Data Storage Corporation (DTST) Q2 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to Data Storage Corporation's Second Quarter Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Alexandra Schilt, Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to Data Storage Corporation's 2025 Second 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 2025 second quarter 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 or 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 provide no assurance that such expectations will prove to have been correct. These risks should not be construed as exhaustive and should be read together with other cautionary statements included in the company's quarterly reports on Form 10-Q, 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 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.

Thank you, Allie. Good morning, everyone, and thank you for joining us on today's call to discuss our 2025 second quarter results. We appreciate your continued interest and the opportunity to share an update on our performance as well as provide insights into recent developments and future plans. To begin, we'll start with a review of our financial results for 3- and 6-month periods ended June 30, 2025. And with that, I'd like to turn the call over to Chris, our CFO. Chris?

Thank you, Chuck. Good morning, everyone. Total sales for the 3 months ended June 30, 2025, were $5.1 million, an increase of approximately $236,000 or 4.8% compared to the 3 months ended June 30, 2024. The increase was primarily driven by continued growth in our subscription-based services. Cloud infrastructure and disaster recovery revenue increased by approximately $193,000 or 6.1% due to the addition of new subscription clients and expanded services for existing clients. Nexxis also contributed significantly with an increase of approximately $48,000 or 17.3%, reflecting successful sales initiatives. This growth was partially offset by a decrease in equipment and software sales of approximately $95,000 or 12.1%, which is attributable to nonrecurring equipment sales in the prior-year period and a strategic shift towards subscription services. Total sales for the 6 months ended June 30, 2025, were $13.2 million, an increase of approximately $84,000 or 0.6% compared to the 6 months ended June 30, 2024. The relative stability in total sales was the result of a significant shift in our revenue mix. Growth was primarily driven by a $600,000 or 9.8% increase in our core cloud infrastructure and disaster recovery services, and a $79,000 or 14.3% increase in Nexxis services. This growth was largely offset by an approximately $615,000 or 12.6% decrease in equipment and software sales, which is primarily attributable to nonrecurring equipment sales in the prior-year period. Cost of sales for the 3 months ended June 30, 2025, were $2.6 million, an increase of approximately $108,000 or 4.3% from the prior- year period, which was consistent with the overall growth in sales and also reflects our investment in the newly established U.K. entity, which is contributing to higher cost of sales as operations ramp up. Cost of sales for the 6 months ended June 30, 2025, were $7.8 million, an increase of approximately $62,000 or 0.8% from the prior-year period. Selling, general and administrative expenses for the 3 months ended June 30, 2025, were $3.3 million, an increase of approximately $536,000 or 19.2% as compared to the 3 months ended June 30, 2024. The increase was primarily driven by an increase in salaries and directors' fees and noncash stock-based compensation. The rise in salaries is attributable to an increase in head count to support our growth initiatives in the U.K. and in the U.S. and annual merit-based salary adjustments. The increase in stock-based compensation reflects new equity awards granted to the Board and to key employees and directors in the current period. Also contributing was an increase in commissions associated with increased revenues. These increases were partially offset by lower professional fees and occupancy costs compared to the prior period when we were in the process of transitioning our principal office location. Selling, general and administrative expenses for the 6 months ended June 30, 2025, were $6.3 million, an increase of approximately $735,000 or 13.3% as compared to the 6 months ended June 30, 2024. The increase was primarily driven by an increase in salaries and directors' fees and noncash stock-based compensation. The increase in salaries is attributable to an increase in head count to support our growth initiatives in the U.K. and in the U.S. and annual merit-based salary adjustments. The increase in stock-based compensation reflects new equity awards granted in 2025, and the full period effect of awards granted in 2024. These increases were partially offset by a decrease in rent and occupancy expense compared to the prior period when we were in the process of transitioning our principal office location. Net loss attributable to common shareholders for the 3 months ended June 30, 2025, was $733,000 compared to a net loss of $244,000 for the 3 months ended June 30, 2024. Net loss attributable to common shareholders for the 6 months ended June 30, 2025, was $709,000 compared to net income of $113,000 for the 6 months ended June 2024. We ended the quarter with cash, cash equivalents and marketable securities of approximately $11.1 million at June 30, 2025, compared to $12.3 million at June 31, 2024. Thank you. I will now turn the call back to Chuck.

Thank you, Chris. Today's conversation is about the road ahead, and how we plan to capitalize on the opportunities in front of us. At the center of the conversation is the proposed sale of CloudFirst Technologies. I want to be clear, our long-term strategy is not contingent on the outcome of this transaction. Whether the sale is approved by the shareholders or not, we are moving forward with purpose and ambition. Let's start with the path that the sale is approved. This transaction would be transformative. At $40 million, the deal represents a substantial premium to our entire market cap prior to the announcement. And after fees, taxes, working capital, commissions to investment banks, we -- the approximate net amount is $24 million, and that's $24 million plus the cash in Data Storage Corporation that can be returned to shareholders and reinvested in future growth. CloudFirst has been a vital part of our journey. It is a high-performing cash-generating business that has consistently delivered year-over-year EBITDA growth. However, the public markets, its contribution was not fully recognized. With the sale, we have the opportunity to unlock that hidden value and convert it to tangible return. In addition, our Board has authorized a tender offer to purchase up to 85% of the company's outstanding common stock, using 85% of the cash on hand as I mentioned, including the proceeds from the sale and our bank accounts at Data Storage Corporation. This represents a return of capital to shareholders designed to reward long-term holders. And even after returning capital, we will retain the resources necessary to remain on Nasdaq and to pursue broader growth agenda, with 15% of the cash earmarked for acquisitions, innovation and expansion. The 15% is assuming that all shareholders participate, which may not be the case. However, it's up to 85%. That said, if the transaction is not approved by the shareholders at our upcoming annual meeting, we are just as committed to the future. CloudFirst will remain a core part of the business. It is a valuable and growing asset. In this scenario, we will continue to optimize CloudFirst platform, continue to invest in long-term performance. Equally important, we will continue to explore and expand into new high-growth markets that align with our evolving vision. Our plan is to reshape and rebrand Data Storage Corporation. In fact, we're already engaged in evaluation, strategic partnerships and technology extensions. These opportunities span artificial intelligence, cybersecurity and AI vertical SaaS solutions, and we are not limiting ourselves to just these areas alone. In either scenario, we intend to lead with focus, discipline and a bias towards growth that we expect to drive increased value to our shareholders. The last 12 to 18 months have ushered in a dramatic shift in enterprise technology. The acceleration of AI adoption, the growing complexity of infrastructure needs, the emergence of new software categories, all of these trends are shaping a different kind of enterprise. We believe this creates a window to capitalize and to step into a more expansive role within the tech ecosystem. We are doing this with experience and network to bring together the talent required for our expanded direction, and we are doing it with a goal of delivering value to our shareholders. To support this evolution, we are exploring a full rebranding of the company. We will be redesigning our website and refreshing our brand identity to better reflect the direction and future of our company. It's strategic. It's about signaling to investors, to partners, to customers, we are evolving. We are focused on the markets that drive shareholder value today and in the years to come. Whether we complete the CloudFirst sale, our capital allocation remains rooted in balance. We will continue to look for opportunities to return value to shareholders while retaining the flexibility to invest in new platforms, products and partnerships. If we complete the sale based on the shareholder approval, and over time, we cannot execute our plans for some reason, our public entity alone has value to excellent private companies that desire to be public and to be listed on Nasdaq. We will continue to operate Nexxis, which remains an asset in our portfolio. And more importantly, we will continue to pursue opportunities where we believe our expertise can unlock new value either through organic expansion or targeted M&A. I want to reiterate that the proposed transaction is subject to shareholder approval at our annual meeting on September 10, 2025. I urge all the shareholders to review the material in the proxy statement. These documents outline the terms of the deal, the Board's rationale and the long-term strategy we are pursuing. It's more than just a sale. It's a shareholder-aligned reset, a chance to realize value today and position the company for greater value tomorrow. Just to recap, we have a proposed sale of CloudFirst at a compelling premium with substantial net proceeds. If approved, we intend to return capital to our shareholders through a tender offer. Whether the sale is approved or not, we are executing future-facing strategy. We are rebranding the company to reflect our new direction. We are investing in next-gen growth verticals like AI, cybersecurity and SaaS. And most importantly, we are confident that either path leads to a stronger, more focused and ultimately more valuable Data Storage Corporation. Thank you again for your time, your attention and your continued support as we move forward together. And with that, I'd like to open up the call for questions. Operator?

[Operator Instructions] Our first question comes from Matthew Galinko with Maxim Group.

Maybe just first one is -- and I apologize if I missed this in the script, but what would your cash position be roughly following the transaction? I know we have the $24 million in net proceeds. So is it just another $11 million and sort of that's your post-transaction capital position?

Thanks for the question. The -- we have $24 million in there, and we believe that, that kind of is approximately the bottom of where it is. We really don't know fully because of taxes and other things that we have, net working capital adjustments. So we believe it could be more, but we're cautioned with that to say it's $24 million. And that with the $11 million would lead us to $35 million.

Great. And maybe on the -- just on your visibility into the cloud pipeline for the balance of the year. I'm curious how that's looking. Are you seeing any acceleration in move to cloud and you're capturing those opportunities? Or sort of how is the pipeline for the cloud business through the balance of the year?

We normally always have around $10 million in opportunities. And what happens, Matt, is it's rated from a 10% probability up to 90%. 90% means that there's verbal approvals. So it's a wide question. But usually, there's between [ $10 million and $11 million ] in total contract value that always sits in there. What we are seeing, though, and it's continuing because we're seeing almost like a 3:1 ratio of adds to existing customers and then new sales that typically come in through either shows we've gone to or SEO and things like that with lead generation. But we're seeing the customers continue to add to it. But usually, you'll see between $10 million to $11 million. Chris is shaking his head, yes, at me, Matt.

All right. Great. And the last question for me, and I'll jump back in the queue. You mentioned higher -- some higher expenses related to your European expansion. Any update on how the growth opportunity is shaping up there? And kind of where is the -- where are you operationally in Europe at this point?

Sure. So Colin Freeman, who does an excellent job with his staff, everything is installed in three data centers. I think we have 10 partnerships -- other 10 partnerships. They are not the same company. I don't know if we've been clear on that in the past. There are three separate companies, organizations that have the Intel platform in these data centers. And each one of those companies have partnership arrangements. I believe that Colin and his group have trained all of their sales force, the partner sales force. In addition, there's around seven additional distributors. So that funnel is building. I believe they have some opportunities in there. At hand, I don't have that, but I've heard as of last week that those opportunities are building, and they are working towards bringing them in and closing the deals. So that's going well. Also, just we've added, and I'm not sure if it hit the second quarter fully or not, we have four new sales individuals, account maintenance and such, and two additional techs that have been added into the mix on things. So we've really beefed up the sales, especially in the account maintenance area because at one time, we had one person doing that. We have a team now because these addendums are coming in and same customer sales are important along with the renewals that go along with it. So we continue to hold a good renewal rate.

[Operator Instructions] Our next question comes from [ Ellen Litvik ] with Forest Hill Capital.

First, can you actually walk us through, I guess, really the rationale behind selling CloudFirst, especially given that currently it represents, I guess, approximately about 95% of your revenue.

I'm -- frankly speaking personally, someone that has invested in this company and what's interesting, this company was launched on 9/11, and we now have a shareholder meeting actually on September 10, and it's kind of interesting. And hopefully, we close on September 11, and it's interesting of what happened, 9/11, and now all of a sudden, this company that kicked off then, now years and years later, where we are. And quite frankly, it's very interesting about the dates and how they align. Not to be too into astrology and all. But it's disappointing because we weren't able to do M&A. We weren't able to use the stock. Our volume was low, and we have a cash machine. If it stayed as a private company, it's a cash machine. What was the EBITDA, Chris, on, let's say, CloudFirst?

So the EBITDA for CloudFirst for Q2 was approximately $1 million, and then for the 6 months, it was approximately $2.5 million.

So you have a cash machine with this, and it's not being recognized, it's -- maybe it's not exciting, but we weren't able to do anything with the stock. And we didn't want to create dilution for shareholders on it. And so at some point, you have to say where can we get the value. And I believe that we're getting the value. I'd like it to be higher than that, but we've negotiated a deal out with a firm that we believe is excellent, Performive, and they're backed by Renovus, PE firm. And we think it's a great home with great people. They have an x86-type platform. So really coming together it should be a good marriage if the shareholders approve it. But we couldn't do anything with a public company with that company. So we need to really be able to move this forward on it. And we believe some of the things that we are planning. But if it doesn't happen on it, we're doing the things we're planning anyway. But for the most part, we want to be able to return value to our shareholders.

That makes sense, and thanks for being candid about it. I guess following the sale, what will the company's operations look like? I mean what is your strategy for driving growth in the business post-divestiture?

Well, post-sale, I would say that there's going to be three people left in the public company. It's going to be the Chief Financial Officer, the Chief Administrative Officer. Wendy Schmittzeh, Chris Panagiotakos and myself. And we're in the process now of actually lining up Board of Advisers. Excuse me, also, we have Nexxis in as well. Chris reminds me, sorry. Nexxis, and they have a great team. I believe that the company is profitable or very near profitability and growing. But our intention is first on the AI in this area. We're in the process of putting together some very experienced adviser group. And then from that, we're going to look to do some investing into companies that are developing AI vertical software. And we'll see what these acquisitions bring and how long it will take us. But it will take us probably 30 to 60 days to actually get a full position on a full plan. If that helps. But we're back to the beginning again. The only difference is when I started this company with Larry Maglione and Rich Rebetti, there were three of us, and we started it from scratch. And we're okay with doing that again because now this time, we have a public company, and we have a few million dollars. And we have Nexxis, which is an excellent company. I don't know if that answers the question.

Yes, it definitely does.

[Operator Instructions] And ladies and gentlemen, there appears to be no additional request for questions. So I'll hand the floor to Chuck Piluso for closing remarks.

Thank you for the question, Matt and [ Ellen. ] As we move into this next chapter, we're focused on unlocking value, whether that's through the proposed sale of CloudFirst or through the continued optimization of our existing businesses. This is a moment of alignment, aligning capital with opportunity, aligning our brand with strategic future and aligning our operations with growth sectors that are reshaping today enterprise technology. We have a clear path and a commitment to making disciplined, high-impact decisions that will drive shareholder value. In short, we are not standing still. We are transforming. We are building a company that reflects where the market is going. Regardless of the outcome of the shareholder vote, our vision remains the same, to evolve, to invest and to grow. We're excited about what lies ahead, and we are confident that our strategy will position Data Storage Corporation for long-term success. I'd like to thank the shareholders for your continued support. Have a great day. Thank you.

This concludes today's conference. All parties may disconnect. Have a good day.