Victor Dellovo - President & Chief Executive Officer Gary Levine - Chief Financial Officer.

Analysts:.

Dan Zeff - Zeff Capital:.

William Kidston - North & Webster:.

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Good day and welcome everyone to CSP’s first quarter 2014 earnings conference call. Today’s call is being recorded. The financial results news release is posted on the website at www.cspi.com for those of you who did not receive it by email. Later we will be conducting a question-and-answer session. (Operator Instructions).

With us today are CSP’s President and Chief Executive Officer, Mr. Victor Dellovo and Chief Financial Officer, Mr. Gary Levine. At this time, for opening remarks and introductions I will turn the call over to Mr. Levine. Please go ahead, sir..

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 will 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 the 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 in the company’s filings with the Securities and Exchange Commission. During today’s call, Victor will provide an overview of our performance for the year and an update on our business segments and our strategic progress.

I’ll then discuss our first quarter financials in more detail, and then we’ll open it up to your questions. With that, I'll turn the call over to Victor..

Thank you Gary. We began fiscal 2014 with a solid quarter, reporting very strong net income and EPS on a 2% year-over-year increase in sales. Lets jump right into the segment review starting with our System Segment, which includes our MultiComputer business.

Revenue in the segment was up $1.2 million to $2.3 million in the quarter, driven partially by $800,000 in revenue from our Myricom acquisition. We also reported $1.1 million in royalty revenue related to the E-2D aircraft from Lockheed Martin versus only $700,000 in E-2D royalty revenue in the prior year quarter.

The royalties in Q1 of fiscal year 2014 were made to support our first phase of full rate production, as well as spares for Lots three and four of Low Rate Initial Production.

As we said on our last call, we continue to expect to receive royalty revenue related to five planes in fiscal year 2014 with significant future opportunities as production continues through fiscal year 2018. The integration of our Myricom acquisition continues to proceed according to plan.

We are focused on three key areas maintaining an uninterruptible supply of Myricom products to the supply chain, providing excellent support to existing customers and to develop the next generation products.

Late in the first quarter we announced the addition of the first of several next generation products, which provides faster network transfers fee for a number of different customer applications, including data centers.

We continue to be enthusiastic about the growth possibility arising from Myricom, which for the first time provides our MultiComputer business with a base of customers in commercial growth markets.

What’s even more existing about Myricom is that it potentially enables us to develop products in the MultiComputer division that are aligned with our Modcomp customers. This is an excellent possibility for cross selling opportunities.

Likewise our KeyDSP MultiComputer products that we have announced last quarter, also affords us additional prospects to target new commercial market. Lets turn now to our Service and System Integration segment, which includes our Modcomp subsidiary. Services and System Integration revenue in the quarter were down 4% year-over-year to $19 million.

While Germany was up year-over-year for the first time in several quarters, it was more than offset by a decline the U.S. I should note that the U.S. continued to profitable in the quarter. Also because of our focus on managed services and the resulting demand for those offerings, all of our engineers in the U.S. are being fully utilized.

They are working on projects such as unified communication, virtualization and storage. In addition to Q1 sales growth in Germany, that business has been making progress in improving the bottom line as well. In fact we see additional opportunities to reduce cost in Germany over the next two quarters. .

We made progress on further defining our managed service offerings and we see excellent opportunity for growth in managed services well into the future. With managed services we are essentially taking over the monitoring and maintenance of client network.

These clients are coming to us from a variety of industries, including banking, publishing, medical, recruiting, transportation and travel. For these clients we are insuring that all their critical network devices are healthy and functioning reliably and optimally.

We scheduled preventive maintenance and performed real-time optimization to our network operation center, so that critical issues are identified and resolved immediately. We also provide security and backup management to keep the clients network environment secure.

Since we provided these offerings from multiple geographies, clients can leverage Modcomp’s technology and expertise 24/7. Now what managed services means for Modcomp is a growing, recurring revenue stream as high-end margins in our legacy business. We had good success in attracting clients and our pipeline is growing.

The sales people are excited about this offering and are working to capture new business. We are optimistic about seeing our recurring revenue continue to grow.

In summary, we’re progressing well on our strategic initiatives; we have new growth opportunities on both MultiComputer and Modcomp sides of the business and we’re looking forward to reporting continued progress.

We’re also continuing to work very hard to take costs out of the business, in order to improve margins and gain better leverage from our expected sales growth in the coming quarters and years. With that I’ll turn it over to Gary for a review of the financials..

Thanks Vic. Revenues were $21.3 million, which were up 2% from a year ago. Revenue was up due to higher sales at our systems segment and foreign exchange, which was positive by $300,000. Our total cost of sales for Q1 was $16.7 million, about flat with the prior year.

Gross profit for the quarter increased to $4.6 million from $4.2 million as a result of greater percentage of sales from system segment and the increase in royalty revenue. Gross margin increased to 21% from 20% in Q1 last year.

First quarter engineering and development expense was $0.6 million compared to $0.4 million a year ago as a result of the Myricom acquisition. As a percentage of sales, Q1 engineering and development expense was 3% compared to 21% last year. We were just above our target range, where engineering and development are between 2.4% and 2.7%.

SG&A expenses were $4 million or 18.8% of sales compared to $3.6 million or 17.1% of sales in the year ago quarter. The increase was primarily due to the Myricom acquisition. We were above our target range of SG&A of 16.6% to 18.2%. We had a tax benefit of $32,000 compared with tax expense of $117,000 a year ago.

The tax effect on the bargain purchase is netted against the gain. We expect our overall tax rate going forward to be approximately 39%. We reported net income of $346,000 or $0.10 per diluted share compared to $115,000 or $0.03 per diluted share a year ago.

The increase was primarily due to the $462,000 bargain purchase gain related to the Myricom acquisition. The bargain purchase gain resulted because of the higher fair value of the acquired assets over the acquisition consideration. The gain was recognized against the operating expenses on the acquisition date.

Cash and short term investments decreased by $4.7 million to $13.9 million from fiscal year end. This was largely due to an increase in accounts receivable because of large orders received at the end of the quarter, which have now been paid.

Looking forward, we continue to expect to report improved top and bottom line results for fiscal 2014 over fiscal 2013. Although we may see some lumpy results on a quarter-by-quarter basis, we continue to execute on our strategy and as Victor mentioned earlier, we are focused on opportunities to streamline the organization.

With that Victor and I will be happy to take your questions. Donna, we’re ready for the questions..

Thank you. (Operator Instructions) Our first question is coming from Dan Zeff of Zeff Capital. Please proceed with your question..

Hi, so despite having over $1 million in royalty revenues and you kept the bargain gain, bargain purchase gain, you lost money this quarter on an ongoing operating basis.

So my question is, can you specify the streamlining decisions you’ll be making in terms of cuts, because it looks like we’ve got to cut a lot of costs to get back on ongoing operating profits here..

Right now we’re in the process of reviewing. We are not going to discuss specific actions that we’re going to Dan as we mentioned to you yesterday..

Okay, when you discuss improved top and bottom line results, are you including one-time non-cash gains that we’re seeing right now or are we talking about actual ongoing business improving..

Actual business improvements..

Thank you..

(Operator Instructions) Our next question is coming from William Kidston - North & Webster. Please proceed with your question..

Good morning gentlemen..

Good morning..

Good morning..

Can you guys just break out the operating profit if you’ve got it for the Myricom division of Systems and if you don’t have that, can you break out the operating profit overall at Systems, as well as the operating profit at Modcomp?.

Well, the operating profit for the Systems division would be $142,000..

Is that including the bargain purchase gain?.

Yes, it does..

So if you net that out, somewhere you lost about $300,000 in that division on an ongoing operating basis..

Well, the other thing that we have is that with the bargain purchase there was a step-up in basis related to the inventory, which meant there was additional expenses that were taken related to that, to the tune of about $144,000 spent..

Sure, sure.

So you’re talking about $150,000 then roughly of an operating loss ongoing?.

Yes, within the quarter..

And how about Modcomp?.

Modcomp had an operating profit of $198,000..

Sure, sure. All right, well that’s all I have guys. Thanks very much..

Thank you..

(Operator Instructions) Our next question is coming from (inaudible). Please proceed with your question..

Good morning gentlemen.

A clarification in the Myricom acquisition; did you say about $800,000 in revenue was added in this quarter from that acquisition?.

That’s correct..

Now if I recall, that acquisition was inter coordinated, but you didn’t provide any this quarter; is that correct?.

Right, two months..

So that is two of the three months. The revenue was $800,000 for two of the three months..

Correct..

Very good. Thank you very much. I appreciate it..

Thanks..

Thank you. Our next question is coming from William Lauber of Sterling Capital. Please proceed with your question..

Yes Gary, you mentioned that the receivables, the high level of receivables, most of that has been collected, its not all of it.

So where does that put your cash position now?.

To be candid, I don’t have the number right now Bill with me today, but it did move up. So obviously I can’t answer that right now, but I can – I’ll let you know..

Okay, and in terms of the royalty revenue in the first quarter, can you break that down, how many – did you shift the date – is it one plane or is it….

Its spares and one plane..

Okay. Spares and one plane, so that leaves four estimated for the rest of the year..

That is correct..

Okay, any more spares between now and the end of the year?.

At this point we’re not sure. It’s an ongoing process, but there is some small amount I believe that they are talking about..

Okay, thank you..

Thank you. At this time I would like to turn the floor back over to management for any additional or closing comments..

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

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day..