Earnings Call Transcript - CSPI Q4 2025

Operator, Operator

Good day, everyone, and welcome to CSPi's Fiscal Fourth Quarter and Full Year 2025 Conference Call. It is now my pleasure to hand the floor over to your host, Michael Polyviou. The floor is yours.

Michael Polyviou, Host

Thank you, Matthew, and hello, everyone. I appreciate you joining us to discuss CSPi's financial results for the fourth quarter and full year of fiscal 2025, which ended on September 30, 2025, along with recent operational developments. Joining me on the call are Victor Dellovo, CSPi's Chief Executive Officer, and Gary Levine, CSPi's Chief Financial Officer. After their opening remarks, we will open the call for questions. Please note that statements made by CSPi's management during this call that are not historical facts may be forward-looking statements as defined by federal securities laws. Terms like may, will, expect, believe, anticipate, project, plan, intend, estimate, and continue, along with similar expressions, are used to identify these statements. Forward-looking statements should not be seen as guarantees of future performance or results. The company cautions that these statements reflect current expectations about future performance or events and are subject to various uncertainties, risks, and influences, many of which are beyond the company's control, which may affect the accuracy of the statements and projections. Factors that may impact the company's results include, but are not limited to, the risks and uncertainties outlined 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 information available at the time of the statement and management's good faith belief regarding future events. All forward-looking statements are fully qualified by this cautionary statement, and CSPi has no obligation to publicly revise or update any forward-looking statements following the date they are made. Now, I will turn the call over to Victor Dellovo, Chief Executive Officer. Victor, please go ahead.

Victor Dellovo, CEO

Thanks, Michael, and good morning, everyone. We had a strong finish to the fiscal year. Overall fourth quarter revenue increased 11%, while our overall gross margins increased by more than 800 basis points to 37%. We significantly increased our profitability during the fiscal fourth quarter from the same prior fiscal quarter while continuing to invest in building the deal pipeline and new customers of our highly differentiated and award-winning AZT PROTECT cybersecurity offering. For the full fiscal year, we maintained our strong balance sheet and positioned ourselves for increased momentum and growth in fiscal 2026. Once again, our Technology Solutions business drove our fourth quarter and full year growth. We expanded relationships with existing customers while gaining new customers due in large part to the exceptional customer retention track record we have earned in a wide variety of industries, including finance, manufacturing, oil and gas, healthcare, aerospace, education, utilities, telecommunication, and maritime. Technology Solutions increases the efficiency and effectiveness of our customers' IT investments in networking, wireless, mobility unified communication, collaboration, data center and advanced technology security, and continues to be a major driver of our service business growth. During the fourth quarter, our service revenue grew 63% over the same prior year quarter and represented approximately 44% of our total revenue. Last year, service revenue represented approximately 30% of total revenue. For the full year 2025, service revenue represented 36% of total revenue as compared to 33% a year ago. Managed cloud and MSP services are increasingly important parts of our offering, and during fiscal 2025, this business grew at a healthy double-digit rate. One of our key objectives in fiscal 2026 is to build on that growth rate. To achieve this, we are allocating more resources to these opportunities, including adding more sales reps. Our MSP/cloud service strategy has been especially positively effective in the maritime industry. We are expanding installations during fiscal 2025 and have gained contracts to service these installations, the results of which will begin to be realized in fiscal 2026. In addition, we entered fiscal 2026 with a backlog for cruise ships installations and upgrades, which we hope to convert revenue over the next 12 months. Growing our service business benefits our shareholders in two important ways. First, the revenue tends to be very sticky given our strong service track record with customers and our unique position in the marketplace. Second, our service revenue earns higher gross margins than our product revenue. We are quite excited about the results generated from our service segment during fiscal 2025 and are even more excited about our potential entering fiscal 2026. Turning to the HP segment, we continue to gain traction with our strategic partners and distributors and their customers for AZT PROTECT cybersecurity offering. Over the course of the past fiscal year, our go-to-market strategy led to dozens of new AZT customer installations as well as continuously expanding our pipeline for new customers. Working through our gold star resellers, including Rockwell Automation's largest North American distributors. Our strategy is to successfully implement our solution at an individual site within the customers' operations, then pursue other installation opportunities within the organization. We have recently executed this sales approach with several customers as we speak and are actively working on purchase orders with our partners to deploy AZT PROTECT at additional sites. To date, we have customers in steel, energy, manufacturing, water utilities, pharmaceutical, food, telecommunication, and other industries, all with multiple installation potentials. Many of these have the potential to become a six- or seven-figure dollar relationship for our company. We have deployed case studies of the results achieved by AZT PROTECT within most of these industries, and Rockwell distribution channels are aggressively taking these results to market. We believe this approach is working, as we exit the year with a significant increase in the number of AZT PROTECT deployment deals in the works. In addition, in the fall of 2024, we participated in the Rockwell Automation Fair in Anaheim, which was a first step into the Rockwell Automation channel. We participated again this year at the Rockwell Fair in Chicago that was held a few weeks ago, and it is not an exaggeration to say the booth was busy throughout the entire fair. Operational technology customers continue to lack the effective cybersecurity protection at the level AZT PROTECT provides. We continue to believe we have a strong competitive advantage in this space and also believe that the market now sees us as a substantial resource. Our objective is to convert this building momentum into sizable AZT PROTECT sales in fiscal 2026. We are quite excited about the direction for fiscal 2026 and the prospects for our business as we expand our focus to protecting industrial IoT devices. These devices have traditionally been difficult to protect due to the types of processes used and limited resources available that typically don't support conventional IT-based endpoint protection solutions. AZT PROTECT has had initial success in being selected and deployed in such environments. We are optimistic that this opens a new market for the product. Many AZT PROTECT installations require an approach to simplify mass deployments. This means our team has had to enhance our software to allow for easy integration into the industrial IoT products supplied by other vendors. To date, we have overcome these integration challenges successfully. There is still more work to be done to streamline the approach; however, this ability to integrate the deployment of AZT PROTECT into the industrial IoT companies' existing systems is a major driver behind our growing pipeline into this large, unserved industrial edge compute market. In summary, our service business exited the year on an extremely strong note, and our product business is gaining momentum. We believe we are on a trajectory to generate consistent profitability improvements for the fiscal full year 2026 as we build the infrastructure and made the investment required to support significant expansion of our business. As a result, we believe that we are in a position to significantly leverage revenue growth going forward. With that, I'm going to turn the call over to Gary to provide you with some more details about our recent financial performance. Gary?

Gary Levine, CFO

Thanks, Victor. For the fiscal fourth quarter ended September 30, 2025, we generated $14.5 million in revenue as compared to $13 million for the year-ago fourth quarter. Our products revenue decreased by $1.1 million. Service revenues increased by $2.5 million or 63% compared to the year-ago period. Gross profit for the fourth quarter was $5.3 million compared to $3.7 million for the fourth quarter of fiscal 2024. The exceptional service revenue growth during the quarter drove the gross profit margin increase. Gross margin for the fourth quarter was 37%, which was more than 800 points higher than the same prior year quarter. The strong increase in service revenue drove the increased margin. On the expense side of the income statement, comparing the fourth quarter of fiscal 2025 to the same prior year quarter, research and development costs increased by 13% as we brought to market new features for AZT PROTECT and developed software solutions to engage with and integrate our solutions into customers' operations. Our SG&A expenses for the quarter were essentially flat compared to last year. Our operating loss for the quarter was $0.5 million compared to a $2 million operating loss for the same period of the prior year quarter. We reported a net loss of $191,000 or $0.02 per diluted share for the fourth quarter compared to a net income of $1.7 million or $0.18 per diluted share for the year-ago period. As of September 30, 2025, our balance sheet remains strong with cash and cash equivalents of $27.4 million. Our cash position is down about 10% from our cash position a year ago. However, we continue to provide revenue financing to qualified customers and you'll note that our financing receivables level doubled over the course of the past year. In addition, we invested in the growth strategy of AZT PROTECT. We also used cash to pay the $0.03 share dividend and repurchased 19,500 shares of our common stock during the fourth quarter for a total cost of $234,000. As we noted in the press release this morning, we will be paying a $0.03 a share dividend on July 15, 2026, to shareholders of record on December 26, 2025. Turning to the full year ended September 30, we grew the revenue by 6% and grew gross profit which was $18.5 million or 32% of sales compared to $18.9 million or 34% of sales. We reported a net loss of $91,000 or $0.01 per share of common compared with a net loss of $326,000 or $0.04 per diluted share of common for the prior year. I will turn the call over to the operator for your questions.

Operator, Operator

Your first question is coming from Joseph Nerges from Segren Investments.

Joseph Nerges, Analyst

My quick math here. You mentioned that the service revenue in the fourth quarter was about $6.4 million. So, if my calculations are correct, you're close to $6.4 million in service revenue for the quarter alone. Am I correct? Am I wrong on that?

Gary Levine, CFO

Yes. I mean, overall, as a company, yes, that's approximately...

Joseph Nerges, Analyst

Yes, I calculated that 44% of $14.5 million gives me that figure, which is impressive. Back at the annual meeting a few years ago, Victor mentioned the constant inquiries about acquiring our managed services division. If we maintain this momentum, we're looking at over $20 million in annual service revenue just from managed services within the TS division, which is fantastic. Now, moving on to another point, I believe the recent press release regarding the IIoT expansion of AZT PROTECT is significant. Victor referred to it as a game changer when it was first launched, and I truly think this expansion is transformative. This all seems to have begun with our cell tower client in South Africa, where we implemented the system and gradually rolled it out to other providers in that market. When we mention the black box, consider a scenario where a cell tower client operates around 1,000 towers. What is the potential for endpoint sign-ups if the system is fully deployed and well-received by clients? What would that look like for those 1,000 towers?

Victor Dellovo, CEO

Well, if you look at the two press releases that we've done before, right, we started off with the black box that's inside the cell towers and then we opened it up to the cameras that are on the cell towers also. So those are the two press releases that I had released probably six months ago or so. And it's not 1,000 towers, it's tens of thousands of towers that we're talking about. I think the first round was like 15,000, and then it will continue to grow as they move out. And I had mentioned on the last call that it took some time to get the product to be able to integrate into those systems and with significant testing. And that has already gone through the testing, and the approval process with the customer. And as we said on the other call and in press releases, we're trying to do a seed unit type of environment. And then we did that and we already got the second order for the cameras for additional cell towers. And as they continue to grow and expand, there should be further purchase orders throughout the year next year. Of what magnitude and what exactly that looks like is too early to tell.

Joseph Nerges, Analyst

But obviously, we're just talking about one cell tower customer here. How many other customers could we possibly integrate? Have we currently signed any OEM agreements in the IIoT environment? I assume the supplier of the black box could be a potential OEM supplier for the IIoT market. Have we signed contracts with these suppliers yet?

Victor Dellovo, CEO

Not yet.

Joseph Nerges, Analyst

Not yet? So that would be the next stage. And I'm assuming that's a priority for our sales team going forward. Is signing up as many of these OEM suppliers as possible.

Victor Dellovo, CEO

Of course.

Joseph Nerges, Analyst

Am I correct? Am I wrong in that? You would be focusing on...

Victor Dellovo, CEO

No, you're correct.

Joseph Nerges, Analyst

I think the numbers look great. I understand that the issue is we simply need time to complete full rollouts with some of our customers. As far as I know, the only full rollout of AZT PROTECT has been with our pharmaceutical company. Most of our other customers have deployed it at individual plants or on specific equipment, but they haven't completed full rollouts. So when you mention expecting the full rollout within the next year or two, I take it that's what you mean.

Victor Dellovo, CEO

That's correct.

Joseph Nerges, Analyst

Customers we have, have deployed it in individual plants or equipment, but not fully rolled them out. So when you're saying you're expecting the full rollout over the next year to two years, I assume that's what you're talking about.

Victor Dellovo, CEO

Yes. We are having discussions with various companies about establishing enterprise agreements where centralized purchasing would acquire the product and then distribute it across all locations. As I mentioned in the last call, sometimes we need to engage with each plant individually. We have successfully sold to one plant, and then to a second and third, but this process requires time because we need to communicate with 50 to 120 plants. Securing the first plant is easier, but it remains a sales process. Additionally, we are speaking with companies at the purchasing level who intend to consolidate their orders for all locations, which simplifies our process and accelerates the timeline for finalizing the purchase order.

Joseph Nerges, Analyst

One more follow-up on that. And I'm assuming that all of these potential customers already have contracts signed in their OT environment cybersecurity contracts. So am I correct in that some of these customers might be waiting for that contract to expire before they enter a new contract with a new supplier like us?

Victor Dellovo, CEO

In some cases, yes. In some cases, yes. So sometimes the competition may not be supporting older versions of software. So one of the energy companies we sold to, that's what happened. They stopped supplying the product that they're currently using, which I don't want to mention, they stopped supporting older versions of Microsoft. So we took over those couple of thousand devices because they're not willing at this stage to throw them out completely, but at least we're in there and we're picking at it slowly.

Joseph Nerges, Analyst

All right. I appreciate the answers. Good luck going forward. It sounds like '26 could be a really good year for us.

Victor Dellovo, CEO

Did you enjoy the show, Joe?

Joseph Nerges, Analyst

Yes, except for one thing. I came back with a cold and I still have it. I'm still trying to get rid of the cold. But the show was really good. A lot of customers came by and they seemed pretty well engaged. Now closing these guys is another story, but the numbers are there from what I saw to hopefully get some pretty serious contracts in the not-too-distant future. So yes, I appreciate inviting me to the show anyway.

Operator, Operator

Your next question is coming from Will Lauber from Visionary Wealth Advisors.

William Lauber, Analyst

Just had a couple of questions. I guess I was at that Rockwell show as well for, I guess, a day and a morning. I didn't get to see the whole thing, but definitely saw quite a bit of traffic and the time was there. If I kind of remember right, most of the customers that you guys have gotten over the last year the connections were made at that Rockwell show a year ago. Is that true?

Victor Dellovo, CEO

That is correct. Yes. Most of the orders that we got all came from the Rockwell. So that's been our biggest way of getting leads.

William Lauber, Analyst

Okay. And then can you kind of quantify the number of leads you got last year versus this year and then I guess, along with that, maybe the quality of leads, I assume it's probably better this time because I noticed a number of your distributors bringing their customers to the booth. So that's a lot better than just some random person walking by your booth and talking to you.

Victor Dellovo, CEO

I'm glad you noticed that the distributors, like Sonepar and Rexel, are more comfortable with our product this year after closing some significant opportunities. Last year's introduction at the show established a relationship that has proven beneficial. They brought many of their customers, resulting in a considerable amount of follow-up. We've already set up numerous initial meetings. The timing of the show coincided with Thanksgiving, which caused some delays, but in the last two weeks, we've contacted many individuals and arranged follow-up meetings right after Christmas. We saw about a 50% increase in leads this year compared to last year. While we haven't reviewed all of them yet, there is a noticeable uptick in initial meetings thanks to the relationships we've built with companies like Rexel, CDs, and Sonepar. We're optimistic about having closed several deals last year due to this show, and my goal is to double our closures. With 50% more leads and enhanced relationships, along with a better reputation and many installations under our belt, I am looking forward to a successful 2026.

William Lauber, Analyst

Yes, that was more leads than I thought. So that's good.

Victor Dellovo, CEO

Yes. You were there. Our booth was always busy, right? You never saw it empty; we had two demos running almost all day for the entire eight hours of the show.

William Lauber, Analyst

It was good. I know your booth is smaller, which likely involves significant costs, but I believe it's a worthwhile investment in generating all those leads.

Victor Dellovo, CEO

Yes. Definitely, definitely.

Operator, Operator

Your next question is coming from Mike Price.

Unknown Analyst, Analyst

You didn't mention Acronis, and I was wondering if AZT is being integrated into Acronis' software. Is there not predictability as far as revenue is concerned? And if that's the case, can you give us an idea of what that might be?

Victor Dellovo, CEO

Well, it is being integrated, but what the projections are on that, I think it's too early to tell. We're working diligently to get that done over the next few months. But as soon as I have some information I can share, I definitely will.

Unknown Analyst, Analyst

So how soon do you think we start seeing some revenue? Is this something a couple of months late 2026, some kind of time frame? It seems like it should be a pretty significant number. Is it not?

Victor Dellovo, CEO

I think it's too early. Our hopes for both parties is that it's going to be significant for both of us. We fill a gap that they have. So that's kind of how we put this together, but what revenue looks like, I think it's just way too early for me to even guess at this point what that is, but our hopes that it's going to be significant for both parties. I don't think Acronis as being as big as they are would team up with us if they didn't think it was worth their time and effort.

Unknown Analyst, Analyst

Okay. And last conference call, I asked you about the relationship with some of the resellers, specifically UFT where with the original press release, they have 16,000 customers in the water and wastewater area. And you said that there are things in the works that would be discussed later. Do you have any more light on that?

Victor Dellovo, CEO

I do. So the powers to be at UFT wanted to get three sites implemented and then do case studies on those three. So that's what's happened over the last couple of months. Their customers move slower than they would like, but we are on weekly calls with updates. And then in the new year, it's full steam ahead as a lot of their customers are doing major marketing events jointly with their 16,000 customers doing outreach. But they needed case studies; they needed to change legal agreements. There was a lot that they had to do on their side to get this ready and I'm a little bit at their mercy, but the relationship is strong. We closed three opportunities over the last quarter. That was part of the case studies that they're writing up now.

Unknown Analyst, Analyst

Okay. And one last quick question. Last quarter, you bought some shares, but are you not subject to the same rules as insiders when it comes to buying shares? So now that you're reporting earnings so late within two weeks of the end of the first quarter, you can't buy shares until the next earnings report. Is that correct?

Gary Levine, CFO

Yes, pretty much. Yes.

Unknown Analyst, Analyst

So basically the blackout for share repurchase was from mid-September until mid-February when you next report. Is that correct?

Victor Dellovo, CEO

Well to the 15th of the month of December. And we're here now just because of when the year-end reporting.

Unknown Analyst, Analyst

You last had a window within 2 weeks at the end of the fiscal year, mid-September. Because of the late reporting is within 2 weeks at the end of the first quarter, you cannot buy shares again until you report earnings probably mid-February. Is that correct?

Victor Dellovo, CEO

Correct. That's correct.

Operator, Operator

Your next question is coming from Brett Davidson.

Unknown Analyst, Analyst

I want to go back to the confusion surrounding Acronis and its name pronunciation. I understand that much of this relates to endpoint protection and revenue generation. How does this work with the Acronis device? Who will you be recognizing the revenue from? Is it coming from Acronis or from their end users?

Victor Dellovo, CEO

It will be coming from Acronis. And it's a little different from what we're doing with them. We're concentrating on scanning the backups before Acronis does the backups to make sure all the content is secured and there's nothing inside that. And then they would trigger the backup. And that's where the advantages are scanning all the information before the backup occurs; we would scan it and certify that there's nothing wrong with it, and then the backup would go. So if they ever had to do a recovery, it would be a secured recovery.

Unknown Analyst, Analyst

So is this going to go on every one of those devices that they're producing? Or is it going to be based on what their customer wants? Or is this automatically going to be thrown on their devices?

Victor Dellovo, CEO

No, they would still have to sell it to their customer. That's the way it is right now. If it reaches the level you just mentioned, we're not there yet. They need to approach their industrial customers, which I can't disclose, and demonstrate it as an added value.

Unknown Analyst, Analyst

And it's going to work similar. This is going to be like a subscription type thing that will renew at some point?

Victor Dellovo, CEO

Yes.

Unknown Analyst, Analyst

Perfect. The only other question I had was about revenue for next year. Can we expect to see steady increases in revenue throughout the year, or is it too uncertain to have that kind of insight into how things will turn out?

Victor Dellovo, CEO

The latter.

Operator, Operator

That concludes our Q&A session. I'll now hand the conference back to Victor Dellovo for closing remarks. Please go ahead.

Victor Dellovo, CEO

Thank you, everyone, for joining us today. We hope you've come away from today's call with a sense of excitement from our fourth quarter results and our opportunity for fiscal 2026. We are working extremely hard to capitalize on the opportunities we have had in the service side of our business as well as AZT PROTECT, and we look forward to reporting on our progress with you in February of next year. In the meantime, thank you to our shareholders for their support, to our team for their dedication and effort, and we wish everyone a happy holidays. Goodbye for now.

Operator, Operator

Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.