CSP Inc. (NASDAQ:CSPI) Q1 2026 Earnings Call Transcript

CSP Inc. (NASDAQ:CSPI) Q1 2026 Earnings Call Transcript February 12, 2026

Operator: Greetings. Welcome to CSP Inc.’s first quarter fiscal year 2026 conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please note this conference is being recorded. I will now turn the conference over to your host, Michael Polyviou. You may begin.

Michael Polyviou: Great. Thank you. Hello, everyone, and thank you for joining us to review CSP Inc.’s initial results for the fiscal 2026 first quarter ended on 12/31/2025, as well as recent operating developments. Today, with me on the call is 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 then 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 requeue if you have additional questions. Statements made by CSP Inc.’s management on today’s call regarding the company’s business that are not historical facts may be 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 meant as a guarantee of future performance or results. The company cautions you that these statements reflect the current expectations of 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 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 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. I will now turn the call over to Victor J. Dellovo, Chief Executive Officer. Victor, please go ahead.

Victor J. Dellovo: Thank you, Michael, and good morning, everyone. As expected, our first quarter product revenue compared to the prior-year period reflects tough year-over-year comparables, which obscures the progress we continue to make executing on CSP Inc.’s core growth strategies and building long-term shareholder value. In the year-ago quarter, we recorded approximately $4,500,000 in a one-time product deal that did not repeat in fiscal Q1 2026, resulting in the decline in total revenue. As I have emphasized on prior calls, our strategic focus is on expanding service revenue and 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%.

The strength translated into a meaningful improvement in our overall gross margins, which reached 39.3%. The higher-margin profile contributed to a $171,000 increase in gross profit versus the prior-year period. We also continue to gain traction in the market with our 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 CSP Inc. Our technology solution 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 centers, and advanced technology security.

And while all our TS services are performing to plan, our managed cloud and managed service practice 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 and 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 six figures in monthly revenue commencing this quarter. This traction has continued into the second fiscal quarter as we look out over the remainder of the year. We believe our service segment momentum can continue. Meanwhile, based on our best-in-class services, our customer’s 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 AZT, and through our strategic partnership and distribution, continue to expand our pipeline of prospective deployments. Despite being in the market with the AZT for just over a year, we now serve over 46 unique customers, some of whom have multisite installations on the way 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 potential to develop into seven-figure relationships, remain ahead of us as customers advance through their respective procurement and deployment processes. We have already received approval—

Michael Polyviou: I believe we may have lost that. Gary, are you there?

Gary W. Levine: Yeah, I am here. Let us take a look. Line connected?

Operator: Ladies and gentlemen, please stand by. We will get Victor back on the phone.

Gary W. Levine: Yep. One moment, please. I still see his line connected.

Operator: I will reconnect it again. One moment, please.

Michael Polyviou: Yep. Again, please stand by. We are trying to get Victor back on the phone here. Hello? Victor? Hello? How CSP Inc. Technology Solutions professional services can transform your IT challenges into a business advantage. We offer five core areas of expertise, including network—

Victor J. Dellovo: Unified communications, operation.

Michael Polyviou: Data center solutions, and advanced security.

Operator: Your IT infrastructure is the backbone of your business, but managing and maintaining multiple mission—

Michael Polyviou: Gary, perhaps it is Victor’s phone?

Operator: —security can strain your resources and get in the way of executing your core business and IT strategy. CSP Inc. Technology Solutions managed services team can customize a—

Michael Polyviou: We have Victor’s line connected.

Operator: Alright.

Victor J. Dellovo: Hey, Michael. Where did we leave off? I did not realize we dropped.

Michael Polyviou: Why do we not just pick up on—well, Victor, it is probably easier if we could pick up from the beginning. If not, we could pick up on the top of page two.

Victor J. Dellovo: Okay. We will talk technology solutions business. Yeah. Sounds good. Sorry about that, everyone. Our technology solution 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, and advanced technology security. And while all our TS 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 operation support required once the migration is complete. A primary factor behind the market driver is the growing complex 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 a 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 six figures in monthly revenue commencing this quarter. This traction has continued into the second fiscal quarter, and we look out 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 site 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 for just over a year, we are now serving 46 unique customers, some of who have multisite installations underway and additional expansion opportunities. These customers span 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 develop into seven-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 site and our team is focused on rapid execution to demonstrate the substantial value AZT Protect delivers in preventing cyberattacks that otherwise can disrupt operations for days, or even weeks. The case studies developed from our 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 do not realize their exposure until it is 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 sales for the fiscal year unfolds. In addition to expanding direct pipeline, we are advancing 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.

We also conducted our first webinar this quarter with Acronis, which drew nearly 200 attendees and generated more than a dozen demo requests. Engagement levels were 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 are 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?

Gary W. Levine: Thanks, Victor. For the fiscal first quarter ended 12/31/2025, we generated $12,000,000 in revenue as compared to $15,700,000 for the year-ago fiscal first quarter. Product revenue for the 2026 fiscal first quarter was $6,700,000 compared to product revenue of $11,000,000 for the 2025 fiscal first quarter. Last year’s revenue for the quarter included several one-time transactions with customers totaling approximately $4,500,000, and we did not 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 $5,300,000 from $4,700,000 in the year-ago fiscal first quarter. Gross profit for the fiscal first quarter was $4,700,000 versus $4,600,000 during the 2025 fiscal first quarter.

The solid service revenue growth and mix during the quarter drove the gross profit margin increase. Gross profit margins for the first quarter were 39.3% of sales, which was slightly more than 10% higher than the gross margin for the prior 29.1%. Research 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 embedding development. Sales and general and administrative expense for the fiscal first quarter declined $143,000 to $4,000,000. 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 fiscal first quarter of 2026 was $91,000 compared to $42,000 in the prior-year period. Diluted earnings per common share were $0.01 compared to $0.05 in the prior-year first quarter. As of 12/31/2025, our balance sheet remains strong with cash and cash equivalents of $24,900,000. We would also like to point out that the decrease in cash from 09/30/2025 was primarily related to several financing deals that we closed in Q1 2026, and we are to collect approximately $3,300,000 from financing payments scheduled during the next two 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: Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. To pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question for today is from Joseph Nerges with Seagram Investment.

Q&A Session

Joseph Nerges: Hello. Good morning, guys. How are you?

Gary W. Levine: Good. Good morning, Joe. How are you doing?

Joseph Nerges: Okay. A quick accounting question. We keep talking about service revenue. Do we have two categories service? When you talk service revenue, are we talking managed services, are we talking services beyond managed services? So are is there two categories or just one category?

Gary W. Levine: For services revenue, it is—

Joseph Nerges: Do you understand my question? Of—

Gary W. Levine: Yeah. Multiple items, Joe.

Joseph Nerges: Okay. It is not just one.

Victor J. Dellovo: Alright. So then what are we talking about for managed service for the quarter? You—

Gary W. Levine: I think you said—did you say $5,300,000? Is that correct?

Joseph Nerges: Correct. The managed services portion of our services revenue—

Gary W. Levine: For the first quarter—well, that is the total service revenues inclusive of, you know, the TS division as well as the—

Joseph Nerges: Yeah, AZT—

Gary W. Levine: Okay. So—

Joseph Nerges: We do not break it out, Joe. Joe, we do not break it—

Gary W. Levine: Okay. You are not breaking out between TS and—

Joseph Nerges: I am just trying to understand where—how much of our managed—much revenue in managed services do we have?

Victor J. Dellovo: A lot.

Joseph Nerges: Yeah.

Victor J. Dellovo: It is a good portion of it. I do not have that number right in front, but it is the majority.

Joseph Nerges: Okay. So the majority of the $5,300,000 would be the managed services portion of it.

Victor J. Dellovo: Okay?

Joseph Nerges: Alright. Alright. Let me get past the accounting here. Let us talk about the Acronis just for a second. I noted that from the Acronis website, they changed their—we are going to be rolled into Acronis Cyber Protect. That is going to be their product, I understand. Is that correct? In other words, when we be into—it will be into not just a Cyber Protect. It will be over all—

Victor J. Dellovo: It will be on their front GUI. 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 is no issues before they back up the data.

Joseph Nerges: Okay.

Victor J. Dellovo: So, you know, previously, they had a product called Acronis Cyber Backup. Now they changed the name to Acronis Cyber Protect. That is, as I understand, where we will be rolled into.

Joseph Nerges: So we—and are we not—are we not selling Acronis Cyber Backup? Have we not sold that in our TS division?

Victor J. Dellovo: We have customers that are utilizing the Acronis down there.

Joseph Nerges: Have we?

Victor J. Dellovo: Yeah.

Joseph Nerges: Correct. So, theoretically, we can increase our AZT sales force by incorporating our sales team in Florida who sell the Acronis backup service, which would now include AZT. You understand my question there?

Victor J. Dellovo: It is not really. It is a statement.

Gary W. Levine: Yes.

Victor J. Dellovo: And the capability of the backup service for the possibility of adding AZT to it.

Gary W. Levine: Correct.

Victor J. Dellovo: And since we have customers, I assume, because we have been representing—

Joseph Nerges: Yeah.

Victor J. Dellovo: —have customers—a number of years in our TS division. We must have a number of—just in our division that have Acronis that are utilizing the backup service.

Gary W. Levine: Solely.

Victor J. Dellovo: Mhmm.

Joseph Nerges: Okay? So in effect, our sales team in Florida can expand the backup service to include AZT for those customers that want to have that protection.

Victor J. Dellovo: Yeah. If we are doing backup for a customer—you have to understand not all would do backup for. There are a few that we do.

Joseph Nerges: Well, okay. I am good. But the few we do can all utilize the AZT admin if they start to—

Gary W. Levine: Yeah. If they choose to—

Joseph Nerges: If they choose to spend the money.

Gary W. Levine: Yes.

Joseph Nerges: Yep. Okay. I will let somebody else jump in. You know, I do not want to dominate the whole thing, but I will come back and put another question in after other people have a chance to ask questions.

Gary W. Levine: Okay. Thanks, Joe.

Operator: Your next question is from Mike Price, a shareholder.

Mike Price: Good morning. Thanks for taking my questions. 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.

Victor J. Dellovo: Yeah. We have not even fully integrated. We are building the APIs. So how that rolls out, Mike, is if we ever get that out there, that we have some outlook on that, I will include it. But at this stage, it is way too early.

Mike Price: And how far out do you think that might be till you give us some idea of a dollar amount?

Operator: I have no idea, Mike.

Victor J. Dellovo: I am not going to guess at this stage. Right now, I am concentrating on the integration finished.

Mike Price: Okay. And, also, it has been five months because the blackout period that you have been able to repurchase shares. Is that in the plans? With, you know, a $100,000,000 market cap and the stock within hailing distance of the twelve-month low—

Gary W. Levine: Yeah. It is always been part of that. Yeah. We have been—we have been—

Victor J. Dellovo: You know, unfortunately, locked out for a—

Gary W. Levine: Yeah, for a while. It will open up in the next forty-eight hours, and we will do something this—

Victor J. Dellovo: We will be doing some this quarter.

Mike Price: Okay. And a statement along with that, it would sure show a lot of confidence if the insiders, other than Joe Nerges, were buying shares also. Just a statement.

Victor J. Dellovo: Yeah.

Mike Price: Okay. Thank you.

Victor J. Dellovo: Thanks, Mike.

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

Brett Davidson: Good morning, gentlemen.

Victor J. Dellovo: Morning, Brett.

Brett Davidson: Just got a few quick things. Gary, I think you were talking about the repayments on the financing, the $3,000,000.

Gary W. Levine: The interest.

Brett Davidson: Yeah. Are we—are we still—so we are going to collect $3,000,000. That number on the balance sheet could conceivably drop, but are we still acting in that financing role? Is it going to drop on the balance sheet? Or it is just cycling through to another customer or whatever?

Victor J. Dellovo: It could. Right? It could. Yeah. It is just—every customer is a little different, but those are the ones that we have already, you know, paid out, you know, paid for the product, and now we will be collecting.

Brett Davidson: So—

Victor J. Dellovo: Sometimes we are taking three-year deals for the customer and, you know, the payment structure for all deals are a little different.

Brett Davidson: Okay. So we are still in that business. Just one of—

Victor J. Dellovo: Yeah. We are offering it to customers that are high-quality customers, and it keeps us sticky inside the organization. And it is a good use of our cash.

Brett Davidson: Yeah. You got your claws in them.

Victor J. Dellovo: Mhmm. Yep.

Brett Davidson: So the permission on the second and third sites—I am just interested in kind of when that occurred. Are we talking about just in the first quarter? Or does that continue into the current quarter, some of those second, third sites?

Victor J. Dellovo: The ones that have multisite, there is two variations. The ones that we deal with corporate and then, you know, if they have 50 locations, like we did with one of our large pharmaceuticals, they bought 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—you know, one came in last quarter. One came in this quarter. There is another one in food industry that we got the second one. Another one in another industry came in actually yesterday for the third site. So, yeah, they are—unfortunately, it would be nice if we could just deal with corporate, take one purchase order, and push it all out.

In some cases, that is not the case, so we have to go to every individual site, and it gets easier after the first one because we do not have to do another POC. We just have to go get budget money from them. And as I mentioned earlier in the script, 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. Things take way more time than I think it should. But we are at the mercy of the customer.

Brett Davidson: Well, from the description there, it sounds like this is becoming a more regular occurrence. Starting to happen with some kind of frequency.

Victor J. Dellovo: Yeah. Like, last year at this time, we had two customers. A year later, you know, I mentioned we have 40-something. So we are doing that where we seed the product at one 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, and multiple locations that they have. So, yeah, it is getting easier, but it is not easy. Every customer is a little different, and getting to know the customers and how they do business is a lot of work. But we are getting references, and the references are helping.

We are working on a deal right now. They are like, who else do you do business with locally? And we mentioned it. He is like, oh, I know that person. Let me call him. If they get thumbs up on our AZT, I do not 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.

Brett Davidson: Yeah. I am—it is—yeah. You know, it is exactly what I am getting at. I fully get it that, you know, it is just really tough slog, but eventually, we get to the point where multiple of these relationships start to pay dividends and, you know, one guy is talking to another guy, and—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?

Victor J. Dellovo: Still a little too early. We are gathering the data. It is getting a little easier to connect dots, but it is still—you know, like I said, it is 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—you know, like I had mentioned in the script there, that we are putting these one-pagers together that represent the industry to try to make it a little easier to understand how we can help them, and why we are a little different than the competitors, where we fit in with those competitors. Sometimes we can go alongside of those competitors. They can do the IT side of it while we do the OT side of it. 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 to make it a little cleaner, clearer to the customer—everything to speed up the sales process.

Brett Davidson: So it sounds like the beginning signs are there, but it just has not fully mushroomed yet. I commend you for the hard work and moving this forward, and I will try and be patient.

Victor J. Dellovo: Yeah. We are moving as fast as we can. I promise you that. You should know me. You know? I am not a patient person.

Brett Davidson: Okay. Alright. Well, thanks for taking my questions.

Gary W. Levine: Thanks, Brett.

Operator: As a reminder, if you would like to ask a question, please press 1. Next question is a follow-up question from Joseph Nerges. Your line is live.

Joseph Nerges: Okay. I am back on again. Okay. Just a little clarification. You elaborated on the expansion of our marketing and managed services, and I am trying to get the numbers. I heard them once, and I think we heard them through a repeat again. Well, you said that we are adding some new customers in managed services. Did you say that you thought it would be monthly revenues going forward of $100,000? I am trying to get the numbers that you gave in the—

Victor J. Dellovo: Joe, we had a—we closed some nice deals. So a little clarity. When you close an MSP deal, it takes various time to get them set up and actually start 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 bill net close to $100,000, a little less than $100,000 additional per month of net new revenue for the MSP. That is net new revenue.

Joseph Nerges: That is extremely good. That is what I thought you said, and that is the total of all the customers you have added.

Victor J. Dellovo: Yeah. Those are just the additional increase per month.

Joseph Nerges: Alright. Well, great. Thank you. That is that clarification. I thought that is what you said, but I just want to make sure that the numbers were added up to what I was thinking of. Thanks a lot. Thanks again, guys.

Michael Polyviou: Yep. No problem, Joe.

Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Victor for closing remarks.

Victor J. Dellovo: Thank you, everyone, for joining us today. As I mentioned at the top of 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 AZT Protect. 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 their dedication and effort, and we wish everyone a good remainder of the day. Goodbye for now.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.