Data Storage Corporation (NASDAQ:DTST) Q4 2022 Earnings Call Transcript

Data Storage Corporation (NASDAQ:DTST) Q4 2022 Earnings Call Transcript March 31, 2023

Operator: Greetings and welcome to the Data Storage Corporation 2022 Fiscal Year Business Update Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow a formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host . Please begin.

Unidentified Company Representative: Thank you. Good morning, everyone, and welcome to Data Storage Corporations 2022 fiscal year 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 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 included in the Company’s annual report on Form 10-K for the year ended December 31, 2022, and quarterly report on Form 10-Q 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: Thank you, Allie, and good morning, everyone. 2022 was a year of assimilation for Data Storage Corporation, especially as it relates to our Flagship subsidiary. And while we are proud to report achieving a 60% increase in revenue to 23.9 million for 2022, we have also implemented meaningful business initiatives during the year that we believe will enable us to further accelerate growth and streamline the organization with the goal of long-term profitability. Additionally, this is the first reporting period that we have broken out our revenues by business segment, which we believe allows us to paint a better picture for each of our business units. While each of our subsidiaries address important aspects of information technology and provide solutions and services to a broad range of clients across various industries, our primary focus is targeting long-term contracts with subscription services that provide meaningful recurring revenue streams, allowing us to maintain long-term growth and profitability.

The day of waiting for that one large equipment or software sale in order for a subsidiary to be profitable for a quarter is over. The objective is recurring revenue. However, we are not turning away from equipment and software sales. We are instead basing profitability each month on recurring revenue. Our revenue objective is to have 80% of our annual revenue recurring, while we are not 100% there at Flagship, Tom Kemps to the new President of Flagship since November 2022, is highly focused on the strategy and vision. An example of how the strategy is working is our CloudFirst subsidiary, which we achieve profitability on a standalone basis with net income of $1.9 million and an EBITDA margin of 27% or $3 million with revenue of 11.5 million for 2022.

Hal Schwartz, President of CloudFirst has positioning the subsidiary as a leader in the market and taking advantage of the cloud migration on IBM Power Service, which is currently underway. We have only begun to scratch the surface to this market, a $36 billion annual addressable market in the United States in Canada. Turning to Flagship. When we acquired Flagship, we understood and still believe today that Flagship’s brand and reputation is in very high regard. However, given the current economy, companies are being more cautious in terms of large equipment purchases and the timing of the purchases. While we’ll continue to pursue these opportunities, we are focusing Flagship on subscription based services, which typically provide a higher margin.

The strategy is aligned with the overall market and economy as customers are working to outsource and migrates the cloud type services and solutions, where CapEx moves to OpEx and customers can pay as they grow. Flagship will continue to provide equipment to their client base. However, we will not base the business health on a one-time equipment sale. As a result, after reviewing proposals outstanding for 2023 for equipment sales, we felt it prudent to reduce goodwill by $2.3 million. Today, Flagship is positioned with IBM and is working closely with IBM on cybersecurity solutions and software. Moving forward, we’ll be making an investment with IBM to accelerate cybersecurity revenue. Additionally, to further assist in the success of Flagship, we are refreshing the Flagship website, hiring new business development personnel, expanding distribution channels through key marketing programs.

We believe these steps will assist in reaching profitability for Flagship on a standalone basis as well as aid in the overall profitability of Data Storage Corporation. Furthermore, we intend to deploy capital effectively and have outlined several objectives that we expect to execute throughout 2023. First, we intend on hosting high margin revenue driven events during the year in various cities around the United States. Second, while we provide solutions to government agencies, we are building out a government focused business unit. Third, we intend to expand internationally as our products and services are applicable worldwide. There are many large markets we can penetrate. Fourth, we are already underway with the consolidation of the technical teams of CloudFirst and Flagship under our CTO, Chuck Paolillo.

One positive outcome expected should be an improvement in gross profit. Fifth, we will expand our channel partner program in the United States and Canada. Channel partners are a great way to grow quickly, since these MSPs are the trusted advisers to their client base. And finally, as I have touched on before, we plan to expand the sales force with dedicated sales representatives and teams, aligned with the business segments and departments and we can then focus both on growth and profitability. With the realignment of management refocused efforts on business initiatives and a growing sales team, we believe the value of the activities, we undertook in 2022 will become apparent in 2023. Importantly, we expect these steps will be reflected in our first quarter 2023 results, which is shaping up extremely well.

Overall, we remain committed to growth. And with limited competition in several of our core services and solutions, we believe our sales teams and our proposal pipeline will aid in advancing our service delivery teams and assist in long-term profitability. With approximately $11.3 million of cash and short-term investments and no debt, we expect to deploy capital effectively and efficiently, including expanding our distribution channels, increasing marketing activities and exploring accretive acquisitions. We believe we are well on our way towards becoming a multi-billion dollar leader in this growing market. With that, I’d like to turn it over to Chris, our CFO, to discuss the 2022 financials. Chris?

Chris Panagiotakos: Thank you, Chuck. Total revenue for the year ended December 31, 2022 increased by approximately 60% to $23.9 million compared to $14.9 million for 2021. All of our subsidiaries saw increases in revenue. The primary increase in revenue relates to the acquisition of Flagship. At CloudFirst, revenue grew from $10.2 million to $11.5 million an increase of approximately 13%. At Nexxis, revenue grew from $817,000 to $931,000 an increase of approximately 14%. The Company saw increases from mostly all of its revenue sources, cloud infrastructure and disaster recovery, equipment and software, managed services and Nexxis’ VoIP services all grew from prior year. Cost of sales for the year ended December 31, 2022 was $15.8 million compared to $8.5 million for the year ended December 31, 2021.

The increase of $7.3 million was mostly related to the increase in sales, which resulted from the Flagship acquisition. Selling, general and administrative expenses for the year ended December 31, 2022 were $9.8 million, an increase of approximately $2.7 million compared to $7.2 million for the year ended December 31, 2021. The increase is primarily attributed to the Flagship acquisition. We also saw increases in salaries as a result of new sales and marketing staff, increased marketing expenses, and increases in professional fees associated with being on NASDAQ. Adjusted EBITDA for the year was $4,384 compared to adjusted EBITDA of $824,583 for the same period last year. Net loss attributable to common shareholders for the year ended December 31, 2022 was $4.4 million compared to net income of $204,161 for the year ended December 31, 2021.

For further detail on the $4.4 million loss we had a goodwill impairment at Flagship of 2.3 million. We had approximately a $400,000 expense in 1x equity compensation. We had127,000 in 1x offering cost and approximately a $1.5 million loss, mostly attributed to Flagship and our public company and corporate expenses. We ended the year with cash and short-term investments of $11.3 million at December 31, 2022, compared to $12.1 million at December 31, 2021. Thank you. I will now turn the call back to Chuck.

Chuck Piluso: Thanks, Chris. I’d like to open it up for questions. Rob, if you can take over at this point.

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Q&A Session

Operator: Absolutely, thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from Matthew Galinko with Maxim Group. Please proceed with your question.

Matthew Galinko: Nice job on 2022 results. So Chuck, I think you touched on the aligning Flagship with subscription being consistent with how I think macro is shaping how investors or how customers want to consume services. They want to go more towards the rental model than the capital purchase model. Did I understand you correctly? And can you go a little bit more into how this environment is resulting in some changes to customer conversations? Is that having a material impact on that shift?

Chuck Piluso: Hey, Matt, it’s a little difficult. First of all, I think that very large clients, which we — which Flagship has many I think that they could be taking an approach to delaying or being more cautious on the large equipment sales. So, you have the very large customers that might not be moving over to we called infrastructure cloud, but folks are looking at software-as-a-service. They’re looking at cybersecurity-as-a-service. So, instead of just purchasing and running it on their own systems, so you have a couple of things going on. One is possibly delaying on equipment sales, and putting that off a little bit, and others that are investigating or evaluating should they move onto infrastructure-as-a-service. We know that several large government agencies have moved onto infrastructure-as-a-service.

So, I would say for the most part it’s according to the size of the accounts, and all, but there is I believe a delay just based on the economy of people putting off that and very easily on equipment sales it can move from where you would think you’re going to close it one month and it rolls over to the next quarter and then we get the sale. I think we should be expecting some decent results when we take a look at the first quarter, but folks are consuming on a monthly subscription basis. Overall when we talk about the overall business environment, instead of making big capital purchases or software that they would usually license for an entire year or for three years. I don’t know, if that answers your question, Matt. Does it?

Matthew Galinko: Yes. That was helpful. Maybe, I know you don’t provide guidance, but just given how ’22 shaped up through the year you had the plug of Flagship revenue in the first quarter and fourth quarter was obviously very strong. What’s the — can you give us any commentary on what we might expect just given those high water marks that you reported during 2022? Does that set a really high bar for us to think about in ’23? Does the subscription growth sort of get to meet that equipment purchasing that you reported in ’22?

Chris Panagiotakos: When you take a look at the first quarter of 2022, we have some, as I mentioned, Flagship has some very large accounts and so there’s some software renewals that you see in there and that’s why we get the lumpiness when it goes — when we start looking at quarters. So when you take a look, I think our press release as well from last year, you’ll see that there was a large equipment sale and there’s also a large software renewal. These software renewals and hardware maintenance revenue, what happens is that, they occur in various months of the year. There’s not all of in one quarter or in one month. It just happens out through, through the entire year. And then at that point they go out. In some cases the clients put them out for competitive bids.

So, if you take a look at last year and you can see, our software renewal and hardware maintenance type revenues, you’ll see that lumpiness there as well as equipment. What we’re trying to do is just move more and more towards where it is straight lined and steady and you can see a consistent growth. But what ends up happening is when you get, for example, the $2 million software renewal that might occur in February, and it may be every February, you can see that lumpiness that’s there. So, the software renew on hardware maintenance, but with equipment that can just easily, as I mentioned before, just move to another month or another quarter. But if they’re looking to move to infrastructure to service were there to give a proposal on our infrastructure to see if they’re planning on moving to it.

So, it’s very hard to predict the equipment closes and that’s why we took the goodwill impairment, frankly, on Flagship, because it’s very hard to predict. And we wanted to be really conservative and prudent with that. But if you look at that lumpiness, Matt, you’ll be able to see that a lot of that is software renewal and hardware maintenance that occurs annually.

Matthew Galinko: I’m going to ask one more question and then jump back in the queue. You touched on international expansion. It’s definitely a topic that’s come up over the last few quarters. Can you talk a little bit more about how those plans will shape up for 2023? What’s new in that strategy and I guess what can we expect to see?

Chris Panagiotakos: Well, I still consider Canada to be international. We have with the partner ABLe Communications was purchased by a much larger MSP, which we have relationship now with. And we have in the Toronto metro area — we have the two — our equipment in two data centers there. So, we are looking to do much more in Canada. Additionally, we have been talking to MSPs and alike in Europe and we will continue to explore that. We really — we want to make sure, in the case of Europe that’s the MSPs that we can enter into partnership agreements in the same way that, the CloudFirst has done in the United States and Canada. So, we are exploring those MSPs that are there. We have programs going on to expand the MSP channel partner program in Canada and of course the United States.

So, we are focused on English speaking for the most part. It’s easier for all of us. And so, yes — so we are looking at the UK and Europe, primarily the UK, and doing more in Canada with the equipment that we have invested in those two data centers with Able-One.

Operator: Our next question comes from Adam Waldo with Lismore Partners. Please proceed with your question.

Adam Waldo: Yes. Good day. Thank you very much for taking my questions. I’d like to explore two areas, the new business pipeline and then the outlook for cash generation and capital deployment. So, on the new business pipeline, I know, as the prior question said, you don’t like to give specific financial guidance in terms of revenue, net income, cash flow and so on. But can you give us a sense some granularity or quantification, what your new business pipeline looks like at this time on a value basis in the recurring revenue side of the business? And how that would have compared, let’s say, six months or a year ago? And related to that, can you give us some quantification of where your closed rates are trending? Then I’ll hold my second question.