Data Storage Corporation (NASDAQ:DTST) Q3 2022 Earnings Call Transcript

Data Storage Corporation (NASDAQ:DTST) Q3 2022 Earnings Call Transcript November 15, 2022

Data Storage Corporation beats earnings expectations. Reported EPS is $-0.04, expectations were $-0.06.

Operator: Good day, ladies and gentlemen, and welcome to the Data Storage Corporation Third Quarter 2022 Conference Call. It is now my pleasure to turn the floor over to your host, . Ma’am, the floor is yours.

Photo by Chris Barbalis on Unsplash

Unidentified Company Representative: Thank you. Good morning, everyone and welcome to Data Storage Corporation’s 2022 third quarter ended September 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. The company issued a press release this morning containing third quarter 2022 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 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 September 30, 2022, and annual report on Form 10-K and current reports on Form 8-K filed with the Securities and Exchange Commission. Any forward-looking statements 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.

Chuck Piluso: Thanks Ally, and good morning, everyone. We continue to witness strong revenue growth evidenced by achieving revenue of $4.4 million for the third quarter ending September 30, 2022. This represents a 14% increase compared to the same period last year. Notably, our revenue for the nine months ending September 30, 2022, increased 80% over the same period last year, reaching $17.9 million. Our decades of experience, providing an array of multi cloud technology solutions, properly allocated investments, and highly skilled employees are the foundation to our success that has allowed us to firmly position ourselves as a leader within the industry. I’d like to note that we provide solutions to a multi-billion dollar marketplace.

In fact, according to Fortune Business Insights, the cloud managed service industry in North America was $16.3 billion in 2019. And has been growing at a rate of 13.8% compounded annual growth rate, bringing the number to $24 billion by the end of 2022. Disaster recovery is projected to be at $3.6 billion in the U.S. by the end of 2022, which represents 35% of the overall 10.3 global marketplace based on Grand View Research Disaster Recovery Solutions Market Size report. Our Nexus Solutions fit well with our dedicated Internet access or critical component to access cloud services. Further, the steadily growing VoIP market is expected to reach 90 billion worldwide in 2022, with a compounded annual growth rate of 3.1% with 17 billion in the U.S. according to GlobeNewswire Market Analysis and Insights.

Our goal is to aggressively penetrate these markets while executing on our strategy of securing high margin recurring, subscription based and managed service contracts. As we see more companies migrating their IBM Power infrastructure to the cloud, we believe this propel our solutions to the forefront of the industry, providing us the potential to capitalize on these growing multibillion dollar markets. We see this migration underway as the future of our industry and we are well positioned to take advantage of these opportunities. Given the migration to the Cloud within the IBM market that I’ve been discussing over the past few conference calls, currently only 15% of the IBM Power service are utilizing the cloud today, despite over 1 million virtual IBM Power service globally.

With limited competition in the market, we have the platform and the talent to capture the migration opportunities in front of us. The company has invested millions of dollars in fixed Tier 3 data centers in the U.S. and Canada. The equipment and technical teams build out solutions. This is not an IBM reseller arrangement, we have the employees overseeing the services and operate our own equipment, cages and racks in the data centers. Today, we service over 350 companies. We compete with just four or five companies that have this expertise, helping companies looking to migrate to the cloud. And yet I believe we do a better job less painful, more efficiently and cost competitively. Our company is a leader in this industry. I would also like to reiterate that the businesses that are increasingly under pressure to improve the effectiveness and efficiency of the information and storage systems, whereby accelerating the migration from self-managed technical equipment and solutions to fully managed multi cloud technologies to reduce cost and compete effectively.

Additionally, in today’s environment, capital preservation is an encouragement to move from a capital intensive on-premise technology to a pay as you grow CapEx to OpEx model. These trends create an opportunity for cloud technology service providers, and demand for fully managed cloud and cybersecurity services across major operating systems, an addressable market of approximately $48 billion in annual recurring revenue in the U.S. and Canada. Demonstrating our commitment to security, we achieved ISO certification for our CloudFirst in Nexus Division’s. This third party certification validates our extensive internal protocols and security measures that ensure our customers data and information has been addressed, implemented, properly controlled in all areas of our organization.

We believe this certification will also assist us in accelerating our customer adoption due to the fact many organizations seek this certification prior to implementing certain solutions. We remain committed to adhering to the highest level of security standards for our company, and for the trusted support of our . Importantly, we are undertaking activities that we anticipate will further improve our margins and profitability, as well as accelerate our growth. This includes realigning management and operations. We have recently centralized service delivery and infrastructure. Our sales engineering teams now can better utilize our client proposal tools and software across combined sales teams. Additionally, we are establishing a new major accounts team that will be responsible for supporting our large enterprise level clients, as well as continuing satisfying ongoing equipment, software and IT requirements.

We believe the changes stated will significantly improve our infrastructure solutions and recurring revenue to one time sales ratio, and as a result, will enhance gross profit and margins. At the same time, we plan on expanding our international programs and strengthen our established and successful U.S. sales and marketing programs. To streamline our operations, we are reducing redundant operating expenses within the organizations. We have realigned our management team to further increase our profitability. I’m also pleased to report that we achieved positive adjusted EBITDA for the third quarter of 2022 and believe our initiatives that they have laid out will advance us towards increased profitability and improved margins. On a final note, we have a strong team, a robust proposal pipeline and limited competition.

With over $11 million in cash in the bank, we are well funded, well positioned to execute on our growth strategy, improve our margins, increase profitability, all while maintaining leadership position in the industry. With that, I’d like to turn it over to Chris our CFO discuss our third quarter financials. Please go ahead, Chris.

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Chris Panagiotakos: Thank you, Chuck. Total revenue for the three months ended September 30, 2022 was $4.4 million, an increase of approximately 600,000 or 14% compared to $3.9 million for the three months ended September 30, 2021. The increase is primarily attributed to the increase of equipment and software sales. This was offset by slight decrease in managed services for the three months ended September 30, 2022. Cost of sales for the three months ended September 30, 2022, was $2.6 million, an increase of approximately 250,000 or 11%, compared to $2.3 million for the three months ended September 30, 2021. The increase was mostly related to the increase in revenue. Selling, general and administrative expenses for the three months ended September 30, 2022 were $2.1 million, an increase of approximately 200,000 or 11% as compared to $1.9 million for the three months ended September 30, 2021.

The increase is primarily attributed to the increase in salaries as a result of new sales and marketing staff and increased marketing expenses. Adjusted EBITDA for the quarter was $162,390 compared to adjusted EBITDA of $104,985 for the same period last year. Net loss attributable to common shareholders for the three months ended September 30, 2022 was $245,619 compared to net income of $135,630 for the same period in 2021. We ended the quarter with cash and cash equivalents of $11.3 million as of September 30, 2022 compared to $12.1 million at December 31, 2021. Thank you. I will now turn the call back to Chuck.

Chuck Piluso: Thanks. Thanks, Chris. I’d like to open it up right now for some Q&A. Any questions that we may have?

Q&A Session

Operator: Your first question for today is coming from Matthew Galinko at Maxim Group.

Matthew Galinko: Hi, good morning. Thanks for taking my questions. Can we start off with what the pipeline today looks like for SaaS recovery and cloud infrastructure looking forward?

Chuck Piluso: Hi Matt. Yes, I can go more detail on that. We have around approximately $20 million in the sales funnel. And so when we look at the sales funnel, we look at it as total contract value. So this approximately $6 million or so and one type of one time charges that could be IT services, equipment and software, and approximately $14 million total contract value. And if you remember that previous calls, I revealed that we usually get a 36-month term contract, it can be sometimes 12 and as high as 60 months, but I would say on average 36 months. So if the number that occurs the most, the mode is $3,000 a month. You know, that’s how we’ll come up with that $14 million in sales proposals. So a quick number is to kind of divide that by 36.

And you’ll see what we’re working with. But usually we try to keep it around that level. You know, most of the times we won’t lose this very few competitors. In most cases, people are asking for proposals and quotes. And then what ends up happening is they’re not ready to do it yet, but a gathering budgetaries so actually in our sales force, we rated – from a quote to negotiation of an agreement to a win. So, overall the proposals outstanding today, $14 million in total subscription recurring.

Matthew Galinko: Got it, thank you. And I guess the follow-up to that is are you seeing any changes to customer behavior in terms of how they structure deals, how they approach cloud versus premise? As we’ve seen, you know, the capital market environment change and, you know, the macro environment change?

Chuck Piluso: We’re seeing larger deals come in actually, you know, it’s, you’ll see some deals that come in that might be 1,000. But we’re seeing deals that could range from $12,000 to $18,000 in monthly recurring revenue that are being proposed. I don’t want to go through too much detail on that. But we are seeing an uptick. We had approximately 6,000 with so organic searches off of our CloudFirst division. And it resulted in 100 leads that are being worked by the sales organization. So yes that’s looking, at this point, what we need to do is, is increase that by we’re in the process of hiring salespeople, but just from the lead flow, it’s pretty effective to be able to get leads and, and work those leads and convert into proposals and sales.

So the actual numbers as relates to the economy, I think people are questioning whether they should refresh their equipment on premise, versus, go with a company like ourselves. Remember, keep in mind these systems, we don’t compete with AWS, Google or Microsoft, these systems on the operating system, some of them have the actual tools, where the applications have been custom developed. So that wasn’t a solution so fast for them before, they may have migrated all their Intel over already. So now, we’re seeing I think, this uptick, and this lead flow coming on because they realized the cloud is secure, possibly where ISO and that is seeing that and feeling comfortable. And I believe that they were evaluating whether they should go put the money into a piece of equipment.