TSG in the First Quarter: Orders Support Demand, Acquisitions Still Need to Convert Into Cash

TSG opened 2026 with a quarter that deserves more operating credit than the company had at the end of 2025, but it still does not settle the quality test around the acquisition platform it is building. Revenue rose to NIS 120.7 million, reported operating profit rose to NIS 13.1 million, and net profit was more than two and a half times the comparable quarter, so demand and scale are now visible in the income statement. The stronger point is roughly NIS 191.2 million of orders from related parties in the defense segment in one quarter, more than quarterly revenue, which shows that the budget timing issue from late 2025 did not become a demand problem. Still, most of those orders are extensions of existing activity, foreign revenue was only NIS 2.6 million, and concentration around Israel's Ministry of Defense and Israel Aerospace Industries became even sharper. The January private placement lifted cash and equity, but part of that cash already went to debt repayment and the Mabat acquisition, while the company continues expanding its acquisition base. This is therefore not just a record quarter. It is a proof year that started well, but still has to show that backlog, acquisitions and the new production layer converge into recurring cash rather than well-funded growth alone.

What the Company Sells and Why the Quarter Matters

TSG sells command-and-control systems, data fusion, AI solutions, intelligence systems, monitoring, IT services and software solutions for municipalities and civilian bodies. Its economics do not look like a pure software company with transparent ARR. This is a business that combines projects, services, acquisitions, government customers, skilled labor and execution discipline.

The first-quarter economic engine is a combination of strong local defense demand, expansion of the capability stack through acquisitions, and a balance sheet that received a large equity injection in January. That combination is attractive when it works, because it allows the company to grow faster than organic development alone. It also creates a clear yellow flag: as the company buys more layers, the reader needs to test how much of the growth is truly repeatable, how much depends on related-party customers, and how much cash remains after acquisitions, repayments and contingent consideration.

The quarter directly continues the point raised in the prior annual analysis: after a strong year and a wave of deals, the company is no longer judged only by demand. It is judged by its ability to absorb acquisitions without losing the operating advantage of the core business. The first quarter gives a partly positive answer: activity grew and profitability improved. The answer that is still missing is whether the acquisition layer will bring recurring revenue, new orders and cash flow, or mainly expand the balance sheet and the list of companies inside the group.

NIS 191 Million of Orders Supports Demand, but Also Concentration

The key number in the quarter is not only 19% revenue growth. The number that explains why this quarter carries more weight is roughly NIS 191.2 million of orders from related parties in the defense segment. That is more than 1.5 times quarterly revenue, and it arrived exactly where one of the key follow-up points from the end of 2025 was the conversion of deferred defense orders into the first quarter.

But the quality of those orders is not one-dimensional. Of that amount, only about NIS 18.1 million reflects new activities, while the balance reflects extensions of existing activity. Demand is strong, but it is still mainly based on deeper existing relationships rather than a broad opening of new revenue sources. For a defense systems company, that is not necessarily negative; a long relationship with a government customer can be an advantage. The problem begins if the market reads the full amount as if it already proves a new, international and broad platform.

The geographic data restores perspective. Revenue in Israel was NIS 118.1 million, compared with NIS 2.6 million outside Israel. That is a sharp improvement versus the comparable quarter, but still less than 3% of revenue. The discussion around expanding presence in Europe, anti-drone solutions and the planned joint venture with RETIA is a strategic direction, not the number that currently carries the report.

Customer concentration points in the same direction. The Ministry of Defense contributed NIS 43.7 million, Israel Aerospace Industries contributed NIS 14.6 million, and another customer contributed NIS 11.8 million. Together, those three customers explain about 58% of quarterly revenue, and the main customers belong to the defense segment. This gives the company a strong demand base at a time when defense systems are enjoying a tailwind, but it also sharpens dependence on budgets, timetables and order flow from a small number of customers.

Profitability Improved Even Versus the Fourth Quarter

Growth did not stay only at the top line. Reported gross margin rose to about 25.5%, from about 23.3% in the comparable quarter, and reported operating profit rose to NIS 13.1 million. Even when using the company's adjusted measures, which are not a substitute for reported figures, the picture is positive: adjusted operating profit rose to NIS 17.4 million, and adjusted EBITDA rose to NIS 19.1 million.

The comparison with the fourth quarter of 2025 matters more than usual because it tests whether the first quarter was a continuation of the run rate or only a jump against a weak base. Versus Q4, revenue rose about 5%, adjusted gross profit rose about 10%, adjusted operating profit rose about 16%, and adjusted net profit rose about 23%. This is not only a recovery versus the comparable quarter; it is sequential progress across most of the metrics the company chose to present to investors.

Still, one quality point remains open. Part of the increase came from organic growth and part from acquired subsidiaries, and the report does not fully break down organic contribution versus acquired contribution. That does not cancel the improvement, but it changes how it should be judged. Growth that combines existing activity and acquisitions can be excellent if it raises profitability and cash flow. It is less clean if it requires more acquisitions, more contingent consideration and more management bandwidth.

Expenses tell a mixed but reasonable story. Selling, marketing, general and administrative expenses rose to NIS 16.9 million on an adjusted basis, but did not prevent margin improvement. The company also benefited from a decline in share-based payment expense versus the comparable quarter, so the reported profit looks better than the operating improvement alone. That is not a negative item, only a reminder: the right read is real operating improvement, but still without a full separation between the existing business and acquired activity.

The Capital Raise Bought Room, Acquisitions Will Decide How Much Remains

Liquidity changed sharply. Cash and cash equivalents rose to NIS 297.6 million, equity rose to NIS 483.9 million, and equity to total assets reached about 57%. In its presentation, the company shows cash, deposits and marketable securities of about NIS 309 million against financial debt of about NIS 81 million, meaning surplus cash over financial debt of about NIS 227 million. This is a dramatic change versus the end of 2025, and it explains why the quarter does not look like a tight funding story.

But all-in cash flexibility was built mainly by new equity. In January, the company raised roughly NIS 192 million gross in a private placement, with a possible future inflow of up to roughly NIS 92 million from option exercises. During the same quarter, it also repaid early a bank loan balance of NIS 24.6 million, paid NIS 14.7 million in cash for the Mabat acquisition, and generated NIS 13.4 million of operating cash flow after a negative NIS 3.0 million working-capital movement and NIS 5.0 million of interest and tax payments.

This is a broad cash flexibility frame, not a measure of normalized cash generation. It asks how much cash remained after operating activity, acquisitions, investments, repayments and the actual equity raise. Under that frame, the company looks very strong at quarter-end, but the source of change is the capital raise, not only the core business. Operating cash flow is positive, but lower than the comparable quarter, mainly because working capital moved from a positive contribution to moderate pressure.

Mabat is a good example of the question that follows all of 2026. Total consideration in the deal will not exceed NIS 45 million, but at acquisition date the company recorded purchase consideration of NIS 40.6 million, of which NIS 14.7 million was paid in cash and NIS 25.9 million was recognized as contingent consideration. Within the acquired assets, goodwill stands at NIS 29.9 million, while identified backlog and technology together stand at NIS 4.9 million. This does not mean the deal is weak; it means that much of the value depends on future performance, collection, order intake and the ability to connect Mabat to broader solutions.

After the balance-sheet date, Production Floor was added as well, a transaction that is not material in size but is strategically important: it adds end-to-end manufacturing services, planning, production, assembly and integration, mainly for defense customers. That layer may help the company narrow the gap between software, sensors and production. On the other hand, it also raises the need to manage a broader execution chain. For TSG, 2026 no longer looks only like a sales year, but a year in which the company needs to prove that broader capabilities do not erode operating simplicity.

Conclusion

The first quarter gives a positive answer to one question: demand for TSG's defense solutions has not weakened, and it received meaningful support from large related-party orders. It also gives a positive answer to a second question: the company is increasing activity without losing profitability, at least for now. Those two points should not be minimized.

The main bottleneck has moved elsewhere. The company trades at a market capitalization of about NIS 1.4 billion, so the market no longer prices it like a small supplier waiting for initial demand proof. It gives the company credit for growth, an acquisition platform and defense exposure. For that credit to hold, the coming quarters need to show three things: new orders that are not only extensions with existing customers, foreign revenue that starts moving beyond the margins, and acquisitions that add profit and cash flow without requiring more and more capital.

The strongest counter-thesis is that the quarter already delivers what is needed: record revenue, better profitability, a strong balance sheet, large orders and a supportive defense environment. That is a serious argument. But it ignores the quality of the proof. Most revenue is still in Israel, customer concentration is high, most of the order amount is extensions, and a large part of acquisition value will only be tested later through contingent consideration, backlog, collection and integration. The current conclusion is therefore positive but not final: TSG started 2026 strongly, and the next quarter already needs to show whether that strength becomes broader cash flow and a platform less dependent on a few core customers.