Good morning, everybody and welcome to CSPI Second Quarter Fiscal Year 2023 Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Michael Polyviou. You may begin..

Thank you. Hello, everyone and thank you for joining us to review CSPI’s fiscal 2023 second quarter results which ended March 31, 2023. 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 will then open the call for 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 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 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 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. Today, we reported our third consecutive quarter of solid growth with revenue up 11% and earnings per share more than doubled from a year ago.

The growth is a direct result of our team’s successful effort to build both our recurring revenue customer base and a pipeline of million-dollar-plus business opportunities.

Despite an increase in competitive operating environment for the customers’ budget dollars, the demand for our services and solutions results in another quarter and backlog of more than $22 million, and we again increased our gross margins from a year ago fiscal second quarter. We are at the midway point of our fiscal year.

We believe that we will be able to generate positive results during the third and fourth fiscal quarters. Once again, our Technology Solutions business continued to lead the way with sales growth of 9%.

Meanwhile, the high-performance products for our HPP business revenue continued its strong assumed with a growth of 29% compared to a year ago fiscal second quarter. Of particular note for this segment, the ARIA product line is gaining traction with customers around the world.

We have continually growing our ARIA customers and our team has more than doubled the pipeline for this product. We could potentially expand our marketing capabilities for this product line in key international markets through the establishment of a reseller agreement. We have signed Australian MSP, and we have multiple deals that are underway.

Turning to some of the financial results, our fiscal second quarter marks the beginning of the budget year for most of our customers, and therefore, can be a challenging period for our company. Despite this historic seasonality, total revenue for the period grew to $13.3 million from $12.0 million in the year ago fiscal second quarter.

Our TS business revenue totaled $11.8 million. The segment of our operations continued to be the driver by our customers’ increased use of our implementation, installation and training capabilities. Our HPP revenues were $1.5 million compared to $1.1 million in the year ago fiscal second quarter and were driven by Myricom and ARIA.

The ARIA customer base continues to grow and the pipeline is at an all-time high. During the quarter, we continued to manage the business in a cost-efficient and high-return manner.

Gross margin percentage over the year ago period of 35% continued to expand and reached 38%, while we gain leverage from our operations and generating net income of $321,000 or $0.07 per common share.

While we continue to invest in our programs to build a long-term growth, we are once again paying a cash dividend to shareholders of $0.04 per share, a $0.01 increase from prior quarter. We continue to manage our balance sheet to get optimal returns.

We continue to achieve record-setting levels of pipeline for most of our product lines and the opportunities ahead of us continue to expand.

Our focus over the past few years of offering differentiated value enhanced solutions for a challenging face by our customers as well as an increasingly effective go-to-market strategy are the key factors to our growth.

At the same time, we continue to invest in our top-notch engineering team and R&D efforts to enhance the existing offering as well as create new solutions for our customers. ARIA is an example of the result from our development efforts, and we are working to create others in a not-so-distant future.

In the cybersecurity space, new threats and challenges are faced by our customers all the time and our solutions are providing to the adaptable flexible answers to those threats. While we have strong momentum and our opportunities in the marketplace continue to expand, we do have hurdles to overcome to realize our full potential.

The supply chain continues to be a hurdle. And although we have created work around most of these hurdles, gaining acceptance for these solutions offer require extensive review by our customers, which delay shipments. Our customers continue to remain loyal to our solutions often because of our most effective cost-efficient and to serve these needs.

At the same time, our team constantly interacts with our customers to keep them abreast of supplier timelines and options. The supply chain issue continues to improve but slower than we would like and it requires constant attention by our team.

At the top of the call, I mentioned an increase in competitive operating environment for the clients’ budget dollars, the situation is being driven by customer needs to maximize the return from their technology investments. Across our product lines, we were able to meet this challenge quite effectively.

However, the internal process followed by many of our clients is resulting in an extended time frame for order decisions, which in turn is in decisions on several major opportunities we are pursuing. Another challenge for us has been the absence of any significant recent revenue from the Cruise Lines industry.

We are beginning to see signs that this drought is starting to end as we are currently retrofitting one log ship and several other ships that we could begin work on during the next couple of quarters. To summarize, we have generated substantial growth during the first half of the fiscal year.

And if we execute in the market cooperation, we believe the second half of fiscal year performance will be even better. With that, I will now ask Gary to provide a brief overview of the fiscal first quarter financial performance.

Gary?.

Thanks, Victor. As Victor mentioned in his opening remarks, we had a solid fiscal second quarter, and we continue to achieve our operating and financial objectives. We reported revenue of $13.3 million and an 11% increase compared to the year ago fiscal second quarter, which further validates our growth strategy.

We reported gross profit of $5 million or 37.6% of sales compared to $4.2 million or 35.1% of sales in the year ago fiscal second quarter. Our engineering and development expenses for the fiscal second quarter were $858,000 compared to $717,000 in the year ago period.

As we discussed previously, the increase is primarily due to higher personnel costs, which includes outside consultants. Our SG&A expenses in Q2 were $3.9 million compared to $3.5 million in the year ago quarter due to increased payroll and variable compensation based on higher year-over-year gross profit.

We reported net income of $321,000 in the fiscal second quarter or diluted earnings per share of $0.07 per share compared to net income of $156,000 or diluted earnings per share of $0.03 for fiscal 2022 second quarter. As Victor mentioned earlier, this represents a more than double increase in our earnings per share.

The cash and cash equivalents was $13.3 million as of March 31, 2023, the cash and cash equivalents were approximately $10.7 million lower than cash and cash equivalents as compared to the September 30, 2022, level, primarily due to moving $3.5 million of cash to short-term held-to-maturity investments during the second quarter of fiscal 2023 and a large vendor payment made in the second quarter on a large financing customer sale that occurred in the first quarter of fiscal year 2023.

In accounts receivable, there is $8.7 million with payment terms, which exceed 1-year. We will be paid $0.6 million and $6.2 million in the third and fourth quarter of the fiscal year.

We believe this is only possible because the prudent management of our resources, which allows us to implement our multiyear growth strategy of transforming into a cybersecurity, wireless and managed service company.

I also want to highlight that the Board of Directors approved an increase in the quarterly dividend to $0.04 per share payable on June 13, 2023, to shareholders’ record on the close of business on May 25, 2023. With that, I will turn it over to the operator to take your questions..

Thank you, Gary. [Operator Instructions] Your first question is coming from Joseph Nerges of Segren Investments. Joseph, your line is live..

Good morning, gentlemen.

How are you today?.

Good morning, Joe..

Hi, Joe..

Okay. Well, let me first congratulate you guys on the press release from last week, the announcement of the customer – Miami Dolphins as a new customer with the – I guess it’s Acronis.

Is that at the software company that you’re tied up with?.

Yes..

That’s a pretty high-profile customer in the area, and I assume that doesn’t hurt our publicity from the locals that we’re trying to recruit outside of them..

Yes, that’s part of the goal is with the announcement, it’s a 3-year contract with them. So we’re looking forward to developing a strong relationship over the next couple of years..

I noticed in looking up Acronis, they have a pretty dynamic sports program. They have quite a few professional sports teams under contract. And I’m just wondering if – and of course, from our market area, from basically Tampa Bay down, we – there is quite a few sports teams.

I’m wondering if we’re in contact with any of the other teams in the area?.

This conversation is happening. I can’t say more than that, but there are other things going on..

Got it. Alright. And in the Cruise, and you did say, well, there is been some pretty good publicity of late about their bookings in the cruise industry. You’re saying it hasn’t yet to any great degree helped us but we’re still talking.

Is that basically what you’re saying?.

Well, yes, they have actually started spending money because we haven’t done a ship in a long time, and we completed one in Spain last week or the week before, I can’t remember now. And there is 11 more we’re talking about. So if we get all those, it will be a good kickstart to hopefully more after that.

But they are moving slow, but we are moving, which is good news..

Well, like I said, I’ve read at least the press releases of late that their bookings have been pretty strong. So I mean, hopefully that....

They are still watching every dollar. They have been hit so hard right now that their budgets are still, I don’t think, of what they used to be..

No, I understand. I’m just saying that at least from a positive standpoint is their bookings are in good shape. Now a couple of quick – so from a cash standpoint, you’re talking $13.3 million in cash and cash equivalents. So you’re also saying that there was $3.5 million you moved to short-term investments.

What term do we – what do we consider short term? Is it more than 6 months? Or....

6 months..

3 months, 90 day..

90 days..

90 days are less..

Okay.

So anything that’s 90 days and above would be in that category of short-term held to maturity investments?.

Correct..

Correct..

From your year-end – on the R&D front, did you say was $585,000 for the quarter, that’s what the R&D spending was?.

$858,000..

$858,000. Okay. So it’s higher and that’s why lower no, $858,000 versus $717,000 last year. In your year-end letter, you mentioned about 10 ARIA customers. And of course, in this press release, you now indicated 14. Am I correct in the assumption, in your press release, you talked about the pipeline and some multimillion-dollar potential opportunities.

Most of that relies and falls into the ARIA basket, let’s put it that way..

No. They are both TS and ARIA..

Both TS and ARIA, okay? And anything new on the NVIDIA front. I mean I know you’ve had contact with them and some of their customers in the past.

And I didn’t know if there was any progress or any discussions going on with any of their base?.

There is a different department we started talking to recently seems promising on some stuff. But again, in those worlds, things move really, really slow when you’re trying to get integrated into a product line of theirs..

So at least there are some discussions. It’s not dead in water, let’s put it that way..

No, no, no. Not at all..

Okay, alright. Well, that’s all I have. Thanks a lot. Again congratulations moving forward. And certainly, congratulations – I guess, really congratulations to me on the dividend. .

Okay, Joe..

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

Good morning. I have a question about the long-term receivable.

Is that all with that one large customer from Q4?.

There is at least a couple of others too, but primarily with one customer..

Got it.

And do you have a ballpark you could give me as to when that resolves itself? Or is that going to be a continuing story over the next couple of years, we’re going to continue to add to that?.

We hope it continues..

We hope it continues. There – we’ve been doing this with them for probably about 4 years now, maybe 5. So as things come up, it keeps us pretty sticky inside the account. So we’re hoping it does continue moving forward..

And the terms are agreeable on that, that we’re capturing the interest rate increases, and that’s working out to our advantage?.

Absolutely..

Yes. Absolutely..

The other thing I wanted to get was more of a qualitative. You can talk about the supply chain holding things up, and I know there is that $22 million backlog.

Absent supply chain, what portion of that do you think you could ship in the next quarter absent supply chain hiccups?.

It’s all supply chain hiccups really, right? Because if the majority is supply chain, it just sometimes if you order to say $1 million, you might get $800,000 worth of gear right away and then the other $200,000 could be on backlog for 6 months, so you can’t complete the project until it all comes in.

So it’s unpredictable, and that’s where some of the frustrating points are in supply..

And this is still equipment like firewalls and routers?.

A lot of firewalls, servers, it’s a mixture of a little bit of everything..

How much of it would you estimate as chips for ARIA products?.

Right now, it’s resolved itself at this point..

Nice, that’s good to hear. One thing moving in a positive direction.

And from a hiring perspective, have you guys had with some of the pressures and some of the other tech industry giant some, is that worth your advantage all in past hiring those?.

Florida is a hotbed, right? So a lot of people are moving down. So it hasn’t really – there is people out there, but it’s still very competitive on the amount we have to pay for salaries and bonuses out there to get the top people that are available..

Interesting. Alright. Thanks a lot, guys. You guys, take care. Well, talk to you next quarter..

You got it..

Okay, thanks..

Thank you very much. [Operator Instructions] It doesn’t appear like we have any more questions. I’m going to hand back over to Victor for any closing remarks..

Thank you. As always, I want to thank our shareholders for your continued interest and support. We have now reported three consecutive quarters of significant growth and the momentum we are continuing to experience in the current quarter excites us for the remainder of the year.

We have a solid revenue conversion, a building pipeline in the product and service portfolio that are generating favorable gross margins. Gary and I look forward to sharing our progress in fiscal 2023 third quarter operating results in August. Until then, be well and stay safe. Thank you..

Thank you..

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