Data Storage Corporation (NASDAQ:DTST) Q3 2023 Earnings Call Transcript

Data Storage Corporation (NASDAQ:DTST) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Greetings, and welcome to the Data Storage Corporation 2023 Fiscal Third Quarter Business Update Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alexandra Schilt. Thank you. You may begin.

Alexandra Schilt: Thank you. Good morning, everyone, and welcome to Data Storage Corporation’s third 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 third 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’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 preceded by, followed by or 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, 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 find 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 of 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 should be read together with the company — with other cautionary statements included in the company’s quarterly report on Form 10-Q for the quarter ended September 30, 2023, and annual report on Form 10-K and current reports on Form 8-K filed with the Securities and Exchange Commission.

Any forward-looking statements speaks only as of the date on 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.

Charles Piluso: Thanks, Alexandra. Good morning, everyone. I’m proud to report we generated a 35% increase in revenue to approximately $6 million for the third quarter of 2023. Importantly, we achieved another quarter of profitability with approximately $158,000 in net income for the third quarter. We believe this is a direct result of our ongoing business growth initiatives, which we have implemented to assist in accelerating our revenue growth and increased profitability. Notably, CloudFirst as a stand-alone business, achieved $3.7 million in revenue for the third quarter with a net income of over $800,000 and $1.1 million in EBITDA. In addition, on the equipment and software side, we generated approximately $2 million of revenue in the third quarter, compared to approximately $1 million for the third quarter of 2022, an increase of nearly 100%.

While the increase in equipment sales had a slight impact on our overall gross profit margin, we continue to work to assimilate Flagship business unit and have actively implemented strategies to enhance our gross profit margin by increasing subscription revenues within Flagship and move closer to the 50% margin that we generated CloudFirst. We have begun the process of bringing together these two excellent companies and their team members to leverage the talent, client bases, assets and management. Across the organization, with the continued execution and further implementation of our growth initiatives, including ongoing expansion of our distribution channels, increased utilization of our digital and direct marketing programs, optimizing our lead generation program, hosting additional revenue driven sales events and exploring strategic M&A opportunities, can continue to increase revenue while maximizing long-term profitability.

Furthermore, we plan to expand internationally as there is a significant need for our innovative solutions around the world, and we intend to penetrate these large underserved markets. Today, a program is underway to reach out to over 1,000 managed service providers in the U.K. to build partnerships and create a distribution channel. We’ll provide updates on our progress as developments unfold. Validating the demand for our solutions, we have continued to witness an increase in visitors to our website. We also have our nurture list, which I have spoken about in the last quarter that contains over 25,000 organizations, who are interested in the potential implementation of our services. We intend to take advantage of these avenues to secure new contracts and increase exposure within the market.

In addition, we recently launched a strategic sales and marketing initiative designed to capitalize on the growing demand for our products and services. We are already witnessing the benefits of these initiatives. This includes onboarding new sales representatives, who are dedicated to driving and securing new customers, which supports and works hand in hand with our ongoing lead generation programs. Our new sales representatives are responsible for attending to our nurture list with the goal of progressing discussions to contract. Concurrently, we launched a new major accounts program. This program is solely focused on increasing our penetration with an existing enterprise and middle market accounts to take advantage of upselling and cross-selling opportunities.

Today, DFC receives a small segment of the ITC spend for these enterprise-level clients. In fact, our ongoing strategy has been to land new customers and expand our relationships over time as their needs grow. Land to expand enables endless cross-selling opportunities. However, with a dedicated team, ensuring these opportunities aren’t overlooked, we can truly capitalize on significant opportunities within the market. Demonstrating this effective strategy is our recent contract announcement with one of the nation’s leading sports and entertainment companies. We have been working with this customer for a number of years and continue to expand our relationship. We are working to implement our cybersecurity solutions into their security systems to assist with protecting their large infrastructure, as well as aid in response times to certain threats.

We believe this expanded contract validates how we grow with our clients and continually address their needs. I’d also like to highlight that this contract follows previously announced contracts as discussed in our last conference call, including a subscription-based contract with the leading promotional company. We were providing fully monitored and managed cloud solutions today. Unfortunately, an unexpected natural disaster happened and following this, they realized they were unable to recover and resume operations. That was within their required time frame. And as a result, we have implemented cloud-based disaster recovery and cloud-based infrastructure, allowing the client to run its critical applications on our fully managed, highly secure enterprise cloud 24/7 dedicated support, ensuring seamless rapid recovery of data during unexpected downtimes.

We also announced a multimillion dollar project with the same sports and entertainment organization we touched on. This previous contract was for a custom solution to provide response time to files, file recovery and increased storage capacity to support their critical aspects of the security infrastructure, and we secured a subscription-based contract with one of the largest food distributors in the U.S. We are providing managed disaster recovery solutions to reduce the recovery time of critical data. As you can see, we are witnessing strong contract momentum and continue to maintain a 94% renewal rate with an average term of 24 months, demonstrating our ability to support clients while meeting or exceeding their needs. We currently serve over 450 companies and intend to continue to grow this impressive list.

Today, data center companies that provide infrastructure on Windows-based type platforms come to Data Storage Corporation for their client — for our IBM platforms. These infrastructure partners are a great way to expand our distribution with their expertise, excellent staff while leveraging our assets deployed. Overall, we are executing on our strategic growth plan, which has resulted in profitability for the third quarter of 2023, as well as new and expanded contracts while increasing our penetration within the market. We are also actively exploring potential strategic acquisitions that would assist and support our growth and, more importantly, complement and improve our current operations. As a result, I believe we’re at a pivotal point in the company where we are extremely well positioned to enter large international markets, upsell and cross-sell our products and services and secure additional meaningful subscription-based contracts, all leading to sustainable profitability and revenue growth.

At the same time, we have carefully managed expenses and have preserved a strong balance sheet with over $11.5 million in cash and marketable securities enabling us 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 the third quarter financials. Please go ahead, Chris.

Chris Panagiotakos: Thank you, Chuck. Total revenue for the 3 months ended September 30, 2023, was $6 million, an increase of $1.6 million or 35%, compared to $4.4 million for the three months ended September 30, 2022. The increase is attributed to an increase in all of our revenue streams during the current period. Cost of sales for the three months ended September 30, 2023, was $3.7 million, an increase of $1.1 million or 42%, compared to $2.6 million for the three months ended September 30, 2022. The increase was mostly related to an increase to the increase in sales. Selling, general and administrative expenses for the three months ended September 30, 2023, were $2.3 million an increase of $240,000 or 12%, as compared to $2.1 million for the three months ended September 30, 2022.

The increase was primarily due to an increase in salary expenses as a result of an increase in other employee benefits and an increase in professional fees, offset by a reduction in advertising expenses. Adjusted EBITDA for the three months ended September 30, 2023, and was $487,000, compared to adjusted EBITDA of $162,000 for the same period last year. Net income attributable to common shareholders for the three months ended September 30, 2023, was $179,000, compared to a net loss of $246,000 for the three months ended September 30, 2022. We ended the quarter with cash and marketable securities of approximately $11.5 million, compared to $11.3 million at December 31, 2022. Thank you. I will now turn the call back to Chuck.

Charles Piluso: Thanks, Chris. Probably a good time to open it up for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question comes from Adam Waldo with Lismore Partners. Please go ahead.

Adam Waldo: Yes, good day, Chuck and Chris, I hope you can hear me okay. Congratulations on a strong quarter.

Charles Piluso: Thanks, Adam.

Adam Waldo: Chuck, I want to see if we can drill down a little bit on some of the new business pipeline and backlog metrics and also talk a little bit about the sort of what you think the medium-term margin structure and organic growth profile of a Flagship might look like now that you’ve sort of had it in the tent for a while and are making some strong progress with its growth? So on the new business pipeline and backlog side, at the end of the first quarter, you reported year-to-date inbound inquiries of about 6,000 at the end of the second quarter, about 19,000, which was very strong progress. And obviously, that’s now translating into the revenue growth profile acceleration. What did that metric look like at the end of the third quarter in terms of year-to-date inbound inquiries in 2023?

Charles Piluso: I’m going to back it up just a little bit because you talked about flagship. So right now — that’s okay because you mentioned Flagship and all. So I just want to cover that, and I mentioned it in the earnings call, we’re pretty much finished with the full assimilation of Flagship and we’re bringing both Flagship and CloudFirst together as one company. So we feel that we know the company well enough. We know the talent that’s there, the client base. And so we’re bringing that together as one company that will be an unbelievable team that will be underneath the CloudFirst and Flagship will be a brand, as well as CloudFirst dis a brand today and so specs there’ll be more branded items on that. As to the pipeline itself and we talk about inquiries coming into our site, I think at the end of August, I don’t have an update right now.

There were over 60,000 visitors coming into our site on and they’re visiting and based on the number of pages they might go into one of those site, it will generate and classify a lead class. I happen to have Hal Schwartz here with me right now, who is the President of CloudFirst, so Hal maybe you can answer that question on the pipeline.

Hal Schwartz: Yes, we have seen steady growth in the number of visitors to our website from — most recently, we’re in the 7,000-plus a month range. So if you want to do a quarterly estimate on that, you’re above 20,000. And our pipeline continues to grow. We are well above $10 million in total contract value in our pipeline at the moment, CloudFirst.

Charles Piluso: CludFirst, so I don’t know if that helped, Adam on that piece?

Adam Waldo: That’s very helpful. Thanks, Chuck, and Hal. And so that’s just on the CloudFirst side. Now if we think about the enterprise and the company overall, obviously, now with the integration of Flagship pretty far along. What do you think is a reasonable mid-term gross margin for the services? I know the equipment sales are very lumpy. But for the pure services revenue stream, what do we think is a reasonable target gross margin range — and then what is the dollar value of our backlog at the end of the third quarter? And that will end my questions. Thank you.

Charles Piluso: Sure. The first piece is that Tom Kempster that’s a heads up Flagship we hope that we’re very, very successful on selling equipment and software and cybersecurity software, support and maintenance on the IBM systems. And when we do that, those margins are somewhere between 10% and 16% on the Flagship side. And so when we talk about equipment, there’s been some pretty good margins that have improved. Typically, in the past, we saw margins in the area of 15% to 20%. Those margins seems to be moving up. And when we look at the flagship, the annual recurring revenue typically and nothing is guaranteed on anything. But on the annual recurring revenue, it’s around $7 million. And that $7 million includes managed services, which is somewhere between a 25% and a 28% margin and then you have software renewals, hardware maintenance and all of that, that could be somewhere between 10% and 14%.

But we’ve been seeing proposals going out and almost, in some cases, at a 40% margin. So it’s pretty hard to determine because, as you mentioned, it’s lumpy. When we look at our service revenue, and I’m talking about subscription based, it’s I’m going to say 52%, an estimated 52% on that. And keep in mind that when we look at the margins on that, I believe, Chris, we put around $1 million we spent on equipment, on CapEx, on CloudFirst. And when you take a look at that, we’re not using all of that, but we are getting hit with depreciation on that. So typically, if we were allowed to carry an inventory on it for unused, we’ll call it storage and anything else, you’d probably be north of 52. But let’s use 50 to 52 as a margin on subscription-based services.

I would say, 25% to 28% on managed services. And when we take a look at what we might be entering 2024 with I would estimate that — I give you the estimate to get the fourth quarter, I’ll tell you January 2024, I would say an estimate $18 million as a baseline right now.

Adam Waldo: ARR on the service side, Chuck.

Charles Piluso: Yes. ARR on the service side, on managed services and software and hardware renewal programs.

Adam Waldo: Okay, great. And then the dollar value or new business backlog at the end of the third quarter was what I think were $5.8 million at the end of the second quarter.

Charles Piluso: Yes, okay. On those numbers, I was told that around $3.7 million of that is estimated. It’s been installed with another $2 million more to go plus any new contracts that are in. But just to back into that number, it said, well, $2.8 million more to go. I was just stated.

Adam Waldo: Okay. Thanks so much. Continued wishes for an ongoing strong progress. Thanks.

Charles Piluso: Thank you. Thanks, Adam.

Operator: [Operator Instructions] Next question, Nick Pinkus with Forest Capital. Please go ahead.