Good day, everyone, and welcome to today's program. [Operator Instructions] Please note this call is being recorded..

It's now my pleasure to turn the conference over to Mr. Gary 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. Mr. Dellovo is out of the country on business. And if he is dropped from the call, I will continue with his presentation..

Before we begin, I'd like to remind you that during the call today, 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 can cause actual results to be different materially from the forward-looking statements made by the company. Such risks include general economic conditions, market factors, competitive factors and pricing pressures and others described in the company's filings with the SEC.

Please refer to the section on forward-looking statements included in the company's filings with the Securities and Exchange Commission..

During today's call, Victor will provide an update on our business segments and our strategic progress. And then I will discuss our first quarter's financials. Then, we'll open it up to your questions.

Victor?.

Thanks, Gary. We performed well in the first quarter of fiscal '16, as many of the strategic changes that we put into effect in 2015 are becoming -- are beginning to come together.

Our Myricom product line continues to perform well, and the new product rollout schedule is on track and has potential to smooth out the lumpiness inherent in our High Performance Products division.

In the Technology Solutions division, we are seeing growth in our managed service pipeline as well as an increase in sales, which include a recurring revenue stream. .

With that, I'll get right into the segment review, starting with our High Performance Products division. Revenue increased 5% for the quarter as we received royalty revenue for 1 E-2D plane in addition to some miscellaneous E-2D revenue compared with $58,000 of E-2D royalty revenue a year ago.

Looking ahead, our expectation is to receive royalty revenues from 4 more planes in fiscal 2016, all in the back half of our fiscal year..

Our Myricom product line continues to perform very well, including our legacy product. As we have mentioned before, we've had expected revenue from the legacy product to decline over time, but we have been able to keep sales at a steady pace.

However, the long-term strategic opportunity lies with our next generation of products, which have been -- which have the potential to expand the commercial market reach of the division and be the primary growth driver for HPP..

You may remember that in Q3 of fiscal 2015, we began to ship early versions of the Myricom 10-gig DBL network adapter to the financial customers for beta testing. To-date, customers' response have been very positive, and we're excited by the market potential.

In early April '16, we will be placing an updated model of this 10-gig DBL adapter with beta customers, and we expect it to be available to the general public towards the end of the fiscal year..

We also planned on a variation of the same board using our 10-gig Sniffer software geared towards the security application of the packet capture. This adapter, to be named the Myricom ARC Series D-Class, delivers customers the critical functionality required for their demanding application in a cost-effective package.

The network adapter for the financial service market, primarily used in high-frequency trading, are slightly behind the capture packet product in terms of development but have really exciting potential.

Early this month, we've showcased a E-Class DBL product at the Intelligence Trading Summit (sic) [Intelligent Trading Summit] in London, and the potential customers are providing very positive feedback about its characteristics and value proposition.

We expect these new-generation products to record meaningful revenue, beginning in the third fiscal quarter..

Turning now to our Technology Solutions division. Quarterly revenues were up 18% year-over-year. Let's walk through our geographic businesses, starting with Germany. Our core strategy continues to be increasing our higher-margin revenues for managed services.

We partnered with 2 established and well-known European managed service providers, Claranet and QSC, to accelerate our progress in the area. These new-formed partnerships have proven helpful in building our managed service pipeline. We've also changed our sales compensation structure to focus more on our managed service offerings.

Penetration testing also continues to be very strong market for us in Germany, and we're seeking more engineers and penetration testers to support the growth. .

In the U.S., we had a good first quarter across the board. And similar to our German counterpart, our managed service pipeline continues to grow. We're particularly excited that we are closing managed service deals at a greater frequency. And because of this, the portion of sales with a recurring revenue stream is growing.

We have added additional engineers to focus on managed services to satisfy our current and future demand and continue to actively expand our team. In addition, we're looking forward to capitalizing our new managed services, marketing campaigns that we recently put into place.

During the quarter, we also closed deals for the installation services around Microsoft Office 365. We're capitalizing on the growing trends towards cloud-based computing, as large enterprises rely on us to move their Microsoft Office applications from their internal exchange servers to the cloud. .

Turning to the U.K. We are pleased with the state of the business and are seeing clear progress -- forward progress in sales growth because of the management and strategy change, which we put into place. As we mentioned last quarter, Frank Puetz is now overseeing the U.K.

business in addition to Germany, and he's already made some significant changes with tangible results. We refocused the sales team on security products, where we see good opportunities and away from the generic data center business. We also have a new system in place and new sales compensation plans to enable a better focus on higher-margin business.

At the same time, we are focused on cost cutting and better efficiencies to drive better profitability out of the business. .

With that overview of the 2 divisions, I'll turn it over to Gary for the financial review. .

Thanks, Victor. Revenues increased 16% to $23.7 million from 29.4 -- $20.4 million a year ago. Our total cost of sales for Q1 was $18.5 million, up 12.2% from the prior year. Gross profit for the quarter was $5.2 million compared to $4 million a year ago.

Gross margins increased to 21.9% from 19.4% in the prior year as a result of the mix of products and services in our businesses..

First quarter engineering and development expenses decreased to $799,000 from $853,000 a year ago, primarily as a result of planned turnover of engineering personnel as we hire talent that is in line with our strategic initiatives. As a percentage of sales, Q1 engineering and development expenses were 3.4% compared to 4.2% last year.

This is just slightly below our expected range of between 3.5% and 4% of sales. SG&A expenses were $4 million for the year -- for the quarter or 17.1% of sales compared to $4 million or 19.7% of sales in previous year. Based on our planned investment, we expect SG&A expenses to be in a range of 17.8% to 18.2% for fiscal 2016.

The effective tax rate for the quarter was 23% compared with 54% in the prior year. We expect our overall tax rate going forward to be approximately 39%..

We reported net income of $283,000 or $0.07 per diluted share compared to a net loss of $430,000 or $0.12 per share a year ago.

Cash and short-term investments decreased to $10.5 million from $11.2 million at year-end as a result of a pay down of accounts payable and accrued expenses of approximately $700,000 and partially offset by cash from other operations.

Lastly, our board of directors voted to pay a quarterly dividend of $0.11 per share to shareholders of record on February 26, 2016, payable on March 11, 2016. We aim to improve our bottom line performance by focusing our growth initiatives, increasing the level of high-margin products and aligning cost containment across our organization..

I'll now turn the call back over to Victor. .

Before we go to questions, let me sum up. In the High Performance Products division, we are making progress with our next-generation Myricom product line and expect to see meaningful revenue from the new network adapters, beginning Q3. We anticipate royalty revenue from 4 more E-2D planes during the later half of the year.

In our Technology Solutions division, we plan to increase revenue on a global basis from our managed service offerings, which we expect to be an excellent driver of growth in recurring sales for the long term..

While we still have much more work to do, the more significant changes to transform the business are in place, and we are now focused on the solid execution of our strategy. We have created many opportunities for CSPI, and we are looking forward to capitalizing on our potential in fiscal 2016 and beyond. .

Now we will take your questions. .

[Operator Instructions] And we can take our first question from Sam Kidston with North & Webster. .

Just a couple quick questions on the results here. First of all, I know it appears that E&D expense, engineering and development, was up about $250,000 from last quarter.

What's going on there?.

Well, we're ramping up, Sam. I think as we've said that we're -- we've been hiring. So basically, we're down with our expenses in the last quarter and brought in some new personnel to work on our new products. So there's been a shift in personnel.

So as people have been leading in the other areas, we've brought in new people as well as some consultants to help with the transition to the new product line. .

Got you.

So headcount in that area was down last quarter because you're essentially turning over engineering and development talent?.

Correct. .

Okay. Great.

And then on the E-2D, in the press release, you guys said that you received royalty revenue for 1.5 E-2Ds, and, what 3.5, what's going on there?.

Well, it's just the way that the -- our integrator takes the product. So we don't really have any say -- they necessarily don't take a full plane all at once sometimes. They may take partial shipments as they ship them off to the integrator. So that's -- we just get notifications, Sam.

So that's based on that as well as there was, I think, a small amount of parts that was purchased in the first quarter. .

Okay. So it's not 1.5 royalty payments? This is... .

Well, it's the equivalent. Right. There was just a small amount, I think, of parts. .

So you took 1 royalty... .

Royalty. Right. .

So you still have 4 more royalty payments. .

Well, see, the problem is that as I'm saying it, they do take partial. So we're saying truthfully -- probably we're going to get, like, 3.5. .

Royalty payments?.

Correct. .

Okay.

Have you guys recognized 0.5 royalty payment before?.

We've recognized -- what we do is we base it on boards. So as they ship boards, that's how we receive royalty. And they don't necessarily take a whole plane. It's what -- we get notification from the integrator as to what was built, and then we receive payment on that, and they invoice them appropriately.

So it's not necessarily a full complement of boards each time. It may get portioned. They just send us a requisition to build us x number of boards. .

Okay, perfect. And then just finally, on the dividend, I would guess that you guys are getting close to the point, where you're going to need to repatriate cash from abroad to continue to support the dividend, given that you're paying out more than you earn consistently.

When do you expect that to happen?.

Well, I think we're going to have positive cash flow for the year, and we've had some discussions. But currently there is no plans going forward from continuing with dividend that is being funded by the U.S. .

So you have more than $2 million of cash on hand in the U.S.?.

Yes. .

[Operator Instructions] We'll go next to Joseph Merges [ph] with Seagram Investments. .

You did answer. I was wondering about the 0.5 airplane. And I don't recall ever in the past utilizing a partial payment in your reports, but maybe I'm missing out on the past experience on that. .

Joe, it's a matter of the way that they procure, and this is the way that it's been done. So probably in the past within cut offs within quarters, we probably have had full planes or approximately full plane. But it's really based on the number of boards that are delivered. .

Yes. You mentioned that, and I just, like I said, I don't recall in the past ever having 1/2 plane or 1/4 plane or whatever the case may be.

On the upgrades, I'm talking about the Myricom upgrades, you're talking -- in the press release, you were specifically talking about in the third quarter -- our fiscal third quarter, beginning in April that is, that's we're referring to the quarter beginning in April, the fiscal third quarter, that you're expecting greater revenues from the financial markets.

.

That's what we're planning. .

Okay.

And so in the last conference call, I guess, we discussed the -- one of the hang-ups -- was the fact that the Linux operating system wasn't fully rolled out yet, and I'm assuming that that's been the case now that we're going to have a Linux version that's being tested in the financial marketplace?.

Yes. So we also have Windows based and Linux. .

Okay. And the Linux -- in the past, we didn't have Linux, and that's part of the upgrade on the adapter. .

That's correct. .

And also, you mentioned about the security, and I assume that's in the packet capture area. .

That's correct. .

You're looking for possibly revenues there late in the fiscal year or... .

That's correct. Right now, as we've mentioned on there, it's all in beta. So that's -- we're trying to give you some information of what our strategy is. And as long as all the testing comes back in a timely fashion, those are some estimates that we hope to see some revenue from these new products. .

So the beta testing right now is being done in financial as well as packet capture.

And do we have any beta testing being done in the third market area, which is the video or not at this point in time?.

Not at this point. .

Okay.

So basically we're testing in both financial and packet capture with the beta tests?.

That's correct. .

Okay. Very good. And on the managed services end, you're -- just a little clarification on the -- in Germany, you're talking about you're partnering what QSB you said and was it Claranet were the 2 names that were mentioned. What are they? Are they just another sales... .

They're colocations, where they're basically just providing gear power for customers. And we're looking to take over the MSP side of it and manage some of the security needs for those different customers that they currently have. .

Okay.

So their -- you're working with their customers in an MSP arrangement?.

That's correct.

It's early stages, but I wanted to mention kind of where we're looking for to -- with some new partnering there and to look at their customer base, which is pretty big, thousands of customers, and looking to offer our MSP in SOC and security management for them and see if we could add value to not only what we're doing but also what Claranet is offering.

.

That's a pretty large base of customers there. So the possibilities should be quite good if we can sell the idea. .

That's correct. .

And are they going to be -- are they being paid a royalty or a commission based on signing their customers? Or is it just from their standpoint security -- they're providing a service that they haven't provided in the past?.

Exactly. There's no commission based on it. It's just a service to give extra value of what they potentially provide. .

Okay. That takes the question of why would they even -- why do they want to deal with us? I mean, what are they getting out of it, I guess, would be my question.

What do you think they are?.

Well, in Germany, for years, right, for over a decade, we're known for one of the best security organizations around. We handle a lot of large organization security needs and have done that successfully. So the reputation that we have in Germany has been second to none.

So with our reputation and what we can offer, that's what -- that's the value that we're providing. .

That sounds like an excellent -- sounds like we're in a great position in Germany and in an area that's critically more important more than ever. So that sounds extremely good. .

And we also have a follow-up from Sam Kidston. .

Just for my unification, how many boards typically go on under 1 plane?.

Sam, I'm. . . .

65, I think, it is, right. It's about [indiscernible] give or take. .

And it does appear we have no further questions at this time. I'll return the call to management for any closing remarks. .

Thank you for all joining us today. We look forward to speaking with you again on our next call. .

Thank you. .

And ladies and gentlemen, this does conclude today's program. Thanks for your participation. You may now disconnect and have a great day. .

Thank you..