CSP Inc.'s Q4 2025 Earnings Call: Contradictions in OEM Partnerships, Revenue Predictability, and Market Opportunities Raise Investor Concerns

Date of Call: The transcript does not specify a date, but refers to the fiscal 2025 fourth quarter and full year ended September 30, 2025.

Financials Results

• Revenue: Q4: $14.5M, up 11% year-over-year. Full Year: Revenue grew 6%.
• EPS: Q4: Net loss of $0.02 per diluted share, compared to net income of $0.18 per diluted share in the prior year quarter. Full Year: Net loss of $0.01 per share, improved from a net loss of $0.04 per diluted share in the prior year.
• Gross Margin: Q4: 37%, up more than 800 basis points year-over-year. Full Year: 32% of sales, down from 34% a year ago.
• Operating Margin: Q4: Operating loss of $0.5M, improved from an operating loss of $2M in the prior year quarter. Full Year: Operating margin not explicitly stated.

Business Commentary:

* Strong Financial Performance and Profitability Improvement: - CSPI reported revenue of $14.5 million for the fiscal fourth quarter, up 11% compared to the same prior year quarter. Gross margins increased by more than 800 basis points to 37%. - The growth was driven by significant service revenue increase and continued investment in building the deal pipeline for the AZT PROTECT cybersecurity offering.

• Service Revenue Growth:
• Service revenues increased by 63% compared to the year ago period, representing 44% of total revenue in the fourth quarter, compared to 30% a year ago.

• This growth was driven by the expansion of managed cloud and MSP services, which are becoming an increasingly important part of CSPI's offerings, particularly in the maritime industry.

• Momentum in AZT PROTECT Cybersecurity:

• CSPI's HP segment gained traction with strategic partners and distributors, resulting in dozens of new AZT customer installations and a continuously expanding pipeline for new customers.

• The company's go-to-market strategy, leveraging Gold Star resellers like Rockwell Automation, successfully implemented solutions at individual sites, leading to further opportunities within organizations.

• Increased Backlog and Strategic Positioning:

• CSPI entered fiscal 2026 with a backlog for cruise ships installs and upgrades, aiming to convert this into revenue over the next 12 months.
• The company is optimistic about expanding its focus to protecting industrial IoT devices, viewing this as an opportunity to open a new market for its AZT PROTECT product.

Sentiment Analysis:

Overall Tone: Positive

• Management described a 'strong finish to the fiscal year' and a 'strong increase in service revenue.' They expressed being 'quite excited' about service segment results and 'even more excited' about fiscal 2026 prospects. The tone highlighted 'significant increase in the number of AZT PROTECT deployment deals' and a trajectory for 'consistent profitability improvements' and 'significant expansion of our business.'

Q&A:

• Question from Joseph Nerges (Segren Investments): My quick math here. You mentioned that the service revenue in the fourth quarter was like $0.44 of total sales. So that -- if my math is correct, you're close to $6.4 million in service revenue in the quarter alone. Am I correct? Am I wrong on that math?
  Response: Confirmed the math is correct, service revenue was approximately $6.4 million in Q4.

• Question from Joseph Nerges (Segren Investments): What's the potential for endpoints with a cell tower customer with, let's say, 1,000 towers? What -- let's say, size of 1,000 towers?
  Response: It involves tens of thousands of towers, not 1,000. The first orders were for black boxes and later expanded to cameras. Testing is complete, and further purchase orders are expected as deployments grow.

• Question from Joseph Nerges (Segren Investments): Have we signed any OEM agreements in the IIoT environment?
  Response: Not yet; signing OEM contracts is a priority for the sales team going forward.

• Question from Joseph Nerges (Segren Investments): When you're expecting the full rollout over the next year to 2 years, I assume that's what you're talking about.
  Response: Confirmed. Rollouts can be at the plant level or through enterprise agreements, which takes time based on individual sales processes.

• Question from William Lauber (Visionary Wealth Advisors): Just had a couple of questions. I was at that Rockwell show... Is that true [that most orders came from the Rockwell show]?
  Response: Yes, most orders over the past year came from the Rockwell show, which has been the biggest source of leads.

• Question from William Lauber (Visionary Wealth Advisors): Can you kind of quantify the number of leads you got last year versus this year and then I guess, along with that, maybe the quality of leads?
  Response: Approximately a 50% increase in leads this year compared to last. The quality is better as distributors brought their customers, leading to more initial meetings and follow-ups.

• Question from Unknown Analyst (Mike Price): You didn't mention Acronis, and I was wondering if AZT is being integrated into Acronis' software, is there not predictability as far as revenue is concerned? And if that's the case, can you give us an idea of what that might be?
  Response: Integration is ongoing, but it is too early to predict revenue. Both parties hope it will be significant.

• Question from Unknown Analyst (Mike Price): Last quarter, you bought some shares... you can't buy shares until our next earnings. Is that the case?
  Response: Confirmed. The share repurchase blackout period extends until the next earnings report in mid-February.

• Question from Unknown Analyst (Brett Davidson): How does [Acronis] revenue generation work? Who are you going to be recognizing the revenue from?
  Response: Revenue will come from Acronis. The integration will focus on scanning backups before they occur to ensure security, with the end customer as the ultimate buyer.

• Question from Unknown Analyst (Brett Davidson): Regarding the revenue next year. Is this something where we could reasonably expect incremental increases in revenue throughout the year?
  Response: No, management indicated revenue outlook for next year is uncertain and 'all over the place.'

Contradiction Point 1

Status of Large OEM Partnerships and Revenue Inflection

This is a direct contradiction regarding a core strategic partnership. In Q1, the company explicitly stated it had **not pursued or established any large partnerships**, relying on distributors. By Q4, a significant partnership with Acronis is being actively integrated, with **revenue expected to be significant**, which directly contradicts the earlier strategic assertion and creates uncertainty about management's forward-looking statements and execution.

Can you provide an update on AZT PROTECT integration with Acronis software, the predictability of revenue and potential timeline, and current discussions with reseller UFT? - Unknown Analyst (Mike Price)

20251216-2025 Q4: The integration [with Acronis] is in progress, with revenue expected to be significant for both parties... - Victor Dellovo(CEO) & Gary Levine(CFO)

Have you pursued a partnership with a larger entity to accelerate AZT's market entry, considering national security concerns? Do you anticipate a significant revenue inflection from AZT this year? - Mike Price (Private Investor)

2025Q1: No large partnership has been approached or established to date. The company is focused on building 'feet on the street' through large distributors like Rockwell. - Victor Dellovo(CEO)

Contradiction Point 2

Predictability of Revenue Growth for Key Partnerships

This involves a clear shift in the characterization of future financial performance from confident optimism to vague unpredictability, impacting a key partnership (Acronis). In Q1, management stated **2025 was the year for a "significant increase" in AZT revenue**, implying a clear inflection point. By Q4, the same executive, when asked about the **predictability of next year's revenue**, stated it would be **"all over the place"**, directly contradicting the earlier confident outlook and raising questions about the stability of the revenue pipeline.

How is revenue recognized under the Acronis partnership, and are incremental revenue increases predictable throughout the year? - Unknown Analyst (Brett Davidson)

20251216-2025 Q4: Regarding revenue predictability for next year, the answer was 'the latter', indicating it is not predictable and will be all over the place. - Victor Dellovo(CEO)

Has AZT's 19-month-old "game-changing" product generated material revenue in a $50B market? Have you pursued partnerships with larger entities to accelerate deployment, particularly given national security concerns? Do you anticipate a significant revenue inflection from AZT this year? - Mike Price (Private Investor)

2025Q1: While impatient, the company is working the channels and believes 2025 is the year for a significant increase in AZT revenue, which is budgeted for. - Victor Dellovo(CEO)

Contradiction Point 3

Scale and Nature of Cell Tower Customer Opportunity

This represents a material change in the description of a major sales opportunity. In Q2, the company framed its cell tower contract as a **unique opportunity** to reach out to other providers. By Q4, the CEO **corrected a previous question** (refuting "1,000 towers") and revealed the customer has **"tens of thousands of towers,"** indicating a much larger, more substantial deployment opportunity than previously suggested. This scaling up of a key deal's size significantly impacts revenue potential and growth narrative.

How is the confirmed service revenue calculated (~$6.4M in Q4), and what is the potential scale of endpoints for a large cell tower customer (e.g., 1,000 towers) and the status of OEM agreements for the IIoT market? - Joseph Nerges (Segren Investments)

20251216-2025 Q4: The company is engaged with a customer having tens of thousands of towers (not 1,000), having completed integration testing. - Victor Dellovo(CEO)

What is the current backlog size for AZT, and what are the potential contract sizes? What is the current status and future outlook for the cruise ship and freighter business? Is the cell tower contract unique, and can additional similar contracts be pursued? Is the cloud-based project backlog still sizable? - Joseph Nerges (Segrum Investments)

2025Q2: The contract was unique due to the compact, efficient Linux-based solution... The company is reaching out to other similar cell tower providers to explore opportunities. - Victor Dellovo(CEO)

Contradiction Point 4

Status of OEM Agreements for the IIoT Market

This shows a shift in the status of a key strategic initiative (OEM partnerships for IIoT) from active progress to a complete lack of success. In Q3, the CEO indicated **progress with other resellers** and expected **success in 2026**. By Q4, the response to the same type of question was that the company **"has not yet signed any"** OEM agreements for IIoT, despite making it a sales team priority. This represents a setback in a stated strategic priority.

Can you confirm the service revenue calculation (~$6.4M in Q4), clarify the potential scale of endpoints for a large cell tower customer (e.g., 1,000 towers), and provide the status of OEM agreements for the IIoT market? - Joseph Nerges (Segren Investments)

20251216-2025 Q4: Regarding OEM agreements for industrial IoT (IIoT), the company has not yet signed any but making that a priority for the sales team. - Victor Dellovo(CEO)

Are there successes with resellers in the water facilities sector outside Rockwell? Do you have long-term revenue projections for AZT PROTECT? - Mike Price (Unidentified Company)

2025Q3: Progress is being made with other resellers (e.g., under an NDA with a water facilities company). Legal and market entry processes have been navigated, and success is expected in 2026. - Victor J. Dellovo(CEO)

Contradiction Point 5

Predictability of Revenue and Partnership Timeline

This contradiction involves a change in the company's public stance on sharing financial forecasts. In Q3, the company **refused to share specific long-term revenue projections**. By Q4, when asked about the predictability of revenue from a key partnership (Acronis), the CEO provided a **definitive, negative characterization** ("not predictable and will be all over the place"). This represents a shift from a policy of non-disclosure to making a specific, critical forecast about a partnership's performance.

Can you clarify the revenue recognition model for the Acronis partnership and whether incremental revenue growth is predictable throughout the year? - Brett Davidson (Unidentified Company)

20251216-2025 Q4: Regarding revenue predictability for next year, the answer was "the latter"**, indicating it is **not predictable and will be all over the place**. - Victor Dellovo(CEO)

How successful are resellers outside Rockwell, particularly in the water sector? And do you have long-term revenue projections for AZT PROTECT? - Mike Price (Unidentified Company)

2025Q3: The company does not share specific long-term revenue projections publicly. - Victor J. Dellovo(CEO)