CSP Inc (CSPI) 2010 Q4 法說會逐字稿

Good day, and, welcome, everyone to CSP's fourth-quarter fiscal 2010 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 e-mail. Later, we will be conducting a question-and-answer session. (Operator Instructions).

With us today are CSP President and Chief Executive Officer, Mr. Alexander 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, Christine, and good morning, everyone. With me on the call today is our Chairman, President, and Chief Executive Officer, Alexander Lupinetti. I'll take you through our fourth-quarter financial results and then Alex will review our operations before we take your questions.

First, our Safe Harbor statement. During the 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 actual results to differ materially from 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.

With that, let's get right into our financial review. Our fourth-quarter results capped an excellent year of financial performance. During the quarter, total sales were $23.9 million, an increase of 32% from Q4 of fiscal 2009. The year-over-year increase was driven by 42% growth at our Services and Systems Integration business, while Systems revenues were down 45% year over year.

Our strong overall year-over-year sales growth was partially offset by a negative foreign exchange effect of approximately $600,000 due to the strong US dollar in Q4 2010 versus Q4 2009.

For the year, revenue grew 14% to $95 million as a result of a 4% increase in Systems and a 15% growth at Services and Systems Integration.

CSP's total cost of sales for Q4 increased year over year to $19.3 million from $14.7 million in Q4 of 2009 due to higher sales volume.

Gross profit for the quarter grew 32% to $4.5 million as a result of the sales increase. Overall gross margins were flat at 19%.

Fourth-quarter engineering and development expenses of approximately $550,000 increased from $400,000 in Q4 2009 and was up by about 100 basis points as a percentage of sales to 2.3%. This was still slightly below our target range of engineering and development expenses of 2.4% to 2.6% of sales.

SG&A expenses increased by 5% on a real dollar basis to $3.9 million in the quarter. This primarily reflected bonus expenses on increased profits. SG&A was 16.3% of sales in Q4 of fiscal 2010 compared with 20.4% of sales in 2004 last year. Our target range for SG&A expense is in the range of 18% to 18.4%.

Other income in the fourth quarter of 2010 was $53,000 compared with an expense of $144,000 in Q4 last year.

Our effective tax rate was 59%. We expect our effective tax rate will be approximately 45% for the first quarter of fiscal 2011. The net income for the fourth quarter was $46,000 or $0.01 per share compared with a net loss of $3.6 million or $1.03 per share in the fourth quarter of fiscal 2009.

For full year of fiscal 2010, net income was $914,000 or $0.26 diluted -- per share diluted shares compared with a net loss of $3.8 million or $1.05 per share for fiscal 2009. Last year's net loss in Q4 and the year included a goodwill impairment charge of $3.9 million.

Let's now turn to the balance sheet. Cash and short-term investments decreased by approximately $3.4 million from $18.9 million at fiscal year end September 30, 2009, to $15.5 million as of September 30 of 2010. The decrease was primarily due to an increase in accounts receivable, in line with higher year-over-year sales volume, as well as the effects of foreign exchange and purchase of property, equipment and improvements. In addition, CSP purchased approximately $400,000 of common stock during the year.

Cash decreased sequentially by $2.3 million from the third quarter as a result of higher receivables. As we have talked about in the past, CSP's cash position can vary significantly from quarter to quarter due to the high working capital requirements needed to fund large projects at both our Systems and our Services and Systems Integration segments.

As we enter 2011, we will continue to run the Company with a cautious approach, tightly managing our expenses and focusing on effective working capital with the goal of driving long-term profitable growth. With that, I will turn the call over to Alex, who is at our MODCOMP subsidiary in Deerfield Beach, Florida.

Thanks, Gary, and welcome to our call this morning. As Gary mentioned, we performed well in the fourth quarter, ending what was a successful year on the top and bottom lines, as well as in terms of our strategic execution.

I will provide you with some color about the performance of our operating segments in the fourth quarter and the year and what we see going forward for each.

Let's start first with our Systems segment, which consists of our MultiComputer business. Our Systems segment sells to major prime contractors that sell to the US Defense Department, as well as to our partner, KBK, who sells to the prime contractors in Japan.

The Systems business had a good year with revenue up 4%. Sales benefited from a follow-on order for FastCluster MultiComputer systems and related services as part of our contract with Raytheon.

The Systems segment contributed even more significantly to the bottom line in fiscal 2010 as a result of high-margin royalty payments from Lockheed Martin related to the E2D Advanced Hawkeye intelligence surveillance and reconnaissance aircraft. The payments were for aircraft being built as part of the Low Rate Initial Production phase, or LRIP.

Systems gross margin was up about 800 basis points for the year.

Looking specifically at Q4, while systems revenues were down 45% from Q4 fiscal 2009, we recorded $1.1 million in high-margin royalty payments from Lockheed Martin. If you remember from last quarter's call, we expected $1.6 million in royalty payments for radar processing systems by fiscal year end. About $0.5 million of those royalties were pushed out by just a few days into the first quarter of fiscal 2011.

During the year, we continue to invest in technology to position CSP to capitalize on opportunities in intelligence, surveillance and reconnaissance, or ISR, which we believe is a US military priority.

This investment has led to two recent product launches, including our 3000 Series OpenVPX and a new 4000 Series ATCA.

Our new 3000 Series OpenVPX is the architectural framework that defines system-level interoperability for multivendor, multimode integrated systems environments. OpenVPX improves interoperability between computing and communications platforms and reduces customization, testing, cost and risk.

The new 4000 Series ATCA products deliver affordability, sustainability, and high-availability to manned and unmanned large mobile platforms on land, air, and sea. ACTA provides built-in high reliability features and other capabilities that are ideal to the US military's network-centric warfare initiative.

The 4000 Series gives CSP an entry-level product for the first time. We plan to leverage the 4000 Series to broaden our base of customers focused on SR.

Looking to fiscal 2011, we believe that our product mix will be different than in 2010. While we expect to record a total of $1.6 million in E2D royalty revenues, including the $0.5 million that were pushed into Q1, we expect a lower percentage of royalties in our revenue mix than this past fiscal year.

Let's turn now to our Services and Systems Integration segment, which includes our MODCOMP subsidiary, providing solutions and services for complex IT environments that include storage and service, network security, unified communications, and consulting and managed services.

The IT demand environment has improved and we have capitalized on our superb technical expertise and the ability to solve our customers' complex IT problems. Our strategy in this segment is to enhance profitability by attracting a greater percentage of higher-margin consulting as well as solutions and managed services business. We executed well on this strategy in fiscal 2010, reported excellent financial results for the year.

Sales were up 50%, while gross margin was down about 100 basis points as a result of higher volume from low-margin hardware sales, as well as the impact of a settlement agreement from a vendor pricing dispute.

CSP's Services and Systems Integration segment also reported an excellent quarter with a 42% increase in revenue due to strength at both our US Systems and Solutions division, or SSD, and our German subsidiary.

In the US, sales growth was primarily driven by services to a hosting company that provides outsourcing of computer infrastructure, storage and communications resources. We also were successful in tracking other unified communications and consulting services projects.

We've established a good base of sales professionals in the US and have recently reorganized the sales team into pre and post sales to enhance our sales effectiveness and better track and increase utilization.

Before I turn to our German subsidiary, I would like to note that the hosting customer I just mentioned, which is also MODCOMP's largest customer, acquired one of our largest competitors several months ago. In addition, the hosting company also expects a downturn in business from one of its own customers that was creating significant demand for CSP's products. We expect that these events could result in a significant reduction in sales volume in this customer for fiscal 2011 and beyond.

At our German subsidiary, our revenue increase was primarily related to sales to a large telecom company as well as other large customers through our partnership with California-based nCircle, a provider of automated IT security and compliance auditing solutions.

NCircle was selected to provide the infrastructure platform for MODCOMP's managed services offering in addition to MODCOMP reselling nCircle's on-premise solutions to customers in Germany. For example, our partnership with nCircle resulted in a strategic account with Vodafone, one of the largest mobile telecommunication network companies in the world with operations or partner networks in 67 countries.

Our expertise in security and ability to quickly staff up to the changing customer needs provides an excellent solution for companies like Vodafone.

In addition to Vodafone, we have won two other very large customers through our partnership with nCircle that should contribute to revenue in fiscal 2011. Due to the nature of our consulting services, this revenue could be lumpy from quarter to quarter. We expect that our partnership with nCircle should result in additional high-margin work in 2011.

As with our US division, we're focused on tracking utilization to maximize effectiveness and enhance our margin performance.

Before we take your questions, let me provide you with our thoughts on fiscal 2011. First, we are seeing positive signs for both sides of our business. That said, we believe that reduced sales from our large Services and Systems Integration hosting customer is the key factor that most likely will prevent us from reporting year-over-year revenue growth in fiscal 2011. We anticipate that we will be profitable for the full year of fiscal 2011, primarily due to continuing Systems segment royalty revenues.

Longer term, we are bullish about our prospects in both segments. We expect to continue to make progress at our Services and Systems Integration segment in attracting a greater percentage of higher-margin consulting, as well as Solutions and Managed Services business. And we are well-positioned in our Systems segment, especially with our newly announced products, to capitalize on the military's network-centric warfare priorities, as well as supporting the next LRIP phases of the E2D program. With that, Gary and I will take your questions.

(Operator Instructions). Dan Zeff, Zeff Capital Partners.

Hi; You know, it seems, guys, that you're working awfully hard to make $1 million on an almost $100 million company. You've got a lot of divisions. Were not sure how much money you're going to make in the future. Are you beginning to think about, or have you, or are you accelerating the process on strategic alternatives and selling certain divisions so that we can get into a more decent margin-type business that can actually grow the bottom line? And have you thought about a Dutch tender offer? The market is obviously valuing you at zero. Is that fair? And what are you guys -- and what is the Board doing about it?

Well, Dan, we are always looking at alternatives to increase shareholder value. I don't think that we have made a decision at this point to take any specific actions regarding strategic alternatives. We will evaluate any opportunities, as I said, to increase shareholder value which would mean buying companies, selling divisions, whatever we think is going to strategically help us do that.

We are not considering a tender offer at this point. These are things that we have looked at in the past and we will continue to evaluate going forward if we think that it's the right thing to do, again, for increasing shareholder value.

Thank you.

(Operator Instructions). Patrick [Schaefer], Rubicon Capital Group.

I wanted to get a sense of your plans for share repurchases in 2011.

Well, we have -- still have approximately 160,000 shares in our repurchase program, and we have been supporting the stock through last year and even into the first quarter. So we purchase, periodically stepping in and buying at market, and we will continue to support the stock and the Board is firmly behind that.

How many shares did you repurchase in the fourth quarter?

In the fourth quarter, 63,000 shares.

63,000 in the fourth quarter?

Right.

Okay. And, the cash position at the end of the fiscal year was $4.17, which doesn't include the $500,000 that was recorded in royalties in the first few days of the first quarter, correct?

You said the cash position was -- are you doing that on a per --?

Per share basis, $4.17.

Right.

I think if you add the $500,000, which is 100% margin, I see a cash position of $4.54. Is that correct?

In theory, yes. Yes.

Okay. And then, aside from that, if you could help me understand the royalty a little bit more, and I think I would like to get a sense of how the $500,000 slipped from the first -- from the fourth quarter into the first quarter, and then also get a sense of the production schedule in the fourth quarter, and then also the production schedule for 2011 and beyond.

Well, what the military is doing is they are building these aircraft in Florida, and our customer, which is Lockheed Martin, is building the radar processing computers that go into the aircraft, so it's a very complicated production schedule that we are not privy to, in detail.

We are in the process of finishing up LRIP 1 and 2, which consisted of six -- I think a total of six aircraft, so that's what we are doing between last year and this year. So, when it's the $500,000 slipped a few days, that's just a matter of the shipping schedule slipping from our customer to their customer in Florida, and we are told about it after the fact. Like we get an idea of the schedule, and we try to help give you guys as much guidance as we can in terms of what we think is going to happen, and then, like any production schedule, sometimes things slip. In this case, it was a small slip. But with that slip, we will finish up LRIP 1 and 2 this fiscal year and the remainder in this fiscal year is $1.6 million worth of royalties.

So if I --

Go ahead.

If I can make sure I understand this. The -- so far you've earned $2.7 million in royalties, and that's on six planes. Is that correct?

Two point -- we did a $3 million last year in royalties in fiscal --

Two point -- are you sure? I thought it was $2.7 million.

No, I think it was $3.0 million.

Okay.

But in any event, yes, that was approximately five planes last year, and there's another couple planes to go this year.

So that would imply roughly $600,000 in royalty per plane?

Roughly.

And the total production schedule? That is -- the current -- I think the current order is for 70 planes. Is that correct?

We do not have -- the current plan -- the original plan was to build up to 70 planes.

Right.

They have not gone into even full production yet. This LRIP is a Low Rate Initial Production, and they are doing four or five planes at a time at this point. That's how they're getting funding to go forward.

Okay.

All right? So, over the course of time, the build could be as many as 70 planes or more. Where the more comes in is if they sell -- that's for US, the US Defense Department. If they sell to other foreign governments, it could be greater than that.

Right. Okay. Okay, thank you, guys. I appreciate your time.

Will Lauber, Sterling Capital Management.

Yes, when will we be getting an idea of -- I know you guys have to reapply on the Advanced Hawkeye to keep that contract. When would that come up?

Well, we're in negotiations, or discussions, I should say, on LRIP 3 and 4. As soon as we finish that and they get budgeted, we will let you know what the next phase is going to be. The good news is we are talking to our customer about LRIP 3 and 4 right now, and, hopefully, we will have something to talk about in the next quarter or two.

Okay. And your customer that bought one of your biggest competitors over in Europe, did they approach you about your business over there at all?

No they -- no. The customer is actually is -- our customer is in the US and it's owned by a Japanese conglomerate. The Japanese conglomerate bought a South African company, Dimension Data, that is one of our biggest competitors.

Okay. And, out of the current cash balance, how much is in the United States and how much is in Europe?

35% is in Europe. 65% US.

And if Congress would do something next year on repatriation, would you bring that cash back to the United States and do some kind of special dividend or something like that?

We would seriously look at bringing the cash back. Whether or not we do a dividend, we would evaluate at the time.

Okay. And I guess along with the first caller there about strategic alternatives, some of us that have been shareholders for an extremely long time had brought this up three years ago, and the Board didn't do anything about it, and here we are in the same place in three years. I'm hoping that the Board can look at this seriously and actually do something this time. Thank you.

Yes.

Paul Haagensen, Haagensen Research.

Yes, good morning. Do you have any comments about your net cash flow prospects in 2011, given your reduced volume outlook?

Well, we believe that, Paul, we should have positive cash flow. A lot of it's going to be really looking at how much stock we repurchase within that, but we believe that as our projections are, we will be cash flow positive.

And can you be any more specific than that pre the buybacks? Could you give us a range, perhaps, low to high or --?

At this point, Paul, because then it sort of works back into the numbers, I don't want to disclose that right now. I don't have the figures in front of me to tell you the truth.

Okay.

That concludes the Q&A session. I will now turn the conference back over to Mr. Alex Lupinetti for any closing or additional remarks.

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

That concludes our conference call. Thank you for joining us today.

Thank you.

Thank you.