Earnings call transcript: CSPi reports Q2 2025 revenue decline and net loss

CSP Inc. (CSPI) reported its Q2 2025 financial results, revealing a slight decrease in revenue and a net loss, which has not significantly impacted the stock price. According to InvestingPro 's comprehensive analysis shows the company maintains a "FAIR" overall financial health score, with particularly strong momentum and cash flow metrics. For detailed insights into CSPI's growth potential and risk factors, access the full Pro Research Report, available exclusively to InvestingPro subscribers.

Executive Commentary

CEO Victor DiLobo emphasized the company's progress in the cybersecurity sector, stating, "We are gaining traction with key prospects while endearing ourselves to the current customers." He also highlighted the potential for AZT Protect growth, noting, "The flexibility of our organization and the prospects for AZT Protect Growth positions us to maximize our opportunities."

Risks and Challenges

• Product price increases could impact competitiveness.
• Customer spending reductions may affect revenue.
• Increased cyber attack risks in certain regions, such as South Africa.
• Maintaining gross profit margins amid declining service revenue.

Q&A

During the earnings call, analysts inquired about the growth pipeline for AZT Protect and the company's unique advantages in cell tower cybersecurity. CSPi confirmed steady demand in the cruise ship and freighter markets and highlighted ongoing cloud-based project expansion, now totaling over 20 projects.

Full transcript - CSP Inc (CSPI) Q2 2025:

Jenny, Conference Call Operator: Good morning, everyone, and welcome to the CSPi's Fiscal twenty twenty five Second Quarter Results Conference Call. At this time, all participants are in a listen only mode and the floor will be opened for questions following the presentation. Please note that this conference is being recorded. I will now turn the conference over to your host, Michael Pollivu.

Michael Pollivu, Investor Relations, CSPi: Thank you, Jenny. Hello, everyone, and thank you for joining us to review CSPi's fiscal twenty twenty five second quarter financial results as well as recent operating developments. The fiscal quarter ended 03/31/2025. Today with me on the call is Victor DiLovo, CSPi's Chief Executive Officer and Gary Levine, CSPi's Chief Financial Officer. After Victor and Gary conclude their opening remarks, we'll then open the call for questions.

During the Q and A session, we ask participants to limit themselves to one question and one follow-up question, and then requeue if you have additional questions. Statements made by CHPI's management on today's call regarding the company's business that are not historical facts may be forward looking statements as terms 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 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 segment and statements are based.

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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 ks 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 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 CSPi 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'll turn the call over to Victor DiLobo, Chief Executive Officer. Victor, please go ahead.

Victor DiLobo, Chief Executive Officer, CSPi: Thanks, Michael, and good morning, everyone. Despite an unusual operating environment, our fiscal second quarter revenue was $13,100,000 met our internal budget and expectations. The results reflected a slight increase in product sales and a decline in service revenue as compared to last year's period due to a single multimillion dollar deal that wasn't repeated this quarter. Excluding that deal, we achieved solid double digit service revenue over the prior year period. However, a 6 figure 12 month customer support contract was signed during the second fiscal quarter relating to the multimillion dollar deal that occurred last year.

AGT Protect continues to gain traction in the OT marketplace. Through the successful execution of our go to market strategy, we signed six new customers during the quarter. Some of these deals were small in nature but have the potential to follow on sales, and we believe that some of these could eventually become installations of 7 figure values over the upcoming quarters. By focusing on the initial project to implement AZPROTECT within the organization, improving our solution, we position ourselves for expanding revenue relationships within the corporation. As a result of this approach, our pipeline for AZT continues to expand, and we believe our total opportunities have increased some fivefold over the past couple of quarters.

We continue to build relationships with our AZT Protect resellers, especially with the largest Rockwell Automation distributor. During the quarter, we entered a new reseller partnership with Rexel USA, an industry leader in supplying industrial equipment throughout The United States. Rexel provides a variety of products to industrial customers across The U. S. And is a premier Rockwell Automation distributor.

Rexel continues the unique capabilities of ARIA recognizes the unique capabilities of ARIA AZT Protect to safeguard its customers against industrial cyber attacks. It is initially working with ARIA to deploy ADT at the facilities of a large building material manufacturer in need of protection from zero day malware, ransomware, and sophisticated cyber attacks. At the April, we were featured in a Rockwell webinar, which just over 100 of its customers signed up, and we are generating new business leads that will be worked with our distributors to come to fruition in the later quarters. We continue to make prudent investments in marketing ADP Protect, which includes conference participation and attending regional events held by distributors to build off their existing customer relationships. All told, in less than two years of the July 2023 launch, we we are where we plan to be at this juncture.

And currently, we are always seeking to enhance our sales team as we scale up the business, ensuring we might have the right caliber people selling AZT Protect while building brand recognitions for AZT Protect brand in the OT market. I strongly believe, based on the current pipeline, we are gaining traction with key prospects while endearing ourselves to the current customers to grow the revenue opportunities. We are particularly excited about our new customers signed in April with our distributor, Orex Industries in South Africa. The contract calls for AZD Protect to protect small portions of the equipment owned and operated by one of the largest cell tower providers in the country. This agreement enables AZT Protect to be broadly deployed across the entire system over the next eighteen months.

This customer could generate sales in the 7 figures for our company over the same period and open up new cell tower protection markets for us. Our team is highly focused on this opportunity as well as several others with similar potential as we enter the second half of the fiscal year. ORIX, which we just pondered towards the end of the quarter, is a leading provider and trailblazer of cybersecurity solutions in South Africa, and we look forward to working with them to attract other businesses that are in critical need of our services as the country is seeing an increase in cyber attacks. Other parts of the business did well during the second quarter. The technology solution or TS business generated 12,000,000 in revenue and continues to be profitable.

We are executing contracts with cruise lines in ocean freighter liner market, and we continue to generate increased demand for our cloud based services for companies wanting to outsource their critical needs to value tested platform. Earlier this quarter, we were awarded a professional and cloud consumption service project to architect, implement, and manage a Microsoft Azure migration for a Florida based health care provider, which operates clinics across the state. Our mandate is to deliver the next generation cloud solution following Microsoft Azure well architected framework, ensuring seamless support for the client's enterprise workloads. We finished the quarter with more than $29,000,000 in cash and cash equivalents, While continuing to invest in our AZT product line, we repurchased $384,000 worth of common shares during the quarter, and the Board of Directors authorized another $03 per share quarterly cash dividend. In summary, we entered the second half of the fiscal year with some momentum, specifically the South African AZT Protect contract and the technology solution contract to deliver critical Microsoft Azure Protect for the Florida based health care providers.

The second half of the fiscal year is off to a promising start. We may face challenging operating conditions, namely price increases on the products that TS purchases for resale as well as customers may reduce spending through reduced headcount and project postponement as they realign their teams. The flexibility of our organization and the prospects for AZT Protect Growth positions us to maximize our opportunities, and that is our dedicated focus. Now I will ask Gary to provide a brief overview of the fiscal second quarter and six months financial performance. Gary?

Gary Levine, Chief Financial Officer, CSPi: Thanks, Victor. For the second quarter ended 03/31/2024, we reported $13,100,000 as compared to 13,700,000.0 for the prior year. Service revenue represented $4,600,000 of overall sales compared to $5,200,000 of overall sales during the year ago period. Gross profit for the three months ended 03/31/2025 was $4,200,000 or 32% of sales compared to gross profit of $6,200,000 or 45.3% of sales for the quarter ended 03/31/2025, reflecting higher component costs in the product side of the business and there was a single multimillion dollar sales contract at a high margin recognized in the fiscal twenty twenty four second quarter. Our overall operating expenses were essentially flat with the prior period.

We had a tax benefit of $683,000 due to excess tax benefit of restricted stock awards that vested in the quarter and tax credits which we expect to be utilized against our federal and state taxes. We had a loss for the quarter of $108,000 or $01 per diluted share for fiscal second quarter. For the six months, our revenue was $28,500,000 versus $29,100,000 for the first six months of fiscal twenty twenty four. We had a net profit of 341,000 or $04 per diluted share of common. The company continues to maintain a robust balance sheet as of 03/31/2025 and had cash and cash equivalents of over $29,000,000 The higher cash balance relative to our liabilities enhances the company's resource to pay a quarterly cash dividend

Joseph Nerges, Investor/Analyst, Seagram Investments: while

Gary Levine, Chief Financial Officer, CSPi: executing growth, which includes the continued rollout and market awareness of the AZT product offering. We spent $380,000 during the quarter purchasing 23,800 shares of common. Lastly, as Victor mentioned, the Board of Directors approved a $03 cash dividend for shareholders of record on 05/28/2025, payable on 06/11/2025. With that, I will turn it over to the operator for your questions.

Jenny, Conference Call Operator: Thank you very much. We will now be conducting our question and answer session. Thank you. Our first question is coming from Joseph Nerges of Seagram Investments. Joseph, your line is live.

Joseph Nerges, Investor/Analyst, Seagram Investments: Thank you. Good morning, guys. Now I gotta lead this. I I've I've got two people I gotta Brett called me. Brett Davidson called me.

He's got a dental appointment, emergency dental appointment. So I've got to ask ask ask questions for Brett too. Well, I and I think you've covered much much of what he wanted to know in your in your remarks, Victor. He was asking for some more color on the backlog for AZT. And I'm I'm guessing that he was look he's looking for something in the neighborhood of, you know, numbers of back on the backlog as well as the potential size of some of these contracts.

Do you wanna elaborate any more than what you said?

Victor DiLobo, Chief Executive Officer, CSPi: No. No. No. I, like I said, the pipeline is growing. We continue to, talk to to to new customers, and the pipeline is the total pipeline is in different stages.

You know, we cut it out to four different stages, and, you know, we have different different deals, and, they're all at at different levels of of the sales process. So I'd rather just not comment on that and tell Betty can call me if he if he has any other questions.

Joseph Nerges, Investor/Analyst, Seagram Investments: Okay. And the other question he had was on the cruise ship business. Of course, you mentioned that too. You know, is it continuing? Is it or do we see more and you said not only the cruise ships, but also the freight freighters.

Right? Mhmm. You were you were doing. And so and that's increasing, or is it, pretty steady? Or

Victor DiLobo, Chief Executive Officer, CSPi: Yeah. It's been steady. You know, as we continue to to modify the ships, we we we get another one or another two. It's on their schedule. So we actually never know what's coming.

It's just depending when the ships are gonna be, you know, on land.

Joseph Nerges, Investor/Analyst, Seagram Investments: Be available.

Victor DiLobo, Chief Executive Officer, CSPi: Dry dock as they call it.

Joseph Nerges, Investor/Analyst, Seagram Investments: Yeah. Yeah. Okay. Well, I'll go to my quick quick question here. I this is on a cell tower contract.

And Mhmm. Particularly interested in in Gary Southwell's comment. In in the contract, he said, other solutions were considered less effective and too complex to operate. I guess my question is, do we have something unique here where we can go at or is is this cell tower thing unique in itself? Is this company unique where we can go after more cell tower companies that have the same structure, if you wanna call it, the same endpoint, needs?

Do we know how because

Victor DiLobo, Chief Executive Officer, CSPi: we were unique because the amount of space we take up on the cell tower because they don't you know, it's not like they have a huge computer sitting there. Right? The amount of space and the amount of CPU power was very attractive to them because, like I said, those cell towers, they're they're they have limited, CPU and, storage on each cell tower. So that that was a big Plus, we work in Linux where some of other companies don't. And some of the versions of software were a little dated also.

So that was one of the perfect customers. I think that's kinda why it might have moved as fast as it did just because we we we had a lot of check boxes right out of the bat on that particular one.

Joseph Nerges, Investor/Analyst, Seagram Investments: I I get so a follow-up there would be, do do do the other cell do we know if other cell companies have limitations on their towers? Let's say storage and

Victor DiLobo, Chief Executive Officer, CSPi: We're reaching out to those different companies. Know, some of them are not calling back right at this second, but we will continue to reach out to various companies that we did some research on that is similar to the company in South Africa.

Joseph Nerges, Investor/Analyst, Seagram Investments: And just one other quick thing from I'm going back to your letter, the December letter, where talked about the cloud based projects you had, I guess, the time 14 at the end of the year. Is that still do we still have a pretty sizable backlog of cloud based projects? Yeah.

Victor DiLobo, Chief Executive Officer, CSPi: 's it's it's definitely more than 14. It's probably in the twenties right now. I don't know the exact number. Yeah.

Joseph Nerges, Investor/Analyst, Seagram Investments: Okay. Well, I'll drop back and let somebody else ask a question. Thank you,

Victor DiLobo, Chief Executive Officer, CSPi: again. Joe.

Jenny, Conference Call Operator: Thank you very much. Okay. I'm not seeing anyone else in the queue for questions. So I will now hand back over to Victor for any closing comments.

Victor DiLobo, Chief Executive Officer, CSPi: Thank you, Jenny. I want to thank our shareholders for their continued interest and support. We have some momentum heading into the second half of fiscal year due to some recent contracts, and I believe the increased activity we are experiencing is encouraging. With each passing quarter, the AZProtect name is becoming more widely known, and the relationship with Rockwell ensures this will continue. Our goal is to go out there with the maximum effort, close deals, and once installed, grow the base.

We're fortunate to have the TS business that generates the profit to fund the ARIA business, and we look forward to updating you on our next progress during the fiscal third quarter call in August. Until then, stay safe. Thank you.

Jenny, Conference Call Operator: Thank you very much. That does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.

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