Data Storage Corporation (NASDAQ:DTST) Q1 2023 Earnings Call Transcript May 15, 2023

Data Storage Corporation misses on earnings expectations. Reported EPS is $0.01 EPS, expectations were $0.02.

Operator: Greetings and welcome to the Data Storage Corporation Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Waldman, Investor Relations. Please, you may begin.

David Waldman: Thank you and good morning, everyone and welcome to Data Storage Corporation’s first quarter business update conference call. On the call with us this morning are Chuck Piluso, Chairman and CEO; and Chris Panagiotakos, Chief Financial Officer. The company issued a press release this morning containing first quarter 2023 financial results, which is also posted on the company’s website. If you have any questions after the call, or would like any additional information about the company, please contact Crescendo Communications at (212) 671-1020. Before we begin, I would like to remind listeners that this conference call contains forward-looking statements within the meaning of 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 and that cause actual results, performance or achievements to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Statements preceded by a thought that 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 or generally forward-looking in nature and not historical facts, although not all forward-looking statements include the foregoing. Although the company believes 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 leverage the scalability and performance to Flagship solutions, 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 NASDAQ listing. These risks should not be construed as exhaustive, and to be read together with the other cautionary statements included in the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2023, annual reports on Form 10-K and current reports on Form 8-K filed with the Securities and Exchange Commission. Any forward-looking statement speaks only as of the date on which 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. Now I’d like to turn the call over to Chuck Piluso. Please go ahead, Chuck.

Chuck Piluso: Thank you, David, and good morning, everyone. We continue to make strong progress as it relates to the implementation of the business initiatives that I highlighted on our last call. These initiatives are highly targeted to accelerate our growth and should assist in achieving our goal of long-term sustainable profitability. Historically, we’ve had an impressive 23% compounded annual growth rate since 2017, but we believe that through these initiatives, we can generate even stronger growth going forward. In fact, our near-term goal is to get to $50 million in high-margin revenue run rate in the coming years through a combination of both strong organic growth and strategic acquisitions. For this end, we have a number of specific activities underway, including expanding our dedicated sales team, hosting revenue-driven sales events, growing our channel partner program at Flagship Nexus as well as CloudFirst, increasing our international footprint through strategic partnerships, and finally, we are actively exploring ways to increase our gross profit margins in Flagship and Nexus on recurring services closer to 50%, much like CloudFirst gross profit on subscription services.

I’d like to note that we are still assimilating Flagship, including the recent realignment of management with Tom Kempster, Flagship’s new President. All of our efforts are focused on the primary goal of efficiently deploying capital based on measurable returns, while increasing our penetration into this multibillion-dollar marketplace. In fact, we are increasingly being sought out for our products, services and proven ability to execute. Validating this, our work in process on executed subscription revenue contracts are over $5.5 million in total contract value, and this further supported by the increasing visitation to our websites with over 19,000 visitors in the first quarter alone. Additionally, we received and we announced receiving a 7-figure order from a Global 2000 listed company on Forbes.

This order is from an existing customer from whom we have established relationship, and which we believe will further demonstrate our ability to meet any and all of the needs of our customers, specifically large enterprise customers. To provide additional clarity for our shareholders on performance of each subsidiary, we have decided to break out our revenue by business segment, and the first quarter is the second reporting period which we have done this. While we did report a decrease in revenue in the first quarter of 2023 when compared to 2022, I’d like to note that during the first quarter of 2022, we reported a $2.6 million equipment sale to an NFL team. Excluding this sale, our revenues increased 14% over the same period last year. As I mentioned in the past, we are focusing our efforts on recurring revenue.

We’re not turning away from equipment and software sales, and we continue to explore and take advantage of these opportunities since we have experience, and we benefit from the cash injection. However, our long-term goal is steady profitability, which can only be sustained with long-term subscription-based contracts, which provide high-margin recurring revenue streams. Concurrently, we’re able to decrease our SG&A expenses by 13% from $2.5 million in the first quarter of 2022 to $2.1 million in the first quarter of 2023, which is a result of reallocating resources and eliminating redundant expenses. As a result, and very importantly, we’ve achieved profitability for the first quarter with $35,000 in net income, and an adjusted EBITDA of $334,000 on revenue of $6.9 million for the first quarter of 2023.

With a solid experienced leadership team, we are focused on subsidiaries to secure long-term recurring revenue contracts. While we believe CloudFirst is hitting the mark, given its ability to sustain profitability on a stand-alone basis, we are extremely dedicated to having Flagship and Nexus achieve the same, thereby increasing overall profitability. We continue to drive this strategy by expanding our distribution channels, while also increasing our digital and direct marketing programs, which have been performing well given our social and digital lead generation programs. CloudFirst alone has over 16,000 visitors to the website from the beginning of the year through April. Additionally, we continue to explore synergistic acquisitions that complement and enhance our current operations, including companies leading in technology trends or that add important technical staff and create economies of scale to improve our gross profit margins and net income.

We will also drive growth by developing and managing collaborative solutions as well as embark on joint venture, joint marketing initiatives with our established distribution partners like IBM, our software vendors, IT resellers, managed service providers, application support providers, consultants and others. Furthermore, we continue to believe there is a significant need for our solutions on a global scale, and we are pursuing growth opportunities internationally as these markets are increasing their use of multi-cloud solutions, which we are very well positioned to handle. To give you a better sense of the market, there is an estimated 160,000 systems in the market with multiple partitions. In total, there are about 1 million of the unique partitions.

Once virtualized, we typically price these partitions at $36,000 per year, which equates to a global addressable market of roughly $36 billion in annual recurring revenue. It is also worth noting the average contract term is about 29 months, and we have maintained an impressive 94% renewal rate. So hopefully, you can see, with the effective rollout of these initiatives, we believe our profitability can accelerate and be maintained long term. Overall, we are positioning ourselves as a leader within the industry. There is very limited competition in the market today. And unlike others, we have a 20-year proven track record with an established first-class customer base. With approximately $11 million in cash and short-term investments and no debt, we can deploy capital effectively, execute on our strategic business initiatives and substantially grow our business.

We look forward to announcing additional accomplishments throughout the year. And with that, I’d like to turn the call over to Chris Panagiotakos, our CFO, to discuss our first quarter financials. Please go ahead, Chris.

Chris Panagiotakos: Thank you, Chuck. Total revenue for the 3 months ended March 31, 2023, was $6.9 million, a decrease of $1.8 million or 21% compared to $8.7 million for the 3 months ended March 31, 2022. The decrease is attributed to a decrease in equipment sales during the current period. Cost of sales for the 3 months ended March 31, 2023, was $4.8 million, a decrease of $1.2 million or 20% compared to $6 million for the 3 months ended March 31, 2022. The decrease of 20% was mostly related to a decrease in equipment related cost of sales. Selling, general and administrative expenses for the 3 months ended March 31, 2023 were $2.1 million, a decrease of $329,000 or 13% as compared to $2.5 million for the 3 months ended March 31, 2022.

The decrease is primarily attributed to a reduction force, a decrease in Software-as-a-Service expense and a reduction in commissions. Adjusted EBITDA for the 3 months ended March 31, 2023, was $334,165 compared to adjusted EBITDA of $604,492 for the same period last year. Net income attributable to common shareholders for the 3 months ended March 31, 2023, was $50,666 compared to net income of $156,010 for the 3 months ended March 31, 2022. We ended the quarter with cash and short-term investments of approximately $11 million at March 31, 2023, compared to $11.3 million at December 31, 2022. Thank you. I will now turn the call back to Chuck.

Chuck Piluso: Thanks, Chris. I’d like to open the call up for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Matt Galinko with Max Group.

Operator: Our next question comes from Adam Waldo with Lismore Partners, LLC.

Operator: Excuse me. We are closing our question-and-answer session. Now, I would like to turn the floor back over to Chuck Piluso for closing comments. Please go ahead.

Chuck Piluso: Thank you, Passila. Thank you. And thank you all for the questions. Appreciate it. And to wrap up, we are actively pursuing aggressive growth strategies and have effectively implemented our business initiatives that we believe will drive revenue and assist in sustainable profitability. We remain committed to reducing redundant expenses, streamlining operations and maintaining a solid balance sheet to position ourselves as a leader within this industry. We are proud of our progress, and we look forward to reporting additional developments as they unfold. Thank you all for joining today.

Operator: This concludes today’s conference call. You may now disconnect your lines at this time. Thank you for your participation and have a great day.