CSP Inc (CSPI) 2015 Q4 法說會逐字稿

Good day, everyone, and welcome to today's program. (Operator Instructions).

It is now my pleasure to turn the conference over to Mr. Gary Levine. You may begin, sir.

Good morning, everyone, and thank you for joining us. With me on the call today is Victor Dellovo, CSPi's Chief Executive Officer. Before we begin, I would like to remind you that during today's 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 would 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 Security and Exchange Commission.

During today's call, I will discuss our fourth-quarter and year-end financials, and Victor will provide an update on our business segments and on our strategic progress. Then we will open it up to your questions.

For the year, revenues increased 5.5% to $89.3 million, with unfavorable foreign exchange rates having a negative effect of 5.4% or $4.5 million. For the year, we generated a loss of $210,000 or $0.06 per share. For the quarter, revenues increased 40% to $28 million. Foreign exchange had a negative year-over-year effect of 6.6% or $1.3 million. Our total cost of sales for Q4 was $21.8 million, up 48.3% compared with the prior year.

Gross profit for the quarter was $5.9 million compared to $5.1 million a year ago. Gross margins for the quarter were 21.3% compared to 25.8% in the prior year. The decrease was primarily the result of an increase in lower-margin business in the US and Germany, and we also had lower service revenues in the US. We've taken action in both the US and Germany to expand and enhance our managed service offering in order to improve the performance of those businesses.

Fourth-quarter engineering and development expenses decreased to $521,000 from $1.1 million a year ago, primarily as a result of planned turnover of our engineering personnel as we hire talent that is in line with our strategic initiatives. As a percentage of sales, Q4 engineering and development expenses were 1.9% compared to 5.6% last year. We expect that our engineering and development expenses will range between 3.5% to 4% of sales as a result of ongoing product development initiatives to capitalize on the Myricom product opportunities.

SG&A expenses were $4.3 million or 15.6% of sales in the fourth quarter compared to $3.9 million or 20% of sales for the same period in the previous year. Based on our planned investments over the next 12 months, we expect SG&A and expenses in the range of 17.8% to 18.2% for fiscal 2016.

The effective tax rate for the quarter was 43.5%, due to higher income in the quarter, with no tax benefit for the loss recorded for the, UK due to the fact that we have a full valuation allowance for our deferred tax asset. We expect that our overall tax rate, going forward, will be approximately 40%.

We reported net income of $653,000 or $0.19 per diluted share compared with a net loss of $78,000 or $0.02 per share a year ago. Cash and short-term investments decreased to $11.2 million at year-end 2015 from $16.4 million a year ago, at year-end 2014. The decrease was primarily due to an $8.2 million increase in accounts receivable as a result of high levels of sales received late in the quarter at the US technology solutions division, as well as a strong Q4 in Germany compared with a year ago, which was partially offset by an increase in accounts payable of $4.5 million.

Lastly, our Board of Directors voted to pay a quarterly dividend of $0.11 per share to shareholders of record on December 31, 2015, payable January 11, 2016. All together, we have returned $1.6 million to shareholders during fiscal 2015 by the way of dividends. We are aiming to improve our bottom-line performance by focusing on growth initiatives, increasing the level of high-margin products, and aligning cost containment across the organization.

I will now turn the call over to Victor.

Thank you, Gary. We ended fiscal 2015 with a solid fourth quarter. With the exception of the UK, all of the divisions performed well. The UK geography is still a work in progress, but with new leadership and a strategic plan in place, we are confident it is heading in the right direction. The keyword for the recent concluded year was most certain change.

During the year we instituted positive change in both products and services we provide our customers, mostly related to more robust managed service portfolio and a new products in the high performance products division to take us into the new commercial markets. We also significantly upgraded a high percentage of our personnel across the globe in sales, engineering, and management, in order to better capitalize on the growth potential in front of us.

With that, I will get right into our quarterly segment review, starting with our high performance products, or HPP, division. We increased revenue by 12% for the quarter as we received royalty revenue for two E2D planes, as expected, compared with one plane in Q4 last year. We also recorded revenue in Q4 from a large international defense customer. Looking ahead to next year, our expectation is to receive royalties from five planes in fiscal 2016.

Myricom's historic product suite also continues to perform very well, and ahead of our initial expectations. As you may remember, we had expected these products to decline over time, which has not been the case. The Myricom acquisition has been a rousing success, both financially and strategically. The strategic opportunity for Myricom is with our next generation of products, which have the potential to expand the commercial markets and be a primary growth driver for the HPP in the coming years.

As we mentioned last quarter, we began to ship alpha versions of our new 10 gig packet capture products at the end of Q3, and expect to ship alpha versions of the 100 gig packet capture product in the second quarter of 2016. Everything is proceeding according to plan with the launch of the products, which offers more functionality than the competition at a significantly lower price. Market traction is very positive, and we're excited about the potential of this product.

Our second-generation suite of HPP products are network adapters for the financial service markets, primarily used in high-frequency trading. Potential customers are providing positive feedback about the product characteristics and its value proposition. As we had mentioned last quarter, the sales cycles will be longer with these products, as customers using Linux servers are waiting for their next server refresh cycle to install the network adapters. Additionally, a transformational product such as this takes time with the amount of testing necessary, so meaningful revenue from the financial service products will take a little bit more time than packet capture products.

Turning now to our technology solution division, quarterly revenues are up 48% year-over-year. This included a negative foreign currency impact of $1.3 million or 8.3%.

Let's walk through the geography businesses, starting with Germany. We have a particularly strong expertise in penetration testing, which is where we analyze our customers' networks and help them to identify weakness and prevent [infrestration] from hackers. A large piece of our German revenue comes from penetration testing, and this continues to be a very strong market for us.

We continue to seek more engineers and penetration testers to support the growth that we are seeing in the business. While growing the penetration testing market, our core strategy continues to be to increase high-margin revenues from managed services.

During the second quarter of fiscal 2015, we announced a multimillion-dollar managed service contract with an international IT service company, our largest to date. This engagement to provide end-to-end managed security service has gone very well. We are now speaking then about contract renewal.

Our managed service sales pipeline continues to grow and we're very encouraged by our future prospects. When these deals begin to close at a greater frequency, we will have increasingly larger recurring revenue stream and higher margins than our traditional sales in the business.

In addition to managed services, were also focused on increasing product revenue with higher margins. Our overall margins in Q4 were negatively affected by large-volume, low-margin product sales to major customers. We believe cross-selling services across geographies will also help generate growth in our German TS division.

We made significant progress on this initiative during the past year, and our revenues generated from cross-selling have grown dramatically off of a relatively small base. But more importantly, we have established a strategic foundation from which to accelerate the progress of this initiative in 2016.

A critical change we made in the past year was to consolidate management of the German and UK offices. Frank Puetz is now overseeing the UK business as well as Germany. And, as a result, we will be better able to identify opportunities in direct engineering resources in a more efficient manner across geographies.

In the US, our MSP pipeline has grown significantly, and we are continuing to add new customers, particularly for installation and services around Microsoft Office 365. We're capitalizing on growing trends towards cloud-based computing as large enterprises rely on us to move their Microsoft Office applications from internal exchange service to the cloud. Overall, our backlog of closable orders is the highest in more than a year, and our engineering team is exceptionally well-qualified and highly billable. We are also hiring a second full-time salesperson to focus exclusively on MSP opportunities in the US.

In terms of products that we have released two new add-on MSP software products that appear to be changing the game in our ability to attract customers. Before we go to questions, let me sum up.

As I mentioned at the outset, we instituted dramatic changes in fiscal 2015 to position CSPi for growth. As we proceed in fiscal 2016, we now have to execute on the strategic plan and build on a solid foundation we established.

In the high performance product division, we are making progress with our next-generation products for Myricom, and expect to see meaningful revenue from our packet capture product as we proceed through the year. And as I mentioned, we anticipate royalty revenue from five E2D planes this year.

In our technology solution 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 and recurring sales for the long term.

And, of course, we remain committed to enhancing shareholder value through the continuation of our dividend policy. Fiscal 2016 promises to be an exciting year for CSP, and we look forward to reporting our achievement to you as the year progresses.

With that, Gary and I would be happy to take your questions.

(Operator Instructions). [Brett Davidson], private investor.

It was a pleasant surprise this morning. I'm hoping you can maybe hone down the revenue changes for me. Is there any indication that this increased revenue rate has carried over to Q1?

Do you want to take that, Victor?

Right. Our strategic plans are put in place. We are working diligently to get the new products released for Myricom to increase that revenue. Our goal is to keep that growing. And our MSP practice, our pipeline is strong; those take a little time. We're hoping that that will continue, so that recurring revenue model -- we don't start at ground zero every quarter. In the TS side of that division, our customers that are -- been buying us for a long time are continuing to support us. And we are adding new customers on.

So, with that size division, there's a timing issue, too. We're doing more professional services around product, so we could be -- we are closing business consistently. But when the timing of one [that will] actually -- we can record that revenue, sometimes moves depending on sign-off from customers. But things look pretty good right now, Brett, across -- the UK needs some help. But that's why, as I mentioned, we put Frank, which has done a good job taking Germany and making it a positive year, and rolling that complete UK practice right into Germany, not only on the engineering side but on the financial side also.

Were those late orders in Q4? I mean, is that a one-off thing, or has that volume kept up into Q1?

The timing of when customers cut purchase orders, we have no control of. We do a lot of quoting. We do a lot of specc'ing in with our engineering services. As when they are willing to pull the trigger, we don't have any control. But the pipeline for those large customers is still as strong as it was prior. But some of those projects that we closed were eight months in the making, just to give you an idea how long we were working on those.

Yes, and the other thing that I think Victor did mention, too, Brett, is that under the revenue recognition rules -- and it's difficult sometimes for us to say, because we've got a lot of things that are in the queue. But we have to just see whether we've got the ability to take that revenue. So it's difficult at this point, because we've got a number of very large projects. But we'd really have to go through and assess those, and that does take us a little time.

So the revenue isn't -- we finished the sale and sent out an invoice. This is --.

Right, no.

(multiple speakers) whether you can recognize it?

Yes. And too, look, (multiple speakers) until the project is complete and all the professional services are done, we can't take all the revenue.

So is this something that normally happens after the close of the quarter, then?

Well, that's when you get notifications. So you're going through and -- in the evaluation, yes, that's a portion of what we do in our closes. If we know they're done, and so on, that's easy. But usually as you get to things, as you know, with things being done and service timing, we just have to go through and evaluate. Because you've got a lot of multi elements within these pieces.

Do you guys have any outlook as to whether -- I mean, this is the revenue for Q4 is going to be something representative of a new level, going forward? Or just too hard to tell at this point?

Too hard to tell.

Too hard to tell, yes.

Got it. And the last thing that I want to broach is the E2D, which has been in the news just continuously. You got the Japanese order in the plane. You've got talk about retrofit to the radar systems on, I believe, 11 of the planes have been delivered. You've got talk about increases in the number of planes that are going to be ordered on the program. You got the Secretary of Defense asking for more E2D planes and fewer ships in the Navy. Has any of this at all filtered down to your level?

Not yet.

Not yet.

We just know on that -- because we're dealing -- we work with Lockheed, and we see all the information out there, but there is nothing that has filtered down to us.

Got it. The orders that are supposed to be coming down the pipeline should make for some very, very enjoyable earnings years in the near future.

That's what we're counting on.

All right. Thank you guys very much, and --.

Thanks, Brett. Have a good holiday.

Yes, you too. You guys take care, and we'll talk to you next quarter.

(Operator Instructions). [Joseph Narcus, Seagreen Investments].

Just one follow-up on the E2D. Do we have any idea on the delivery schedule for that, this year? In other words, do we know it's coming the first quarter, the second quarter, the third quarter, fourth quarter?

No, that's -- it's very difficult for us. They give us a time frame, but it's within three months. And that's where things flip over. We don't really get noticed, Joe, until after they have delivered the products to the prime contractor.

Okay. I knew, last year, you were pretty confident it was all going to be in the last half of the year. The planes (multiple speakers).

Well, that's what we got told by Lockheed. This year, they are not -- right now, it is sort of moving around. They seem to be moving things. We thought we'd have something definitive, and it isn't at this point. We will get five units but knowing exactly what quarters they are going to go in, they are not really giving us a lot of visibility.

Okay. Another question would be -- let me just follow up on the Myricom product line. As I understand reading the press release, you're saying that some of the -- in the financial trading market, they're -- some of these customers are waiting for the next-generation release of -- is that -- am I correct in that? Is that what you're inferring in the press release?

Yes. Because we have one of our products that we kind of alpha and beta tested, which we have in front of some customers that they're testing right now, giving us feedback, making sure all the bugs are worked out of it. And then we are waiting for the next release of the DBL [plus], which will be the Linux version of the current product that we have an alpha-beta right now. And that's a big market segment in that financial market. It's more a Linux-based -- you know, most customers are running that.

Myricom, historically, prior from before we purchased Myricom, they heavily concentrated in the Windows space. And now we're opening up to the Linux platform also.

Do we have any idea on how quickly that release may come about?

Not exactly. Because with the new release of a brand-new product, there's a lot of testing that has to go on. So, as you know, developing products, if it all comes out and there's very little bugs, we can release it a lot faster. If not, we are trying to make sure that we get a product that customers are happy with, right out of the bat with it initially. And then it's our reputation that we're -- they've had Myricom for a lot of years, and we're trying to keep that intact with getting a product that we can be proud of.

I have no problem with that, and I agree with that strategy. You mentioned both the financial trading and the packet capture markets. Are we doing anything with the storage networking and the machine vision markets? Anything new there, or -- on any releases? Or is that just working out the legacy products?

That's still just -- right now, we're just kind of -- we can't boil the ocean right now, Joe, so we're concentrating on a few market spaces that we want to get out. And then we will start adding a little bit at a time.

Are we expecting to announce any new Myricom adapters over the course of this year, beyond the software aspects?

We have timeline of some new products. But just depending on how successful we can release these initial ones, then that will give us some more time to work on the new stuff. But we do have some new products that will be coming out over the next 12 to 18 to 2 -- we're never going to stop releasing with new products and different things. Our goal is to not be a one-trick pony in the Myricom space.

Okay. And managed services, we're talking -- we have a managed service center in the US. And do we have a managed service center in Germany, too?

That's correct. The one in Germany is more focused on security.

Yes.

Where here in the states, customers really want one person to do it all; whether it's monitoring or whether it's full MSP, or in other cases sometimes it's just the phone system. But you have to be able to do -- have the capability to do it all. That's what customers seem to be more in the stage. Where in Germany, we are known to be one of the top security providers out there. So that's kind of where our focus is right now.

And we've been leaning here -- instead of reinventing the wheel here in the States, we have leaned on Germany. When we find opportunities here in the States, we just let them run a lot of it there, because they already have a lot of the engineers that are completely capable of helping us here in the States to do that.

And with the UK now falling under Germany, we will be able to target the UK customers also, and try to open up that a little bit more. So that's a big focus right now. We moved a lot of personnel around in Germany to really focus on MSP. One of the lead engineers -- or, actually, head of engineering -- has really been moved over to focus exclusively on MSP in the SOC, the security practice out there. And we've hired some more salespeople out there. And we've changed compensation across the whole Company to compensate on this recurring revenue model across the whole Company.

Well, obviously the security market is huge. Every day, we hear of somebody breaching somebody's database.

Yes.

Are you saying that if we come across a client in the US, we can utilize the German managed service center to monitor that?

Yes. Yes, we can.

And do we have competent salespeople to address that in the US? I'm talking about in the US, to be able to sell that idea?

Yes. So what we've done is we've done some cross-training. And here in the States, we've always sold security, but it's never been a complete focus. We have a storage practice; we have a security practice, networking. So we've done more here in the States, where Germany has been very, very focused. They do some of everything we've talked about, but the majority of the revenue has been in the security market space.

So, we've done some cross-training. We've actually taken all the marketing material that Germany has had, and we translated it over to the US. So we're -- as you know, we did a name change a few months back, six months ago. So all the marketing material now is as global marketing material. So we have multiple calls every month. And we're -- what we do now in those locations, we're doing it as one company. Instead of like a couple years back, where it was -- everybody was running pretty much independently.

So now we have one look, one feel, one messaging to all our customers, no matter where they are located.

Very good. I'm pretty excited about it. It looks like the potential is there. Certainly the market for managed services seems to be there. It should be no -- and with security paramount, more and more people should be looking at the alternatives to -- beyond their own internal security -- to look for some external help in that matter. So, I'm pretty encouraged. I think the possibilities here are great for the future.

Yes.

Thank you very much.

All right. Have a great holiday, Joe. Talk to you soon.

I will see you guys down at the Annual Meeting.

You got it.

We'll see you then.

And we have no additional questions at this time.

I would like to turn the call back over to our speakers for any closing remarks.

Thank you for joining us today and for the support of CSPi during the fiscal 2015. We look forward to speaking with all of you again on our Q1 call.

Thank you. Happy holidays. Thank you.

This does conclude today's program. You may now disconnect at any time.