CSP Inc. (CSPI) Earnings

Management highlights

### AZT Protect Cybersecurity Business - 100% customer renewal rate for all sites reaching their one-year renewal, and no AZT Protect customer has experienced a breach to date. AZT Protect is uniquely positioned to stop emerging AI-driven exploits and prevent 'friendly fire' production disruptions without requiring ongoing OT security patching, which fills an unmet need in operational technology environments. - The business is pursuing a land-and-expand strategy, starting with initial single-site deployments before rolling out to additional customer sites. Expansion timelines have been longer than expected due to internal customer stakeholder alignment, procurement processes, and competing customer priorities. - Three key initiatives were advanced during the quarter to drive future growth: (1) Several large six-figure opportunities in the 18-24 month sales cycle are nearing completion, with high optimism for contract conversion; (2) OEM integration of AZT Protect is complete for multiple partners, including Acronis Software, which is on track for a fall launch with marketing materials and new SKUs, and a South African telecommunications OEM that is working on its third embedded purchase order; (3) The direct sales organization was restructured to better serve Fortune 500 customers across direct, distributor, and OEM channels, with a focus on engaging senior decision-makers earlier to shorten sales cycles and accelerate expansion. ### Technology Solutions and Managed Services - The legacy technology solution business remained the primary revenue generator, but top-line results were impacted by ongoing hardware shipment delays, with average lead times extending to ~200 days from the historical 30-60 days. Backlog grew 65% year-over-year as orders are closed but delivery is delayed. - Cloud and managed services grew at a healthy pace, driven by enterprise cloud migration and demand for ongoing operational support of complex cloud environments. New contracted wins during the quarter include a 6-year seven-figure managed service agreement with a national professional sports team, and a 3-year mid-six-figure annual recurring revenue agreement with a food distribution customer. - Service gross margin increased 1.3% year-over-year, and management expects continued gross margin expansion supported by high customer retention and growing adoption of cloud-based services. ### Financial and Corporate Updates - Gross profit for the quarter was $4.3 million, with overall gross margin improving 130 basis points year-over-year to 30.1%. R&D expense increased 5% to $832,000 to support AZT Protect customization and OEM integration. Operating loss widened to $1.5 million from $1.2 million year-over-year, impacted by variable compensation and a $200,000 charge related to the buyout sale of the UK pension plan. Net loss for the quarter was $846,000, or 9 cents per share. - The company ended the quarter with $24.7 million in cash and cash equivalents, maintains a strong balance sheet to fund growth initiatives, approved a 3 cent per share dividend, and repurchased 13,000 common shares during the quarter.

Guidance

Management did not provide explicit numerical revenue or earnings guidance for future periods, but shared the following forward-looking expectations: - Hardware shipment delays are expected to persist for at least the next year, as large technology companies continue absorbing most available component supply driven by AI infrastructure build-out. - Acronis OEM integration of AZT Protect is expected to be fully completed by October 1, 2026, after which go-to-market activities will be accelerated. - Management expects new joint announcements with UFT, a reseller partner focused on the water/wastewater utility segment, within the next 2-3 weeks. - The company will continue prioritizing investment in the AZT Protect product, cloud and managed services businesses, which management controls, while navigating ongoing supply chain uncertainty in the legacy hardware product segment. There is no change to the company's stated intent to continue repurchasing common shares at current market prices.

Segment performance

CSPI reported total third quarter revenue of $14.4 million, a decline from $15.4 million in the year-ago quarter. 1. Product segment: Product revenue was $9.9 million (68.75% of total revenue), down from $10.2 million in Q3 FY2025. Product gross margin improved to 20.7% from 15.7% year-over-year. 2. Service segment: Service revenue was $4.5 million (31.25% of total revenue), down from $5.3 million in Q3 FY2025. Service gross margin was 51.2%, compared to 53.9% in the prior year quarter. For the nine months ended June 30, 2026, total revenue was $42.4 million, down from $44.3 million in the prior year comparable period, while overall gross margin improved to 31.9% from 29.9% year-over-year.

Risks & headwinds

- AZT Protect large enterprise and OEM sales cycles are much longer than expected (12-24 months for large deals) and 95% of the timeline is outside of CSPI's control, dependent on large partner/customer internal approval processes, budget ownership, bureaucratic delays, and trust-building with resellers, which can delay revenue conversion. - Ongoing global hardware component shortages and extended lead times (average 200 days) for technology products have negatively impacted current quarter revenue recognition, and these delays are expected to persist for at least a year, creating ongoing top-line volatility for the product segment. - Forward-looking statements about future AZT Protect growth, sales execution, and OEM revenue are subject to inherent uncertainties, including customer budget constraints, shifting IT/OT stakeholder priorities, and competitive bidding processes that could result in delayed or lost opportunities. Many factors impacting results are outside of management's control, as noted in SEC filings for the company.

Analyst Q&A

• Q: The analyst asks about the timeline for new OEM deals, compared to the ~1 year integration timeline for the previously announced Cronus deal, and whether CSPI can shorten this process. /

  A: Management responded that almost all (95%) of the integration timeline depends on the large OEM partner, not CSPI. Large multi-billion dollar OEMs move slowly due to internal size, multiple layers of approval, and CSPI cannot force faster progress. CSPI stays in constant contact to move processes along as quickly as possible, but the pace is ultimately controlled by the partner.

• Q: The analyst asks for clarification on CSPI's updated sales organization strategy, noting recent sales team turnover, and what changes have been made. /

  A: Management explained that turnover occurred because prior salespeople were not able to tolerate the long 12-24 month sales cycles for large AZT Protect deals. Three out of four departed salespeople have already been replaced with new hires experienced in longer sales cycles. The updated strategy retains work through OEMs and resellers, but adds a direct sales focus on large enterprise customers to accelerate progress, building trust with resellers over time to gain access to their customer contacts.

• Q: The analyst asks when hardware supply chain delays will resolve, and if the issue will persist for the foreseeable future. /

  A: Management stated that delays are expected to last at least another year, as large tech companies buying AI infrastructure have absorbed most available component supply, and there is no sign of this imbalance easing soon. Management is focused on growing controlled recurring revenue streams (managed cloud services, AZT Protect) to offset this ongoing uncertainty in the hardware product segment.

• Q: The analyst asks why CSPI cannot partner with a large established player to accelerate AZT Protect adoption in large enterprise accounts faster than current progress. /

  A: Management responded that this is exactly the strategy CSPI is already executing: leveraging existing relationships with large resellers and distributors who have pre-existing trust with major enterprise customers. Even with these partnerships, building trust with reseller sales teams takes time, as resellers are cautious about introducing new solutions to their top customers. The AZT Protect sales pipeline has grown substantially quarter-over-quarter with real budgeted opportunities, but large OT enterprise deals inherently follow long multi-stage review and testing processes that cannot be accelerated significantly.