CSPI - NASDAQ

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.

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.

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 A

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

Yeah, I am here. Let us take a look. Line connected?

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

Yep. One moment, please. I still see his line connected.

I will reconnect it again. One moment, please.

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—

Unified communications, operation.

Data center solutions, and advanced security.

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

Gary, perhaps it is Victor’s phone?

—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—

We have Victor’s line connected.

Alright.

Hey, Michael. Where did we leave off? I did not realize we dropped.

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.

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 A

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 A

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.

Hello. Good morning, guys. How are you?

Good. Good morning, Joe. How are you doing?

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?

For services revenue, it is—

Do you understand my question? Of—

Yeah. Multiple items, Joe.

Okay. It is not just one.

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

I think you said—did you say $5,300,000? Is that correct?

Correct. The managed services portion of our services revenue—

For the first quarter—well, that is the total service revenues inclusive of, you know, the TS division as well as the—

Yeah, A

Okay. So—

We do not break it out, Joe. Joe, we do not break it—

Okay. You are not breaking out between TS and—

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

A lot.

Yeah.

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

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

Okay?

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—

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.

Okay.

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.

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

We have customers that are utilizing the Acronis down there.

Have we?

Yeah.

Correct. So, theoretically, we can increase our A

It is not really. It is a statement.

Yes.

And the capability of the backup service for the possibility of adding A

Correct.

And since we have customers, I assume, because we have been representing—

Yeah.

—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.

Solely.

Mhmm.

Okay? So in effect, our sales team in Florida can expand the backup service to include A

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.

Well, okay. I am good. But the few we do can all utilize the A

Yeah. If they choose to—

If they choose to spend the money.

Yes.

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.

Okay. Thanks, Joe.

Your next question is from Mike Price, a shareholder.

Good morning. Thanks for taking my questions. With A

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.

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

I have no idea, Mike.

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

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—

Yeah. It is always been part of that. Yeah. We have been—we have been—

You know, unfortunately, locked out for a—

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

We will be doing some this quarter.

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.

Yeah.

Okay. Thank you.

Thanks, Mike.

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

Good morning, gentlemen.

Morning, Brett.

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

The interest.

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?

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.

So—

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

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

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.

Yeah. You got your claws in them.

Mhmm. Yep.

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?

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.

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

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 A

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?

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.

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.

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.

Okay. Alright. Well, thanks for taking my questions.

Thanks, Brett.

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.

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—

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.

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

Yeah. Those are just the additional increase per month.

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.

Yep. No problem, Joe.

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

Thank you, everyone, for joining us today. As I mentioned at the top of 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 A