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CSP's (CSPI) CEO Victor Dellovo on Q3 2016 Results - Earnings Call Transcript

CSP Inc (NASDAQ:CSPI)

Q3 2016 Earnings Conference Call

August 18, 2016 5:00 PM ET

Executives

Gary Levine – Chief Financial Officer

Victor Dellovo – Chief Executive Officer

Analysts

Joseph Nerges – Segrum Investments

William Kidston – North & Webster

Operator

Good day, everyone, and welcome to today's CSP Incorporated Third Quarter Fiscal 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note today’s call is being recorded and I will be standing by if you should need any assistance.

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

Gary Levine

Yes, thank you. Good afternoon everyone and thank you for joining us. With me on the call today is Victor Dellovo, CSP'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 risk includes 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. During today's call, Victor will provide an update on our business segments and on our strategic progress. And then I'll discuss our third quarter financials then we'll open it up to your questions.

Now, let me turn the call over to Victor.

Victor Dellovo

Thanks, Gary. We performed well on both top and bottom lines in the third quarter as we continue to make excellent progress against our operational and strategic initiatives. Sales were up 21% in the quarter and we reported EPS of $0.32 versus $0.07 a year ago. In the High Performance products division, which includes Myricom Network Adapter products, we continue to perform above our expectations and we have fully launched our new ARC Series E Class network adapters for the automated trading market. In the Technology Solutions division, our managed service pipeline is strong, recurring revenue is growing and our cross-selling strategy between locations and divisions is advancing.

With that I will get right into our segment review starting with the High Performance products division. High Performance products division had a strong quarter with revenue increasing approximately 43% year-over-year. We have received royalty revenues for three E-2D planes and additional revenue from our large product shipment to support future plane build. This compares with E-2D royalty revenues for three planes in the comparable quarter a year ago as well.

Looking ahead, our expectation is to receive royalties from one plane in Q4 in line with our expectations for the year. In addition, we have received revenue from a large international customer. Myricom's legacy product line continues to perform very well. We had expected decline in revenue from these products, but instead we have seen steady sales. However, the real long-term strategy opportunity for Myricom product lines with that next generation of products such as the ARC Series E Class, which have the potential to expand the HPP’s market reach and be the primary growth driver.

During the quarter, we fully launched our next-generation FPGA network adapter products branded to Myricom ARC Series E Class for the financial trading market. The ARC Series E Class adapter product suite offers more advanced high frequency trading functionality than any other solution. We are building the sales funnels with approximately 30 plus evaluations in process. Looking forward in Q4, we are concentrating or ramping up the adoption of the ARC Series of the 10-gig E within the packet capture market.

For this market, our target audience of both OEMs and end-user of the hyperscale data centers. Our strategy to cross-sell between the high performance product division and that Technology Solutions division is taking shape. For example, we recently hired our first hybrid salesperson, which has shareholders for both of our division. Initially this resource will be concentrating on the financial market selling the Myricom ARC Series network adapter product line.

However, he is also has a – to sell full integrated turnkey solutions that include the Technology Solution products like servers or network security. We have received close request from high profile customers for these integrated solutions, which is a great sign that this is the right approach. Ultimately our customers will receive more value from these types of solutions whereas CSPI driving higher sales and margins for transaction. This is the first time we have products coming out of the high performance products division that are feeding into the technology solutions sales engine and we are excited by the potential.

That as a transition to the technology solution discussion, quarterly revenues were up 60% year-over-year. In Germany, we continue to make tactical changes to drive high-end managed services deals, for example we have changed our sales compensation structure to focus more on our managed service offerings. Penetration testing continues to be very strong market for us and we are seeking additional engineers and tested to support that growth.

In the U.S. our managed service pipeline is strong, we’re particularly excited that we are closing managed service deals at a greater frequency and the recurring revenue stream is increasing. We are winning business in vertical markets such as hospitals school systems and we are currently looking to expand in other markets where we are seeing growth opportunities such as wireless.

During the quarter we also closed deals for the installation and services around Microsoft Office 365. We are capitalizing on the growth trends toward cloud based accessibility as large enterprise rely on us to move their Microsoft Office applications from their internal exchange to the cloud.

I am so happy to report that managed service group of our technology service division in the US successfully completed the SOC 2 Type 2 Security Examination. The SOC 2 Security Examination report presents findings on controls at a serviced organization that ensures that that system is protected against both physical and logical unauthorized access. This definition is a testament to the importance we place not only on providing superior technology solutions but also the security of our internal processes.

Turning to the UK, we recently hired three new sales people and they’ve hit the ground running generating a robust pipeline of new opportunities in the first weeks since joining the Company. As a result of the consolidation of the UK operations into our German business while leveraging German engineers to perform penetration testing in services around security environments for the UK customers. At the same time we focus on cost savings and improve efficiencies to drive better profitability out of the business.

With that overview of the two divisions, I will turn it over to Gary for the financial review.

Gary Levine

Thank you, Victor. Revenues increased 21% to $26.9 million from $22.3 million a year ago. Our total cost of sales for Q3 was $19.7 million, up 15.8% from the prior year. Gross profit for the quarter was $7.2 million compared to $5.3 million a year ago. Gross margins increased to 26.8% from 23.6% in the prior year as a result of volume leverage.

Third quarter engineering and development expenses increased to $779,000 from $626,000 a year ago. Primarily from the addition of five engineers since last year. As a percentage of sales Q3 engineering and development expenses were 2.9% compared to 2.8% last year. This is below our expected range of between 3.5% and 4% of sales due to the increased sales volume during the quarter.

SG&A expenses were $4.6 million or 17% of sales compared to $3.9 million or 17.7% of sales in...


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