CSP Inc. (CSPI)
F2Q11 Earnings Conference Call
May 4, 2011 10:00 a.m. ET
Alexander R. Lupinetti - Chairman and Chief Executive Officer
Gary W. Levine - Chief Financial Officer
Previous Statements by CSPI
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At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference call. (OPERATOR INSTRUCTIONS.)
I would now like to turn the call over to Mr. Gary Levine, CSP’s chief financial officer. Please proceed, Gary.
Gary W. Levine
Thank you, [Operator name], and good morning, everyone. With me on the call today is our chairman, president and chief executive officer, Alex Lupinetti. I’ll take you through our second-quarter financial results, and 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 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. We are pleased with our financial performance this quarter, given the difficult comparison we had with the second quarter of 2010. For the year-to-date, we are running significantly ahead of where we thought we would be, especially on the bottom line. Let’s walk through the income statement and I can provide you with more perspective.
Total sales were $19.2 million, compared with $23.9 million in the second quarter a year ago. The effect of foreign currency was not significant on a year-over-year basis.
The year-over-year revenue decrease was the result of two factors. First, sales at our Systems business declined by 50% as result of a difficult comparison with the second quarter of 2010 when we recorded a 3.7 million dollar follow-on order to Raytheon for the shipment of two FastCluster MultiComputer systems and related services. In addition, we had a 13% decrease in Service and Systems Integration sales due primarily to reduced sales to a major hosting customer. As we discussed previously, that customer acquired one of our largest competitors in 2010. In addition, the hosting company also had expected a downturn in business from one of its own customers that had previously created significant demand for CSP’s products.
For the first half of the year, despite the difficult comparisons in both businesses, sales are only down by 3% to $41.3 million.
CSP’s total cost of sales for Q2 decreased to $15.0 million from $18.4 million in Q2 2010 due to the lower year-over-year volume. Gross profit for the quarter was $4.2 million compared with $5.5 million as a result of the lower sales. Gross margin was 22% compared with 23% in Q2 2010. For the first half of the year, gross margins are 21% compared with 18% for the first half of 2010 as a result of the inclusion of $1.6 million of royalty revenue in the Systems business.
Second-quarter Engineering and Development expense was approximately $500,000 compared with $400,000 a year ago. As a percentage of sales, Q2 2011 Engineering and Development was at about 2.6% of sales compared with 1.8% last year. Our target range for Engineering and Development expenses is 2.4% to 2.6% of sales.
SG&A expenses decreased on a real-dollar basis to $3.3 million in the quarter from $3.4 million a year ago as a result of lower commissions in the Systems business. SG&A was 17.2% of sales in Q2 of fiscal 2011, compared with 14.2% of sales in Q2 last year. Our target range for SG&A expense is between 16.1% to 16.6%.
Our effective tax rate for the quarter was 33%. We expect our effective tax rate will be approximately 37% for the third quarter of fiscal 2011.
Net income for the second quarter was $300,000, or $0.08 per diluted share, compared with net income of $1 million, or $0.28 per share, in the second quarter of fiscal 2010.
Let’s now turn to the balance sheet . . .
Cash and short-term investments decreased by approximately $1.1 million from fiscal year end September 30, 2010 to $14.4 million as of March 31, 2011. The decrease was primarily due to an increase in inventory of $2.3 million to support sales to our large hosting customer, and the purchase of $395,000 in CSP stock.
As we have discussed 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. This was the case this quarter with the significant increase in our inventory.
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 toward long-term profitable growth.