Earnings Call Transcript - CSPI Q2 2026

Operator, Operator

Good day, everyone. Welcome to CSP Inc.'s second quarter fiscal year 2026 conference call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Michael Polyviou. The floor is yours.

Michael Polyviou, Host / Investor Relations

Hello, everyone, and thank you for joining us to review CSP Inc.'s results for the fiscal 2026 second quarter, which ended on 03/31/2026, as well as recent operating developments. Today, with me on the call are Victor J. Dellovo, CSP Inc.'s chief executive officer, and Gary W. Levine, CSP Inc.'s chief financial officer. After Victor and Gary conclude their opening remarks, we will open the call for questions. During the Q&A session, we ask participants to limit themselves to one question and one follow-up question, then please re-queue if you have additional questions. In advance, thank you for your cooperation with this process. Statements made by CSP Inc.'s management on today's call regarding the company that are not historical facts may be forward-looking statements as those identified in federal securities laws. Forward-looking statements may include words such as may, will, expect, believe, anticipate, project, plan, intend, estimate, and continue, as well as similar expressions, or are intended to identify forward-looking statements. Forward-looking statements should not be meant 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 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 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 CSP Inc. 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 thereof. With that, I will now turn the call over to Victor J. Dellovo, chief executive officer.

Victor J. Dellovo, Chief Executive Officer

Thank you, Michael, and good morning, everyone. CSP Inc. returned to growth during our fiscal second quarter as our product sales grew 30% and our service business grew 7% over the prior fiscal year quarter. Our top-line growth and bottom-line improvement were driven by our U.S. Technology Solutions business and some large customer purchase orders. We did see a push–pull pickup in the AZT Protect orders during the quarter with more than 10 of what we call land-and-expand orders with new customers. This was double the amount of AZT Protect orders we signed in Q2 2025. Typically, these orders are used as a test at a single site by a customer to make sure AZT Protect meets our claims and works within the customer's existing cybersecurity infrastructure, which I am happy to report has been the case every time. Then our team goes to work to expand our relationship with the customer through deployment at other sites. This phase of the process has taken longer than anticipated, largely due to evolving stakeholder alignment and internal review requirements. For example, changes within customer teams often require us to reengage and reestablish momentum, while some organizations seek additional validation from initial deployment sites. In other cases, IT teams initially assess the existing infrastructure addressing OT security needs, creating an opportunity for us to provide further education on the distinct requirements of OT environments. We view these dynamics as a natural part of the sales cycle in a complex and evolving market, and they continue to present opportunities for deeper engagement and long-term value creation. We are, however, making progress within the land-and-expand strategy. For example, AZT Protect is now deployed at the fourth plant in a major raw material manufacturer. We have to approach each plant separately, but with AZT Protect's track record it is taking less and less time to add each site. We are seeing similar expansion at other customers where we deployed at a single site in 2025 and are now slowly expanding to additional sites within those organizations. Our most exciting AZT Protect land-and-expand relationship to date was signed in April. It is a three-year agreement for more than two dozen U.S. sites of a global cement manufacturer. The six-figure annual revenue value of this contract will be recorded in the fiscal third quarter. This agreement took approximately 13 months to get across the finish line, but now puts us in a position to pursue the manufacturer's other sites, which number more than 100 around the world. In late March, we entered into an agreement with a leader in cloud-based commercial content automation services to deploy AZT in our ARIA ADR across the company's production infrastructure. And in early March, we deployed AZT Protect at a leading pet food producer. These are examples of how we are consistently evolving our approach to the OT market to shrink time between the initial land and expand. What has helped our effort is the growing awareness by the market of the increasing threats generated by AI and the so-called friendly fire attacks generated by internal sources. Cybersecurity solutions tend to use patches to address cybersecurity threats, but continuous patches are largely ineffective in the OT operating realm. In a friendly fire attack, IT mistakenly sends a faulty update to manufacturing, which can be even more devastating than the attack's impact to OT production. With AZT Protect, no patches are needed, and to date, no breaches have occurred. At the same time, we continue to pursue strategic OEM relationships, most notably with 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, and we are hoping to begin generating revenue from the Acronis relationship by the end of the current fiscal year. AZT Protect continues to have little in the way of effective competition. However, the unique procurement process and development criteria for each customer, and even each site within a customer, has resulted in various timing delays. Our team is relentless when it comes to realizing the AZT Protect opportunity, and we continue to work through each challenge as it occurs. We are definitely moving the needle. After a month into the fiscal third quarter, we are encouraged by the progress we are making with AZT Protect deployments. During the second quarter, once again, the Technology Solutions business was the primary generator of our top-line growth. Our offerings increase the efficiency and effectiveness of our customers' IT investments in network, wireless and mobility, unified communication and collaboration, data center and advanced technology security. Our managed cloud and managed services practice continued to perform well and grew 11% over last year's comparable period. We continue to benefit from the ever-expanding business and organizational migration to the cloud and the increasing trends for enterprises of all sizes to acquire operational support required once the migration is complete. A primary factor behind this market driver is the growing complexity of the cloud and the unique and specific needs of each enterprise. In Q1, we signed a new MSP customer that is generating nearly six figures in monthly revenue that commenced during the second quarter, and as we mentioned in the press release a week ago, one of the top 15 landscaping companies in the U.S. is engaging us to provide comprehensive managed services. As we look out over the remainder of the year, we believe our service segment momentum can continue. Meanwhile, based on best-in-class services, our customer retention rate remains extremely high, contributing to our expanding gross margins in the service segment. During the quarter, service gross margins increased more than 100 basis points over last year's comparable period. Overall, our fiscal second quarter results reinforce our confidence that fiscal 2026 is shaping up to be a growth year for CSP Inc. After being in the market with AZT Protect for just a short amount of time, we have gained more than 60 unique customers, some of whom, as I noted earlier, have multisite installations underway and additional expansion opportunities. These customers span a broad range of verticals, including steel, energy, manufacturing, water utilities, pharmaceuticals, food, and telecommunications. At the same time, we are dedicated to maintaining momentum in our services business, and we are pleased with the margin expansion realized from these operations during the quarter, as well as the profitability we achieved during the quarter. Overall, we are hopeful of sustained top- and bottom-line growth during the second half of the year and generating full fiscal year growth over last year. With that, I will turn the call over to Gary W. Levine to discuss our recent financial results in more detail. Gary?

Gary W. Levine, Chief Financial Officer

Thanks, Victor. For the fiscal second quarter ended 03/31/2026, we generated $16.0 million in revenue compared to $13.1 million for the second quarter ended 03/31/2025. Product revenue grew 30% over last year's quarter to $11.1 million, with the growth primarily attributed to a large one-time purchase order completed for a customer. Service revenue for the period grew 6.6% to $4.9 million. Gross profit for the quarter increased to $4.5 million compared to $4.2 million for the same prior-year period. Gross margin for the fiscal second quarter was 28% of sales compared to the year-ago fiscal second quarter gross margin of 32% of sales. Gross margin realized from product revenue for the quarter was 15% versus 18% for 2025, while gross margin realized for the service revenue was 57% as compared to 55% for the year-ago quarter. Research and development expenses increased 7% to $818,000 compared to $763,000 for the same prior-year quarter as we supported the customization of AZT Protect deployments and OEM embedded developments. Selling, general, and administrative expenses for the fiscal second quarter increased 2% to $4.5 million from $4.4 million for the year-ago fiscal second quarter. The company grew interest income during the quarter by 27.9% due to the increase in financing transactions with customers. We recorded a tax benefit of $568,000 primarily from excess tax benefit from restricted stock awards vested during the second quarter, enabling the company to report net income of $264,000, or $0.03 per share, for the fiscal second quarter, compared to a net loss of $108,000, or $0.01 per common share, for the prior fiscal second quarter. Our strong balance sheet offered us the opportunity to finance customer purchase orders and, as of 03/31/2026, we extended terms on over 30 transactions. We finished the quarter with cash and cash equivalents of $23.1 million, and the balance sheet continues to provide us the necessary resources to execute our growth strategies for the managed services and the AZT Protect product offerings, as well as paying a dividend of $0.03 per share on 06/15/2026 to shareholders of record on 05/21/2026. We purchased 15,510 shares of common stock. Turning to our results for the first six months of fiscal 2026, revenue was $28 million compared to $28.8 million for the same prior-year period. Gross profit for the fiscal six-month period ended 03/31/2026 was $9.2 million, or 33% of sales, compared to $8.8 million, or 30% of sales. Benefiting from the fiscal second quarter tax benefit, the company reported net income of $355,000, or $0.04 per share of common stock, in the fiscal six months ended 03/31/2026, compared with net income of $364,000, or $0.04 per share, for the six-month period ended 03/31/2025. With that, I will turn it over to the operator for your questions.

Operator, Operator

We will now open the call for questions. If you have any questions or comments, please press 1 on your phone at this time. Please hold for just a few moments while we poll for any questions. Your first question is coming from Mike Price. Please pose your question. Your line is live.

Mike Price, Analyst

Good morning. Thanks for taking the question. I know you were just awarded shares, Victor—35,000 shares—but nothing shows more confidence in the growth prospects that you have than when you actually buy shares. And I know the dividend is not payable until June 15, but there is plenty of cash. It seems like Joe Nerges is the only one that has confidence in the company to continue to buy shares. Any thoughts? We will send a message, though, if you actually buy shares. So consider it.

Victor J. Dellovo, Chief Executive Officer

If I decide at some point to purchase shares, I will. I definitely have confidence in what we are doing. I have not sold anything in many years, which I believe shows the confidence I have in the organization and where we are going.

Operator, Operator

Your next question is coming from Joseph Nerges with Segren Investments. Please pose your question. Your line is live.

Joseph Nerges, Analyst

Yeah, good morning, guys. How are you today? Just let us elaborate a little bit on the cement company. You said in the press release that we have installed AZT in over two dozen plants currently in the U.S., and I think you also mentioned on the call that worldwide, what is the opportunity—over 100 plants—if it expands beyond the U.S.? Now with the U.S., by the way, is the U.S. fully deployed with the plants, or do they have more plants to deploy here too?

Victor J. Dellovo, Chief Executive Officer

No. That was just the first phase. So there is potential for growth in the U.S., but the big growth is a sister company of theirs that has plants outside the U.S. that we are in talks with right now, and there are over 100 plants.

Joseph Nerges, Analyst

Okay, so I just wanted to clarify. And as a follow-up, let me get into the press release you guys did on the cement company. I think it was pretty—the bullet points you made were great—and a couple of points that we did not know in the past, we talked about it, especially the savings that the customers are accruing because they have installed AZT. You mentioned $1,000 per plant savings. Can you elaborate on where the savings are coming from?

Victor J. Dellovo, Chief Executive Officer

Those figures came from conversations with some of these companies. They indicated they are reducing patching spend and preserving the life of their assets. They estimate that extending these assets for a year or two or three could average close to $1,000 per plant per month. That becomes significant if they can extend it for another 12 to 24 months. There is also less downtime, because replacing an entire system is not something you do in 24 to 48 hours. It requires a lot of planning, time, and effort, and during that time the machine is down and not producing revenue for the organization. Those are cost numbers from the companies we've spoken with; every company will have a different number, but that was their estimate.

Joseph Nerges, Analyst

Great. Okay. Also, in the press release, you mentioned requirements. Are these industry requirements or government requirements that you are talking about with the CISAE EPG 20 and IEC 62443? Are these requirements being deployed—who is coming up with these requirements?

Victor J. Dellovo, Chief Executive Officer

Sometimes they are industry requirements, sometimes government requirements. It depends on the organization and the vertical.

Joseph Nerges, Analyst

The point, basically, is that you said some of the competitors cannot meet these requirements. It looks like it is coming from the fact that their software is too comprehensive to meet some of these endpoints or to protect the endpoint—well, they are not investing, some of the older versions of the software—

Victor J. Dellovo, Chief Executive Officer

Yes. Some vendors are choosing not to continue supporting older operating systems. The newer solutions are moving forward, but older versions like Windows 7 or other legacy systems may no longer be supported.

Joseph Nerges, Analyst

This ties into it to some extent. You mentioned the lightweight aspect—the fact that we take less memory and less CPU—and I guess some of the competitors take much more, just for cybersecurity software. In this case, they cannot meet requirements because the software is too comprehensive. Is that correct?

Victor J. Dellovo, Chief Executive Officer

Yes. The older versions of software, when installed on legacy OT hardware, can create heavy CPU and memory loads. We are lightweight, requiring only about 1% to 2% CPU utilization and around 16 MB of memory, so we work on systems with very limited resources. Many of the new, more comprehensive solutions are CPU-intensive and are not suitable for older OT endpoints.

Joseph Nerges, Analyst

So, basically, a lot of competition is excluded because they cannot, with their current software, be able to support those older systems?

Victor J. Dellovo, Chief Executive Officer

It's more about their go-to-market strategy and what they choose to support. Many large vendors focus on network or IT-side protections rather than OT endpoint protections. We focus exclusively on OT, which differentiates us and allows us to operate where others do not prioritize support.

Operator, Operator

Your next question is coming from William Lauber with Visionary Wealth Advisors. Please pose your question. Your line is live.

William Lauber, Analyst

Yes, Victor, I noticed you guys have a number of new board members. I know it is early on, but can you give a quick review of what they are bringing to the table? Is it some new ideas, or just what they are adding to the board?

Victor J. Dellovo, Chief Executive Officer

Sure. Jim has been in the OT world his whole life. We worked with him at the largest pharmaceutical that evaluated our products and saw the value in it. He has a lot of contacts and is very well known in the industry with many manufacturers—Emerson, Siemens, Honeywell. He is very familiar with AZT product development and testing and understands where the value is. He has done a webinar with us, so he knows the OT space. We consult with him on market strategy, and his decision to join our board is a testimonial to how much he believes in the product.

William Lauber, Analyst

Okay. And then on the land-and-expand, is it budget issues by plant, or is it contract issues—that they might have a contract that goes on for another year or two? What is driving this?

Victor J. Dellovo, Chief Executive Officer

It's primarily the need to get internal buy-in and validate the product. Our approach is different—no patching—so customers want to see it work. If we can get one advocate who will test it in a lab, run applications, and validate it, it's easier to position it across the organization. IT involvement is increasing, and we've been able to show how we can work alongside IT-side endpoint protection like CrowdStrike; we complement rather than directly compete with those solutions.

William Lauber, Analyst

Okay. So out of all these places where you have landed, if you were able to get, say, 50% of all those different sites, does that make ARIA profitable or breakeven at that point?

Victor J. Dellovo, Chief Executive Officer

It would move us in the right direction toward profitability.

William Lauber, Analyst

And on the cement producer deal, if I have identified it correctly, and if you have done two dozen sites, you have probably gone over the number of their cement-producing sites. So I assume you are probably doing some of their aggregate sites as well. Is that correct?

Victor J. Dellovo, Chief Executive Officer

Yes. The systems targeted were under a particular budget, which allowed us to consolidate under a master agreement. Instead of going site by site, we serviced those plants under one budget. There is expansion potential within the 20-plus U.S. sites we currently have, and the bigger opportunity is the 100-plus international sites. The IT folks have already seen the product, so I am confident the sales process will be much shorter for those additional sites.

William Lauber, Analyst

And would that be an all-or-nothing kind of deal, where you are not going to have to go one by one?

Victor J. Dellovo, Chief Executive Officer

I think they prefer an all-or-nothing approach, but it's too early to say with 100% certainty. My goal is to secure the entire rollout.

Operator, Operator

Your next question is coming from Brett Davidson. Please pose your question. Your line is live.

Brett Davidson, Analyst

Alright, good morning. I am going to use you guys as a conduit here, and correct me if I am wrong, but the AZT products are less resource-intensive than some of the competitors’ more robust products, targeting current hardware, whereas the older hardware has less resources available, making AZT an option because it is less resource-intensive. Is that accurate? The question I have is regarding a statement in the release that says, 'We continue to work with our strategic partners and distributors on additional multisite deployments across key markets.' Just looking for clarification on what exactly that means. Is the company attempting to obtain commitments, or is this actively working on deployments, or a mix of both?

Victor J. Dellovo, Chief Executive Officer

That's accurate on the resource point. It's a mix of both on deployments. We are working with distributors—some of the larger resellers and integrators—to expand deployments across their end-user customers. In many cases they introduced us to customers where we sold one site and are now pursuing expansion. Water districts and other verticals where we have initial installations present further expansion opportunities. We're working with channels to increase end-user engagement and to expand within customers where small land-and-expand deals have already closed.

Brett Davidson, Analyst

So some of these are contracts where we are actively working to deploy on multisite?

Victor J. Dellovo, Chief Executive Officer

Yes. Our goal is to get it tested, secure purchase orders for initial sites, and then expand. We are emphasizing paid POCs now, where customers buy a starter kit—a Trust Center and several licenses—so there's a formal commitment on both sides instead of a free trial. This helps both parties move through validation to broader deployment more efficiently. Budget distribution within organizations sometimes still forces site-by-site approvals, but where possible we pursue enterprise agreements.

Brett Davidson, Analyst

What would you say is the current split of these deals coming through internal sources and through these third-party relationships, these distributors and whatnot? And how many of these types of relationships do we have currently? Are all of them feeding deals through, or are some of the larger ones the majority of this, or is this distributed over the course?

Victor J. Dellovo, Chief Executive Officer

We're leaning on the channel significantly now. We prefer channel-led opportunities with a few exceptions. The channel network we've built over the last 18 months includes a few major partners and several smaller resellers or integrators—collectively about 10 active partners. Some are more aggressive and have stronger relationships than others. Those partners often bring us into customer conversations. We also host small events and presentations with partners to educate their customers and build rapport. In short, many third parties are actively evangelizing the product on our behalf.

Operator, Operator

Once again, if you have any remaining questions or comments, please press 1 at this time. There are no further questions in the queue at this time. I would now like to turn the floor back over to Victor J. Dellovo for closing remarks.

Victor J. Dellovo, Chief Executive Officer

Thank you, everyone, for joining us today. We have made solid progress during the second quarter and are aggressively pursuing our opportunities for the remainder of fiscal 2026, both on the services side of our business as well as AZT Protect, and we look forward to reporting our progress with you in August. In the meantime, thank you to our shareholders for your support and to our team for their dedication and effort, and we wish everyone a good remainder of the day. Goodbye for now.

Operator, Operator

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.