Data Storage Corporation (DTST) Q1 2023 Earnings Report, Transcript and Summary

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.

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.

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.

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.

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

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

Hey, thanks for taking my questions. I guess, can we start with the Fortune 2000 deal that you announced late last week. Was that software equipment? Was that recurring? Anything you could add to how we could expect that to fall into your future results?

Hi, Matt. The deal was software. We this particular company, we don’t like to wait around for approvals from all these companies to have our press releases go through their organization. So we don’t actually go through actually the client is. But this particular client, we provide managed services to this client, and that was a software sale. We expect that to recur every year, hopefully, but it does go after bid, but we consider it annual recurring revenue because we’ve had it for the previous year, but you need to compete for it and win it. But it is a customer that we provide a number of different managed services, software-related patch management, things like that.

Got it. And I guess, this year, was there an expansion of the scope of the contract or size? Or is it relatively the same as the prior year?

I believe it was expanded.

Got it. Terrific. I guess maybe going to a couple of the growth drivers that you’re looking at, I think, the first one you mentioned was expansion of the sales team. So anything new this quarter? Did you add a number of heads that you could point to or any notable hires? Or generally, how is the process of adding new qualified reps?

Sure. One example is Verizon’s layoff of their sales organization of the mid-market has benefited us. We’ve hired two individuals, one to cover the Southeast U.S. for Nexus, and Nexus also brought on someone in the New York metro area. And so that was good as well as we have other candidates that are lined up. But – and those are two examples of that. So these layoffs, to some degree, has helped us, but the recruiting is ongoing.

Got it. Terrific. And last one for me. You called out the M&A pipeline again, or at least you called out M&A as a growth opportunity. So can you touch on the pipeline? Are you seeing a lot of possible acquisition targets? And are the valuations sort of in the right range these days? How do you think about that today?

Well, on the last call, I believe I stated that we put out somewhere between four or five term sheets last year alone. And these typically were companies doing $10 million in revenue. They had net income, but they are very small companies, really didn’t have sales force, and so we decided to try to look on the larger side to move up north of $15 million, folks that are growing, growing the business, have the recurring contracts going on. So this year, we are looking internationally to find managed service providers, and we’re looking at that. At the same time, folks that are really trying to grow the business, not someone that’s been in the business for 25, 30 years and they have a [indiscernible] handicap, nothing that’s wrong with that, but they are not really growing the business. So we are looking internationally with that as well, and we do have an investment bank that’s under engagement to continue to look for M&A opportunities, but north of this $10 million mark. There is not folks that do exactly what we do. So it’s not that we’re focused on a CloudFirst where we have the $7.5 million of assets deployed in six data centers, and it’s IBM [indiscernible] and in IBMi. We’re looking for managed service providers that are growing the business. They are focused on cybersecurity. Cyber has an element of AI in it. So we’re looking. We continue to look, but we’re just – we’re pretty selective, and we’re just not jumping into things. But we are looking internationally on the M&A side.

Got it. And if I could just add one more follow-up to that, I guess the international expansion comment that you made earlier, I guess, would be solved by you making a slightly larger MSP type international acquisition. So is that what you have in mind for international expansion? Or is there also just organic partner expansion in the international market? Can you kind of touch on that?

Sure. For us to go into, for example, the UK, and for us to set up a data center with some racks in two cities in the UK, it’s not such a big deal for us. We really know how to do it. What we’re looking to do is we’re looking for those MSPs that are providing similar services to us as ABC did in 2017 with equipment and software focused in that same marketplace. And so if we can acquire one of those companies, now, all of a sudden, we can deploy that. We have that folks that are part of our organization on board and running their own unit, their own subsidiary. So we can still do that, and we can still move in, spend whatever it might be, $0.5 million to get started in two cities based under our multi-tenant design for that CloudFirst has. We can do that, but we are looking at the same time for acquiring MSPs and MSP in that area UK first because of in speaking, a bit a little bit easier for us. We are not – I don’t think we are large enough now to say, oh, let’s go into other parts of Europe, multilingual Asia, but the UK is the target.

Got it. Thank you.

Thanks Matt.

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

Good day, everyone. Chuck thanks very much for taking my questions. I wonder if we can start just to flush out the recent enterprise win just a little bit more beyond Matt’s questions a few minutes ago. You press released it obviously as a seven-figure deal. You have disclosed now on the call as a software deal, so we have a sense for what the margins look like. Can you give any more color as to sort of how far into seven-figure deal it is? And to what extent there is opportunity for increased scope of sale based for new services based on that sale?

Sure. Hi Adam. I believe it was $2.2 million, Chris, $2.2 million.

Correct.

I think last year, don’t hold me to it. I think it was $1.9 million. So, it continues to expand on that side. But at the same time, this is an organization, a company that’s growing very, very rapidly, and it’s a Forbes Global 2000 company. And we provide project – we have project managers on this. We have technicians on this. This is through flagship, and we provide what’s called patch management with Big Fix and a number of other services to them. So, it is one of the larger accounts at Flagship. Tom Kempster and the team, sales team that works on that, along with the technicians, continue to try to penetrate more of this account. So, the relationship is good. I don’t know if I could say more than that, if there is proposals pending, but it’s a constant working relationship. Just as an example, I believe that our project manager meets on the phone, set meetings twice a week with them. So, we are very, very deep with the account and the account has significant opportunity to grow larger than what we are doing with them right now.

That’s very helpful. Stepping back a level, last quarter, you gave some helpful quantification in terms of the dollar value of your new business pipeline in your biggest segment CloudFirst, and then also some quantification of the step-up in unsolicited inquiries coming from the website, if I am remembering properly in the 6,000 range in the first quarter, and that was quite a bit higher than in the fourth quarter. I think you said earlier in today’s call that you are now seeing about 19,000 so far. I don’t know if that’s year-to-date for 2023 or 19,000 new ones in the second quarter. Can you quantify a little bit more for us the dollar value of the new business pipeline as it stands right now in each of the three principal business segments, and the size of the backlog, and then any changes recently in your close rates? Thank you.

That is a multi answer. That’s a lot of information. Let me try to break it out a little bit. So overall, on all three websites, first of all, we have Nexus, we have Flagship and CloudFirst. So CloudFirst, which was the original Data Storage Corporation operating company that we changed the name last year to CloudFirst to avoid confusion and allow it to be more aligned with what it does, had 16,000 visitors to the website. I believe it was the first quarter or let’s call it through April. It increased because we started moving away – not moving away, but not just doing the I on the IBM, but also AIX. So, it’s increased significantly. How should – what does a great job with the lead generation programs on that, it is really significant. The other two companies had the difference with the 3,000 additional visitors combined. It’s only beginning. Now, since we realigned management with that, Christie Kates, who’s the Director of Marketing, she has been working with Tom, and they are refreshing the Flagship website to be able to get that to be closer to a lead-generating machine that the CloudFirst is, but that does take time. Nexus also is working on their website for lead generation on that. So, the company that we have been with for a long time, CloudFirst, it takes time to build up the SEO and all of the things that go on with that, but we are working on that to be able to increase the inbound lead gen and visitor to both of the other websites. But that is, let’s just call it through April on that, so fairly significant. On the pipeline, CloudFirst is – uses Salesforce.com sort of the other two companies, subsidiaries. And it’s very sophisticated in the sense of which rated at a 10% probability through a 90% probability. So, what we use is we use anything with the proposal is 20% or more, something that we are negotiating the final terms is 90%. But I believe it’s over – Chris, you remember it’s over $12 million in total contract value, the pipeline?

I believe so.

Yes. I think it’s over $12 million in that pipeline on total contract value. So, if that answers that question. So, we had the website, we had the top line. But you didn’t ask me the question, Adam, about the $5.5 million in executed contracts at the service delivery team right now that CloudFirst is in the process of installing. I think that’s fairly significant.

No, absolutely. Maybe I wasn’t clear. I was sort of hinting at that in the backlog, but – and that’s the big – that’s the vast majority of the backlog at this point, right? Is the $5.5 million on the CloudFirst side?

Yes. And that’s if you break that out...

Yes, that’s a big uptick.

Yes. And the average term, we have accounts that are – might be 6 months term to 60 months term. But when you calculate it out, it’s through sales force calculations, it’s a 29 months average. And with $3,000 a month on our, what I will call the more, the number that’s occurring the most in billing is $3,000 a month, it’s fairly significant. Now, we don’t really take too many annual contracts. I put that at $36,000 annually, but it’s typically $36,000 a month on average 29 months. But it is $5.5 million in contracts that were taken, that are executed, that are in the process of being installed.

Right. And then finally, in terms of close rates, can you give some color or quantification around close rate changes here in the first quarter and into the second. Are they pretty stable? Are they improving? Can you quantify that, please?

Well, what happens is, on Flagship, they have a smaller number of accounts than CloudFirst. And typically, those accounts, the relationship with these very large accounts, whether that’s the Miami Heat or accounts like that, the Falcons, the close rate is extremely high. The population sample is smaller, let’s call it, it’s 50, whatever it counts, but the population is small, their close rate is very high. I am going to estimate that it’s probably like 80%. When you take CloudFirst that’s dealing with a much higher volume, I believe how Houzz [ph] said it’s around 23%, don’t hold me to that. Nexus on the other side, I am not exactly sure with, but I would go with one out of four on the close rate for John Camillo and his running of Nexus. But with the Flagship, the rate, I am probably going to just estimate it at around probably 80%. Very rarely, they lose a deal. Sometimes the budget will be pushed up. And by the way, it’s the same thing for CloudFirst. What’s in the pipeline, sometimes it just gets delayed and pushes out because it’s a big deal to move someone’s on-premise infrastructure to off-premise and someone can easily delay that. Disaster recovery, if someone just had a whole loss, those things move kind of quick. But I think Houzz said, on average, is around 23%.

Right. Tremendously helpful. Thanks very much.

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.

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.

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.