CSP Inc (CSPI) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to CSP's first quarter 2011 conference call. Today's call is being recorded. The financial results and 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'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 now like to turn the call over to Mr. Levine. Thank you, sir. You may begin.

Good afternoon, everyone. With me on the call today is our Chairman, President and Chief Executive Officer, Alex Lupinetti. I will take you through our first-quarter financial results, then Alex will review our operations before we take your questions.

But 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, pricing pressures and others described in the Company's filings with the Securities and Exchange Commission. 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. We performed well in the first quarter of fiscal 2011 on the top and bottom lines, in the execution of our growth strategy. Total sales grew 18% to $22.1 million. This included a 3% negative effect from foreign currency due to the strong US dollar in Q1 of 2011 versus Q1 of 2010. The year-over-year revenue increase was driven by an 11% growth at our Services and Systems Integration business and a triple-digit increase at Systems.

CSP's total cost of sales for Q1 increased year-over-year to $17.6 million from $16.4 million in Q1 2010, in line with the higher sales volume. Gross profit for the quarter grew 97% to $4.5 million as a result of the sales increase and higher gross margins at both segments. Overall gross margin climbed 800 basis points to 20% of sales. First-quarter engineering and development expense was flat at approximately $500,000 and was down by about 20 basis points as a percentage of sales to 2.3%. This is slightly below our target range for engineering and development expenses of 2.4% to 2.6% of sales.

SG&A expenses increased by 10% on a real dollar basis to $3.4 million in the quarter. This was primarily reflecting commissions and bonus expenses on increased profits. SG&A was 15.3% of sales in Q1 of fiscal 2011 compared to 16.4% of sales in Q1 last year. Our target for SG&A expenses is between 16.1% to 16.6%.

Our effective tax rate for the quarter was 37.5%. We expect our effective tax rate will be approximately 38.5% for the second quarter of fiscal 2011.

Net income for the first quarter was approximately $400,000 or $0.11 per diluted share compared with a net loss of $700,000 or $0.21 per share in the first quarter of fiscal 2010.

Let's now turn to the balance sheet. Cash and short-term investments increased by approximately $400,000 from $15.5 million at fiscal year end, September 30, 2010, to $16 million as of December 31, 2010. This increase was primarily due to better collection of accounts receivable and the contributions from income, partially offset by an increase in other current assets and prepaid items and capital expenditures. In addition, CSP purchased $200,000 of its common stock during the quarter.

As we have talked about in the past, CSPI's cash position can vary significantly from quarter to quarter, due to the high working capital requirements needed to fund our large projects at both our Systems and our Services and Systems Integration segments. Going forward, our financial priorities remain the same. We will manage the Company cautiously with a strict focus on controlling expenses and efficient working capital management, all while driving towards long-term profitable growth.

With that, I will turn the call over to Alex.

Thanks, Gary, and welcome to our call this afternoon. We are very pleased with the quarter's performance, which surpassed our expectation on both the top and bottom lines. I will begin by providing some context around the first-quarter results for both our Services and Systems Integration and Systems segments and discuss our growth initiatives for each. Then we will go right into your questions.

Let's start first with our Systems segment, which consists of our MultiComputer business. This business sells exclusively to the major prime contractors that sell to the US Defense Department. The Systems business reported revenues of $1.8 million, a significant increase over the $0.5 million in the first quarter last year. $1.4 million was from high-margin royalty payments from Lockheed Martin related to the E2D Advanced Hawkeye Intelligence, Surveillance and Reconnaissance aircraft. Payments were for aircraft being built as part of the Low Rate Initial Production phase, or LRIP. As a result of the high-margin royalty payments, systems gross margin was 82% for the quarter compared with 14% last year. We anticipate approximately an additional $200,000 in E2D royalty revenues for the remainder of the year, in line with the expectations we discussed on our last conference call. This will compete phases one and two of the LRIP. At this point we are in discussions with our customer about phases three and four of the LRIP.

Going forward we will continue to invest in technology to position CSP to capitalize on the military's focus on intelligence, surveillance and reconnaissance, or ISR. In addition, we are marketing two products we launched toward the end of last year, a 3000 series OpenVPX and 4000 series ATCA. The 3000 series OpenVPX improves interoperability between computing and communications platforms and reduces customization, testing, cost and risk. The 4000 series gives CSP an entry-level product for the first time, and we plan to leverage the 4000 series to broaden our base of customers focused on ISR.

Our Services and Systems Integration segment also began the year with a solid quarter. This segment includes our MODCOMP subsidiary to provide solutions and services for complex IT environments focusing on storage and servers, network security, unified communications and consulting and managed services. Sales were up 11% in this segment to $20.3 million, driven primarily by growth in our US-based Systems and Solutions Division, or SSD. The growth at SSD was a result of sales that were previously recorded as deferred revenue. This included revenue from our large hosting customer as well as revenue from a luxury hotel customer we've discussed on prior calls. During the quarter we completed a major unified communications project for the hotel.

Another positive sign is that we saw a number of customers return who had not placed orders in quite some time to make purchases from SSD during the quarter. Our double-digit sales growth in US offset a small decline in Germany, which was primarily due to unfavorable foreign exchange. Gross margins for the Services and Systems Integration segment grew by 300 basis points to 15%. This was due to a greater number of smaller, higher-margin deals in the US as well as a larger portion of newer products that carry higher margins and improved utilization of our services business in Germany.

Our strategy in this segment is to enhance profitability by tracking a greater percentage of higher-margin consulting as well as Solutions and Managed Services business. You can see from our gross margin success that this strategy is working.

We are particularly pleased with the success we have had through our partnership with California-based nCircle, a provider of automated IT security and compliance auditing solutions. nCircle has selected to provide the infrastructure platform for MODCOMP's managed services offering in addition to MODCOMP reselling and nCircle's on-premise solution to customers in Germany and Switzerland. Right now, we are seeing significant opportunities with wireless telecom operators seeking to upgrade their infrastructure. These companies are looking to us to help them load balance their networks to mitigate the heavy demand generated by proliferation of smartphones.

Last quarter we discussed that our nCircle partnership resulted in a strategic account win with Vodafone, one of the largest mobile telecommunications network companies in the world. During the first quarter, we increased the productivity of our consultants on contract with Vodafone and received a follow-on order for nCircle products and services from Swisscom, Switzerland's leading telecom provider.

Before we take your questions, let me leave you with a few thoughts. First, we are pleased with the progress of our strategy at our Services and Systems Integration segment to attract higher-margin consulting as well as Solutions and Managed Services business. Through this strategy we expect to incrementally increase our margins over long-term. Second, at our Systems segment we are well positioned to capitalize on the military's network-centric warfare priorities as well as supporting the next LRIP phases of the E2D program. Third, in addition to organic growth we are committed to accelerating revenues by executing on our acquisition strategy.

With that, Gary and I will take your questions.

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

A couple of questions -- regarding the revenue, I think you just said at the end of your comments there that you expect revenue acceleration from acquisitions this year. And I believe, if my notes are correct, that you had told us on the last call you expect 2011 revenues to be down. Are you now saying that 2011 revenues will be up?

I didn't say we expected revenues to be up. We don't have any acquisitions to talk about this point. I said we were committed to accelerating revenues by executing on our acquisition strategy. I wasn't time-specific on that.

Okay, got it. So you do still expect, despite the fact the revenues were up this quarter due to the loss of the large customer in the Services and Systems Integration business, you still do expect revenues generally to be down this year. Correct?

It's looking better than it did a quarter ago, but it's still a hill in front of us.

And has that customer begun to take revenues away yet? Have they rolled that off yet or not?

No; we are still seeing significant revenue from them.

And you don't have any update as to when (multiple speakers) to that business in general?

No, we don't have any specifics as to when we will see a reduction there. It's not the same level as is last year, but they're still a very large customer for us. They're our largest customer right now, still.

Okay, that's all I have. Thank you very much, guys.

(Operator instructions). There seems to be no questions at this time. I would like to turn the floor back over to Mr. Lupinetti.

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

Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.