Data Storage - Q2 2024

Transcript

Operator (participant)

Greetings, and welcome to the Data Storage Corporation 2024 Fiscal Second Quarter Business Update Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone key, keypad. It is now my pleasure to introduce your host, Alexandria Schultz of Investor Relations. Thank you. You may begin.

Alexandra Schilt (Head of Investor Relations)

Thank you. Good morning, everyone, and welcome to Data Storage Corporation's 2024 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 2024 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, 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 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 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 other cautionary statements included in the company's quarterly report on Form 10-Q for the quarter ended June 30, 2024, annual reports on Form 10-K, and current reports on Form 8-K, filed with the Securities and Exchange Commission. Any forward-looking statements speak only as of the date to which it was initially made.

Except as required by law, the company assumes no obligation to update or revise any forward-looking statement, 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.

Chuck Piluso (Chairman and CEO)

Thanks, Allie, and good morning, everyone. During the quarter, we made important advancements, and we believe will accelerate our growth and increase our penetration within the market. Before I touch on those achievements, I'd like to note that we generated $4.9 million in revenue for the second quarter of 2024. While this represents a decline from our previous year's second quarter, it's important to note that the reduction is attributable to large one-time equipment sales recorded during the second quarter of 2023. As I have previously discussed in our conference calls, our strategic focus is on recurring revenue contracts. The client equipment purchase cycle typically runs on a three to five year cycle. Once we sell equipment each year, typically, we provide software renewal licenses and hardware support. This continues until the client refreshes their equipment, and then the cycle continues.

I am pleased to report that our gross profit margin increased to 49% during the second quarter of 2024, up from 43.7% in the same period last year. This improvement highlights the effectiveness and scalability of our business model. It also reflects the successful integration of our operations. The increased margin is a testament to our disciplined execution and strategic efforts to optimize profitability by building a more sustainable revenue base. In fact, we achieved $13.1 million in revenue and profitability for the first six months of 2024. To effectively advance our growth initiatives, we have recently relocated our new headquarters in Melville, New York. This move has expanded our square footage by nearly 40% while maintaining a minimal impact on expenses.

We are strategically utilizing this increased space to accommodate the expanding technical, sales, and marketing teams, positioning us to capitalize on the significant opportunities within the market. As a result of our strategic consolidation of Flagship and CloudFirst, we are witnessing an increase in upselling opportunities. Validating this are multiple expanded contracts we announced during the quarter. First, we entered into an expanded contract with a prominent provider of end-to-end business processes. Initially engaged for infrastructure solutions, we are now, through this six-figure contract, delivering managed, encrypted backup, and recovery services. This expansion underscores our capabilities to meet the evolving needs of our customers and exceed their expectations... More recently, we expanded services as one of the nation's largest suppliers of promotional products, securing a new seven-figure agreement, highlighting our continued success.

In 2023, we were selected to implement a comprehensive disaster recovery solution for this client, ensuring rapid recovery and enhanced security within a cloud-based environment. This solution included optimization of their network for high speed, secure switching during disasters or interruptions. Following this successful implementation, the client selected us to migrate their critical production systems to our new state-of-the-art data center in Chicago, where we will establish a fully monitored and managed private cloud infrastructure solution. Both of these contracts came through CloudFirst division. In fact, CloudFirst achieved $4.6 million in revenue for the second quarter and was profitable on a standalone basis. To support the traction and growth of CloudFirst, we recently expanded to the United Kingdom with the opening of our London office. We will also be deploying our unique infrastructure platform in two U.K. data centers, increasing our addressable market.

We estimate that the U.K. marketplace consists of over 50,000 companies that conduct business between the USA and the U.K., with over 1.6 million Americans working in the U.K. This strategic move represents a significant milestone in our plan to serve a global clientele and strengthen CloudFirst presence in key international marketplaces. Our first step several years ago outside the United States, was establishing a footprint in Canada. CloudFirst has two Power Platforms in Canada, and the U.K. and Canada are the largest trading partners between those two countries. We consider the addressable markets of the USA, U.K., and Canada to be a significant opportunity. Our cloud infrastructure offerings of cloud hosting, disaster recovery, and cybersecurity solutions will establish Data Storage, we believe, as one of the few single-source, multi-country providers.

We are witnessing an increased demand for our solutions, and as a result, we deployed assets to the seventh data center in Chicago. Chicago was strategically selected as it allows us to capitalize on the growing demand within the region, as well as diversify our geographic footprint within the United States. Demonstrating this growing demand and evidence that the IBM Power service migration is underway, is the continued increase in visitors to our CloudFirst website, which is over 45,000 in the first six months of 2024. Furthermore, we are expanding our technical and business development teams to provide the support required for our anticipated client growth, while maintaining an excellent client renewal rate.

We are also continuing to support our nurture list, which contains over 1,000 organizations interested in potential implementation of our services, and we intend to take advantage of these avenues to secure new contracts and increase our footprint within the United States. We are currently serving over 480 companies and are committed to expanding this impressive client base. Data center firms that specialize in Windows-based infrastructure platforms rely on our expertise in the IBM platform. Collaborating with these infrastructure firms presents an opportunity to broaden our distribution channels, leverage our talented workforce, and optimize our deployed assets. Overall, we are executing on a strategic growth plan, which has resulted in expanded contracts, international expansion, and increased recognition within the industry. We also intend to explore acquisitions that would further our growth while complementing and improving our established operations.

Moreover, we believe we have positioned ourselves to success and growth given our reliable solutions, exceptional service, and now international footprint. In addition, we are leveraging the various upselling opportunities as a result of the consolidation of subsidiaries. These strategic initiatives set the stage for long-term profitability. At the same time, we have carefully managed expenses and have preserved a strong balance sheet with approximately $12 million in cash and marketable securities, and no long-term debt at the end of the quarter, which provides us the flexibility 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 our financials. Please go ahead, Chris.

Chris Panagiotakos (CFO)

Thank you, Chuck. Good morning, everyone. Total revenue for the three months ended June 30, 2024, was $4.9 million, a decrease of approximately $1 million or 17% compared to $5.9 million for the three months ended June 30, 2023. The decrease is primarily attributed to a lower one-time equipment and software sales during the current period, and a decrease in managed services, partially offset by increases in all other revenue sources.... Total revenue for the six months ended June 30, 2024, was $13.1 million, an increase of approximately $362,000 or 3% compared to $12.8 million for the six months ended June 30, 2023.

The increase is primarily attributed to the increase of 29% in infrastructure and disaster recovery cloud services, offset partially by a decrease in one-time equipment sales and managed services during the current period. Cost of sales for the three months ended June thirtieth, 2024, was $2.5 million, a decrease of approximately $823,000, or 25%, compared to $3.3 million for the three months ended June thirtieth, 2023. The decrease of 25% was mostly related to a decrease in equipment-related costs. Cost of sales for the six months ended June thirtieth, 2024, was $7.8 million, a decrease of approximately $344,000, or 4%, compared to $8.1 million for the six months ended June thirtieth, 2023.

The decrease of 4% was mostly related to a decrease in one-time equipment sales. Selling, general, and administrative expenses for the three months ended June 30, 2024, were $2.8 million, an increase of approximately $325,000, or 13%, as compared to $2.5 million for the three months ended June 30, 2023. Selling, general, and administrative expenses for the six months ended June 30, 2024, were $5.5 million, an increase of approximately $947,000, or 21%, as compared to $4.6 million for the six months ended June 30, 2023. The increases were primarily due to an increase in advertising expense, professional fees associated with our international expansion efforts, salaries, stock-based compensation, and travel.

Adjusted EBITDA for the three months ended June 30, 2024, was $164,000 compared to adjusted EBITDA of $350,000 for the same period last year. Adjusted EBITDA for the six months ended June 30, 2024, was $837,000 compared to an adjusted EBITDA of $865,000 for the same period last year. Net loss attributable to common shareholders for the three months ended June 30, 2024, was $244,000 compared to net income of $226,000 for the three months ended June 30, 2023.

Net income attributable to common shareholders for the six months ended June 30, 2024, was $113,000, compared to $277,000 for the six months ended June 30, 2023. We ended the quarter with cash and marketable securities of approximately $12 million at June 30, 2024, compared to $12.7 million at December 31, 2023. Thank you. I will now turn the call back to Chuck.

Chuck Piluso (Chairman and CEO)

Thanks, Chris. Let's open up the call for some questions. Operator?

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. And our first question comes from the line of Adam Waldo with MoffettNathanson Partners. Please proceed with your question.

Adam Waldo (Analyst)

Yes, hey, Chuck and Chris, I hope you can hear me okay.

Chuck Piluso (Chairman and CEO)

Hi, Adam.

Adam Waldo (Analyst)

So I wanna start with sort of where we were expecting to be for the year in terms of our annual recurring revenue and how that compared with the first quarter. And if you

Chuck Piluso (Chairman and CEO)

Adam, you're breaking up a little bit. Can you-

Adam Waldo (Analyst)

Okay.

Chuck Piluso (Chairman and CEO)

repeat that?

Adam Waldo (Analyst)

All right. Is this... Yeah, is this better?

Chuck Piluso (Chairman and CEO)

Let's see. Say something to me. Sing a song, Adam.

Adam Waldo (Analyst)

Oh, no.

Chuck Piluso (Chairman and CEO)

Say something.

Adam Waldo (Analyst)

Is this, is this better?

Chuck Piluso (Chairman and CEO)

It's a little better, yeah.

Adam Waldo (Analyst)

Okay. I, I apologize for that. I hope you can hear me now. I apologize.

Chuck Piluso (Chairman and CEO)

Yeah, it's better. It's a little better. Thank you.

Adam Waldo (Analyst)

Oh, good. Great. Sorry, Chuck. Good day, Chuck, and Chris. Apologies for the technical difficulty. I wanna see if we can start with the annual recurring revenue at which the company exited second quarter relative to first quarter. And with the investments that you've made in the cost-neutral headquarters expansion in Melville, the new London office, and the Chicago data center, what's a reasonable range of sort of break-even quarterly revenue that you need to achieve to support your growth investments?

Chuck Piluso (Chairman and CEO)

I just wanna make sure I'm clear, because it did break up a little bit. On the recurring revenue, you were asking about that and the expenses of Chicago and as well as London on the expansion side?

Adam Waldo (Analyst)

Sorry about that. I'm trying to see the investments you've made in growing the business on the infrastructure side, Chuck. What is a reasonable range of sort of quarterly break-even revenue that would need to be generated to support those infrastructure adds?

Chuck Piluso (Chairman and CEO)

For the recurring revenue, the recurring revenue we have, we have on a, basically on a monthly basis, when we look at CloudFirst. Are we speaking about just CloudFirst, or we're talking about sort of overall the, the consolidation with the, data storage corporation?

Adam Waldo (Analyst)

No, the entire company, right? The whole, the whole company.

Chuck Piluso (Chairman and CEO)

... the entire organization. You know, the, you know, just to, to highlight that, it's, it's somewhat still slightly dependent on equipment sales, which we typically have, but, you know, it becomes lumpy, as we, we spoke about before, because of the cycling of refreshing of the equipment. So we do have some dependency on, on the equipment sales. Less and less as time goes on, and we do have the ability to cut back on, on various marketing expenses. But what ends up happening, just to give an example, you know, of our customer base, just 28 customers have increased their services with us, you know, during, since, since January. So, you know, it's not necessarily all new, all new ads, you know, on stuff. And so, you know, you have renewed contracts, you have clients adding to it.

So as with an example that, I read earlier, you know, you had the customer that was on one service and then added a significant amount on another. So you're not sure when exactly that's gonna be coming on, but we're very, very close, I would say, to a break even on just the recurring, on the recurring basis. What ends up happening, though, this lumpiness continues because if you have subscription agreement, that's, let's say, on a 36-month contract, even though our average is 30 months across the board, a straight average, you'll end up getting software renewal and hardware maintenance contracts like we had that happens in the first quarter, and you have that lumpiness that continues. So if you were to smooth everything out, I would say that the company really, even with these efforts, are break even on basis.

I don't know, Chris, if you agree with that, you know? So, I think it's break even when you start, you know, taking our what we would consider annual recurring revenue with software renewal, hardware maintenance, with the subscription revenue, both in disaster recovery, cloud infrastructure, and cybersecurity. So, that profitability really kicks in high when you have an equipment sale, even though the margins are not great, they're 20-25% margins versus, you know, 52% margins on subscription. So I think we're really there with it. I will say, though, you know, and I think you get to know me a little bit more and more as we talk, Adam, is that I'm kind of never happy. The thing is, is that I-

Adam Waldo (Analyst)

Right.

Chuck Piluso (Chairman and CEO)

You know, I wouldn't mind losing, you know, I wouldn't mind decreasing our EBITDA for greater revenue growth on the subscription side. And, you know, that's why we're looking at and expanding and going into London, into... Primarily into the U.K., because we believe between the U.K., Canada, and the U.S., only the very big guys are there, you know, like an IBM, for example. So you're not gonna work maybe one of three, and we wanna be able to leverage that. And that will take some money. We've already. We have two people identified that are working with us already on a consulting basis out of the U.K. That's costing some money, but we're still okay on the EBITDA side for CloudFirst, and we're gonna be hopefully bringing them on full-time with us.

So, you know, we're signing, we're signing NDAs with companies, and that will mean if they're going to sign up with us as distributors or end user clients, it will cost some money. Our depreciation will will increase that overall expense because of the equipment being deployed there, which we expect that to happen in the fourth quarter and services going live in January. So, yeah, I would like to see that that revenue growth much higher without putting equipment equipment sales on the side and let it hit the EBITDA a little bit to sacrifice that short term. So if that answers your question, I'm not sure.

Adam Waldo (Analyst)

No, that's really helpful context and insight into your thinking, Chuck. I wonder if we can then sort of switch gears a little bit, obviously, in into the new business pipeline and backlog. You know, obviously, you all have seen terrific progress over the last five or six quarters in inbound inquiries through the revamped websites. And, you know, I think it's been a little bit slower in terms of translating RFPs than you've hoped, but you've still seen some pretty good traction there. So can you give us some metrics in terms of how, you know, that surge in inquiries has been translating into requests for a proposal, and then where your backlog sits here at the end of the second quarter?

Chuck Piluso (Chairman and CEO)

Okay, I can do that. Chris, you check me out any point that I'm kind of off a little bit. So I'll give you some numbers on this. We believe that our remaining contract value, okay, the remaining contract value as of June 30th, I believe, is around $31.5 million. And with our renewal rate, it continues to grow because the number of clients that have renewed since January is 82, and of the 400 and +420 companies we serve. So using that $31 million-$32 million, that kind of continues as you continue to to grow. You know, also, we've added six new partners since January, and so that's pretty good. Now, we do have around 100 channel partners. I don't know, I'm gonna call 16 active. It's the old 80-20 theory.

In this case, you know, 15% to 15, 85%, you know? And then when we talk about sales funnels, it's the sales funnels around $15 million in contracts, total contract value. So between the sales funnel that we have, the renewal rate, when you take the remaining contract value, you know, we're very stable. We just need to get. You know, we're on a quest right now, Hal Schwartz is talking to recruiters. We believe some of the acquisitions that were done in our space, usually the companies that acquire these companies, usually, people leave. We think this a great opportunity to hire some very good sales talent, and so we'll be expanding the sales team, you know, in the United States. So we're moving ahead with that and also trying to expand our channel partner management.

But, the migration has taken place. I mean, we, you know, frankly, on our, you know, I just stated the CloudFirst website, but on all of our websites, we've had over 100,000 visitors since January. So the migration is underway. IBM has made a statement. I was in Milan at the IBM conference, user group called Common, and they estimated that 10% of the IBM systems are gonna migrate to the cloud each year. Now, our estimation on that is around $90 million per year is up for grabs. You know, that's on a global basis. But it's fairly significant when you start taking it apart and say, what's in the United States? What will IBM... Because if you're only buy, you know, you don't get fired if you buy IBM.

I don't know if that's true anymore. But, you know, we do a fantastic job on migrating existing systems to our platform, which is a major hurdle, and we do an excellent job with that. You know, I'm gonna say I think we're one of the best. We have good competitors on that, and I don't think IBM is one of them. So, I think we're positioned well with a great sales funnel, good remaining contract value, the number of customers that have renewed already. So it's pretty, pretty stable on it. But we do need to add salespeople, and, and, you know, we're on a search for that right now. I believe we'll be engaging a recruiter and going after some of these companies that have been acquired by, by, two other, two other firms.

Adam Waldo (Analyst)

Okay, last one, if you-

Chuck Piluso (Chairman and CEO)

No, no.

Adam Waldo (Analyst)

Oh, sorry, go ahead. I apologize.

Chuck Piluso (Chairman and CEO)

No, no, go on, Adam. Go on.

Adam Waldo (Analyst)

The last question, if you'll permit me. So, you know, in terms of the dollar value of your backlog that's awaiting implementation or processing implementation, how did we exit the June quarter? And just remind us how that compared with where we were when we exited, the March one.

Chuck Piluso (Chairman and CEO)

Are you asking about the work in process, today? I actually, Adam, I don't believe I have that number.

Adam Waldo (Analyst)

Okay.

Chuck Piluso (Chairman and CEO)

I don't believe I have... Do you know that, Chris?

Chris Panagiotakos (CFO)

No, I don't.

Chuck Piluso (Chairman and CEO)

Adam, I can get that number for you. Usually, we always have that-

Adam Waldo (Analyst)

Well, we'll follow up, yeah.

Chuck Piluso (Chairman and CEO)

We usually have that number. Let's follow up on the web, 'cause we always have that. I'm not sure why it's not on my sheet here, but just give me a second. I wanna see if, you know... I don't know the answer to that, Adam. I apologize. I will usually know that number. I will get that to you.

Adam Waldo (Analyst)

No worries. We'll follow up. Thank you very much.

Chuck Piluso (Chairman and CEO)

Thank you, Adam. Thank you for the question.

Operator (participant)

Thank you. Our next question comes from the line of Ellen Litvak with Forest Capital. Please proceed with your question.

Ellen Litvak (Analyst)

Good morning, and thank you for taking my question. Can you provide an update on the status of the U.K. expansion and share any additional details?

Chuck Piluso (Chairman and CEO)

Sure. Heading there with our CTO, Chuck Paolillo, and Hal Schwartz, the President of CloudFirst, on the ninth of September. We're visiting data centers. We're moving aggressively. The person that we have identified essentially to be the president of that company. We do have the company established as a branch office. We do have an office established there as well, and we'll be going around visiting the data centers. We have potential of a couple of clients already. We have some distributors lined up, and some of them are fairly large, and we're negotiating those distributor agreements today. Some of them are smaller that we do have distributor agreement already with.

We expect to deploy the equipment in the fourth quarter and going live, as I mentioned earlier, in the beginning of January, to be able to take advantage of a fairly large, fairly large account, I believe, out of Europe. You know, we're moving quickly on it. You know, we're working with the institutes to be able to get to a higher level of networking. But, I think we believe there's a significant opportunity between having this, I'll use the term triad, between Canada, the U.K., and the United States.

There are very few companies that have this, and companies want to be able to deal with one support ticket system, to be able to go to one place. It also allows us to probably reduce our expenses on our 24 by seven operations as well, because of the time frames and time differences. So we're excited about it.

Ellen Litvak (Analyst)

That's great to hear.

Chuck Piluso (Chairman and CEO)

Hopefully I answered-

Ellen Litvak (Analyst)

Thank you. My... Yes, it did. Thanks. My other question is, how are you planning on growing the distribution network from channel to direct sales?

Chuck Piluso (Chairman and CEO)

... You know, what happens is on direct sales, and, you know, I've been in the game for a while. You know, I've managed a sales force for over 110 people and all, and it was very, very different, you know, not too many years ago. Today, what happens is, if you have a very experienced sales rep, all the companies have channel partner or agent agreements. So as soon as you get someone that's really excellent, they become a 1099 agent. They form their own business, and they're off and going. So on the direct sales force, it's very difficult. Some people don't want to start their own businesses, as we know.

In this case, we believe with the recruiter we have identified, that Hal Schwartz has identified, we will be going after some of these, we would say, high-level, experienced folks in the services that we sell. We'll also have moved into, you know, IT automation. So with the IT automation, we're also trying to hire in that area because our existing client base is looking for that. And so we've been doing that. We've been proposing that already, but we're trying to build a sales force in two areas, cloud hosting and disaster recovery, that know our platforms, IBM and all, they've been selling it. That's one target for the recruiter, and the other is on IT automation.

On the channel partners, if you think about this a little bit, these are companies that have essentially sold the equipment to the end user, and they are the trusted advisor, and we are going after them. We continue to go after them. A lot of them are small companies. They might have 50 customers, and as that customer is ready to recycle, as we mentioned, three-five years, potentially, you know, they come to us, we give a proposal and say, "You know what? You're making one time every five years on this. You can create an annuity for yourself with our renewal rate of over 90% and have this going on for 15-20 years until technology changes." And so we try to work with that channel partner on it. But other areas are on the Oracle systems.

You know, Oracle partners with Oracle also use the IBM Power platform as well. So we continue to expand on that and have our marketing programs, you know, try to reach out to them. We try to reach out by both SEO, organic advertising. So it's not an easy process. You know, if we have 100 channel partners today with 15, 16 active, I'm not excited about that. But we are now aggressively, I'll use that term, going after increase both our direct sales force, which we have a great sales force today, but we need more. We have a good group, and at the same time, increase our channel partners.

These folks that are not only IT companies, but they're also agents of several companies, but they need the IT Power infrastructure, which is something that a lot of them are missing from their portfolio. Referring to the folks that move from direct sales to ten ninety-nine. So we're also going after that group. If that helps.

Ellen Litvak (Analyst)

Yes, thank you. That is very helpful. I'll hop back on with you. Thanks.

Chuck Piluso (Chairman and CEO)

Thank you. Thanks for the question, Zach.

Operator (participant)

Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing remarks.

Chuck Piluso (Chairman and CEO)

Okay. Well, thank you for your questions. We have developed a robust business strategy, and we are confident that we will drive our growth, ensure, sustain, and increase profitability over the long term, and deliver maximum value to our shareholders. We're optimistic about our potential and our initiatives, and we're looking forward to realizing the full benefits over time. We are committed to keeping our shareholders informed with meaningful updates, and I'd like to thank everyone who joined our call today. Thank you. Have a great day.

Operator (participant)

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.