CSP Inc (CSPI) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to today's CSP Inc. First Quarter Fiscal 2018 Conference Call. (Operator Instructions) Please note, today's call is being recorded. (Operator Instructions)

It is now my pleasure to turn the conference over to Gary Levine, Chief Financial Officer. Please go ahead, sir.

Thank you. Good afternoon, 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'd 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 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.

On today's call, we will refer to non-GAAP net income and non-GAAP earnings per share, which we expect the effect -- which excludes the effect of the new tax legislation. The reconciliation of CSPi's non-GAAP measures to the comparison to GAAP measures are available in the Q1 2018's financial results press release on our website.

During today's call, after Victor provides you an introduction, I'll discuss the first quarter financials. Victor will come back for an update on our business segments and on our strategic progress, and then we will open it up to your questions.

With that, I'll turn it over to Victor.

Thanks, Gary. We performed well in the first quarter of our fiscal year as we continue to execute effectively on our growth strategy. Financially, revenues were up 10.5% for the first quarter due primarily to sales growth at our U.K. Technology Solutions business. We achieved better-than-expected sales on both the High Performance Products and the Technology Solutions segment in what we expected we would be relatively soft for the first half of the year due to timing issues.

On the bottom line, we reported a GAAP loss per share of $0.32 versus $0.01 a year ago. This quarterly loss was primarily due to the $1.1 million impact from the new tax legislation, which Gary will describe later on the call. Excluding the tax impact, our results essentially in line with last year of $0.02 per share and better than we had expected for the first quarter of 2018.

In our High Performance Products division, we continue to advance our next-generation cybersecurity products and received 2 distinguished awards for our new next-generation ARIA security platform. In the Technology Solutions, our wireless security business drove revenue growth as we continue to see increased demand for our managed service offerings.

After Gary reviews our financial results for the quarter, I'll come back with a detailed review of these achievements and our progress in Q1 in each segment. Gary?

Thanks, Victor. For the first quarter of fiscal 2018, revenues increased 10.5% to $22 million from $19.9 million a year ago. Our total cost of sales was $16.9 million, up 9.1% from the prior year on the 10.5% increase in revenue. Gross profit for the quarter increased 15.3% to $5.1 million or 23.3% of sales from $4.5 million or 22.4% of sales a year ago.

First quarter engineering and development expense was $698,000, up 17.1% from $596,000 a year ago. As a percentage of sales, Q1 engineering and development expense increased to 3.2% from 3% last year. This year's expense is within our expected range for the year of 2.5% to 3% given the increase in staff of our High Performance Products business.

Q1 SG&A expenses were $4.4 million or 21 -- 20.1% of sales compared to $4 million or 19.9% of sales in the previous year. We continue to expect SG&A expenses in the range of 13.8% to 16.5% for the fiscal year 2018.

Now I'd like to take a moment to describe the impact of the new tax legislation enacted in December on our Q1 statement of operations. The new tax legislation resulted in a onetime charge of $1.1 million or $0.30 per share during Q1. The charge included, first, $490,000 for the remeasurement of our deferred income tax assets and liabilities as our rate was reduced from 34% to 21%; and second, $690,000 (sic) [$649,000] for the repatriation of undistributed foreign earnings. This will be paid over the next 8 years. Going forward, we are assessing the effects of the new tax legislation and estimate that our overall tax rate will be in a range of 27% to 30%.

Included in the -- including the effect of the tax legislation, net loss was $1.2 million or $0.32 per share compared with a net loss of $43,000 or $0.01 per share a year ago. Excluding the tax impact on our EPS, the loss of $0.02 per -- the loss would have been $0.02 per share for Q1 fiscal 2018. Cash and short-term investments increased to $18.2 million from $13.9 million at 2017 fiscal year-end due mainly to the collections of accounts receivable.

Lastly, our Board of Directors voted to pay a quarterly dividend of $0.11 per share to shareholders of record on February 28, 2018, payable on March 16, 2018. Our financial priorities for Q2 and the remainder of 2018 will be to improve our bottom line performance by increasing the level of high-margin products and

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across the organization.

I'll now turn the call over to Victor.

Thanks, Gary. Let's jump right into our segment review, starting with our High Performance Products division. HPP revenues were $2.5 million, down 10% from last year, with sales coming from domestic E-2D revenue, strong multicomputer support services and the sale of our legacy Myricom products.

In our multicomputer product business, we received royalty revenues equivalent to 1 E-2D plane. We are receiving orders for board for the project within the E-2D program and continue to anticipate sales for the E-2D foreign military program. Although we haven't been given a specific indication regarding the

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We expect the bulk of the orders will be in the back half of fiscal 2018.

On the Myricom side, legacy products performed a little better than expected for the quarter, but we continue to see a decline in sales of our ARC Series 10Gb network adapter for the packet capture in media and entertainment market.

As you know, in 2017, we began investing in the development of our next-generation cybersecurity products to counter this decline. These next-generation products include the Myricom nVoy Series, which is focused on helping companies to not only detect potential data breaches but also determine the exact records or files that were compromised.

nVoy enables companies to gain this data at early -- the early stages of a breach, reducing the investigation response activities to a matter of hours instead of weeks. We are encouraged by the interest of our clients in this product as the state and federal international laws become more stringent and allow notification time frames when the personal identifiable information has been exposed.

To further advance the application of our nVoy Series, this quarter, we joined the Fortinet Fabric-Ready Partner Program, which will allow us to seamlessly integrate the Myricom nVoy Series' automated investigative response application with the Fortinet FortiGate firewall solution. The combination of the nVoy solution with the Fortinet firewalls gives security teams a simple, cost-effective way to focus their efforts and automatically generate the detailed files that contain information needed to research the full impact of any damage.

During the first quarter, we launched our newest line of security products, our ARIA Software Defined Security platform. This platform provides advanced cybersecurity protection capabilities for critical data assets that need to be accessed by the end user and applications in both the cloud and on-premise. What differentiates ARIA in a market is that it allows developers to build security into their application without having to be a cybersecurity expert, and it enables enterprises to set specific security policies for those applications. In December, ARIA was named a finalist in the Best New Security Product category at VMWorld's 2017 conference. In January, ARIA also earned the prestigious Gold status in the Golden Bridge Awards, an annual industry and peer recognition program that honors the best companies in every major industry. We are on track to realize our first revenue from the product in the later part of this year and continue to be excited by the potential in the cybersecurity market.

Turning now to our Technology Solution business. Quarterly revenues were up 13.8% year-over-year driven by strong sales in the U.K. In Germany, we saw continued traction of our managed service business and reported a slight increase in revenues for the first quarter. We renewed a service contract with a large multinational telecommunication provider to manage an increased number of their services and assets. We also closed on a new managed service contract with a client in the mobile operator space. We will be managing and supporting all their security platform and networks, including equipment.

During the quarter, we expanded our geographic presence in Germany. We now have 2 team members in sales and engineering to support clients at Frankfurt, and we expect this to position us for further growth in that region.

In the U.K., revenues were significantly higher than last year, mainly due to activity related to U.S.-based customers, demonstrating the continued success of our cross-selling strategies. During the quarter, we hired a new account sales manager, which we expect will positively affect our performance moving forward.

In the U.S., sales were very strong in what is typically a soft quarter. We closed 2 new customer contracts in our managed service business and hired 9 new sales and engineering team members in the U.S. to keep pace with the business in our pipeline.

In the wireless security, our major cruise line contract continues to grow. When we won the contract in the third quarter of 2017, we were hired to install wireless security in 2 of their cruise ships. On the last quarter's call, we mentioned that we expect to be working on between 8 to 12 ships on a range of services from flight surveys to full installation of wireless networks. We are very excited to have now been awarded around 15 ships, including installation and remediation projects in Japan, Australia, the U.S. and Europe, and we see continued potential for growth over the next 3 years. We are also in talks about other technology areas within the organization.

Overall, our results in the Technology Solution demonstrates that we are successfully executing on our strategy. Our new products are gaining traction and our managed service continues to gain momentum. We expect our cross-selling initiatives will continue to bring new revenue across all geographies.

Before we go to your questions, let me leave you with a few key thoughts. We entered fiscal 2018 anticipating a soft first half of the year, but we delivered a better-than-expected first quarter as our wireless security offers -- offerings, cybersecurity products and managed service business continued to gain traction. We are confident in our strategy and continue to expect growth in sales and profitability for the second half of the year driven by the increased revenues from our multicomputer products and new cybersecurity and Technology Solutions.

Finally, we are in a period of exciting changes at the company. Our performance during the first quarter demonstrates that we are successful -- successfully executing our strategy to move from a company focused on defense-related multicomputer to the growing managed service business that can capitalize on the demand for cybersecurity products and proliferation of wireless. We look forward to further progress and transformation in fiscal 2018 as we advance our new Technology Solutions.

With that, I'll turn it over to the operator to take your questions.

(Operator Instructions) Our first question comes from Joseph Nerges with Segren Investments.

A couple -- just 1 accounting question here. Gary, you mentioned that the repatriation number was $690,000. In the press release, you're at $649,000.

$649,000 is correct. I apologize, I misspoke.

Okay. Is that -- by the way, that's over an 8-year period of time. In other words, if my accounting is correct, we're repatriating around $4.3 million? Is that a 15% tax rate on that repatriation? Is that what...

15% on cash generated and then 8% on other assets, so it's a mix, Joe.

Okay. And that will be done over an 8-year period of time?

Correct.

In other words, money should be coming back, let's say, $500,000 plus a year or in that neighborhood.

Well, no. It's very heavy back-ended. So in the first few years, it's a very small amount. Plus if you repatriate money, you get a dividends-received deduction, which can offset some of that liability.

Okay. Okay. So eventually, it will take place over a period of 8 years. And basically, we've accounted for the cost of it in this report.

Well, this is an estimate.

The tax?

Yes, we've -- this is an estimate. We've done the best we could in such a short period. What we have to go through now is more detailed analysis. But it's -- I worked with our outside consultants, and we believe at least it's a reasonable methodology at this point. Now we have to go and look at the detailed information.

Okay. Very good. Maybe, Victor, you can elaborate on -- in the press release, you said market interest continues to grow for our recently announced software security solution, ARIA. Are we -- does that mean we're getting inquiries on it? How are we getting the interest? I know we're still -- we're not in beta testing yet, are we? Or are we still...

Yes. So what we did, Joe, we've been to a lot of conferences. And before we started developing the product, as I mentioned before, we sat down with a lot of different companies and technologists to find out what their needs were, what -- and hopefully, we could fill those needs with our software. So as we started developing it, Gary Southwell, which is running the product division that's developing this, he went out to a lot of conferences. And as he spoke to those conferences, we got a lot of names and numbers of people who are interested and beta testing it and talking about it as the development went on. So now that we're close to the -- releasing it, we're talking to some -- a couple large companies, which I can't mention, but there's a lot of interest there. So with that being said, we keep doing the trade shows. And as the trade shows are, we're getting a lot of names and numbers and talking with these folks.

My understanding, the product is -- if it works as advertised, it's an outstanding product. Let's put it -- from my perspective anyway. And obviously, you're getting the interest because all of these -- you're getting the feedback from all these conferences that you've been at. Let me ask you, are we -- how many beta test sites are we undertaking? Are there multiple sites on beta testing this or not? Are we -- multiple customers?

There's multiple, yes. There's multiple right now. But there's one in specific that we're doing a lot of work with. They're a very large organization that if everything goes well, it'd be pretty good.

So it's under beta testing as we speak?

Yes. The base of it is -- but there's a lot of functionality that some of these customers are wanting that we're still in the process of developing right now.

Okay. Because I want -- and going through your 10-K, you've been -- I think it was pretty -- the explanation of what's available under this is pretty widespread. Basically, what we're saying is you're calling it SDI -- or instances, right?

SDS.

SDS instances. And then you have the SDS orchestrator, which essentially is, I guess, the general that everything works with -- that's the manager. That'll be licensed on a yearly basis, the SDS orchestrator.

Yes. Yes.

Now when we're talking about the instances, how many -- what are we talking about? And that's going to be sold, as I understand from the 10-K. They will be sold, and as I said, it could be as widespread as the customer wants. What are we talking about on numbers there? I'm talking about the number of instances that could be built into this product line.

It just depends on how big the customer is, how many people have -- developing applications and how many people have to touch it.

Okay. So the instances really, are they going to be per container or per VM or...?

Per VM, yes. Per server, whether it's virtual or just [straight out of the box].

Okay. So everything that's spun out is an instance if you want to call it that or an individual entity?

Yes. Correct.

So that's extremely large.

Yes. If someone has 20,000 servers, there could be 20,000 instances.

That's really, really large. Really exciting. Okay. Let's go to the press release of last week, and you announced the Broward College expansion of -- or at least expansion of managed service agreement with them, the $1.9 million agreement?

Correct.

Now, is that over a 3-year period of time? Or is that some -- part of it's front-loaded with some of the stuff we're doing and part of it's -- I mean, how is that going to be...

The way it is, Joe, we have a contract for 3 years with 3 more -- 1 year on top of it all. So every after 3 years, then it is another 1, 1, 1. And then at that point, we'd have to renegotiate.

Okay, so this is -- but this is -- you already have a contract with the college, correct? And this is added to the previous contract that you have out there?

Yes. Yes.

Okay, great. So right now, as far as the instance responses, the only 2 that we've done so far as far as the automatic responses for the nVoy product are the Fortinet firewall as well as the Cisco firewall, is that correct?

Yes.

And I assume there's going to be additional firewalls over the course of -- other suppliers we're going to tie in.

Yes, we're talking to other ones right now to get their IP.

I see where Gary, I believe -- Gary has, next week, 3 seminars with Cisco in Orlando, Tampa and Fort Lauderdale on this particular product line?

Yes, sir. And that's with the Cisco team -- with the Cisco salespeople, Cisco team and customers. So...

(Operator Instructions) It appears we have no additional questions at this time. I'll turn it back to Victor and Gary for any additional or closing remarks.

Thank you all for joining us this evening. We look forward to speaking with you again on our next call.

Thank you. This does conclude today's conference. We appreciate your participation. You may disconnect at any time, and have a wonderful day.