Data Storage Corporation (DTST) Q2 2022 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Data Storage Corporation Second Quarter 2022 Conference Call. All lines have been placed on a listen-only mode, and the floor will open for your questions and comments following the presentation. [Operator Instructions] At this time, it is now my pleasure to turn the floor over to your host, David Waldman, Investor Relations. Sir, the floor is yours.

Thank you. Good morning, everyone and welcome to Data Storage Corporation's 2022 second quarter ending June 30, 2022 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. Company issued a press release this morning containing second quarter 2022 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 preceded by, followed by or that otherwise include the words believes, expects, anticipates, intends, projects, estimates, plans and similar expressions are 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 the expectations reflected in such forward-looking statements are reasonable, and 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 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 other cautionary statements including the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2022, and annual report on Form 10-K and current reports on Form 8-K files with the Securities and Exchange Commission. Any forward-looking statements speak 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.

Thanks, David. Good morning, everyone. I’m please report that we achieve solid revenue growth in the second quarter of 2022, with total revenue increasing by $1.3 million or 37% compared to the same period last year. For the six months ending June 30, 2022, our revenue increased 121% over the same period last year. As stated in our press release this morning, the higher increase in revenue for the six month period relates to the timing of 1x equipment sales, which were front loaded in the first quarter. Equipment sales by nature are very lumpy and can cause large swings in our revenue from quarter-to-quarter. And while we are continuing and will continue to take advantage of opportunities to sell equipment, to enterprise level customers; however, our primary focus is on high margin, recurring subscription-based cloud and managed services, which increased 47% in the second quarter of 2022 compared to the same period last year. Ultimately, this is where we see the future of the Company and the future of our industry, as more companies seek to migrate their IBM power infrastructure to the cloud. Over the years of our experience, providing data storage and disaster recovery service, this has helped us establish a leading reputation in this market. And as we've discussed in the past, while Intel and windows service have been undergoing this migration to the cloud, the IBM server market has only begun to transition to the last in the last few years. This is very limited competition marketplace, and our timing is excellent to tap into this rapidly growing multi-billion dollar market opportunity. More importantly, businesses are increasingly under pressure to improve their applications, disaster recovery and storage systems, accelerating the migration from self-managed, technical equipment, on premise to solutions to fully managed multi-cloud technologies to reduce and compete effectively. In today's environment, capital preservation is also an incentive to move from a capital intensive on premise technology to a Pay as you Go model. Basically, customers are moving from a CapEx to an OpEx model, which will continue to support growth in our subscription cloud model. Toward this end, we have built a robust sales pipeline, while at the same time, we are increasing our sales force, expanding our marketing initiatives as well as investing in highly skilled personnel and infrastructure. Heading this initiative is Tom Mitchell who joined us from Flagship as our new Vice President of Sales. Tom brings more than 26 years of management and sales experience, including 18 years at IBM. He served in IBM's Channel Partner, the division supporting several IBM largest U.S. partners. Tom has been with Flagship for over 10 years, serving as VP of Sales and is now responsible for all of DSCs revenue. Given the strong demand for our services, we are also expanding our sales team with plan to hire higher an additional four sales reps in the coming month, bringing our direct sales team to 20, while continuing to increase our efforts to develop additional channel partners under the leadership of a Director of Channel, Steve Romweber. Steve has over 20 years experience providing services and software to this community. Steve has been with us over two years and continues to build this distribution channel. We're also creating a special services group, working with partnerships with IBM and Cisco and others alongside of their sales staff to open joint opportunities with their clients. In addition, we're expanding within the government sector under the leadership of Tom Kempster, the Executive Vice President of Data Storage Corp with a particular focus on state county and local agencies. Government is one of the largest users of IBM service and storage. It's a perfect target to migrate our disaster recovery and cloud infrastructure. As a result of these initiatives, the current outstanding contract value on our client subscription services agreements is over $14 million. Moreover, we have proposals outstanding with a combined total contract value of more than $18 million. I'm also pleased to report that despite the lumpiness of equipment sales, we achieved positive EBITDA in the second quarter of 2022. And we believe we are well positioned to drive increased profitability going forward, given the scalability of our business model. At the same time, we continue to carefully manage expenses. Following the acquisition of Flagship, we are centralizing data center operations for better utilization of staff and a reduction in contractors. Overseeing this initiative is our Chief Technology Officer, Chuck Paolillo, who brings more than 20 years of industry experience. We have already identified cost savings. We are implementing across the organization by further integrating our business units. Given these initiatives, let me break down the numbers a little further, so you can see where we are today and why we are optimistic going forward. Our three subsidiaries CloudFirst run by Hal Schwartz; Flagship run by Mark Wyllie and President; and John Camello, President of NEXXIS combined makeup our subsidiary leadership and serve as the Presidents of these units. Combining CloudFirst infrastructure and disaster recovery services with Flagship's managed services, our recurring subscription revenues increased by 47%. Cloud subscription is typically priced at a 50% gross profit margin. In contrast, our equipment software and hardware sales increase approximately 27% with gross profit margins estimated at 25%. On a standalone business, CloudFirst, which was DSC, the operating company is profitable and growing. Flagship will continue to fluctuate based on its heavy reliance on equipment and software sales. But as we continue our annual recurring revenues, which are currently running at an estimated $4.3 million and with centralized operations and the organization, we expect this business to become consistently profitable from quarter-to-quarter. Based on contracted annual recurring revenue, we expect Flagship to enter 2023 with the baseline recurring revenue of more than $5.2 million. NEXXIS has historically been slow and steady business with consistent gross profit margins of around 35% and is near breakeven on a standalone basis. As we continue to grow NEXXIS, it should be consistent contributed to profitability. So to wrap-up, we are pleased with our progress, especially on subscription cloud based services. DSC solutions built by DSC represent the future of the Company. And as I mentioned earlier, while we are prioritizing these services, we are not abandoning equipment and software sales and see these sales as an opportunity for additional cash and add on services to these large clients. Moreover, we were able to positive despite significant investments in our business and sales initiatives, which has always been our strategy. Corporate expenses have grown due in part to our focus on government sales, as well as new personnel and professional expenses. We expect that revenue as revenue grows, corporate expenses, as a percentage of revenue will decrease. At the same time, we continue to carefully manage expenses and see opportunities for additional cost savings. We also ended the quarter with over $11 million of cash and cash equivalence, and no long-term debt. We have a strong team, a robust proposal pipeline, and limited competition. And as a result, we believe we are well positioned to drive increased profitability, given our highly scalable business model. We're excited about the outlook for the business and look forward to providing further updates as developments unfold. With that, I'd like to turn it over to Chris Panagiotakos, our CFO to discuss our first quarter of financials. Please go ahead, Chris.

Thank you, Chuck. Total revenue for the three months ended June 30, 2022 was $4.8 million, an increase of $1.3 million or 37% compared to $3.5 million for the three months ended June 30, 2021. The increase is primarily attributed to the additional sales from the Flagship merger and an increase in monthly subscription revenue. Cost of sales for the three months ended June 30, 2022 was $3 million, an increase of $1 million or 47% compared to 2 million for the three months ended June 30, 2021. The increase of $1 million was most related to the Flagship merger and the variable nature of cost incurred to produce and sell our products and services. Selling, general, and administrative expenses for the three months ended June 30, 2022 were $2.6 million, an increase of $1 million or 62% as compared to $1.6 million for the three months ended June 30, 2021. The increase is primarily attributed to the increase in salaries as a result of the Flagship merger, new sales and marketing staff, and increased marketing expenses. Adjusted EBITDA for the quarter was $33,000 compared to adjusted EBITDA of $249,000 for the same period last year. Net loss attributable to common shareholders for the three months ended June 30, 2022 was $857,000 compared to net income of $136,000 for the same period in 2021. We ended the quarter with cash and cash equivalent of $11.2 million at June 30, 2022, compared to $12.1 million at December 31, 2021. Thank you. I will now turn the call back to Chuck.

Thanks, Chris. I'd like to open up this portion to any questions that listeners have to ask.

[Operator Instructions] And our first question comes from Matthew Galinko from Maxim Group.

Chuck, you mentioned, you described kind of the future as a Pay as you Go model, and we've talked about the opportunities there in the past. How is the macro environment that we're sort of looking at today between inflation and some concerns about growth in the economy impacting? How your customers, prospective customer engagement is looking at that scenario of moving from an on-prem type deployment to a cloud?

I believe that the recession although hits us all personally is excellent for this business. People will preserve their cash and the expression Pay as you Go it's more as Pay as you Grow. And if you look at it that way, so that people will preserve the cash, they'll look to optimize their staff, where we take care of infrastructure. It's one expense they don't need on the payroll side. Along with disaster recovery with being able to have backups that are done after hours, where our backups are done on the target side and continue to -- the companies continue to receive information on how successful those backups are. So through automation, through our 24-hour day monitoring, they can literally, if they want reduce their staff, reduce their capital expenditures and then move with us. So, I think from in a recession or a threat of a recession, it's good for -- I believe it's good for our business, Matt.

And I guess if you could -- if it's -- is it possible to segment that a little further into I think you mentioned that that government is maybe the -- among the heaviest users of IBM power are infrastructure. So do you see a difference in how government versus non-government customers are responding to the current environment?

It's interesting that, I've been dealing with like some government type sales through my career, and with this it becomes difficult to a degree, but what's happened now is Tom Kempster, who originally was with ABC and we merged with or acquired back in '16 and '17, and he's running this right now and knows it really well. And he's responding to RFPs. There are RFPs coming out, which is great. And I believe we just took a sale with a local township in New York state. So, I think, it is heating up. It's seeing the advantages of it, whether they'll move the cloud infrastructure completely, I think that's maybe protective for a little while, but on disaster recovery side, I think we'll see some acceleration in that way. But Tom is responding to RFPs, and I believe we just took an order, we're fairly new at what we call govnet, which is websites being developed for that right now. And it's directly targeted to government services to cybersecurity, infrastructure is a service cloud infrastructure and disaster recovery. So, we believe that it will pick up and in a short period of time, if Tom working on it, I believe we received an order, pretty good.

Very good. Maybe last question for me before I jump back in the queue, I think you've talked in the past a little bit about international expansion of the services business. How is that going for you to-date?

We've been so busy looking at where we can consolidate in the U.S., and we also have two data centers in Canada with our relationship a partner, Able-One. And I will say that, we have our eye on it. We know exactly where the data centers are, where there's heavy bandwidth globally. And we have designed a particular, Chuck Paolilloh, as our CTO where we can put a rack in a particular country and open that up. We are looking at that. We need to see who we would assign to say, they really want to run with international. I believe that we can probably put up 2 cities in 12 months and work with IBM partners in those countries and give them the opportunity to what we've built over 10 years with this platform. So, we are looking at it. We just need thebe able to sign some leadership to be able to do that. So, we do have our eyes on it.

[Operator Instructions] Our next question comes from [Bill Jordan] from TA Investments. Go ahead, sir.

Good morning, Chuck. I was wondering, if you could provide some color on how Flagship is doing on a standalone basis?

Sure. I'm going to turn that over to Chris, but before I do that, I will say that when we acquired Flagship, they had a baseline of recurring annual recurring revenue, which they've been growing over the years to get away from a little dependency on the equipment. And they have a very experienced sales team that has been selling equipment and software for as long as they've been in business. So there's a lot of pressure essentially on Flagship with cross-selling and their customers and all. So, we're working real hard to not lose anything on the equipment and software sales, but at the same time build into the DSC, Data Storage Corporation, CloudFirst data centers with infrastructure and DR. So, we're working together with the training. Tom Mitchell is overseeing all sales has it as a priority for cross-training, compensation and things like that. So, it's a little bit of a transition, but the same time we don't want to lose there's some fairly large accounts that Flagship has. And we don't want to lose that, and there's also additional sales that come along with that, that follow along with those equipment and software sales But actually the actual numbers, Chris, I'll turn it over to you.

So Bill, to further answer your question, if you remove the stock based comp the amortization expense and the corporate allocation, Flagship did show a slight profit for the six months ended June 30, 2022.

And that appears to be our last -- sorry. Yep. That appears to be our last question at this time. I would now like to turn it over to management for any closing remarks. Thank you.

Well, thank you. Thank you for the questions. It's always good to drill down a little bit and appreciated Bill and Matt. Well, as we continue to generate solid year-over-year growth while continuing our focus on monthly recurring subscription-based revenue and managed services, this is what our mission is. And we have a great leadership running the Company, the subsidiaries and the offices and management underneath that. And we believe we are extremely well positioned to capitalize on the growing opportunities. As more companies seek to migrate their IBM power systems and infrastructure, the cloud. In addition, we're well positioned to drive increased profitability, going forward, given the scalability of our business model. We ended the quarter with $11 million in cash. We have no long term debt. We have a solid foundation to accelerate our business model. Thank you all for joining today. It's appreciated and look forward to further updates from us with press releases. Thank you.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.