Data Storage Corporation (DTST) Earnings Call Transcript & Summary

Greetings and welcome to the Data Storage Corporation 2024 Fiscal Second Quarter Business of the Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Alexandra Schilt of Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to Data Storage Corporation's 2024 Second Quarter Business Update Conference Call. On the call with us this morning are Chuck Piluso, Chairman and Chief Executive Officer; and Chris Panagiotakos Chief Financial Officer. The company issued a press release this morning containing its 2024 second quarter financial results, which is also posted on the company's website. If you have any questions after the call, would like any additional information about the company, please contact Crescendo Communications at (212) 671-1020. Before we begin, I'd like to remind listeners that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended, that are intended to be covered by the safe harbor created thereby. Forward-looking statements are subject to risks and uncertainties that could cause actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements float otherwise include the words, believes, expects, anticipates, intends, projects, estimates, plans and similar expressions or future or conditional verbs such as will, should, would, may, and could, are generally forward-looking in nature and not historical facts. -- although not all forward-looking statements include the foregoing. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can provide no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company's expectations include, but are not limited to, the company's ability to benefit from the IBM cloud migration underway, the company's ability to position itself for future profitability and the company's ability to maintain its not deck listing. These risks should not be construed as exhaustive and should be read together with the other cautionary statements included in the company's quarterly report on Form 10-Q for the quarter ended June 30, 2024, annual reports on Form 10-K and current reports on Form 8-K filed with the Securities and Exchange Commission. Any forward-looking statements speak only as of the date to which it was initially made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise. I'd now like to turn the call over to Chuck Piluso. Please go ahead, Chuck.

Thanks, Allie, and good morning, everyone. During the quarter, we made important advancements and we believe will accelerate our growth and increase our penetration within the market. Before I touch on those achievements, I would like to note that we generated $4.9 million in revenue for the second quarter of 2024. While this represents a decline from our previous year's second quarter, it's important to note that the reduction is attributable to large onetime equipment sales recorded during the second quarter of 2023. As I have previously discussed in our conference calls, our strategic focus is on recurring revenue contracts. The client equipment purchase cycle typically runs in a 3- to 5-year cycle once we sell equipment each year, typically, we provide software renewal licenses and hardware support. This continues until the client refreshes their equipment and then the cycle continues. I am pleased to report that our gross profit margin increased to 49% during the second quarter of 2024, up from 43.7% in the same period last year. This improvement highlights the effectiveness and scalability of our business model. It also reflects the successful integration of our operations. The increased margin is a testament to our disciplined execution and strategic efforts to optimize profitability by building a more sustainable revenue base. In fact, we achieved $13.1 million in revenue and profitability for the first 6 months of 2024. To effectively advance our growth initiatives, we have recently relocated our new headquarters in Melville, New York. This move has expanded our square footage by nearly 40%, while maintaining a minimal impact on expenses. We are strategically utilizing this increased space to accommodate the expanding technical, sales and marketing teams, positioning us to capitalize on the significant opportunities within the market. And as a result of our strategic consolidation of flagship and cloud first, we are witnessing an increase in upselling opportunities, validating this are multiple expanded contracts we announced during the quarter. First, we entered into an expanded contract with a prominent provider of end-to-end business processes initially engaged for infrastructure solutions, we are now through the 6-figure contract delivering managed encrypted backup and recovery services. This expansion underscores our capabilities to meet the evolving needs of our customers and exceed their expectations. More recently, we expanded services as one of the nation's largest suppliers of promotional products, securing a new 7-figure agreement, highlighting our continued success. In 2023, we were selected to implement a comprehensive disaster recovery solution for this client, ensuring rapid recovery and enhanced security within a cloud-based environment. This solution included optimization of their network for high-speed to cure switching during disasters or interruptions. Following the successful implementation, the client selected us to migrate their critical production systems to our new state-of-the-art data center in Chicago, where we will establish a fully monitored and managed private cloud infrastructure solution. Both of these contracts came through cloud-first division. In fact, Cloud First achieved $4.6 million in revenue for the second quarter and was profitable on a stand-alone basis. To support the traction and growth of cloud first, we recently expanded to the United Kingdom with the opening of our London office. We will also be deploying our unique infrastructure platform in 2 U.K. data centers, increasing our addressable market. We estimate that the U.K. marketplace consists of over 50,000 companies that conduct business between the U.S.A. and the U.K., with over 1.6 million Americans working in the U.K. This strategic move represents a significant milestone in our plan to serve our global clientele and strengthen cloud-first presence in key international marketplaces. Our first step several years ago outside the United States was establishing a footprint in Canada. Cloud First has 2 power platforms in Canada. In the U.K. and Canada are the largest trading partners between those 2 countries, we consider the addressable markets of the U.S.A., U.K. and Canada to be a significant opportunity. Our cloud infrastructure offerings of cloud hosting, disaster recovery and cybersecurity solutions will establish data stores, we believe, as one of the few single-source multi-country providers. We are witnessing an increased demand for our solutions. And as a result, we deployed assets to the seventh data center in Chicago. Chicago was strategically selected as it allows us to capitalize on the growing demand within the region as well as diversify our geographic footprint within the United States. Demonstrating this growing demand and evidence that the IBM Power service migration is underway is the continued increase in visitors to our Cloud First website, which is over 45,000 in the first 6 months of 2024. Furthermore, we are expanding our technical and business development teams to provide the support required for our anticipated client growth while maintaining an excellent client renewal rate. We are also continuing to support our nurture list, which contains over 1,000 organizations interested in potential implementation of our services, and we intend to take advantage of these avenues to secure new contracts and increase our footprint within the United States. We are currently serving over 480 companies and are committed to expanding this impressive client base. Data center firms have specialized in window-based infrastructure platforms rely on our expertise in the IBM platform. Collaborating with these infrastructure firms presents an opportunity to broaden our distribution channels, leverage our talented workforce and optimize our deployed assets. Overall, we are executing on a strategic growth plan, which has resulted in expanded contracts, international expansion and increased recognition within the industry. We also intend to explore acquisitions that would further our growth while complementing and improving our established operations. Moreover, we believe we have positioned ourselves for success and growth given our reliable solutions, exceptional service and now international footprint. In addition, we are leveraging the various upselling opportunities as a result of the consolidation of subsidiaries. These strategic initiatives set the stage for long-term profitability. At the same time, we have carefully managed expenses and have preserved a strong balance sheet with approximately $12 million in cash and marketable securities and no long-term debt at the end of the quarter. which provides us the flexibility to deploy capital efficiently and effectively to support our long-term growth and drive value to our shareholders. With that, I'd like to turn the call over to Chris Panagiotakos, our CFO, to discuss our financials. Please go ahead, Chris.

Thank you, Chuck. Good morning, everyone. Total revenue for the 3 months ended June 30, 2024, was $4.9 million, a decrease of approximately $1 million or 17% compared to $5.9 million for the 3 months ended June 30, 2023. The decrease is primarily attributed to a lower onetime equipment and software sales during the current period and a decrease in managed services, partially offset by increases in all other revenue sources. Total revenue for the 6 months ended June 30, 2024, was $13.1 million, an increase of approximately $362,000 or 3% compared to $12.8 million for the 6 months ended June 30, 2023. The increase is primarily attributed to the increase of 29% in infrastructure and disaster recovery cloud services, offset partially by a decrease in onetime equipment sales and managed services during the current period. Cost of sales for the 3 months ended June 30, 2024, was $2.5 million, a decrease of approximately $823,000 or 25% compared to $3.3 million for the 3 months ended June 30, 2023. The decrease of 25% was mostly related to a decrease in equipment-related costs. Cost of sales for the 6 months ended June 30, 2024, was $7.8 million, a decrease of approximately $344,000 or 4% compared to $8.1 million for the 6 months ended June 30, 2023. The decrease of 4% was mostly related to a decrease in onetime equipment sales. Selling, general and administrative expenses for the 3 months ended June 30, 2024, were $2.8 million, an increase of approximately $325,000 or 13% as compared to $2.5 million for the 3 months ended June 30, 2023. Selling, general and administrative expenses for the 6 months ended June 30, 2024, were $5.5 million, an increase of approximately $947,000 or 21% as compared to $4.6 million for the 6 months ended June 30, 2023. The increases were primarily due to an increase in advertising expense, professional fees associated with our international expansion efforts, salaries, stock-based compensation and travel. Adjusted EBITDA for the 3 months ended June 30, 2024, was $164,000 compared to adjusted EBITDA of $350,000 for the same period last year. Adjusted EBITDA for the 6 months ended June 30, 2024, was $837,000 compared to an adjusted EBITDA of $865,000 for the same period last year. Net loss attributable to common shareholders for the 3 months ended June 30, 2024, was $244,000 compared to net income of $226,000 for the 3 months ended June 30, 2023. Net income attributable to current shareholders for the 6 months ended June 30, 2024, was $113,000 compared to $277,000 for the 6 months ended June 30, 2023. We ended the quarter with cash and marketable securities of approximately $12 million at June February 2024 compared to $12.7 million at December 31, 2023. Thank you. I will now turn the call back to Chuck.

Thanks, Chris. Let's open up the call for some questions. Operator?

[Operator Instructions] And our first question comes from the line of Adam Waldo with Lismore Partners.

So I want to start with sort of where [indiscernible] in terms of our annual recurring revenue and how that compared with the first quarter [indiscernible]

Adam, you're breaking up a little bit. Can you repeat that?

Is this better?

It's a little better, yes.

Good. Great. Sorry, Chuck. I apologize for that technical difficulty. I want to see if we could start with the annual recurring revenue at which the company exited second quarter relative to first quarter. And with the investments that you've made in the cost-neutral headquarters expansion in Melville, the New London office and the Chicago data center, what's a reasonable range of sort of breakeven quarter revenue that you need to support the growth of assets?

Okay. I just want to make sure I'm quick it did break up a little bit. On the recurring revenue, you were asking about that and the expenses of Chicago and as well as London on the expansion side?

Sorry, I'm trying to get the investments you've made in growing the business on the infrastructure side, Chuck, what is a reasonable range of sort of quarterly breakeven revenue that would need to be generated to support those infrastructure adds?

So the recurring revenue we have on a -- basically on a monthly basis when we look at cloud first. Are we're speaking about just cloud first, or we're talking about overall the consolidation with the Data Storage Corporation?

No, the entire company, the whole company.

The entire organization. Just to highlight that, it's somewhat still slightly depending on equipment sales, which we typically have, but it becomes lumpy as we spoke about before because of the cycling of refreshing of the equipment, so that we do have some dependency on the equipment sales. Less and less as time goes on, and we do have the ability to cut back on various marketing expenses. But what ends up happening, just to give an example of our customer base, just 28 customers have increased their services with us since January. So it's not necessarily all new ads. -- on stuff. And so you have renewed contracts, you have clients adding to it. So as with an example that I read earlier, you have a customer that was on one service and then added a significant amount on another. So you're not sure when exactly that's going to be coming on, but we're very, very close, I would say, to a breakeven on just the recurring on a recurring basis. What ends up happening, though, this lumpiness continues because if you have subscription agreement that's, let's say, on a 36-month contract even though our average is 30 months across the board, a straight average, you'll end up getting software renewal and hardware maintenance contracts like we have that happens in the first quarter, and you have that lumpiness that continues. So if you were to smooth everything out I would say that the company really, even with these efforts are breakeven on basis. I don't know, Chris, if you agree with that -- so I think it's breakeven when you start taking our -- what we would consider annual recurring revenue we saw from renewal hardware maintenance with the subscription revenue, both in the disaster recovery, cloud infrastructure and cybersecurity. So that profitability really kicks in high when you have an equipment sale, even though the margins are not great, they're 20%, 25% margins versus 52% margins on subscription. So I think we're really there with it. I will say though, and I think you get to know me a little bit more and more as we talk, Adam, is that I'm kind of never happy. The thing is, is that I wouldn't mind losing, I wouldn't mind decreasing our EBITDA for greater revenue growth on the subscription side. And that's why we're looking at and expanding and going into London -- primarily into the U.K. because we believe between the U.K., Canada and the U.S., only the very big guys who are there, like an IBM, for example. But you're not going to maybe 1 of 3, and we want to be able to leverage that. And that will take some money. We've already -- we have 2 people identified that are working with us already on a consulting basis out of the U.K. That's costing some money, but we're still okay on the EBITDA side for cloud first. And we're going to be hopefully bringing them on full time with this. So we're signing NDAs with companies, and that will mean if they're going to sign up with us as distributors or end user clients, it will cost some money. Our depreciation will increase that overall expense because of the equipment being deployed there, which we expect that to happen in the fourth quarter and services going live in January. So yes, I would like to see that revenue growth much higher without putting equipment sales on the side and let it hit the EBITDA a little bit to sacrifice that short term. So if that answers your question, I'm not sure.

No, that's really helpful context and insight into your thinking, Chuck. I wonder if we can then sort of switch gears a little bit, obviously, into the new business pipeline and backlog. Obviously, you all have seen terrific progress over the last 5 or 6 quarters and inbound inquiries through the revamp websites. And I think it's been a little bit slower in terms of translating into RFPs than you've hoped, but you've still seen some pretty good traction there. So can you give us some metrics in terms of how that surge in inquiries has been translating into request for proposal. And then where your backlog sits here at the end of the second quarter.

Okay. I can do that. Chris, you check me at any point that I'm kind of off a little bit. So I'll give you some numbers on this. We believe that our remaining contract value, okay? -- the remaining contract value as of June 30, I believe, is around $31.5 million. And with our renewal rate, it continues to grow because the number of clients that have renewed since January is 82 and of the 400 and plus 420 companies we serve. So using that $31 million to $32 million, that kind of continues as you continue to grow. Also, we've added 6 new partners since January. And so that's pretty good. Now we do have around 100 channel partners. I don't know, I'm going to call 16 active as the old 80-20 theory. In this case, 15%, 15%, 85%. And then when we talk about sales funnel, it's -- the sales funnel and $15 million in contract -- total contract value. So between the sales funnel that we have, the renewal rate, when you take the remaining contract value, we're very stable. We just need to get -- we're on a quest right now how Schwartz is talking to recruiters. We believe some of the acquisitions that were done in our space usually the companies that acquire these companies usually people leave. We think there's a great opportunity to be hired some very good sales talent. And so we'll be expanding the sales team in the United States. So we are moving ahead with that and also trying to expand our channel partner management. But the migration is taking place. I mean, frankly, on -- I just stated the cloud-first website. But on all of our websites, we've had over 100,000 visitors since January. So the migration is underway. IBM has made a statement. I was in Milan at the IBM conference user group called common. And they estimated that 10% of the IBM systems are going to migrate to the cloud each year. Now our estimation on that is around $90 million per year is up for grabs. That's on a global basis. But it's fairly significant when you start taking it apart and say, what's in the United States, what will IBM because if you only bought -- you don't get fight, if you buy IBM, I don't know if that's true anymore. But we do a fantastic job on migrating existing systems to our platform, which is a major hurdle, and we do an excellent job with that. I'm going to say I think we're one of the best. We have good competitors on that, and I don't think IBM is one of them. So I think we're positioned well with a great sales funnel, good remaining contract value. The number of customers that have renewed already -- so it's pretty stable on it, we do need to add salespeople, and we're on a search for that right now. I believe we'll be engaging a recruiter and going after some of these companies that have been acquired by 2 other firms.

Okay. Last question, if you permit me. So in terms of the dollar value of your backlog that's awaiting implementation process of implementation, how do we exit the June quarter? And just remind us how that compared with where we were when we exited the [indiscernible]

You are asking about the work in process today. I actually, Adam, I don't believe I have that number. I don't believe I have it. Do you know that, Chris?

No, I don't have.

Adam, I can get that number for you. We usually have that number. Let's follow up on the web because we always have that. I'm not sure why it's not on my sheet here. But just give me a second, I want to see if -- I don't know the answer to that, Adam, I apologize. I usually know that number. I will get that to you.

No worries. We'll follow up.

Our next question comes from the line of [indiscernible] with Forest Capital.

Can you provide an update on the status of the U.K. expansion and share any additional details?

Sure. Heading there with our CTO, Chuck Paolillo and House Forte President First on the 9th of September. We're visiting data centers. We're moving aggressively the person that we have identified essentially to be the President of that company. We do have the company established as a branch office. We do have an office established there as well, and we'll be going around visiting the data centers. We have potential of a couple of clients already. We have some distributors lined up and some of them are fairly large, and we're negotiating those distributor agreements today. Some of them are smaller that we do have distributor agreement already with and we expect to deploy the equipment in the fourth quarter and going live, as I mentioned earlier, beginning of January to be able to take advantage of a fairly large account, I believe, in -- out of Europe. And we're following all the guidelines on the data privacy and everything that means. And we're moving quickly on it. We're working with the institutes to be able to get to a higher level of networking. But I think there's -- we believe there's a significant opportunity between having this -- I'll use the term triad between Canada, the U.K. and the United States. There are very few companies that have this and companies want to be able to deal with one support ticket system to be able to go to one place. It also allows us to probably reduce our expenses on our 24/7 operations as well because of the time frames and time differences. So we're excited about it.

My other question is, how are you planning on growing the distribution network from channel to direct sales?

What happens is on direct sales, and I've been in the game for a while. I've managed a sales force for over 110 people and all. And it was very, very different, not too many years ago. Today, what happens is if you have a very experienced sales rep, all of the companies have channel partner or agent agreements. So as soon as you get someone that's really excellent, they become a 1099 agent, they form their own business and they were often going. So on the direct sales force, it's very difficult. Some people don't want to start their own businesses as we know. And so in this case, we believe with the recruit that we have identified that how Schwartz has identified we will be going after some of these, we would say, high-level experienced folks in the services that we sell. But we also have moved into IT automation. So with the IT automation, we're also trying to hire in that area because our existing client base is looking for that. And so we've been doing that. We've been proposing that already, but we're trying to build the sales force in two areas: cloud hosting and disaster recovery that know our platforms, IBM and all, they've been selling it. That's one target for the recruiter and the other is on IT automation. On the channel partners, if you think about this a little bit, these are companies that have essentially sold the equipment to the end user, and they are the trusted adviser. -- and we are going after them. We continue to go after them. A lot of them are small companies, they might have 50 customers and as that customer is ready to recycle, as we mentioned, 3 to 5 years potentially, they come to us. We give a proposal and say, "You know what, you're making onetime every 5 years on this, you can create an annuity for yourself with our renewal rate of over 90% and had this going on for 15, 20 years until technology changes. And so we try to work with that channel partner on it. But other areas are on the Oracle systems, Oracle partners with Oracle also use the IBM Power platform as well. So we continue to expand on that and have our marketing programs try to reach out to them. We try to reach out by both SEO organic advertising. So it's not an easy process. If we have 100 channel partners today with 15, 16 active. I'm not excited about that, but we are now aggressively I'll use that term going after increase both our direct sales force, which we have a great sales force today, but we need more. We have a good group. And at the same time, increase our channel partners. These folks that are not only IT companies, but there are also agents several companies, but they need the IT power infrastructure, which is something that a lot of them are missing from their portfolio, referring to the folks that moved from direct sales to 1099, so we're also going after that group. Hope that helps.

And there are no further questions at this time. I would like to turn the floor back to management for closing remarks.

Well, thank you for your questions. We have developed a robust business strategy, and we are confident that we will drive our growth, ensure sustained and increased profitability over the long term and deliver maximum value to our shareholders. We are optimistic about our potential and our initiatives, and we're looking forward to realizing the full benefits over time. We are committed to keeping our shareholders informed with meaningful updates, and I'd like to thank everyone who joined our call today. Thank you. Have a great day.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.