Data Storage Corporation (DTST) Earnings Call Transcript & Summary

Good day, and welcome to the iAccess Alpha Virtual Best Ideas Spring Investment Conference 2025. 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, Chief Executive Officer of Data Storage Corporation. Sir, the floor is yours.

Thank you, and thanks, iAccess, for letting us present today. Good morning, everyone. We're going to give an update on the third quarter 2024. We will be filing our annual at the end of the month. So it's a little bit early. Unfortunately, we couldn't put that out to you, but this is the third quarter you'll be seeing some information, presenting with me is also our Chief Executive -- Chief Financial Officer, Chris Panagiotakos. I'm Chuck Piluso, the CEO, as we've mentioned earlier. We'll try to take this through quick, so we leave some time for some Q&A. For your speed reading, this is a disclaimer. You can review that later. So a little bit about Data Storage Corporation. When we speak about Data Storage Corporation, the main operating company is CloudFirst. When we look at CloudFirst, we are one of the few global providers of an IBM Power platform that we own, we operate, we manage, and these systems are set up for mission-critical infrastructure and disaster recovery. And when we think about cloud and all of that, security is one of the key elements here. So when we just think about what we do and some of the key takeaways that we'd like you to take with you at the end, which I'll give you a little bit about this right now is this is a trusted cloud, highly secure. And when you receive disaster recovery from a client where you're actually doing disaster recovery, you move them at a point when they're ready to refresh, hopefully, to hosting. When you get the hosting, you get the cybersecurity, you get even a higher level if they desire it for disaster recovery. And when you take a look at our revenues for the third quarter, we attained over 80% of our revenue is recurring. When you see us drop to a 70%, it means we had some large equipment sales. But typically, our model is to be around 80%, which shows a very stable business model. We couldn't find some acquisitions, so we decided to -- and we're still looking for acquisitions. We decided to spend some of the $11 million in cash on building out Europe. And we went live in January in the U.K. We have 3 data centers with 3 individual data center partners that have Intel data centers. And with that, we placed our IBM platforms in there, our IBM Power platforms that we operate into those data centers. So any business that comes in through their client base, and we do expect to start seeing going in the fourth quarter of this year. We are compliance driven. It is one of the things that we are very proud of, and it's very important to any of our clients because these are usually midsized and enterprise-level clients. We'll talk a little bit about outlook, just to give a quick number. When we merged together Flagship and CloudFirst in January of 2024, if you were to take a look at our compounded annual growth rate from 2020 to 2025 first quarter, it's over a 30% compounded annual growth rate. If we were to remove Flagship from that process, we have approximately an 18% compounded annual growth rate just from CloudFirst alone, fairly significant. There was a slight delay in the charts. So when we overview the company, our data centers are -- have direct connects into AWS, Microsoft and Google. So we're actually able to provide a multi-cloud environment, managed services, disaster recovery, cybersecurity, IT automation. These are the things that we do, and we've been doing it for a while. I'll take you through some of the ramping that's been going up just on lead flow that happens, well people go through a little bit of that. But we are operating these facilities. We're 24/7. Some of you may know already, we raised $18 million in May of 2021 with our uplist to NASDAQ. But we are highly recognized in the field when you'd start looking at the community for IBM and the folks that have this equipment that is on-premise today. And what happens is when they look to refresh, they evaluate whether they should go cloud or whether they should stay on-premise. So typically, this is where we actually started looking at this lead generation that we will take you through a little bit of that. Now when we start looking at the United States, the U.K., and we'll put Europe on the side for a minute, but let's say the U.K. and Europe will push that together and also Canada. There's over 50,000 companies that operate between the U.S.A. and the U.K., which gives us the opportunity for us. When you look at Europe, let's just use Europe and the U.S., we're one of the few single source. When you start looking at U.K. over to Canada, you're talking about over 500 companies. So I don't want to call this low-hanging fruit for us, but our folks that are in the U.K. are looking at the U.S. companies, the U.S. company sales force is looking at what's going on with the U.K. to be able to go after these companies to provide a single source for them. It's powerful. We are in a multibillion-dollar total addressable market. IBM alone at the last conference we attended, said that there were $90 million a year in billing that we will be migrating to the cloud. That's a per year number. So this is a very significant marketplace. These applications have been developed on the operating system. So these are not migratable at all at this point in time to AWS, Google or Microsoft. So it's a significant marketplace. And by the way, we also run an Intel, Windows, whatever you'd like to call it, platforms as well. But when we market, we market to the IBM community. We have over 500 companies that we serve. We manage over 570 contracts. We have today infrastructure partners in the United States as well as the U.K. where they're using our expertise on our platforms and interfacing with our data centers for this. Our total contract value in our sales funnel is over $10 million. And when you look at that, you can divide that out really, typically, you'll see a 36-month term contract. And when we look at the remaining contract value, frankly, as of today, it's $39.2 million. I don't want to round it completely up, but that's the number, $39.2 million. So it's significant. And with a 90% or greater renewal rate, it creates a great baseline. So when we look at 2025, it's over $20 million in annual recurring revenue that we'll have from the baseline from 2024. Our solutions and products, I think that when we look at IT services in general, it's a huge marketplace. Our focus is on cloud infrastructure, our core disaster recovery and cybersecurity. When people start looking at going to the cloud, one of the largest obstacles that you have to overcome or objections is cybersecurity. And what we do with cybersecurity is significant when someone now is looking at us to place their information on our systems. But when we look at this, we're involved with each one of these things. In fact, I think Chris will show you on Nexxis, our voice and data company, this quarter, they broke even, which is great because they've been ramping that up, and they started that from scratch. It's only around 5% or less of our revenue. But the core that we've been doing for many years is sitting right there with cloud infrastructure, DR and cyber. Before I turn this over to Chris, just to give you a feel, so we have cash in the bank. We have a great sales funnel. I'd like it to be higher. That's only because of my personality, but we're doing pretty well in that area, and you'll see some numbers a little later on about the lead flow and what's going on with that remaining contract value we talked about. Our renewal rate on contract is around 94%. It's around 92% on actual revenue, and we do not have any debt whatsoever. I'll turn this over to Chris at this point to take you through some of the numbers. Chris?

Good morning, everyone. Thank you for joining us. This slide is a summary of our 2023 performance. Our revenue for 2023 was $25 million, which was an increase of $1.1 million over prior year. Our gross profit was $9.6 million, which was an increase of $1.5 million over the prior year, and our adjusted EBITDA for 2023 was $1.6 million, an increase of $1.6 million over prior year. This is a summary of our quarter-over-quarter performance. Our revenue for Q3 '24 was $5.8 million, a slight decrease of $200,000 over prior quarter last year. The decrease was due to a reduction of equipment sales, which customers usually -- typically refresh every 3 to 5 years. Our gross profit was $2.5 million, and our gross profit margin was 43.2%, an increase of 4.3% over prior quarter last year. The adjusted EBITDA for the quarter was $520,000. The EBITDA includes the investment in our U.K. expansion, which Chuck spoke of previously, of approximately $219,000 and other onetime costs of approximately $25,000. As you can see, the split between annual recurring revenue and nonrecurring revenue is 81% to 19%. We enjoy equipment sales and hardware and software maintenance renewals, but our focus is on recurring subscription revenue.

Chris, did you -- we had that year-to-date.

Yes, I think we both [indiscernible] the same.

Yes, I got -- I'll control the slides, Chris, I got it.

Okay. This is a summary of our Q3 year-to-date performance compared to 2023 year-to-date results. Our year-to-date revenue for Q3 '24 was $19 million, which was an increase of $200,000 over prior 9 months year-to-date last year. Our gross profit was $7.9 million, an increase of $900,000 over prior 9 months year-to-date last year. And our 9-month adjusted EBITDA was $1.3 million, and the adjusted EBITDA includes the investment in our U.K. expansion and other onetime costs of approximately $481,000. And now I'll turn it back to Chuck.

So that's -- Chris, let's see where we have, $1.8 million. So that's fairly significant over the previous year.

Correct.

I didn't know that you had control as well on these slides, Chris, it's all this remote environment. Some of our clients, by the way, you can get a feel for it, they're midsized to enterprise level. Some of the industries that we focus in on the left-hand side of that chart from food to retail, real estate, they're running these high processing machines that are on-premise that we've moved to the cloud or we're actually supporting them with software or hardware maintenance, which is typically third party for like you look at the P.C. Richards and several other companies where we're doing IT services for some of these companies. And some of them are -- we're managing storage or we have a full environment for hosting disaster recovery and cybersecurity. So it's fairly significant in the work that we do. Unfortunately, not recognized in our share price, but I'll leave that for another time. When we start looking at case studies, you folks can kind of read some of the things that we do, but you'll see IT services here. You'll take a look at a very high level of cybersecurity with the Falcons out of Atlanta. Look at FLEETCOR, which is now Corpay, where we do everything from IT services to software renewals each year. So when you see a lumpiness in some of our quarters, you'll see that these annual software renewals happen at a particular month. But if you look at some of the charts that Chris will present, you'll see the steady nature of the recurring piece of it. But annual recurring revenue for us includes software renewals, hardware maintenance, contracted managed services and cloud hosting and DR. And that's a mixture of what you're seeing over here, whether that's Max Finkelstein or Foster Grant, if you all know, Foster Grant, they're very much dependent on our team. Our operations, our technical team are part of -- these companies part of their team as well, working closely together. So when you see an infrastructure partner where the infrastructure partner does the billing in some cases, that's not really over here, but in general, some of our accounts, the customers' tech team knows our tech team, even though we're not doing the billing on some of those accounts. And so I was mentioning before, you can see this somewhat 45-degree angle where we started in 2018 to today with over 84,000 visitors to the site in 2024. This migration on the IBM Power Systems is underway now, and you could see how it's building, migrating your systems to the cloud is one of the most popular white papers. And when we look about migration, we're not talking about necessarily -- we really don't care about someone -- I say don't care, but if someone buying is brand-new system and they're just getting introduced to the IBM high processing and highly secure platform, it's -- really the folks that are looking to migrate. We do an unbelievable job, our tech team, in migrating their on-premise to the cloud and to hosting Infrastructure as a Service, just to give you a feel for that. So I think that's fairly significant. We keep on refining this when we see drops in lead flow, we adjust, we start taking a look at this marketplace, it's significant. Just on the United States, I want to give you an example. It's 100,000 systems approximately, hard to track it. You can virtualize these systems. When we look at the surveys that were done, you can partition this up or virtualize if you use 10 of these virtual systems, and it ranges from folks that do 2 virtual systems to 100 on it. But if you use just 10, you start multiplying it out because the number from our billing system that you'll see that occurs the most is around $3,000 a month. So at 36 months, you can kind of figure that out yourself, and it comes out to pretty significant. So we strongly believe in it. And by the way, if they have not migrated their Intel systems, their Windows and everything they're doing with that to the cloud, we typically get that business as well. So you'll see when we do a run out of Salesforce, you'll see solutions per client. You'll see there's a mixture of Intel disaster recovery, the IBM Platform disaster recovery, hosting on both sides. So if they haven't moved to a hyperscaler or folks that compete with them, good luck on pay per click or however they pay for it because they're competing with thousands of customers that provide an Intel platform. And then you're also going against AWS. We do not, okay? We do not compete with the hyperscalers. So just taking a look at this, you can see the slopes on that. It's fairly significant on the growth. Yes, we have Flagship that's put in there for -- as part of our growth with acquisition. We did an acquisition in '16, '17 with ABC Solutions. Today, Hal Schwartz that was one of the owners of that company. I think he was President with Tom Kempster and both those individuals with the company today and Hal Schwartz is President of CloudFirst. Chuck Paolillo, who is the CTO, was the CTO of ABC. When we look at Flagship that was acquired in 2021, that tech team is there. It's in place. Some of the sales folks are there. So we do a pretty good job, I believe, at acquisitions. But just when we look at those numbers, CloudFirst's organic growth, compounded annual growth, 18%, 30% when we start including Flagship with the acquisition. So you can see that baseline, that striped funny looking [indiscernible] kind of different color at 20.6%. When we look at cloud services alone, we're talking about a 60% gross profit margin on when it's cloud, DR, cyber and hosting. I'll turn this over to Chris, and we have a few more slides to go. Chris, I'll turn it back to you for this.

Thank you, Chuck. So this is a recap of our revenue and our gross profit performance over the last 10 quarters. Our annual recurring revenue, which includes software renewal and hardware maintenance occurs within different months throughout each year. As you can see by the revenue stack chart in the top left-hand corner, Q1 of 2023 included a large spike in our recurring revenue. The large spike was due to a sizable annual subscription deal with a large e-payables company. On the right-hand side, our gross profit has been steadily increasing since Q2 of 2022. This was achieved by the company consolidating its operations and finding synergies throughout the organization. Also, we have increased our margins and have improved pricing on some of our offerings. Can we go to the next slide, Chuck. So this shows our year-over-year performance for Q3, and it's broken down by segments. For Q3, we had 2 segments, CloudFirst and Nexxis. For year-end, we will also be reporting CloudFirst Europe. So the gross profit margin increased from 42.3% to 43.2% overall, which was driven by margin expansion in both of our segments. As you can see in Q3 of 2024, Nexxis broke even, and our adjusted EBITDA rose from $1.01 million to $1.25 million despite the slight lower revenue. As noted previously, the EBITDA includes the investment in our U.K. expansion, which was approximately $219,000 and other onetime costs of approximately $25,000. And then lastly, CloudFirst ARR portion of revenue increased from 72% to 81%, which reflected a stronger long-term contracts and more predictable revenue streams. So Chuck, I'll turn it back to you.

Thanks. On organic growth, so everyone gets a feel for that. We're trying to do more of what we do. Yes, opening up the U.K., and we're looking at Europe as well right now. We have the money in the bank to do it. The migration is taking place, and we want to be there for it to be able to support it. In the U.K. today, we have over 10 partners, we'll call them channel partners, distributors that are already set up. Colin Friedman, who is the Managing Director of CloudFirst Europe, is doing an outstanding job with his team. And with those partnerships, we do expect some growing to take place in the fourth quarter, and we're forecasting out that January 2026, that will be the first month that we'll actually break even. So we're going to do more of what we're doing. A lot has moved away from Google AdWords and Google search more into ChatGPT and how people are searching for things. So we're adjusting some of our marketing programs. But we need to recruit additional account executives as well. We need to build on that. We had our channel partner or a director retire this year. We are in a search for a channel partner or someone to run those programs for us. M&A side, we were looking at $10 million deals -- frankly, $10 million, $12 million in revenue. We need to move it up to a $20 million look at that. And we're not really -- we don't love debt. But for the most part, we just need to look for larger deals on it because with that -- and there were synergies with Flagship and of course, with ABC. But for the most part, we just need to look at bigger deals and see how we can finance that with our stock price where it is, it makes it very, very difficult. So we're going to spend some of that money on the organic growth programs while we continue to look for good deals. Just to wrap it up, I think you have a feel for what we do. You saw the highlights before for where we are on the sales funnel, the remaining contract value. We today in the United States have around 20, 25 companies. We have contracts with probably 125, but actively, it's the 90-10 kind of rule on things. The companies we manage over -- I think it's 570-some-odd contracts that we manage. Our EBITDA is fairly solid on cloud, and we continue to stay within our core, but we're not going to turn away equipment sales. We like that. It puts cash on the balance sheet. We have a great management team from Tom Kempster to Hal Schwartz, Colin Friedman, Chuck Paolillo. So we're pretty excited about it. I'm just going to just flash through this real quick right now so you can get an idea. The shares and the warrants, hopefully, you know about that. Insiders hold around 41% of the shares. And I'm going to -- you'll see our senior management team, and you can just really go on and download this off of the site. So I'm just going to open it up for any Q&A that if there are any questions.

Yes, Chuck, we have quite a few questions that came in, so I'll jump right in. First question, Chuck, can you offer us some targets for where you aspire to be by the end of each 2026 and 2027 in terms of annualized run rate revenue and EBITDA margin for the International segment?

I'm not going to give guidance on it. I will tell you that Colin in the U.K. is building that up. We do have plans in place to grow that, to grow the partner program and grow the staff there. But it's a little difficult to do that. You can calculate things out basically if you see that there's a $20 million baseline for 2025 already and then just take a look at it. I mean, we try to budget around $20,000 a month in the U.S. in new revenue or revenue for existing accounts. So you can use your rule of 78 to kind of figure that out. And that excludes onetime sales on equipment. So you can try to calculate that out for yourselves where each baseline lands each year. I'd rather not give guidance on it. But if you use 20,000, which we try to budget, use the rule of 78, that creates the next baseline. Europe, I didn't want to put the pressure on Colin to say, oh, he's got to get X amount of revenue. We're looking to break even on what we're building there in January of 2026. And he has a great background, Colin, and great team, great contacts there. So we're expecting a lot from there. I don't know if that answered the question fully, but you can do the math.

Thanks, Chuck. Our next question, what rate of same client growth in annual recurring revenue have you experienced in 2024 relative to 2023? And what same client ARR growth are you targeting for 2025 and beyond?

What's so interesting if everybody has been around in tech for a little while, there was a whole thing that said years ago, data grows, data grows. I would say from the reports that Chris submits and that we see from Hal that it's like a 3:1 ratio of adding to existing contracts versus new sales. I don't have an exact number for you, and we don't break it down. But when we start looking at the number of addendums just this morning, we get e-mails that come across on every new sale and it says whether it's an addendum or not. But it's around a 3:1 ratio. So our existing clients continue to add. And I don't know if that helps, but we've never -- I don't have it calculated out. But if you were to look at our month-over-month revenue by client, you would actually see that growth. It's around 3:1 ratio, an answer to that question.

Our next question is, can you talk about your strategic partnership strategy and maybe reference some of your more significant partnerships and your newer ones in the U.K.?

It's -- you can go into the cloud hosting business if you're doing Intel, pretty easy. You can get the kids out of college. They know what they're doing. You can go get a closet or you can go get a data center, Tier 3, put a piece of equipment in and you're kind of all set, all right? That's kind of going on with that. But there's been such an investment in data centers. There's such an investment going on today, and these data centers are running Intel cloud platforms. They're not IBM partners on the power side. They don't know it. They're in the lower tier typically. Now I'm not talking about everybody. I'm painting with a broad brush here, all right? But they're offering the Intel platforms, and they're offering it to midsize or lower typically. Now if it's AWS or Google, yes, they got the giants that are there. But for the most part, they have all Intel. They need the IBM because the midsized companies have both environments, and they do not have the expertise. And so when we do it with them, they do get the billing. And part of our problem, by the way, we might point out problems for a moment, is that we don't have a multibillion-dollar PE firm behind us because that's how it's difficult even though we do have it to get the monster deals, the $150,000 a month or greater deals that are coming up, that have been coming up. But we work the best. And so sometimes we'll have to move that over to one of our larger infrastructure partners. We don't get the billing -- our margins are pretty much the same, but we don't get the billing on it. But that company that they know us and they know our team. So I would say strategic partners for us, infrastructure partners, those are folks with Intel equipment in data centers that either they own or that they have racks or cases of equipment in. And we love the relationship. We have great training programs as well for that to ramp up. I mean I'm not trying to knock the Intel data centers. I'm just trying to point out that they don't have that expertise, and you need to build confidence if you're in the IBM community looking to move over to the cloud. I know we're out of time, but there was more questions, Ali.

Yes. We'll answer all the other questions personally via e-mail, but that is all that we have time for now. Chuck?

Okay. Well, everyone, thank you very much for spending the time. Thank you for the questions. I'll get the questions and respond back to everyone. So I appreciate it. Thank you, and have a great day.

Thank you. That concludes the Data Storage Corporation's presentation. You may now disconnect. Please consult the conference agenda for the next presenting company.