CSP Q2 Earnings Call Highlights

CSPi returned to growth as product sales rose ~30% and services ~7%, driven by strong demand for AZT PROTECT (more than 10 land‑and‑expand orders, double the prior year) and a three‑year cement agreement covering >2 dozen U.S. sites with an international opportunity of 100+ plants.

Q2 financial snapshot: revenue of $16.0 million (vs. $13.1M a year ago), net income of $0.264M ($0.03 per share) aided by a $568k tax benefit, and a cash balance of $23.1M; company announced a $0.03 per‑share dividend and repurchased 15,510 shares.

Services momentum continued with managed cloud/managed services up ~11% and service gross margin of 57% (improving >100 bps), supported by high customer retention and a new MSP client contributing nearly six figures in monthly revenue.

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CSP (NASDAQ:CSPI) executives highlighted a return to growth in the company’s fiscal second quarter of 2026, pointing to strong product demand, rising services momentum and increased activity around its AZT PROTECT operational technology (OT) cybersecurity offering.

Chief Executive Officer Victor Dellovo said CSPi “returned to growth” during the quarter as product sales grew 30% and the services business grew 7% versus the prior-year quarter, driven by the company’s U.S. technology solutions business and several large customer purchase orders.

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Dellovo said CSPi saw an “appreciable pickup” in AZT PROTECT orders, including more than 10 “land and expand” orders with new customers—double the number signed in the same quarter of fiscal 2025. He described these initial orders as limited deployments used to validate AZT PROTECT within a customer’s existing cybersecurity environment, followed by efforts to expand deployments across additional sites.

However, Dellovo said the expansion phase has taken longer than anticipated due to factors such as stakeholder changes, internal review requirements, and additional validation requests from early deployment sites. He also noted that some IT teams initially approach OT security needs through an IT infrastructure lens, requiring further education on OT-specific requirements.

Despite those timing challenges, Dellovo said CSPi is making progress. He cited AZT PROTECT being deployed at a fourth plant for a major raw material manufacturer, adding that additional plant rollouts have taken less time as the product’s track record builds. He also said other customers that started with a single-site deployment in 2025 are expanding to additional sites.

Dellovo pointed to a major “land and expand” relationship signed in April: a three-year agreement covering “more than 2 dozen U.S. sites” for a global cement manufacturer. He said the contract carries a “six-figure annual revenue value” expected to be recorded in fiscal third quarter and noted it took roughly 13 months to finalize.

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During the Q&A, Dellovo said the U.S. rollout represents the first phase and that CSPi is in discussions with a “sister company” for sites outside the U.S., describing the international opportunity as “over 100 plants.” He added there is also potential for additional growth in the U.S. footprint.

Dellovo also referenced additional customer activity during the quarter, including an agreement in late March with a “leader in the cloud-based commercial content automation service” to deploy AZT within CSPi’s ARIA ADR offering across production infrastructure, and an early March deployment of AZT PROTECT at a “leading pet food producer.”

Dellovo said CSPi’s OT-market approach has been helped by increased awareness of threats “generated by AI” and “friendly fire” incidents, where faulty IT updates can disrupt manufacturing environments. He contrasted typical cybersecurity patching approaches with AZT PROTECT’s model, saying “no patches are needed,” and added that “to date, no breaches have occurred” with the product.

He also said CSPi is pursuing strategic OEM relationships, “most notably with Acronis,” which is working to embed AZT PROTECT into its platform. Dellovo said CSPi is “hoping to begin generating revenue from the Acronis relationship by the end of the current fiscal year,” while noting such integrations take time to mature.

In response to investor questions, Dellovo discussed CSPi’s view that AZT PROTECT faces limited effective competition in certain OT environments, particularly older systems. He said some competitors are “choosing not to continue supporting” older Windows versions, and described AZT PROTECT as lightweight—citing CPU utilization in the “1% to 2%” range and memory usage around “16 meg.”

On go-to-market execution, Dellovo said CSPi is leaning heavily on distribution and reseller channels and is “trying not to take anything direct any longer,” with exceptions. He said CSPi has “three major” channel relationships and “probably another six or so smaller resellers or integrators,” estimating roughly 10 in total. He added that deal flow is “distributed all over the place,” with varying levels of activity across partners.

Dellovo also described a shift toward “paid POCs,” where customers purchase a starter kit—such as “one trust center” and “five or ten licenses”—to establish mutual commitment beyond a no-cost trial.

Dellovo said CSPi’s managed cloud and managed service practice grew 11% over the prior-year comparable period, benefiting from ongoing enterprise cloud migrations and rising demand for operational support after migrations are complete. He noted the growing complexity of cloud environments and the unique needs of different enterprises as key market drivers.

He also said CSPi signed a new managed services provider (MSP) customer in fiscal first quarter generating “nearly six figures in monthly revenue” that began contributing during the second quarter. Dellovo added that a top 15 U.S. landscaping company is engaging CSPi for comprehensive managed services.

According to Dellovo, customer retention in services remains “extremely high,” supporting gross margin expansion in that segment. He said service gross margins increased more than 100 basis points year over year during the quarter.

Chief Financial Officer Gary Levine reported revenue of $16.0 million for the fiscal second quarter ended March 31, 2026, compared with $13.1 million in the year-ago quarter. Levine said product revenue increased 30% to $11.1 million, primarily due to a “large one-time purchase order,” while service revenue grew 6.6% to $4.9 million.

Gross profit increased to $4.5 million from $4.2 million a year earlier. Gross margin was 28% versus 32% in the prior-year quarter, reflecting product gross margin of 15% (down from 18%) and service gross margin of 57% (up from 55%).

Levine said research and development expense rose 7% to $818,000 as CSPi supported customization of AZT PROTECT deployments and OEM embedded developments. Selling, general and administrative expense increased 2% to $4.5 million.

Levine also noted interest income rose 27.9% due to increased financing transactions with customers. The company recorded a tax benefit of $568,000, “primarily from excess tax benefit from restricted stock awards vested during the second quarter,” resulting in net income of $264,000, or $0.03 per share, compared to a net loss of $108,000, or $0.01 per share, in the prior-year quarter.

Levine said CSPi’s balance sheet has enabled it to finance customer purchase orders; as of March 31, the company had extended terms on “over 30 transactions.” CSPi ended the quarter with $23.1 million in cash and cash equivalents. Levine said the company plans to pay a $0.03 per share dividend on June 15, 2026, to shareholders of record on May 21, 2026, and noted that CSPi repurchased 15,510 shares of common stock during the quarter.

For the first six months of fiscal 2026, Levine reported revenue of $28.0 million versus $28.8 million in the same prior-year period. Gross profit was $9.2 million, or 33% of sales, compared to $8.8 million, or 30% of sales. Net income for the six-month period was $355,000, or $0.04 per share, compared to $364,000, or $0.04 per share, in the prior-year period.

In closing remarks, Dellovo said CSPi made “solid progress” in the quarter and is “aggressively pursuing” opportunities for the remainder of fiscal 2026 across both services and AZT PROTECT, with the company planning to update investors again in August.

CSP Inc develops and markets IT integration solutions, security products, managed IT services, cloud services, purpose-built network adapters, and cluster computer systems for commercial and defense customers worldwide. It operates in two segments, Technology Solutions and High Performance Products. The Technology Solutions segment provides third-party computer hardware and software as a value-added reseller to various customers in web and infrastructure hosting, education, telecommunications, healthcare services, distribution, financial and professional services, and manufacturing industries.

The article "CSP Q2 Earnings Call Highlights" was originally published by MarketBeat.