CSPI - NASDAQ

Greetings and welcome to CSP Inc.'s Fiscal Fourth Quarter and Full Year 2024 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. I will now turn the conference over to your host, Mr. Michael Polyviou. Sir, you may begin.

Thank you, Alan. Hello, everyone, and thank you for joining us to review CSPi's fiscal fourth quarter and full year 2024 financial results, which ended September 30, 2024. 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. 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's management on today's call regarding the company's business that are not historical facts may be forward-looking statements as the terms 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 meant 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 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 report 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 the 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. Our fourth quarter and full year financial results came in pretty much as expected when we last talked with you in August. Recurring revenue, which has been an area we have committed to growing, increased 17% of the total sales compared to less than 5% of sales just a couple of years ago. Overall, we finished the year with more than $30 million in cash and cash equivalents as of September 30th, 2024. Technology Solutions business generated approximately $12.7 million in sales in the fourth quarter of fiscal 2024. We finished the quarter with plenty of momentum. For example, very little of our fiscal fourth quarter revenue came from our cruise ship customers. However, towards the end of the quarter and during the current fiscal first quarter, we've seen a pickup in the business, including the signing of a large order that should be executed during the next fiscal year. It was the first cruise ship order for Professional Services for our company in many quarters and piggybacks on the continued consistent momentum we built in the Ocean Freightliner market. Our freightliner operation customer continues to add new ships and choose to utilize our managed service offering following the retrofits, which have led to increase in recurring revenue. We continue to see increased demand for our cloud clients who want to migrate the consumption of these services to our cloud group. We also have a dozen active cloud based projects to accommodate the growth. We continue to invest in people and process to provide managed service to assist in our clients with the day-to-day operations of these environments. The pipeline remains very encouraging, so we are optimistic about our opportunities to grow the overall TS sales, especially the recurring revenue piece during the coming fiscal year. On the HPP side of the business, for the fourth quarter of fiscal 2024, we reported revenue of $0.4 million mostly from ARIA based customers. Also, as we discussed in the prior conference call, we were in the process of transitioning our A

Thanks, Victor. For the fourth quarter ended September 30th, 2024, we reported revenue of $13 million compared to revenue of $15.3 million for the fiscal fourth quarter ended September 30th, 2023. Revenue was relatively flat compared to 2024 fiscal third and second quarters. Service revenue represented $4.0 million of overall sales compared to the year ago service revenues of $4.3 million. Gross profit for the three months ended September 30th, 2024 was $3.7 million or 28.4% of sales compared to $5.2 million or 33.8% of sales reflecting a higher percentage of product sales. Gross margins on our service revenue increased 160 basis points from last year's comparable figures. The company reported a net loss of $1.7 million or $0.18 loss per common share for the fourth quarter ended September 30th, 2024, compared to net income of $1.4 million or $0.15 per diluted share for fiscal fourth quarter ended September 30th, 2023. We had cash and cash equivalents of $30.6 million as compared to $25.2 million at the end of our 2023 fiscal year. The robust balance sheet ensures that the company has the resources to implement the A

Thank you. At this time, we will be conducting our question-and-answer session. [Operator Instructions] Thank you. Our first question is coming from Joseph Nerges with Segren Investments. Sir, your line is live.

Good morning, guys. How are you today?

Good morning, Jim.

Good morning, Jim.

Just one quick accounting point here. Gary, last year, I think you mentioned in our fourth quarter, we had a credit of $2.1 million for employment retention credit in our reporting of fourth quarter of last fiscal year. So obviously that number and when we're comparing fourth quarter this year versus fourth quarter last year, that credit didn't fall into this year. So that's a considerable number.

Absolutely, yes.

I'll go on to the, not really your question, but we talked about last year, Victor, quite a bit, we call proof-of-concept. And I realize the trade shows that you referred to were very recent. In fact, we were in one last week, I believe, in Oman.

Correct.

But the Rockwell was last month and then the Atlanta show, I think, was the month previous, whatever. So I'm assuming there's an enormous amount of leads come out of all those shows, but do we have any proof-of-concepts? Have we started testing any of these companies or even prior to where are we at today with testing? How many people are out there? How could I say, testing A

Yes. From the shows, the one for Rockwell, it was right before Thanksgiving, and then you had Thanksgiving, and then it's literally only been like 10 business days that we've been able to contact those. But, yes, there's been a lot of conversation, but the one that was overseas, we actually are starting a POC, believe it or not, on Sunday that happened already just in a week. So, yes, there's been a lot of activity, a lot of conversations, and a lot of people like the POCs will start after the New Year, they're kind of already on vacation mode, but there's been a lot of good conversations and a lot of things that we have to follow-up on the New Year.

Yes. But even prior to that, we've had proof-of-concepts ongoing even from earlier this year?

Yes. And those will continue. I think maybe I misunderstood your question, but like I thought you meant new just from those recent shows. But, yes, we have probably more than a dozen of POCs going on of -- in various stages. The one that we closed with the energy company recently that was over a year POC and we finally got awarded and there's some other that we're waiting, the POCs are done, and now we're just waiting either for budgets or we're waiting to see if we were the last one standing on in the POCs. And a lot of them had said to us that decisions we made in January. I don't know if that's true or not, if it moves, but we are waiting for a couple very promising things in January. So hopefully they come through.

And just to clarify, you've made PRs on this before, but we have three Fortune 500 companies now that are utilizing A

Yes. And hot off the presses, just keep your eyes out there'll be something coming out early next week on another nice win. So I'll just give you a --

All right. I appreciate that. And one other point on the stock buyback, it will be like 2,800 shares. All I'm saying is, I think you guys and the Board ought to get maybe slightly more aggressive. I know we have a little more volume in the shares now than we did a year ago, but so we can buy more shares under the market conditions, but I would think that you guys should be seriously considering maybe upping the amount of shares that can be repurchased under the program. And I'll move on to somebody else's questions now. Thanks again guys.

Thanks, Joe.

Thank you. Our next question is coming from Will Lauber with Visionary Wealth Advisors. Your line is live.

Yes, guys, just so people can realize and help us get a handle on how much money you guys are putting into this A

But it was a loss. So I mean.

No, you said if you're taking out, if you took out A

Yes.

Yes, definitely. It would be profitable.

It would be very profitable, yes. Yes, that's something that I have to understand that TS is doing really, really well. They are the cash cow that's paying for all this R&D for A

Okay. Could you guys put an approximation on it? I mean, could we have earned $1 a share?

Yes, more than that, yes.

More than $1 a share? Okay. My next question was, the increase in your recurring revenue as a percentage is pretty impressive. When you look out say three, maybe five years down the line, what percentage do you think that could be and what's kind of your internal goals?

If we could double again in the next 24 months, that would be something that would be we'd be proud of. And that's why we're very, very focused on that recurring revenue piece of it, especially in the cloud, the Microsoft business that we're bringing, we continue to grow, the engineers, the support staff and the sales staff along with it. And then the MSP, once if we could get into the cloud play, the MSP usually comes after that. So they're definitely, they're adjacent to each other. If we could get one, we usually get the other. So, yes, our goal is to grow that as fast as possible. There's no limits on what we want to do, but at least a 10% to 15% growth minimum year-over-year, if not more.

Okay. All right.

The answer to your question, it would be about $0.56 per share.

Okay. All right. Thank you.

Thank you. Our next question is coming from John Crotty, who is a Private Investor. Your line is live.

Hi. Thanks for taking my call. I want to just say congratulations on the S500 Energy Company. 18 months is a long POC. I understand I've been involved with a few, and good job, especially having the patience. And for us investors, we need to have the patience of a dead person. So we're with you right along with it. Anyway, you've talked a lot about the Rockwell, and I read a lot, and that really seems like a great partnership with lots of leads. But I want to talk about the other partnerships you have. You have the large one in Australia. You mentioned there was a smaller one in the Middle East, and then we had a larger one that was out, in the US, I believe, in the East Coast with a lot of clients. Could you give us any feedback on that in terms of are they running proof-of-concepts? Do they have a large pipeline or any type of any info you would like to add?

The partner in Australia, they're not the largest partner, but we do have some POCs going on with them. They are good sized opportunities. And they're not in the commercial sector, so things do take time there, but they are progressing. And, yes, and the partners that we're focused on right now, with the Rockwell is because we're really focused on that OT space and because we have the approval from Rockwell as a certified partner, that's kind of where our focus has been because getting into some of the other manufacturers takes time. Rockwell took us almost two years to get approved inside as a certified partner. So we're working with some of the other big manufacturers. We're in different stages of getting approval, as a certified partner that can work inside their stack. So, yeah, everything is moving just at different paces, just depending on how fast in some of these large organizations, unfortunately people leave, move or get fired. And sometimes you take two steps forward and then someone leaves and you got to reeducate the new person and we've seen that happen in some of these large manufacturing companies.

Yes, I agree. Go for the low hanging fruit because they're pushing you through. I agree. I also wanted to talk about what you mentioned a couple of calls ago that some of the, the government win that you had. They had many other divisions or departments or areas that were waiting for budgets to add it in. Is anything moving along with increasing any of the opportunities with existing customers, especially like you had mentioned with the Western Intelligence?

Yes. There's another opportunity I think that has moved forward. Timing on that is not, I'm not exactly sure, but there is a deal that I feel like in the next 90 days, we're hoping that will come in. And that's all I can say about that.

Okay. That's fair enough. And I know you have a lot of non-disclosures you got to be cautious with. That was it. That's what I wanted just to follow-up. Everything else read through and I like the response. And I like $0.56 a share on just the TS side. So that's good. All right. Thank you so much. Keep up the good work, guys.

Thank you.

Thank you. Our next question is coming from Douglas Johnson, who is a Private Investor. Your line is live.

Yes. How large are these A

Well, I can't disclose exactly, but one of them is in the millions and the other ones, as I mentioned in the script, we're looking to get adopted inside their infrastructure. And some of these were what was left in the current budget and then we'll roll out I mentioned the big energy, they have thousands of systems that they told us it could take up to three years to roll them out. We're hoping to speed that up by us doing or assisting with the installation. But there are thousands of endpoints and it's how they roll out and how fast is kind of up to the customer.

Okay. Thank you.

Thank you. Our next question is coming from Jeffrey Stevens with Long Pond Capital. Your line is live.

Yes. What's going on guys?

How are you doing?

Yes. Good, good. I want to look -- I look back a couple of years ago and you guys had a relationship with NVIDIA, which you guys were, you guys did a little announcement with them, that their hardware and their software. Is it possible that have you had conversations with them for A

Yes. So we definitely have had conversations with them. That was one of the examples where some of the powers to be that we were talking with kind of moved on. So we kind of had to start from scratch a little bit on some of the contacts there. But there's definitely conversations. They're not moving as fast as we would like, but we do have some relationships there and we're talking more in their robotic area. That's kind of where we want to focus on A

All right. Well, thank you so much.

Thank you.

Thank you. Our next question is coming from Brett Davidson, who is a Private Investor. Your line is live.

Gary, Victor, Happy Holidays.

How are you Brett? Same to you Brett.

I'm doing good. Just got a couple of I'm going to limit it to one question. It's just going to be a multipart. I'll link it with and. Is there any legacy stuff at all going out in the E2D program? And can you give a little color on those UCaaS contracts that were announced in the last quarterly earnings release?

There is going to be a little E2D next year. It was supposed to be in this quarter. They moved it. So we're thinking it's going to be Q1. It could move out, but that's coming, as you note, towards the end, it is at the end of its career. But we believe there'll be one more next year in 2025. And then there'll be some pieces and parts, we're guessing, we're not sure exactly. And then on the UCaaS, we continue just to grow that business, bringing on new clients. There's been a few that we sold a deal last quarter, but it took some time to implement and we turned on the billing in this quarter. So it will continue to grow over time. And these are usually three year contracts.

Got it. And so that's this quarter and any headway since then?

Yes, yes. No, the pipeline looks pretty good on UCaaS and we're constantly we're bringing on one or two customers consistently every quarter of all sizes. And it's a monthly recurring, so it's not like you get a big pop, you get whether it's 5,000 or 20,000 or whatever the number may be, it's on a monthly basis. Like I said, we're focused on our recurring revenue at this stage of the game. We'll still sell the product and services as we do. And I mentioned we -- one of the cruise lines finally gave us a nice close to $1 million professional service contract, that will roll out over 2025. Yes, we're focused on either professional services because it's high margin or any of the recurring revenue and we try to do like multiyear deals on pretty much everything we do. Microsoft is a little different. You either get one year or monthly, but that's because it's a program that they offer.

Got it. Well, thank you very much.

Yes. Have a good one. Happy Holidays.

Thanks. Happy Holidays.

Same to you.

Thank you. [Operator Instructions] Okay. As we have no further questions in queue at this time, I'd like to hand the call back over to Mr. Dellovo for any closing comments.

Thank you. As always, I want to thank our shareholders for their continued interest and support. Good things are happening at CSPi and A