Data Storage Corporation (DTST) Earnings Call Transcript & Summary

Good day, and welcome to the Second Winter Wonderland Best Ideas Conference. The next presenting company is Data Storage Corporation. [Operator Instructions] I'd now like to turn the floor over to today's host, Chuck Piluso, CEO of Data Storage Corporation. Sir, the floor is yours.

Thank you, Matt, and thank to all of you for joining today. I'll give a little of my background. I'll take you through a pretty quick presentation, and then I'll give you some updates that I believe you might be interested in. Some of you, I'm sure we've met before. But a little bit about me. I've been involved in technology and telecommunications for over 30 years. I have my own money invested in this company as well of over $6 million. We offer cloud-based solutions. We focus on a niche marketplace, the IBM community for the most part. It's over a $3 billion global marketplace for these services as Infrastructure-as-a-Service, DR and cybersecurity. We also provide equipment and software. And we really look at it why now, why do we focus on Infrastructure-as-a-Service today. For the most part, there are 1 million of these LPARs globally. These are virtual servers that are out there. [ Operation ] on AWS and folks moving to Microsoft Azure and Google, this started some 8-plus years ago with AWS. This is just starting now on these IBM systems. And some recent surveys show that only 15% are using some sort of cloud service. So we believe it's a tremendous opportunity with limited competition, and we are positioned, and I will take you through the presentation, and then I'm going to hope to at the end of this, give you an update on what's been going on. Little delay in the slide, but a little disclaimer. So I will say everything I tell you that's not filed, I'll say I believe. But let's move through this. I mentioned the 1 million IBM virtual servers that are out there with 50% sitting on the cloud. So this migration is taking place. How do we know that? We had over 50,000 visitors to our site in 2021. We have a very stable customer base, over 400 customers. We have a renewal rate on our contracts of over 94%. When we say renewal rate, they're not month-to-month contracts, these are typically 3-year terms. So we have customers for many, many years. Our average [ win ] folks are using disaster recovery and Infrastructure-as-a-Service around $3,000 a month. That's the number that occurs most of the time. We have customers that are $500 a month, and that means their data is critical to them. But if they lose it, they have some serious problems. We have cash in the bank, our pro forma for 2020 with flagship was around $18 million. We don't have any debt. And as I mentioned before, we have limited competition. We take a look at the growth as we move through the years. We were doing disaster recovery on Windows in 2001. In 2010, we purchased a company that provided these services disaster recovery on IBM systems. We saw the average revenue much higher. We started getting into this more and started shifting that around. On the 2008, the company bought an OTC company, we were an OTC held for a while, and it looks like we're in NASDAQ, but I'll talk about that a little later. Anyway, we continue to grow. We formed a joint venture called SIAS, Secure Infrastructure & Service, with a company called ABC as I was very involved with AWS. And so it was going on with that migration, and we started providing niche services for the IBM power systems. But migration wasn't moving very quick. Folks were over the last few years, very confident in security on the Windows side. Now that they've already moved that, they have these IBM systems. So it's just a matter of time. And that's reflected by the visitors to our site and the folks that download our VoIP. We formed a telecom company that provides direct internet access for our clients for others along with VoIP in '18. And then in 2021, we uplisted to NASDAQ in May. We acquired Flagship, an IBM global partner, and we are working together to cross-sell. The solutions that we offer are all typically long-term agreement but it focuses on business continuity, every part of what we do, even in the case of equipment and software, which people say, that's why you'll see peaks and valleys in our financial statement sometimes. But we like equipment and software. Put the cash in the balance sheet. We did a recent deal with a sports team. We put a press release out on that, good cash on the balance sheet. But I love monthly recurring beginning of every month it comes in. And with our renewal rate, it's fantastic. So Infrastructure-as-a-Service as well the equipment is in our data centers. folks retire their equipment. They're on us. We provide Windows x86 as well in the cloud but our marketing focus is on the IBM side. That community is a cult. Disaster recovery, we replicate the multiple data centers. We guarantee the recovery times. We are a great company. Our clients stay with us. We continue to grow. We have a great reputation with it. As we went on NASDAQ, I think a lot of people are saying, what does this company really do. We are the only company globally that's public that focuses in the areas that we focus on. And we have 6 data centers in Canada and the United States. Our assets are deployed. Our customers really love us. We do annual solution reviews, we have account maintenance team, and they continue to add more services to our clients, the client's environment. These logos I'm sure you know some of them. These are very large customers. We have medium and small customers, too. But no matter what, the average revenue for our clients on infrastructure and DR, it is $3,000 a month. But we often manage services to these folks. We sell equipment in some cases, we do both. So while we have a significant technical team, they're fantastic, well trained. Just a little bit about the systems so that you'll understand what's going on with it. These systems run mission-critical applications. These applications have been custom developed for this platform. It's very difficult to move to Amazon or anywhere else, very, very sticky. So very steady. So when you -- when the survey that went out globally to these 500 users, basically, one of the things that was brought up was cybersecurity and core applications that are running on it. So security is built into this system, even though we layer cybersecurity software, it's a very secure system. But in that survey, it said that between 76% and 100% of these clients are running core applications and are increasing their footprint. So this is not on a downward trend. This footprint is increasing. These are powerful systems and the survey reflected that the clients say that they get a better ROI on these systems. You get a little bit of an idea. On the organic growth strategies for us, we raised $18 million in change. We spent some money on Flagship, $5.5 million to $6 million on that company. I don't know, Chris is CFO, I believe we have around $13 million. Chris, what do we have in the bank?

Approximately $13 million.

Yes. So we have that. We are saving some of that for looking at acquisitions. We're very busy in the M&A space. But we want to do more of what we're doing, and we're spending money in that direction. We set up an office in Austin in WeWork's. We have a director of marketing there. On the Flagship business development reps and they're busy. They're working on cross-selling our customer base. So we want to do more of what we're doing. We have the cash to be able to do that. And we continue to grow partners. We have 54 partners today out of just DSC alone. Flagship pretty much has direct sales. So we're continuing to do what we do, only we have the cash in the bank. On the acquisition side, we're looking for synergistic acquisitions. They could be VoIP companies, companies selling direct Internet access, a combination of both MSPs, data analytic companies, and we're looking at folks that are in that IBM space because they don't necessarily have the money to build out what we've built out and their clients that they've sold equipment through the years are going to be moving to a cloud environment. So they're also not a good target for being a distributor for us. So we call it channel partner. They're also a harvest for acquisition as well. They might have data centers, for example, in the case of Flagship, they have a data center in Miami. I believe we are -- the guys are moving that to one of our data centers that we use and -- but they have some setups in, I think, in Hong Kong in a few places. But we have a certain standard for it, and we continue to see where there is economies of scale as we look at these acquisitions. On the financial side, I'll turn it over to Chris to give a little overview on the pro forma when we look at Flagship Nexus and Data Storage. Chris?

Chris? Thank you, Chuck. Good afternoon, everyone. On a pro forma basis for the calendar year ended December 31, 2020, the company had consolidated revenues of approximately $18.2 million. The pro forma cost of revenues were approximately $11.9 million. Gross profit on a pro forma basis was $6.3 million. Our pro forma gross profit percentage was approximately 34.5%. The pro forma SG&A was approximately $6.2 million, and the combined net income of both entities was $254,000. On a stand-alone basis for the calendar year ended December 31, 2020, Data Storage Corporation had revenue of approximately $9.3 million, which was an increase of $837,000 or 9.9% over prior year. The cost of revenues were approximately $5.4 million. Gross profit for Data Storage Corporation on a stand-alone basis was $3.9 million, which was an increase of $168,000 or 4.2% over prior year. The stand-alone gross profit percentage was approximately 42%. The stand-alone SG&A for Data Storage Corporation was approximately $3.9 million, and the company had net income of $173,000, an increase of $144,000 or 491% over prior year-end. Under our recent highlights, you can see that our Q3 2021 revenue increased 42% over prior quarter. Our cash as of Q3 2021 was approximately $12.9 million, and a significant portion of the company is owned and managed by -- is owned by management and other insiders. Our current gross profit margin is approximately 44% and Data Storage Corporation has no debt and a clean capital structure. This next slide represents select quarterly data for Data Storage Corporation. The top left-hand bar chart shows our total revenue by quarter from Q1 2020 to Q3 of 2021. The company has consistently grown its revenue quarter-over-quarter by adding new customers and by selling additional services to its existing customer base. The company has grown its revenue from $2.1 million in Q1 of 2020 to approximately $3.9 million in Q3 of 2021, an increase of $1.8 million. The bottom left-hand bar chart shows our subscription-based revenues from Q1 2020 to Q3 of 2021. Once more, the company has grown its subscription revenues quarter-over-quarter by adding new customers and by selling additional subscription services to its existing customers. The top right-hand chart shows our gross profit and EBITDA over the past 7 quarters. Once again, the company has consistently increased its gross profit quarter-over-quarter. Gross profit in Q3 of 2021 was approximately $1.7 million, an increase of $0.8 million compared to gross profit of $0.9 million in Q1 of 2020. The pie chart on the bottom right-hand corner shows year-to-date gross profit margin at 44%. Our '20 pro forma revenue is approximately $18 million and our Q3 revenue increased 42% over the prior quarter. Our year-to-date Q3 revenue increased by 46%. Lastly, our enterprise value to sales ratio is approximately 0.72. This number is on a pro forma trailing 12-month basis. Back to you, Chuck.

Thanks, Chris. Chris joined us in May of last year as the CFO, and he's been a great addition. He's learning our business and getting into it all. We run this company as a parent company with 3 subsidiaries today and hoping to grow that beyond that. So for the most part, it was structured as the corporation takes care of the public company finance and administration, and we have entrepreneurs that have their businesses that continue to grow it. So when we take a look at subscription revenue, by the way, we priced that out at a 50% margin. But when you have equipment sales in there, it reduces that. As I mentioned, we like equipment sales and software sales, they're onetime, but it does drive the gross profit margin down. Another thing that drives gross profit margin down is that we can't carry inventory of equipment that's unused in our data center. So we take that depreciation from day 1 the minute that, that's installed. So when you look at that, you get a little feeling of that 44%. Additionally, even if we fully depreciated that equipment, we're still using that in the data center, which, over time, increases the gross profit margin because these applications might run on older releases. That gives you a little bit of a feel for that. The 6.7 million shares, folks asked this question, we would love to see our stock price over $8, $9, $10 because we have $13 million plus that [ affluence ] are executed, which would be a significant growth opportunity for us. We really don't understand why the stock is ridiculously low. We'll talk about that in a moment. And we hold 37% of the offices and the directors. Board directors, that's more a couple left hand -- lower left-hand side, that's me on the top, but Marcus with Flagship, he's now a corporate officer. He is on our Board. [indiscernible], that's a company we merged with, acquired in 2016. We do a very, very good job of assimilating acquisitions, independent directors, very experienced folks. You can look at our website for that. And just on the investment highlights, I think you get a feel for where we are. We have cash in the bank, great sales funnel, good remaining contract value over $12 million, $13 million. We mentioned the renewal rate, no debt. This migration is taking place now. This is a cult in the IBM community globally. We want to capture that internationally as well as domestically. I would like to -- I'm just going to cover a couple of things, if I could, so that those folks that know me and that we've spoken with before, I'm going to cover some points. I'm going to try to cover these in 3 minutes so that we do some Q&A. Nexus, our VoIP and carrier services, they have proposals going in the first quarter. Sales orders already taken. We put a press release out with Flagship. Ed Grossman running our data analytics group. He's already working with our clients, organizations like the Falcon and PFL, Professional Fighting League. We opened an office that WeWork in Austin, Texas. We have BDRs, business development reps there that are working on cross-selling. They finished -- they started in January, finished over 150 hours of training. They received 5 badges from IBM, they're together and they're very, very active. Flagship is going to focus on building a new website, they have a theme. We run it, you use it and they're doing the campaigns that follow along with that. First quarter has been very, very busy so far. On DSC side, the sales funnel continues to grow. We -- installations, I believe they have over 80 opportunities that they're working to close. We expanded our DR and our infrastructure services in our 4 data centers in the United States. The funnel is pretty big, over $14 million. Account management team, very busy with adds to our clients. I mentioned that every year, we do annual solution reviews that always brings in addition to their existing contract. We're working today on trying to launch a corporate website. We're doing it in 3 phases. It's geared to the investor, and it will link over to either a subsidiary where you can click on an industry that we focus on or a solution, but it is geared towards that. We've kind of separated where we were calling Data Storage Corporation and DSC is a subsidiary now, Data Storage Corporation, the parent. So we're running 3 subsidiaries today. Hopefully, that changes shortly, and we can grow on those subsidiaries with our M&A opportunities. DSC and Flagship are sharing information on the website. They have a tech channel going. It's excellent. You can visit that. As I mentioned, we had over 50,000 visitors to our website. But what's more important than that probably is we'll rank 1, 2, 3, 4 or 5 when we take a look at hosting a back up on Google. So we are moving up there. It does change. It's very dynamic but that's today. Our stock price, ridiculously low. I mean, I'm not going to give guidance on where I think it should be. It's ridiculously low. I don't know if retail traders, they trade us whatever, it's going to make $0.40 on these trades and what goes on. But this is not a company to be valued at $20 million or $25 million. We have over -- I'm going to say millions in assets deployed, cash in the bank, limited competition, huge marketplace. it's just unbelievable where we sit. We're advised that put out -- you wanted to move put out quarter-over-quarter performance and ongoing press. I believe -- I hope that's the case because that will be really good. But it's a little upsetting where that stock is sitting today. And really, that's it. So I can open it up for Q&A and go from there.

Thanks, Chuck. We do have some questions that came in from the audience. Our first question is, what are your largest opportunities currently in the pipeline?

I'm not sure if there is largest in the sense of dollar or company names, I really would not like to release who our customers really are that are proposals for obvious reasons. But they range. We have clients that are -- proposals that are not spending for $1,000 to over $20,000. I mean I think, way over $20,000. But for me, I'd rather have the $3,000 account and get multiple ones. If you happen to lose your account, which we really don't lose too many, you're not hurt that much. But that could be a separate conversation, but we really don't release what our proposal log is, but you have an idea of the size.

Our next question, can you talk about your relationship with IBM?

Sure. It's different with different companies. Flagship Solutions Group is an IBM gold partner. They will use both DSCs, infrastructure and DR. But if a lead comes from IBM, where the client wants to be on IBM's cloud, they'll put them on IBM's cloud. They just finished a major installation of IBM's cloud with the client down in Florida. So their relationship is one as a goal partner. For DSC, we buy the equipment, IBM equipment, IBM storage, and we assemble an offering, and that offering is Infrastructure-as-a-Service and disaster recovery. So we're a build partner, which is very different than Flagship. So we think we have it both ways.

Our next question, your business model is very appealing to growth [ by ] private equity firms, at approximately $18 million of revenue, public company costs depressed your net margin, what benefit do you gain from being public that outweigh the financial benefit of being private?

Well, right now, we're a little bit limited because the stock price is so low. But the advantage is, is that when we go to M&A, these companies are private companies that do not have the liquidity. So when we do an acquisition, it gives them the ability to have stock and cash and then provide liquidity for that individual -- for that company. So I would say that is one of the main reasons is liquidity on the M&A side. That's one of the main reasons. And right now, we don't have anybody in management offices or Board members that are selling shares. So even though they're limited and restricted to a degree, for the most part, M&A, it's a big help. And on the other side, just to say it's -- on the other side, by the way, I'd be disappointed if we don't have larger numbers in the $18 million. But keep in mind that we only have 7 months in '21 of Flagship's reporting, even though $18 million was shown in the pro forma when we take a look at 2021, it's 7 months of Flagship, 12 months of DSC and Nexus. But I'd be disappointed if we're not showing some decent numbers for the first quarter when it comes out. But on the other side, I just want to go back to the public part of it. Most of our clients believe we're a $100 million plus revenue company. So in some cases, private companies that we compete against and they're probably just 3 or 4, they can use that against us to a degree. But we have a lot of cash on the balance sheet. And we have a great reputation. And if they're not comfortable, we put them through one of our VARs, and we have a VAR with 18 clients on it. Some of those clients range from -- some good numbers. I mean, much higher than the average of the 2,000. So if that happens, we move the billing to the VAR and the client, the end user knows that it's Data Storage Corporation supplying those services.

Our next question, are your average deal sizes getting bigger or smaller? And if so, should that start to move the 3,000 per month number higher or lower?

No, it's coming across in all ways. Someone can have 5 -- one client can have 5 [indiscernible] VARs, and they're moving just 1 right now, 1 virtual server. And over time, they might -- maybe they move testing and development over maybe their technicians that are working there where the critical apps are running are getting older and they're testing out. So I think it's all over the place from 1,000, 3,000 to north of there. I think it will stay that way. And I don't like using averages when we talk about if we have an account that was billing over $50,000 and it throws the average up. We use the mode. We really don't look at averages. So that $3,000 is the number that occurs the most.

Great.. Our next question...

Any other?

Yes. Our next question, what kind of acquisition multiples are you seeing? And are acquisitions usually accretive out of the gate?

Good question. We're looking at anywhere between 8 to 10x EBIT, could be 1x revenue on a private company. That's really what we're looking at. And is it accretive? The customer base is in the distribution channel, we move very, very quickly on the cross-selling opportunity and to bring their channel partners, agents, distributors in the fold with us. In some cases, in this year 2022, we're going to roll out some stock appreciation rights programs for these folks that if they hit certain levels, they'll be able to earn that. So we have a program for that as well. So we bring them in closer by doing that. So I would say that we move very quickly towards this cross-selling because we know that they have an environment where they either need disaster recovery, they need direct Internet access or disaster recovery and cybersecurity. Those are common things that they would need immediately.

Our next question, do you expect to benefit from COVID tailwinds? And if so, how?

I don't want to benefit from COVID at all. I would say that in March of last year -- March, I guess we're in this thing for 2 years. Our managed service revenue went up to our existing customers because we provided them the opportunity for our employees to be remote, either with VoIP phones and VoIP services as well as remote working with Office 365 with Microsoft Teams and security at the endpoint at the user at home. But for the most part, the company itself has always had the technology to be remote. So it may be the case here is why the sales funnel is building so high is that folks really just want to be remote. And the first thing they're getting remote is the people, the second thing they're getting remote because it requires Internet access and all is moving their systems to Infrastructure-as-a-Service to cloud. So that could be one of the reasons. I think the migration is taking place no matter why.

Great. Our next question, how does the cost to acquire a new customer vary based on the customer size?

Sometimes it's easier to get to $10,000 customer than it is to get to $500 customer. Usually, the larger customers have a great tech team, not that the other ones don't have a tech thing. Typically, they use an outsourced provider. So the ones that have unstaffed technical folks and they're larger, sometimes it's easy to work with their experienced people. They're focused only on their employer who would be our client. So it doesn't really matter. We might have to put more resources up. We had resources when we get 80% capacity typically. So we're -- typically we're ready. If it's a very large customer, the contracts and we would quote a longer turnaround time to set them up, and they're fine with that. A lot of planning goes into Infrastructure-as-a-Service more so than anything else. DR is much faster, disaster recovery.

Chuck, and one last question, I'll squeeze in is when will you report earnings?

Chris?

So we are looking to report earnings at the end of March, sometime at the end of March.

Great. That is all we have time for. So Chuck, back to you for closing remarks.

As I mentioned, we're a solid company. We're growing. It's a great company. We probably have over 55, 60 employees today, but where the stock price is, I just don't know. That's the only thing that's concerning and only thing that's concerning because everything else is growing at a great rate. I really don't have any more closing remarks than that. I know we're going to have probably 17 or so one-on-ones, Thursday and Friday. So hopefully, I'll be meeting some of the folks on the calls Thursday and Friday. I'd like to thank everybody for joining, and we'll hopefully talk to many of you over the next couple of days.

Ladies and gentlemen, that does conclude the Data Storage Corporation presentation. This concludes today's event. Remember, one-on-one meeting requests are still open to be sure to log into the conference platform to request more meetings. You may now disconnect.