CSP Stock: A Spinoff Of AZT Is Hopefully Developing (NASDAQ:CSPI)

CSP Inc. (NASDAQ:CSPI) provides IT, cloud, security, and computer system products and services. I’ve been bullish on this stock since the introduction of Aria Zero Trust Protect (“AZT”) in July 2023. AZT is designed to prevent a malicious attack before it can enter a computer. It requires no downtime to install, and the software is operating system-agnostic.

AZT landed a large customer just a few months after it was launched. In a January Seeking Alpha article, I wrote that the product is a game-changer. The stock price is higher now than in January as some investors remain bullish, but it is 50% off its 52-week high as there hasn’t been a single press release announcing a sale this year. I remain bullish and believe AZT sales will come.

Validation

Because of the lack of sales, the first question that comes to mind is whether the product is what the company says it is. AZT is being validated by several prestigious awards, including winning:

• The “American Security” category at the 2024 Fortress Cybersecurity Awards presented by Business Intelligence Group.
• Cyber Defense Magazine’s prestigious Infosec “Hot Company” Award at RSA 2024.
• “Next Gen Zero-Trust Application Protection Product ” category for 2024.

Small Company

This, I think, is a very non-promotional company. The website has an investor section with press releases and quarterly reports, but where there is usually an investor deck, it states, “There is no presentation available.” I cannot find any participation in any investor conference. There is also no analyst coverage. This is a microcap company that is generally unknown, making it a hard sell and a long sales cycle to gain customer confidence for the introduction of a revolutionary product.

This is a small company with about 100 employees, and it is not a startup security company. CSP is a steadily profitable business before the introduction of AZT. The majority of its resources are directed at maintaining the underlying business. During the recent earnings call, management explained how it took six months to set up an AZT demo for a large oil company.

During a call with management this morning, I confirmed that spinning AZT into a separate company, which I am rooting for, was one of several strategies being considered.

Activist Position

Joseph R. Nerges is the largest shareholder at 14%. Even last week, he has steadily bought to build his position since the introduction of AZT. He filed a Schedule 13D, declaring himself an activist investor. The reason:

The Reporting Owner intends to enter into discussions with other individuals and or investment groups with the intention of making a take-private proposal for CSP, Inc. shareholders to consider.

I don’t know what Mr. Nerges is planning, but considering the size of his position, it is unlikely to be shareholder-unfriendly. I think the best outcome right now is for AZT to be spun off as a separate company, with a team dedicated to selling AZT.

Scaling Sales Network

Management has built a sales network through partnerships, starting with Rockwell Automation. A presentation for Rockwell’s customers is scheduled for the fall Rockwell Automation Fair.

The current strategy will attract customers if there isn’t a spinoff. Over the last few months, the company has beefed up its sales network by adding several new partnerships, including:

During the recent earnings call, it was revealed that Greg Pysher was brought on to lead AZT sales.

Financial

There are almost 10 million shares, and the market cap is $136 million. The balance sheet is solid, with a last reported cash position of $29 million and no debt.

The stock sells at a PE ratio 75% higher than its peer group as investors anticipate AZT sales to escalate the top and bottom lines. Should AZT sales not materialize, the stock price will crater.

Conclusion

The company has organically beefed up its sales network with a new hire and externally by adding partners. AZT has won many prestigious awards, validating the product. A new activist position opens up the possibility of a structural change, such as spinning off AZT into a separate company. Both the increased sales effort and a potential spinoff present positive developments to increase AZT sales.