CSP Inc (CSPI) 2009 Q3 法說會逐字稿

Good day and welcome everyone to CSP's Third Quarter Fiscal 2009 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. Alex Lupinetti, and Chief Financial Officer, Mr. Gary Levine. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Levine. Please go ahead, sir.

Thank you, Melissa, and good morning, everyone. With me on the call today is our Chairman, President and Chief Executive Officer, Alex Lupinetti. I'll take you through our third quarter financial results, and then Alex will provide a brief overview of our operations before we take your questions.

But first, our Safe Harbor Statement. During the call we'll be taking 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 actual results to be different materially from forward-looking statements made by the Company. Such risks include general economic conditions, market factors, competitive factors and pricing pressures, and other descriptions 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.

With that, let's get right into the numbers. Our sales were $18.7 million for the third quarter of 2009 compared to $19.2 million last year. The 3% year-over-year decline was due to lower Service and Systems Integration sales partially offset by higher Systems sales. Adjusting for currency, sales were up by 3%. Alex will go into more detail on our sales trends in just a minute.

For the first nine months, sales were up 11% or 16% adjusting for currency to $65.2 million. For the nine-month period, sales grew at both our Systems and our Service and System Integration businesses. Looking at the bottom-line, net loss for the third quarter was $752,000 or $0.21 per share compared with a loss of $8,000 or breakeven on a per share basis in the third quarter of last year. Year-to-date our net loss was $182,000 or $0.05 per share compared with a net loss of $78,000 or $0.02 per share for the same period last year.

We saw a slight increase in cost of sales to $15.8 million for Q3 while gross profits for the quarter was down 17% to $2.8 million resulting from lower sales volume. Engineering and development expenses increased 11% on a real dollar basis to $524,000. As a percentage of sales, engineering and development was 2.8% of sales compared with 2.4% of sales a year ago. Engineering and development expense was a higher percentage of sales due to the lower sales volume and increased development activities related to our FastCluster 3000 Series. We continued to target engineering and development expenses to be in a 2.2% to 2.5% range.

SG&A expense increased by 7% on a real dollar basis to $3.3 million in the quarter due primarily to our acquisition of R2 in the fourth quarter of fiscal 2008. As a percentage of sales, SG&A was within our target range of 15.8% to 17.9% of sales at 17.9%. This compares with 16.3% of sales a year ago.

Other income was $23,000 expense compared with income of a $123,000 in the third quarter of last year due to the negative effects of foreign exchange. Our income tax rate was 28% in the quarter and we expect the income tax rate to be approximately 10% going forward.

Before we turn to the balance sheet, I'd like to note that we will be restating our first and second quarter fiscal 2009 because one of MODCOMP's largest hardware manufacturers had disagreed with certain discounts taken by the Company in connections with purchase from the manufacturer's distributors.

As a result, we will be reducing our first quarter EPS by $0.01 per share or $22,000 and that our second fiscal quarter EPS will be reduced by $0.02 per share or $67,000. Our three-month and nine-month results as reported in our news release and on our call this morning reflect all of the restatement adjustments.

Let's turn to the balance sheet which continues to be a key strength for CSP. Cash and short-term investments were $17.4 million as of June 30, 2009 compared with $18.5 million at fiscal yearend September 30, 2008. The decrease in cash was due to the purchase of 936,000 of CSP stock as part of our repurchase plan as well as the negative effects of foreign exchange and capital expenditures. Receivables decreased by $5.6 million in the quarter to $8.9 million due to collections in the quarter and lower sales volume. Inventories increased by $1.3 million to $6.7 million in the third quarter. Now I'll turn the call over to Alex to review our operations.

Thanks, Gary, and welcome, everyone, to our call this morning. Our results this quarter reflect the full effect of the global recession and the downturn in IT spending. Last quarter we mentioned that we have started to see delayed orders and pricing pressure in our Service and Systems Integration segment. Those trends continued throughout the third quarter. As a result, lower sales in this segment more than offset the year-over-year sales increase in our Systems Segment. Lower margins in the Service and System Integration business also contributed to the greater overall net loss on a year-over-year basis.

Let me give you additional color on each of our business segments. As a reminder, our Systems business consists primarily of CSP's MultiComputer Division. This division designs and manufactures high-performance digital signal processing systems for the defense market. During the quarter we reported year-over-year growth as a result of follow-on orders.

For example, we supplied Lockheed Martin's Surface and Sea-based Missile Defense Systems business with FastCluster systems valued at $1.6 million. This follow-on order will support the deployment of a radar screen generation program which will provide a new test and evaluation resource for the Aegis combat system at the U.S. Navy's combat systems engineering development site in Morristown, New Jersey.

One of our competitive advantages is our ability to integrate and support best-of-breed technology into our high-performance systems. During the third quarter we enhanced our expertise in this area with the addition of a new FastCluster Field Programmable Gate Array or FPGA development platform. FastCluster FPGA development platform integrates Annapolis Micro System's development tools and DSP libraries with FastCluster FPGA XMC modules.

Using this robust development platform, engineers can prototype their FPGA applications for deployment on the FastCluster XL-Gate architecture. This new development platform also underscores a commitment to provide world class support for integrators installing complex high-performance embedded systems including the ability to customize the systems to their needs and specifications.

Looking ahead, we expect to record additional follow-on System orders in the fourth quarter and report year-over-year growth at our Systems business for fiscal 2009. In fiscal 2010, we anticipate follow-on orders as well as high-margin royalty revenues from Lockheed Martin related to the E2D Advanced Hawkeye intelligence, surveillance and reconnaissance aircraft. And while there is still very little visibility, we will also continue to compete for new programs.

Now let's turn to our Service and System Integration business which consists primarily of MODCOMP's solution and services for complex IT environments that include storage and servers, network security, unified communications, and consulting and managed services. As I mentioned at the outset, the global recession had a significant effect on our financial results this quarter.

Let's start with MODCOMP's German subsidiary, a professional service business is a strategic growth area for CSP and one that has provided excellent revenue and margin contributions. This quarter we experienced pricing pressure and lower utilization rates as our customers focused on conserving cash. While we pared down our workforce in Germany in light of lower demand, we are maintaining a staff of highly experienced engineers.

Our professional services business remains a very important strategic growth area for the Company. When IT spending resumes, we expect that our professional service business will provide CSP with significant high-margin sales as well as opportunities to expand to other practice areas. On last quarter's call we expressed some uncertainty about the prospects of our German subsidiary to report large installation deals in fiscal 2009. At this point we do not expect to record any such deals this fiscal year.

Now let's turn to our U.S.-based system and solutions business or SSD which provides IT infrastructure solutions. We experienced deep discount in SSD driven by significantly lower IT spending by our customers during the quarter. This is another business that has excellent growth prospects when the market rebounds.

In fact, we're excited to have become a member of the Cisco managed services channel program for managed business communication, firewall, IDS/IPS, secure router, router and LAN services. This program will enable us to grow our managed services business in a repeatable and predictable fashion worldwide. It also will enable us to achieve better and more consistent results for customers and increased margins and leverage for our managed services business.

We also recently attained the Cisco power designation for managed business communications and managed security services. With the Cisco power designation, we'll be able to align ourselves with the Cisco powered logo as well as have access to higher margins and rebates for the strategic investments we have made within our network operations center. We are very excited about opportunities in managed services since companies are increasingly buying technology as a service instead of managing their own IT infrastructure, freeing valuable time and resources to focus on their core competencies.

As we are doing in Germany, we're planning to focus our attention and resources at SSD on higher-margin business and away from low-margin business as we move forward. While this may put some pressure on sales growth in 2010, we believe this strategy will accelerate profitable growth for the long-term.

Looking to the remainder of 2009 and into 2010, we are managing our Service and Systems Integration business for weak near-term demand. We've taken costs out of the business including headcount and we'll continue to reduce expenses in light of the IT spending environment. We expect three quarter charge of approximately $200,000 related to severance in the fourth fiscal quarter.

In summary, across the Service and System Integration business, we are focusing our attention on growing our high-margin offerings. We have a highly skilled team that continues to provide exceptional value for our customers and we expect to be very well-positioned for growth when the IT markets rebound. At the same time, we expect our Systems business to benefit from follow-on orders and high-margin royalties in 2010 as we continue to advance our MultiComputer technology and pursue new programs. With that, Gary and I will take your questions.

Thank you. Ladies and gentlemen, we will now be conducting the question and answer session.

(Operator Instructions)

Our first question is from the line of with Will Lauber with Sterling Capital Management. Please state your question.

Hi. Yes, can you give us some approximation of the royalty revenue from the Advanced Hawkeye in 2010?

Yes, I think what I said in the last conference call will still hold up. This year we're in what's called the pilot production phase and they're building three planes and we saw approximately $2 million in royalty and parts. Next year we're expecting that they'll be building five more planes and something called LRIP, the low rate initial production, and that should generate $3 million to $4 million in parts and royalties.

$3 million to $4 million?

$3 million to $4 million, yes.

Okay. And the layoffs - or is that in Europe, where those layoffs are?

No, they're -- we've had layoffs in [Delrica], Florida and Germany, all three places.

And Germany I think I remember from a couple of years ago, I don't know if it was Germany or if it was the UK, the severance packages there pretty generous, are they not?

Yes, for people who have been employed for many years, that's the case. Over the last few years the environment has changed there and people we've hired are somewhat like people in the US, so it's not as costly. So the total that we're looking at reducing over there is a total of five by the end of the year and the severance is $200,000 and it was virtually for two of the people who have been around longer. The other three were like they are US people. So it's a changing environment.

Okay. That's all for right now. Thank you.

Yes.

(Operator Instructions)

Our next question is from the line of Gary Siperstein with Eliot Rose. Please state your question.

Good morning, guys.

Good morning.

Hi, Gary.

Alex, last conference call you talked about salesmen on the IT side moving from 17 to 20. In light of the slowdown in the economy and the cutbacks and severance, et cetera, is that not happening now or the cutbacks coming elsewhere?

Well, I'm not even counting, but our sales headcount is down. I'm not counting that in the numbers, actually. It's -- the others came from our legacy maintenance business in the US and here in [Bericoli] we let a couple of people go. Our sales headcount is down. The economy's had a Darwinian effect on the numbers there.

I think I said last time we were a total of 26 and now we're down to 20 right now in Florida. So those are people who just couldn't generate any commissions in this environment and decided to leave -- sales people. So now we're still trying to hire. It's harder to hire but we're getting much more selective during this period.

Have there been any -- even though you've had a net reduction, have there been any special hires, you know, people with extraordinary talent or connections on the sales pipeline?

On the sales side, I'd say no. We've got some technical people who are allowing us to open some new practice areas but they're not on the sales side, okay?

And, Alex, you talked about going from three planes on the Systems side to five planes. You said five planes next fiscal year would be $3 million to $4 million, planes and parts. What was the revenue total for the three planes or what do you estimate to be --

This year's $2 million.

$2 million. Okay. Thank you. And, Gary, in your comments you mentioned 936,000 on the buyback. Obviously, that was dollars, correct?

Correct.

Is that year-to-date?

Yes, it is.

And do you have the number of shares and average price?

The average price was $3.21.

Okay, super. And I know I sound like a broken record, but just in light of the tough market, tough economy, the Company now as of the financials that came up this morning, you got $4.92 per share in cash. You got working capital of $6.38. You got a book value of $6.49. You've managed through this difficult time well where nine months' essentially breakeven. You're making cost-cuts and you're going to get higher revenue last year with substantial gross margins on the Systems side. So more than likely, you're going to be profitable next year.

So with all of the above, I continue to say that we should use part of the buyback money for dividend for your shareholders. There's no reason the stock should be selling at such a discount to cash, let alone book value. So I think as a service to your shareholders, if you would pay $0.10 or $0.15 dividend, your stock would probably trade between $5 and $6, probably not go anywhere until the earnings come on, but at least the shareholders would get something each quarter in the mail, and the volume that occurs for those who want to liquidate would be at a higher price. It will probably be between $5 and $6.

That's the only thing you guys haven't done. Everything else you've done pretty much right. You've been judicious with your cash, judicious on your acquisitions, you've managed the Company to breakeven or profitability during tough times. So I think if you add this one factor to the equation, it would make a big difference plus it could bring in some research analysts and/or some institutional holders who can only buy a stock that pays a dividend. And it wouldn't cost you any more money annually. You just take it away from the buyback because the buyback hasn't managed to keep the stock at book value. Can you comment on that and tell us at what point you might consider that?

Gary, we talk about it at each Board meeting as far as the things we evaluate quarterly. We'll continue to do that. I mean we're not in a position to make any commitment on that today, but we'll continue to evaluate that option. You've articulated it well every time you had a chance.

Okay. And I guess we'd say to the Board, you've done it your way and we see the result and the consistency of the under-pricing of the stock. So maybe it is time to give it maybe a higher level of consideration. Thank you for your time.

Yes.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Lupinetti for closing comments.

Thank you for joining us today. We look forward to speaking with you next quarter.

This concludes today's teleconference. Thank you for joining us today.