CSP Inc. 2026 Q3 Earnings Call

Good morning, everyone, and thank you for joining us to review CSPi's financial results for the fiscal 2026 third quarter, which ended on June 30, 2026, as well as recent operating developments. Today with me on the call is Victor Dellovo, CSPi's Chief Executive Officer, and Gary Levine, CSPi'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 to please re-queue if you have additional questions. In advance, thank you for your cooperation with this process. Statements made by CSPi'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 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 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 factor 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 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 statement, whether as a result of new information, future events, or otherwise after the date thereof. With that, I will turn the call over to Victor Dellovo, Chief Executive Officer.

Victor, please go ahead. Thank you, Michael, and good morning, everyone.

The Technology Solutions business performed near our expectations during the fiscal third quarter, reflecting solid growth in our cloud and managed service business. However, our third quarter financial performance was impacted by what we believe are two relatively short-term factors. First, while the Technology Solutions business continued to generate solid order growth during the quarter, our ability to convert those orders into revenue has been impacted by longer hardware vendor delivery times. In many cases, vendor deliveries that historically took 30 to 60 days are now extending well beyond 200 days. As a result, our Technology Solutions backlog is now 65% higher than it was a year ago. The second factor impacting our top-line performance is the continued ramp of our AZT PROTECT business and the longer sales cycles associated with larger enterprise opportunities. We made meaningful progress during the quarter.

However, I believe we can and will do better. As we pursue larger accounts, we continue to add new land and expand customers while expanding relationships with existing customers as our customer base grows. We continue adapting to each customer's unique deployment timelines and procurement process for rolling out additional protected sites after the initial installation. We recognize that every customer has different priorities and often multiple competing projects that can delay expansion. Our ability to execute within this environment continues to improve. We believe several initiatives will position us to expand both the number and size of AZT PROTECT opportunities over the next six months. First, we are nearing the end of the 18 to 24-month sales cycle for several large six-figure opportunities and remain optimistic about converting a number of those into contracts.

Second, we continue to see growing opportunities for AZT PROTECT to become part of an OEM customer solution. During the quarter, we completed the integration of our AZT PROTECT into several OEM products and are beginning to see a growing pipeline from this market segment. While OEM sales cycles are lengthy, they create attractive long-term recurring revenue opportunities once integrated. A good example is our relationship with Acronis software, where the integration has been completed, and we understand marketing materials and SKUs are on track for a fall launch. Another example is the work in South Africa, where our OEM partner, large telecommunication customer, is now working on a third purchase order with an AZT PROTECT embedded in the deployed solution. With the integration challenges and unpredictable timelines largely behind us, we are making meaningful progress in the South African telecommunication market.

We are applying the lessons learned from this deployment to other OEM relationships currently under development and expect continued progress in this segment over the coming quarters. A third initiative implemented during the quarter was the continued evolution of our direct sales organization focused on Fortune 500 customers. Our experience with distributors, OEMs, and large direct customers has reinforced that our sales organization must effectively serve all three channels while addressing the unique requirements of each customer. We believe the changes made during the quarter better position our sales team to show in the sales cycle, broaden the sales funnel, and improve execution as we enter into the new fiscal year in October. We remain committed to the land and expand strategy.

Our approach is to secure the initial deployment at one customer site, validate the AZT Protect performs as expected within the customer's existing cybersecurity infrastructure, then deployment across additional sites. This expansion phase has taken longer than anticipated, largely because of the evolving stakeholders alignment and internal review process. We believe our enhanced sales organization will help accelerate expansion by engaging higher decision-makers within customers' organization. Changes within the customer organization often require us to rebuild momentum. While some customers seek additional validation before approving broader deployment, in other cases, IT organizations initially believe their existing infrastructure adequately protects OT environments when expansion opportunities become larger enterprise projects. This creates an opportunity for us to educate customers on the unique security requirements of operational technology.

The data we've collected from existing deployments, combined with strong customer references, has enabled us to build compelling business case demonstrating why AZT Protect is a better solution for OT environments. While these dynamics are a natural part of selling into complex and evolving markets, we believe we are becoming increasingly effective at influencing the customer's decision. We made solid progress with AZT Protect during the third quarter by signing new customers and expanding deployments within existing accounts. In addition, we achieved 100% renewal rate on all customer sites reaching their one-year renewal period. We have also advanced into final stages of the selection process within several major corporations, demanding continues to be supported by the growing number of cyberattacks disrupting operations worldwide, as well as increased awareness of AI-driven threats and so-called friendly fire incidents generated by internal systems.

Traditionally, cybersecurity solutions rely heavily on continuous patching, which is often impractical in OT environments. Friendly fire incidents where IT inadvertently sends faulty updates into production environments can be just as disruptive as an external attack. AZT Protect prevents these production disruptions while eliminating the need for ongoing OT application security patching. To date, no AZT Protect customer has experienced a breach. We have also developed an extensive catalog of AI-driven exploits emerging through 2026 that AZT Protect is designed to stop. One highly publicized example was the OpenAI ChatGPT-related attack involving Hugging Face. Based on the publicly available information, we believe AZT would have prevented the attack, and we have publicly shared those findings. We continue to believe AZT Protect has little effective competition in defending against these emerging AI attacks while eliminating the need for code-level security patching in OT environments.

We remain intensely focused on expanding our sales opportunities as we enter the new fiscal year. Turning to our technology solution business, it once again served as our primary revenue generator despite ongoing hardware shipment delays. Our offering continues to improve the efficiency and effectiveness of our customers' IT investment across networking, wireless, mobility, unified communication, data center infrastructure, and advanced cybersecurity. A managed cloud and managed service practice continues to grow at a healthy pace. We continue to benefit from the ongoing migration to the cloud and the increasing demand for managed operational support after those migrations are complete. A key driver remains the growing complexity of cloud environments and the unique requirements of enterprise customers. During the quarter, we entered the professional sports market with the signing of a six-year, seven-figure managed service agreement with a nationally recognized sports team.

We expect to issue a joint press release in the coming weeks. We also signed a 3-year managed service agreement with a food distribution customer, expecting to generate mid-six figures annual recurring revenue. Looking ahead, we believe our best-in-class service organization, exceptional high customer retention, and continued adoption of cloud-based service will drive further service growth and support continued gross margin expansion. During the quarter, our service gross margin increased 1.3% compared to a prior year period. While we recognize there is still work to do before fully realizing the value of our award-winning product and customer service, we have made significant organizational improvements that position us well for the continued growth. With that, I'll turn the call over to Gary to discuss our financial results in more detail.