CSPI Q1 2025 Earnings Analysis

ALEX: Welcome to Beta Finch, your AI-powered earnings breakdown where we decode the numbers that move markets. I'm Alex.

JORDAN: And I'm Jordan. Today we're diving into CSP Inc's first quarter 2025 results - a small-cap tech company that's making some interesting moves in the cybersecurity space.

ALEX: Before we jump in, I want to remind our listeners that this podcast is AI-generated content for educational and entertainment purposes only. Nothing we discuss should be considered investment advice. Always do your own research and consult a qualified financial advisor before making any investment decisions.

JORDAN: Absolutely. Now Alex, CSP Inc - ticker CSPI - reported their Q1 results, and while they're a smaller company with about $15.7 million in quarterly revenue, there's actually some compelling stuff happening here, especially around their cybersecurity product called AZT PROTECT.

ALEX: Right, so let's start with the numbers. Revenue came in at $15.7 million, which was up from $15.4 million in the prior year quarter and significantly higher than the $13 million they did in Q4. What really caught my eye though was the service revenue growth - up 17% year-over-year to $4.7 million.

JORDAN: That's a great point, and it's driving margin expansion too. Gross margins improved 200 basis points to 29.1%. When you see service revenue growing at that pace, it usually means the company is building more predictable, recurring income streams. In CSP's case, they're seeing demand for their cloud-based managed services, particularly in the maritime sector.

ALEX: Speaking of maritime, they mentioned adding a second major cruise line customer and continuing success in the ocean freight market. But Jordan, the real story here seems to be this AZT PROTECT cybersecurity product. Can you break that down for our listeners?

JORDAN: Sure. AZT PROTECT is CSP's cybersecurity solution specifically designed for operational technology - or OT - environments. Think industrial facilities, water treatment plants, manufacturing floors. These are critical infrastructure systems that have historically been air-gapped from the internet but are increasingly connected and vulnerable.

ALEX: And this market is massive, right? The company estimates the OT cybersecurity market at around $50 billion. But here's what's interesting - they're not trying to go it alone. They've partnered with Rockwell Automation, which is a major player in industrial automation.

JORDAN: Exactly. CEO Victor Dellovo mentioned they've signed up three major Rockwell distributors and are hoping to add two more by the end of February. This is smart strategy - instead of trying to build their own sales force for every vertical, they're leveraging Rockwell's existing relationships and distribution network.

ALEX: The company also highlighted a partnership with United Flow Technologies, which serves water treatment facilities in 40 states. Water infrastructure has been a prime target for cyberattacks, including nation-state actors. AZT PROTECT apparently uses AI-based countermeasures to stop these attacks in real-time.

JORDAN: What I found particularly encouraging was that a large pharmaceutical company that bought AZT PROTECT a year ago renewed their six-figure annual support contract. That suggests the product actually works and customers are satisfied, which is crucial for any cybersecurity solution.

ALEX: During the Q&A, there was an interesting exchange about whether CSP should partner with a larger company to accelerate AZT PROTECT's market penetration. An investor asked if anyone with better name recognition and infrastructure had approached them for a partnership.

JORDAN: Dellovo's response was pretty direct - no one has approached them yet. He emphasized that working with these large distributors like Rockwell is their strategy for building name recognition and getting more feet on the street. It's a more methodical approach, but given the company's size and resources, it might be the right play.

ALEX: The patent portfolio is also worth noting. CSP currently has three issued patents for their ARIA platform technology, with two more expected to issue by year-end and two additional submissions that should be completed in 2026. That's important IP protection in a competitive space.

JORDAN: Looking at the financials beyond revenue, they earned $0.05 per share compared to a loss of $0.01 per share in the prior year. They're sitting on over $30 million in cash with minimal debt, and the board authorized another $0.03 quarterly dividend. That's a pretty solid balance sheet for a company this size.

ALEX: One thing that came up multiple times in the Q&A was share buybacks. With the stock trading at what many consider attractive levels and management expressing optimism about AZT PROTECT's prospects, investors are wondering why they're not more aggressive about repurchasing shares.

JORDAN: CFO Gary Levine indicated they're taking a closer look at that and will probably be purchasing more shares going forward. It's one of those capital allocation questions that smaller companies often struggle with - do you invest in growth or return cash to shareholders?

ALEX: The big question mark here is execution on AZT PROTECT. Dellovo said they're "budgeting for a significant increase in revenue" from the product this fiscal year. But as one investor pointed out, it's been 19 months since they first called it "game-changing technology," and revenues still aren't material.

JORDAN: That's the risk and opportunity with CSP. If AZT PROTECT gains traction through the Rockwell channel and other partnerships, this could be a very different company in 12-18 months. The OT cybersecurity market is massive and growing, especially as critical infrastructure becomes more connected and vulnerable to attacks.

ALEX: On the flip side, cybersecurity is notoriously difficult to scale, even with great technology. Sales cycles can be long, especially for critical infrastructure customers who move slowly on security decisions.

JORDAN: True, but CSP seems to be taking a measured approach. They're focusing on the middle market through Rockwell distributors, which should have shorter sales cycles than the large enterprise customers. And they're building reference customers and case studies that should help with future sales.

ALEX: For investors considering CSP, this feels like a classic small-cap growth story. Strong balance sheet, expanding margins, and a potentially significant product opportunity in AZT PROTECT. But execution risk is high, and the cybersecurity market is incredibly competitive.

JORDAN: The maritime business provides some stability and recurring revenue growth, which is nice downside protection. And at this size, if AZT PROTECT does gain meaningful traction, the impact on financial results could be substantial.

ALEX: Looking ahead, key things to watch would be progress with Rockwell distributor signings, new AZT PROTECT customer wins, and whether service revenue growth continues. Management seems confident about fiscal 2025, but the proof will be in the execution.

JORDAN: Before we wrap up, I want to remind everyone that everything we've discussed today is AI-generated analysis for educational purposes. Past performance doesn't guarantee future results. Please do your own due diligence before making any investment decisions.

ALEX: That's all for today's episode of Beta Finch. We'll be back with more earnings breakdowns soon. Thanks for listening!

JORDAN: Until next time, keep those portfolios balanced!