CSP (CSPI) Q3 FY26 earnings call: the analyst Q&A

The Technology Solutions business experienced solid order growth during the quarter, but its ability to convert these orders into revenue was significantly impacted by extended hardware vendor delivery times. Historically, deliveries took 30 to 60 days, but are now stretching beyond 200 days. This has resulted in the Technology Solutions backlog growing by 65% year-over-year, indicating strong demand but also a bottleneck in revenue recognition. Management anticipates these delays to persist for at least another year due to high demand for components driven by AI build-outs.

The AZT PROTECT business is making meaningful progress, signing new customers and expanding existing deployments. The company achieved a 100% renewal rate for all customers reaching their one-year renewal period. However, the sales cycles for larger enterprise opportunities, particularly those in the 6-figure range, are proving to be longer than anticipated, often spanning 18 to 24 months. This is attributed to complex procurement processes, evolving stakeholder alignment, and internal review processes within large organizations, as well as the need to educate customers on OT security requirements.

CSPi is actively pursuing OEM opportunities for AZT PROTECT, having completed integration into several OEM products. A key example is the partnership with Acronis software, with marketing materials and SKUs on track for a fall launch. Another significant OEM relationship is in South Africa with a large telecommunication customer, which is now on its third purchase order with AZT PROTECT embedded. The company is applying lessons learned from these deployments to other OEM relationships, including three additional US-based OEMs currently in discussions, expecting these to create attractive long-term recurring revenue streams.

The company has continued to evolve its direct sales organization, focusing on Fortune 500 customers. This includes replacing salespeople with those accustomed to longer sales cycles in the enterprise market. The goal is to shorten sales cycles, broaden the sales funnel, and improve execution by engaging higher decision-makers within customer organizations. This strategic shift aims to accelerate the 'land and expand' strategy, addressing the political and budgetary complexities encountered in large enterprise sales.

The managed cloud and managed service practice continues to be a healthy growth driver. During the quarter, CSPi entered the professional sports market by signing a 6-year, 7-figure managed service agreement with a nationally recognized sports team. Additionally, a 3-year managed service agreement with a food distribution customer is expected to generate mid-6 figures in annual recurring revenue. This growth is driven by the ongoing migration to the cloud and increasing demand for managed operational support, contributing to a 1.3% increase in service gross margin compared to the prior year period.

For Q3 FY26, total revenue was $14.4 million, down from $15.4 million year-over-year. Gross profit was $4.3 million, with gross margin expanding to 30.1%. The company reported a net loss of $846,000 or $0.09 per share. Despite the loss, the balance sheet remains strong with $24.7 million in cash and cash equivalents. The company continues to finance customer purchases, with approximately 8.3% of receivables being longer-term. The Board approved a $0.03 per share dividend and repurchased 13,000 shares during the quarter.