CSP Inc. (CSPI) Q1 FY2026 Earnings Call Transcript & Summary

Greetings, welcome to the CSPi's First Quarter Fiscal Year 2026 Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Michael Polyviou. You may begin.

Great. Thank you. Hello, everyone, and thank you for joining us to review CSPi's financial results for the fiscal 2026 first quarter, which ended on December 31, 2025, and as well as recent operating developments. Today with me on the call is Vic Dellovo, CSPi's Chief Executive Officer; and Gary Levine, CSPi's Chief Financial Officer. After Victor and Gary conclude their opening remarks, we'll then open the call for questions. During the Q&A session, we ask participants to limit themselves to 1 question and 1 follow-up question then requeue if you have additional questions. Statements made by CSPi's management on today's call regarding the company's business that are not historical facts made these forward-looking statements as those identified in federal securities laws. The words may, will, expect, believe, anticipate, project, plan, intend, estimate and continue as well as similar expressions are intended to identify forward-looking statements. Forward-looking statements should not be met as a guarantee of future performance or results. The company cautions you that these statements reflect the current expectations about the company's future performance or events and are subject to several uncertainties, risks and other influences, many of which are beyond the company's control that may influence the accuracy of the statements and the projections upon which the segment and statements are based. Factors that may affect the company's results include, but are not limited to, the risks and uncertainties discussed in the Risk Factors section of the annual report on Form 10-K and the quarterly report on Form 10-Q filed with the Securities and Exchange Commission. Forward-looking statements are based on the information available at the time those statements are made and management's good faith belief as of the time with respect to future events. All forward-looking statements are qualified in their entirety by this cautionary statement and CSPi undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise after the date they're up. With that, I'll turn the call over to Vic Dellovo, Chief Executive Officer. Victor, please go ahead.

Thank you, Michael, and good morning, everyone. As expected, our first quarter product revenue compared to prior year period reflects tough year-over-year comparables, which obscures the progress we made. We continue to make executing on CSPi's core growth strategies and building long-term shareholder value. In the year ago quarter, we recorded approximately $4.5 million in the onetime product deal that did not repeat in fiscal Q1 2026. The resulting in the decline in total revenue. As I've emphasized on prior calls, our strategic focus is on expanding service revenue in growing our MRR base in the first quarter, service revenue driven by ongoing momentum in the technology solution and managed service practice grew 14.6%. This strength translated into a meaningful improvement in our overall gross margins which reached 39.3%. The higher margin profile contributed to $171,000 increase in gross profit versus the prior year period. We also continue to gain traction in the market with a differentiated and award-winning AZT Protect cybersecurity solution, supported by both new customer wins and multisite expansion with existing customers. Overall, our fiscal first quarter results reinforce our confidence that fiscal 2026 is shaping up to be a growth year for CSPi. The Technology Solutions business continues to lead our progress. Our offerings increase the efficiency and effectiveness of our customers' IT investments in networking, wireless mobility, unified communication and collaboration, data center is in advanced technology security. And while all our TS services are performing to plan, our managed cloud and managed service products continue to excel. We are benefiting from the ever-expanding business and organizational migration to the cloud and the increased trends for enterprise of all sizes to acquire operation support required once the migration is complete. A primary factor behind this market driver is the growing complexity of the cloud in the unique and specific needs of each enterprise. Microsoft, through its Azure offering, is considered to be the market leader in this space. And our MSP practice is a platinum partner with the company. During our last call with you in December, we mentioned the increased investments we were making in the managed service practice. We have already begun to generate returns from the investment through the signing of new customers. In Q1, we signed new MSP customers that will generate nearly 6 figures in monthly revenue commencing this quarter. this traction has continued into the second fiscal quarter as we look forward -- look over the remainder of the year. We believe our service segment momentum can continue. Meanwhile, based on our best-in-class services, our customers' retention rate remains extremely high, contributing to expanding our gross margins in the Service segment. We also achieved meaningful traction with our AZT Protect product suite in the first quarter, delivering year-over-year revenue growth while we are still progressing towards the full market opportunity for cybersecurity solutions. The quarter reflected several encouraging developments. We secured multiple new site customers for ACT and through our strategic partnership and distribution continue to expand our pipeline of prospective deployments. Despite being in the market with the RA AZT for just over a year, we now serve over 46 unique customers, some of whom have multisite installations underway. In addition, and additional expansion opportunities. These customers span a broad range of verticals, including steel, energy, manufacturing, water utilities, pharmaceuticals, food and telecommunication. Importantly, many of the highest value multisite opportunities each with the potential to develop into 7-figure relationships remain ahead of us as customers advance through their respective procurement and deployment processes. We have already received approval...

Ladies and gentlemen, please standby. We'll get Victor back on the phone.

One moment, please. I still see it line connected. I will reconnect it again. One moment, please. [Presentation]

We have Victor's line connected.

Michael, where did we leave off? I didn't realize we dropped.

Yes. Why don't we just pick up on -- well, Victor, it's probably easier if we just pick up from the beginning. If not, we could pick up on the top of Page 2. Okay. Let's talk about Technology Solutions business, yes.

Sorry about that, everyone. Our Technology Solutions business continues to lead our progress. Our offerings increased the efficiency and effectiveness of our customers' IT investments in networking, wireless, mobility, unified communication and collaboration, data centers in advanced technology security. And while all our CS services are performing to plan, our managed cloud and managed service practice continue to excel. We are benefiting from the ever-expanding business in organizational migration to the cloud and the increasing trend for enterprises of all sizes to acquire operations support required once the migration is complete. The primary factor behind the market driver is the growing complexity of cloud and unique and specific needs of each enterprise. Microsoft through its Azure offering is considered to be the market leader in this space, and our MSP practice is a platinum partner with the company. During our last call with you in December, we mentioned the increased investment we were making in the managed service practice, and we have already begun to generate returns from that investment through the signing of new customers. In Q1, we signed new MSP customers that will generate nearly 6-figure and monthly revenue commencing this quarter. Distraction has continued into the second fiscal quarter, and we look over the remaining of the year, and we believe our service segment momentum can continue. Meanwhile, based on our best-in-class services, our customer retention rate remains extremely high, contributing to our expanding gross margin in the service segment. We also achieved meaningful traction with our AZT Protect product suite in the first quarter, delivering year-over-year revenue growth. While we are still progressing towards the full market opportunity for our cybersecurity solution, the quarter reflects several encouraging developments. We secured multiple new sites, initial site customers for AZT Protect and through our strategic partnership and distribution continue to expand our pipeline of prospective deployments. Despite having been in the market with AZT with just over a year, we are now serving unique customers, some of whom have multisite installations underway and additional expansion opportunities. These customers spend a broad range of verticals including steel, energy, manufacturing, water utilities, pharmaceutical, food and telecommunication. Importantly, many of the highest value multisite opportunities each with the potential to development to 7-figure relationships remain ahead of us as customers advance through their respective procurement and deployment process. We have already received approval to proceed at several second and third sites and our team is focused on rapid execution to demonstrate the substantial value AZT Protect delivers and preventing cyber attacks that otherwise can disrupt operations for hours, days or even weeks. The case studies developer initial industry installations are helpful getting our target customers to understand how exposed they are to operational disasters and how AZT Protect uniquely acts to prevent such disaster. For some, they are learning of the risk as operational technology customers continue to lack effective cybersecurity protection at the level AZT Protect provides. Unfortunately, for many, they don't realize their exposure until it's too late, and they are exposed. We continue to believe we have a strong competitive advantage in the space and believe that the market is starting to see us as a resource. The unique procurement process and development criteria for each customer previously mentioned has resulted in various timing delays, which we continue to work through. Our team is resilient and committed and we are not letting up. We continue to believe the effort will result in sizable AZT Protect sales for the fiscal year unfolds. In addition to expanding direct pipeline, we are advancing strategic OEM relationships, most notably with the Acronis as they work to embed AZT Protect into their platform, while these integrations require time to mature, they represent highly scalable opportunities with substantial long-term potential. We also conducted our first webinar this quarter with Acronis which drew nearly 200 attendees and generate more than a dozen demo requests. Engagement levels are strong, reinforcing our view that this go-to-market motion will be an important contributor to our long-term growth trajectory. In summary, we are off to a solid start of the fiscal year, with particularly strong performance in our service business. We believe we remain on track to deliver steady, profitable improvements throughout fiscal 2026. Supported by the infrastructure investments we have put in place to enable meaningful scale. As a result, we expect to generate substantial operating leverage as revenue grows. With that, I will turn the call over to Gary to discuss our recent financial results in more detail. Gary?

Thanks, Victor. For the fiscal first quarter ended December 31, 2025, we generated $12 million in revenue as compared to $15.7 million for the year ago fiscal first quarter. Product revenue for the fiscal first quarter of 2025 was $6.7 million compared to product revenue of $11 million for the fiscal first quarter of 2025. Last year's revenue total for the quarter included several onetime transactions with customers totaling approximately $4.5 million and we didn't have any product orders of that magnitude in the first quarter of this year. Service revenue for the first fiscal quarter increased 14.6% to $5.3 million from $4.7 million in the year ago fiscal first quarter. Gross profit for the fiscal first quarter was $4.7 million versus $4.6 million during the fiscal first quarter of 2025. The solid service revenue growth in mix during the quarter drove the gross profit margin increase. Gross profit margins for the first quarter was 39.3% of sales, which was slightly more than 10% higher than the gross margin for the prior fiscal first quarter of 29.1%. Energy and development expenses increased 9.2% or $858,000 compared to the same period of prior year. as we supported the customization of the AZT Protect deployments and OEM and bedding developments. Sales in general and administrative expenses for the fiscal first quarter declined $143,000 to $4 million for the year ago first fiscal quarter. The company had increased interest income that increased 23% over the prior year on our financing deals and interest on our cash. The company recorded a tax expense of $280,000, which represented a year-to-date effective tax rate of 75.5%. The differential between the company's effective tax rate year-to-date and the U.S. statutory tax rate of 21% is primarily due to state income taxes changes in the valuation allowance maintained against certain state credits and nondeductible executive compensation. Net income for the first quarter of fiscal year 2026 was $91,000 compared to $42,000 in the prior year period. Diluted earnings per common share was $0.01 compared to $0.05 in the prior year first quarter. As of December 31, 2025, our balance sheet remains strong with cash and cash equivalents of $24.9 million. We would also like to point out that the decrease in cash from September 30, 2025, was primarily related to several financing deals that we closed in Q1 '26, and we are to collect approximately $3.3 million from financing payments scheduled during the next 2 quarters. As we noted in the press release this morning, we will be paying a dividend of $0.03 per share on March 12 to shareholders of record of February '26. With that, I will turn it over to the operator for your questions.

[Operator Instructions]. your first question for today is from Joseph Nerges with Segren Investments.

A quick accounting question. We keep talking about service revenue. Do we have 2 categories for service -- when you talk service revenue, are we tackling managed services? Are we talking services beyond mange services? Is there 2 categories or just 1 category for services revenue?

Yes, yes, multiple items, Joe. It's not just one.

All right. So then what are we talking about for managed service for the quarter? I think you said -- did you say $5.3 million. Is that correct?

Correct.

The managed services portion of our services revenue for the first quarter.

Well, that's the total service revenues inclusive of the TS division as well as the AZT.

We don't break it out, Joe. Joe, we don't break it out.

Okay, you're not breaking up between TS and AZT. I'm just trying to understand where -- how much of how much revenue in managed services do we have?

A lot. Yes, it's a good portion of it. I don't have that number right in front, but it's the majority.

Okay. So the majority of the $5.3 million would be the managed services portion of it. All right. Let me get past the accounting here. Let's talk about the Acronis just for a second. I noted that from the cones website, they changed their -- we're going to be rolled into a corona cyber protect. That's going to be their product, I understand. Is that correct?

It will be not just a cyber protect, it will be over all -- it will be on the front gooey. So like even when they potentially want to do a backup if the customer chooses, they can run our product to look at all the data and all the applications, making sure there's no issues before they back up the data.

Okay. So previously, they had a product called Acronis cyber backup. Now they change the name Acronis Cyberprotect. That's, as I understand, where we'll be rolled into. So are we not selling a Acronis Cyber Backup, haven't we sold that in our TS division? We have customers that are utilizing Acronis down there heavily?

Yes. Correct.

So theoretically, we can increase our AZT sales force by incorporating our sales team in Florida who sell the Acronis' backup service, which could now include AZT. You understand my question?

It's not really a statement, yes.

We're expanding the capability of the backup service for the possibility of adding AZT to it. And since we have customers, I assume, because we've been representing a number of years in our TS division, we might have a number of customers out there just in our division that have Acronis that are utilizing the backup service solely. Okay. So in effect, we -- our sales team in Florida can expand the backup service to include AZT for those customers that want to have that protection.

Yes. If we're doing backup for a customer, you have to understand not all customers we do back up for. There are a few that we do.

Well, okay, whatever view we do could now utilize the AZT adding if they sort...

If they choose to spend the money, yes.

Yes. Okay. I'll let somebody else. I don't want to dominate the whole thing, but I'll come back for another question after other people have a chance to ask questions.

Your next question is from Mike Price, a shareholder.

With AZT being embedded in the Acronis offering, there should be some predictability. Can you give us an idea of how that translates into revenue? I mean at some point, it would be nice to have this quantified.

Yes. We haven't even fully integrated we're building the APIs. So how that rolls out, Mike. If we ever get that out there that we have some outlook on that, I'll include it. But at this stage, it's way too early.

And how far out do you think that might be until you give some idea of a dollar amount?

No idea, Mike, I'm not going to guess at this stage. Right now, I'm concentrating on getting the integration finished.

Okay. And also, it's been 5 months because of the blackout period that you've been able to repurchase shares. Is that in the plans with $100 million market cap and the stock within hailing distance of the 12-month low?

Yes. It's always been part of that. Yes. We've been, unfortunately, locked out for a while. It will open up in the next 48 hours in -- we'll do something this quarter -- yes, we'll be doing something this quarter.

Okay. And a statement along with that, it would sure show a lot of confidence at the insiders, other than Joe Nerges. We're buying shares also, just a statement.

Your next question for today is from Brett Davidson, private investor.

Just got a few quick things. Gary, I think you were talking about the repayments on the financing, the $3 million on the interest -- yes, are we still -- so we're going to collect $3 million. That number on the balance sheet could conceivably drop, but are we still acting in that financing rule? Is it going to drop on the balance sheet? Or it's just cycling through to another customer or whatever?

It could, right? It could. Yes. It just -- every customer is a little different. But those are the ones that we've already paid out, paid for the product and now we'll be collecting. So sometimes we're taking 3-year deals for the customer and the payment structure for all deals are a little different.

Okay. So we're still in that business. I just want to...

Yes. We're offering it to customers that are high-quality customers and it keeps us sticky inside the organization, and it's a good use of our cash.

Yes, you got your claws on them. The permission on the second and third sites, I'm just interested in kind of when that occurred. Are we talking about just in the first quarter? Or is that continued -- or excuse me, in the prior quarter? Or does that continue into the current quarter, some of those secondary sites?

The ones that have multisite, there's 2 variations, right? The ones that we deal with corporate. And then if they have 50 locations like we did with one of our large pharmaceuticals, they bought it from the corporate level, and we pushed it out to those 40 plus. In some cases, all the budgets are separated. So we have to go to one of the ones I mentioned was that steel company. We have to go to all 20-some-odd sites and we already got the third site, one came in last quarter, one came in this quarter. There's another one in the food industry that we got the second one, another one in another industry came in actually yesterday for the third site. So yes, unfortunately, it would be nice if we could just deal with corporate, take on purchase order and push it all out. In some cases, that not the case and we have to go to every individual site. And it gets easier after the first one because the -- we don't have to do another POC. We just have to go get budget money from them. And as I mentioned earlier in the script that every customer's purchasing process is a little different. So we have to kind of abide on how each one does that. And sometimes, unfortunately, they are very, very slow and things take way more time than I think it should, but we're at the mercy of the customer.

From the description there, it sounds like this is becoming a more regular occurrence. This is starting to happen with some kind of frequency.

Yes. Look, last year, at this time, we had 2 customers, right? A year later, I mentioned we have 40 something. So we are doing that where we see the product at 1 location. We try to get someone who can evangelize the difference between us and some of the competitors out there, why they should spend money with a small company like us and how we truly do protect the endpoint and lock it down. And if we can get someone who can evangelize internally, it makes it a lot easier for the second, third in multiple locations that they have. So yes, it's getting easier, but it's not easy, right? Every customer is a little different in getting to know the customers and how they do business is a lot of work. But we are getting references -- we are getting references and the references are helping, right? We're working on a deal right now. They're like who else do you do business with locally. And we mentioned he's like, oh, I know that person, let me call them, if they get thumbs up on RA AZT, I don't even have to do the POC. So things like that are happening. To me, it can always be faster, but things are happening in a positive direction.

Yes. That's exactly what I'm getting at. Yes, I fully get it, that this is really a tough slog, but eventually, so once mean you get to the point where multiple of these relationships start to pay dividends and one guy is talking to another guy in. I mean, do you get any feel yet of the kind of momentum where this starts to look exponential instead of linear? Or still too early?

Still a little too early, right? We're gathering the data. It's getting a little easier to connect dots, but it's still -- like I said, it's only been truly a year of really, really pushing this product and kind of figuring out the messaging and every industry is a little different. So building those like I have mentioned on the script there that we're putting these on pages together that represent the industry to try to make it a little easier to understand how we can help them and why we're a little different than the competitors where we fit in with those competitors, right? Sometimes we can go alongside of those competitors. They can do the IT side of it while we do the OT side of it, right? And how we can join all the logs on the one interface. So those are the messages that we kind of put together over the last year to try and make it a little cleaner, clearer to the customer, everything to speed up the sales process.

So it sounds like the beginning signs are there, but it just hasn't fully mushroomed yet, but well I commend you for the hard work and moving this forward and I'll try and be patient.

Yes. We're moving as fast as -- we can. I promise you that. You should know me, I'm not a patient person.

[Operator Instructions]. Your next question is a follow-up question from Joseph Nerges.

Okay. I'm back on again. Okay. Just a little clarification. You elaborated on the expansion of our marketing and managed services. And I'm trying to get the numbers, I heard one. I think we heard them through repeat again, where you said that we're adding some new customers in managed services. Did you say that you thought there would be monthly revenues going forward of $100,000. I'm trying to get the numbers that you gave in the...

Joe, we had a really good -- we had -- we closed some nice deals, so a little clarity. When you close an MSP deal, right, it takes various time to get them set up and actually stop billing them. Over the last -- we closed some -- before the end of last year, we closed some nice deals. It took us a little time to get those up and running. And as of last quarter, we are starting to build net close to 100,000, a little less than 100,000 additional per month of net new revenue for the MSP. That's net new revenue.

That's extremely good. That's what I thought you said, and I'm -- and that's the total of all the customers you've added another...

Yes. Those are -- yes, just for the -- just the additional increase per month.

All right. Well, great. That clarification. I thought that's what you said, but I just want to make sure that, that was -- the numbers were added up to what I was thinking of. Thanks a lot. Thanks, again, guys.

No problem, Joe. We have reached the end of the question-and-answer session. And I will now turn the call over to Victor for closing remarks.

Thank you, everyone, for joining us today. As I mentioned at the top of the today's call, we made progress on all fronts during the first quarter and are aggressively pursuing our opportunities for the remainder of fiscal 2026, both on the services side of the business as well as the AZT protect. And we look forward to reporting on our progress with you in May. In the meantime, thank you to our shareholders for their support to our team for the dedication and effort, and we wish everyone a good remainder of the day. Goodbye for now.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.