like, for example, Palo Alto will include your the area with the Palo Alto product?

I would love to get that relationship going. If you have any context, could that -- could help do that? Please let me know.

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

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

So. Yes. So we went to $0.03, yes.

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

Apologies, you've had your allotted questions. If you do have any more, Sergio, you can press Star 1 and join back in the queue. Your next question is coming from Paul Scolardi, he is a private investor.

Two quick questions. First of all, we constantly see in the news of the government warning against threats, threats 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 getting traction? Are we getting the government aware that we have a solution to what they're warning about?

To summarize it, yes, on all parts. We -- I have mentioned, just a few moments ago, that we are focusing on the energy, the water treatment. We've done marketing outreaches to all of them. We've done -- we've talked to individuals that shows -- and we are -- mentioned -- I mentioned also very, very close to signing one of the largest government distributors out there that would allow us to do business directly with these different agencies, that would speed up the process because the distributor holds all the necessary contracts that would allow us to 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 and some of the trade shows, these folks show up there, and we've had conversations with them. But as I mentioned...

But your people going out to the water utilities?

If they will take a meeting, absolutely. We still believe it or not, we're still in the world and nobody really goes to work any longer, mostly everything is over

Okay. And then last question, with A

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

Our next question is coming from Joseph Nerges of Segren Investments.

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

Well, yes. I think you had 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 journal, we'll definitely post it on the website that you can go in.

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

Yes, I guess I was getting a little long-winded. So I didn't get to wrap this up. But getting back to that kind of pipeline or how you guys want to refer to it, can you just give some character of 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?

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

Your next question is coming from John Crotty, who is a Private Investor.

I really want to tell you that, that was great seeing the awards you won, but more importantly, you put out a PR the other day that really has some great information in it. You mentioned the new industries you had won. And I was wondering if we could just get a little color on them. You had stated that you had won energy and utility as well as pharma manufacturing. Now we're aware of the pharma company but the other 3 are new 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 it was as well as the manufacturing?

The manufacturing -- the utilities and the energy are like the oil and gas, I can't mention any of the names, but they're just you would know who they are. They're just some of the big oil and grid companies that we're talking to, and we met at shows and getting POCs together and trying to get into their labs. So yes, the shows have been really good to get us -- to 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.

Right. Because we were aware that the targets that they're coming after in the U.S. be in the operational infrastructure, electrical grid as well as pipelines, those are the types of levels of quality we're talking in the industry you're involved with, right.

Correct.

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

Thank you. As always, I want to 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.

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

Bye.