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A Quick Take of CSP Inc.
CSP Inc. (NASDAQ:CSPI) offers a wide range of managed IT services, security software and related IT consulting services.
The firm has produced profitable growth in recent quarters and launched its ARIA security software product, which may drive growth in the coming period.
Investors with a risk perspective may want to consider a Buy of CSPI at around $24.80 per share on the company’s growth prospects.
CSPI Overview and Market
CSP Inc. based in Lowell, Massachusetts was founded in 1968 and operates in two segments, Technology Solutions and High Performance Products.
The Technology Solutions segment offers a broad range of value-added reseller products and services, professional IT consulting services and managed IT services.
The High Performance Products segment offers its ARIA Software Defined Security solution, Myricom network adapters and products for digital signal processing applications in protective environments.
The firm is led by President and Chief Executive Officer Victor Dellovo, who has been with the firm since 2003 and, prior to that, was President of Technisource Hardware.
CSP acquires customers through its direct sales and marketing efforts, as well as through its bidding processes.
According to a 2023 market research report by Grand View Research, the global market for managed IT services was valued at $267 billion in 2022 and is projected to reach $741 billion by 2030.
This represents a forecast CAGR (Compound Annual Growth Rate) of 13.6% from 2023 to 2030.
The main drivers for this expected growth are the difficulty in finding qualified people to handle the increasing complexity in designing and managing systems.
Also, the chart below shows historical and projected future growth prospects for the US managed services market:
Studying the big picture
The firm also operates in the software security and other hardware markets.
CSPI’s latest financial trends
Total revenue by quarter (blue columns) has continued to grow, albeit unevenly; Operating income by quarter (red line) has remained positive in recent quarters:
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Gross profit margin by quarter (green line) has fluctuated without a discernible trend; Selling expenses and G&A as a percentage of total revenue by quarter (amber line) have trended lower recently, indicating increased efficiency in this regard:
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Earnings per share (diluted) increased significantly in the last quarter:
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(All data in the charts above are GAAP.)
In the past 12 months, CSPI’s share price has risen 214.92% versus that of the iShares Advanced Technology and Software ETFs (TV Listings) profit of 46.76%:
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ABOUT BALANCE As a result, the firm ended the quarter with $16.2 million in cash and equivalents and $1.7 million in total debt, all of which were categorized as current.
During the last twelve months, cash used was ($2.7 million), during which capital expenditures were $0.2 million. The company paid out $1.1 million in stock-based compensation in the last four quarters.
Rating and other metrics for CSPI
Below is a table of the relevant capitalization and valuation figures for the company:
Measure (after twelve months) | AMOUNT |
Enterprise Value / Sales | 1.5 |
Enterprise value / EBITDA | 34.3 |
Price / Sales | 1.6 |
Income growth rate | 38.4% |
Net income margin | 7.9% |
EBITDA % | 4.4% |
Market Capitalization | $113,460,000 |
Enterprise Value | $99,610,000 |
Operating cash flows | -$2,490,000 |
Earnings per share (fully diluted) | $1.11 |
Free cash flow per share | -$0.64 |
R&D / Revenue | 5.0% |
(Source – Seeking Alpha.)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:
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Based on DCF, the firm’s shares would be valued at approximately $34.18 versus the current price of $24.88, indicating that they are potentially undervalued currently.
CSPI’s most recent unadjusted Rule 40 calculation was 41.8% of FQ3 2023 results, so the firm has performed well in that regard, according to the table below:
Rule 40 Performance (unregulated) | FQ3 2023 |
Revenue growth % | 38.4% |
Operating Margin | 3.4% |
Total | 41.8% |
(Source – Seeking Alpha.)
Comment on CSPI
In the last earnings call (Source – Looking for Alpha), covering FQ3 2023 results, management’s prepared remarks highlighted “continued momentum” for its business as revenue growth was driven by the strong performance of its Technology Solutions business segment.
The company continued to reduce its backlog, which had increased due to supply chain bottlenecks. Notably, the firm has not “lost any orders” during this period of delays.
CSP also recently launched ARIA Zero Trust PROTECT [AZT]and given early industry feedback, management believes this system “will be a key growth driver” for its High Performance Products segment in 2024.
Analysts asked leadership about potential AZT product partnerships, capital deployment strategy and international expansion opportunities.
Management responded that it is currently looking to build its customer base through internal efforts and will consider partnerships later.
The firm has been focused on investing in AZT’s product and launch, so the capital allocation has targeted success with that process.
In expanding internationally in the managed service provider space, the company is looking to work with partners who are focused on its offering, not just adding a line item to their catalog.
Total revenue for the third quarter of 2023 increased by 33.1% year over year, while gross profit margin decreased by 4.3%.
Selling expenses and G&A as a percentage of revenue decreased 4.8% year over year, a positive development, and operating income increased to $600,000 for the quarter.
CSP’s R&D/Revenue ratio was 5% for the last four quarters, which is materially lower than many technology firms of its size.
The company’s financial position is solid, with ample liquidity, little debt and a small amount of cash burn in the last four quarters.
CSP’s Rule 40 performance has been good, although it has been largely driven by the company’s revenue growth rate.
Looking ahead, management is clearly focused on growing AZT Security Software, which has the promise of producing initial growth signals as early as the fourth fiscal quarter of 2023.
In the past twelve months, the firm’s valuation EV/Sales multiple has risen to nearly 4.5x its initial level, as the chart from Seeking Alpha below shows:
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As CSPI continues to work through hardware supply chain issues, its AZT security program appears to have the potential to drive the company’s future growth trajectory.
Risks to the company’s stock could include a slowing demand environment as customers closely watch every dollar spent, slowing sales cycles and the firm’s near-term growth prospects.
Investors with a risk perspective may want to consider a purchase of CSP Inc. stock. at about $24.80 per share on the company’s future growth prospects.
