Data Storage Corporation (NASDAQ:DTST) Q4 2023 Earnings Call Transcript

Data Storage Corporation (NASDAQ:DTST) Q4 2023 Earnings Call Transcript March 28, 2024

Data Storage Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Data Storage Corporation 2023 Fiscal Year Business Update Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to David Waldman, Investor Relations. Thank you. You may begin.

David Waldman: Thank you, Sherry, and good morning to everyone. Welcome to Data Storage Corporation’s 2023 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 its 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’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 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 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 annual report on Form 10-K for the year ended December 31, 2023, quarterly reports 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 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.

Charles Piluso: Thank you, David, and good morning, everyone. We have made meaningful process throughout 2023, resulting in record revenue of approximately $25 million, as we continue to increase subscription solutions and leverage our technical assets deployed in six data centers. As a result, our gross profit increased 18.5% with gross profit margin increasing to 38.4% from 33.9% in 2022. This is a major achievement and validates that our strategy is working. As a result of these initiatives, we achieved profitability for the year and anticipate that as our revenue continues to grow, we anticipate continued improvement in both our margins and overall profitability in 2024 and beyond. Notably, CloudFirst as a standalone business, achieved $13.5 million in revenue for the ’23 fiscal year with a net income of approximately $2.6 million and $3.8 million in adjusted EBITDA, the EBITDA margin 28%.

Furthermore, Flagship as a standalone business in 2023 achieved $10.4 million in revenue with a net income of approximately $28,000 and over $400,000 in adjusted EBITDA, a swing from the previous year of over $1.8 million from the ’22 loss of $1.3 million. We believe the positive results within Flagship are a direct result of our efforts to fully integrate Flagships business within the company, and we recently announced that Flagship has merged internally with CloudFirst, which we believe will further assist in improving our gross profit margins and result in increased revenue and profitability. Throughout the organization, we are confident that by executing and advancing our growth strategies, including the CloudFirst and Flagship merger, as well as expanding distribution channels, enhancing digital and direct marketing efforts, refining our lead generation process, organizing revenue centric sales events, and investigating strategic M&A prospects, we can potentially further boost revenue and optimize long-term profitability.

And as I previously mentioned, we aim to venture into international markets due to the substantial demand for our groundbreaking solutions globally. Our focus lies in tapping into these expansive yet underserved markets with our niche cloud infrastructure solutions. Presently, an initiative is in process to engage managed service providers in the U.K. and establish partnerships and establish a distribution network. We will keep you informed with our advancements. Validating the demand for our solutions, we have continued to witness an increase in visitors to our website, which was over 135,000 visitors in ’23. We also have a nurture list, which I spoke about on our last call that contains over 25,000 organizations who are interested in potential implementation of our services.

We intend to take advantage of these avenues to secure new contracts and increase our footprint within the market. Furthermore, we initiated a strategic sales and marketing campaign during the fourth quarter aimed at leveraging and increasing demand for our solutions. We are already observing a positive outcome of these endeavors, which included the recruitment of new sales representatives, committed to acquiring and retaining new clients, while synergizing effectively with our ongoing lead generation efforts. Additionally, these sales representatives are tasked with nurturing our prospect list, aiming to advance conversations towards contractual agreements. At the same time, we introduced a major account program with the exclusive aim of enhancing our presence with an established enterprise and middle market accounts, aiming to capitalize on the opportunities for upselling and cross-selling.

Currently, we capture only a modest portion of the related IT expense for these enterprise and mid-market companies. In fact, our ongoing strategy has revolved around acquiring new customers and nurturing these relationships as their requirements evolve. By deploying a dedicated team to oversee these opportunities, we can effectively seize the substantial potential within the market. Validating our efforts on the various contract announcements made throughout this year. First, we secured a multimillion dollar expanded contract with the Forbes Global 2000 listed company, considering the expansive reach of this client, we view this agreement as additional confirmation of our capacity to deliver products and services tailored to the requirements of major enterprise accounts.

Our central objective remains the expansion of our recurring revenue streams. We persist in strengthening our foothold within the client base and providing supplementary recurring managed services. We also successfully obtained a multimillion-dollar contract with a prominent global provider of end-to-end business processes. Under this agreement, we are providing cloud-based infrastructure to accommodate the clients’ extensive data sets, along with round the clock dedicated support. Additionally, we are offering data recovery solutions to ensure uninterrupted business operations for the client, whether doing scheduled maintenance or unforeseen downtime. Subsequently, we secured a large subscription-based contract with a leading promotional company.

Following an unfortunate and unexpected natural disaster, we were contracted to provide fully monitored and managed cloud solutions for the client. We have implemented cloud-based disaster recovery and cloud-based infrastructure, allowing the client to run its critical applications on a fully managed, highly secure enterprise cloud with 24/7 dedicated support, ensuring seamless and rapid recovery of data during unexpected downtimes. We were also selected by one of the nation’s leading sports and entertainment companies to provide cloud storage infrastructure. The multimillion-dollar project required us to develop a customized solution that improves response time to their files, file recovery and storage capacity to support a critical component of their security infrastructure.

Later, we were selected again to provide a variety of services and solutions to address their cybersecurity requirements, further demonstrating our ability to meet evolving needs of our customers. And lastly, we secured a multimillion dollar subscription-based contract, one of the largest food distributors in the United States, where we are providing managed disaster recovery solutions to reduce the recovery time of critical data. In addition, we had a strong start in ’24, evidenced by the expanding contract with a global telecommunications company, as well as securing contract with a leading U.S. insurance company for cloud migration. As you can see, we have experienced robust contract momentum and have sustained our renewal rate with an average initial term contract duration for 29 months, showcasing our capacity to meet or surpass client expectations by offering unwavering support.

Presently, we serve over 450 companies and aim to further augment this remarkable clientele. Data center firms specializing in window-based infrastructure platforms rely on Data Storage Corporation subsidiary CloudFirst for our expertise in IBM platforms. Collaborating with these infrastructure partners presents an excellent opportunity to expand our distribution channels, utilizing our skilled staff and maximizing our deployed assets. It’s also important to note that we have over $100,000 in new monthly billing currently being installed, totaling $3.5 million in total contract value. Our overall remaining contract value today is $26.7 million, we are not counting what will renew. Since we do have an excellent renewal rate, the client experience is excellent.

Further, we have limited competition, our solutions are sticky, migration into a competitor’s platform is difficult. Additionally, we have over 60 proposals outstanding with a total contract value of over $8 million. We believe as these prospects decide to migrate their systems or just their disaster recovery programs to our cloud-based solutions this should serve as an increase in our current annual recurring baseline revenue that we entered 2024 with, which is already over $18 million. Overall, we continued execution of our strategic growth plan. We achieved profitability in ’23 fiscal year as well as secured new and expanded contracts, while increasing our penetration within the market. We are also actively exploring potential strategic acquisitions that would assist and support our growth and more importantly, complement and improve our current operations.

I’m convinced that we have reached a critical junction within the company where we are exceptionally well prepared to venture into international markets, capitalize on upselling and cross-selling opportunities for our products and service and acquire further substantial subscription-based contracts. These endeavors collectively paved the way for sustained profitability and potential revenue expansion. At the same time, we have carefully managed expenses we have preserved a strong balance sheet with over $12.7 million in cash and marketable securities. Over $11 million of working capital and no long-term debt, as of December 31, 2023, which provides us the flexibility to deploy capital efficiently and effectively to support our long-term growth and drive value for our shareholders.

With that, I’d like to turn the call over to Chris Panagiotakos, our CFO to discuss our financials. Chris?

Chris Panagiotakos: Thank you, Chuck. Total revenue for the year ended December 31, 2023, increased by approximately 5% to approximately $25 million as compared to $23.9 million for the year ended December 31, 2022. The increase is primarily attributed to an increase in our cloud infrastructure and disaster recovery services as well as our VoIP services during the year. Cost of goods sales for the year ended December 31, 2023, were $15.4 million, a decrease of approximately $400,000 or 3%, compared to $15.8 million for the year ended December 31, 2022. The decrease of $400,000 was mostly related to new negotiated pricing at Flagship offset by an increase in the cost of sales at CloudFirst and Nexxis, due to the increase in revenue.

Selling, general and administrative expenses for the year ended December 31, 2023 were $9.7 million, a decrease of $93,000 or 1% as compared to $9.7 million for the year ended December 31, 2022. The decrease was primarily due to a decrease in advertising expenses as a result of not renewing a marketing program at Flagship offset by an increase in professional fees as a result of various employment matters and corporate projects. Adjusted EBITDA for the year ended December 31, 2023 was $1.6 million, compared to adjusted EBITDA of $4,000 for the same period last year. Net income attributable to common shareholders for the year ended December 31, 2023 was $382,000 compared to a net loss of $4.4 million for the year ended December 31, 2022. We ended the year with cash and marketable securities of approximately $12.7 million at December 31, 2023 compared to $11.3 million at December 31, 2022.

Thank you. I will now turn the call back to Chuck.

Charles Piluso: Thanks, Chris. Let’s open up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Matthew Galinko with Maxim Group. Please proceed.

Matthew Galinko: All right. Thanks for taking my questions. Maybe first on the recurring baseline. I think you mentioned it was $18 million entering 2024. Do you happen to have the number entering 2023?

Charles Piluso: Hi, Matt. This is Chuck Piluso. The — I’d like to turn it over to Chris, but I’m trying to remember the number on that. I think that — remember, we’re talking about annual recurring revenue. So when we talk about annual recurring revenue, we’re talking about subscription revenue. We’re talking about contractual managed services. Next is actual contractual recurring revenue, both in dedicated Internet access as well as the VoIP contracts and then we have software renewal and hardware maintenance contracts that we enter the year with. And sometimes, that’s what causes that lumpiness that you might see in our investor presentation because they do it. But I believe the number for ’23 was $18.7 million. On 2022, I don’t have that number, Matt, I can get that for you.

Matthew Galinko: Sure. Okay. And I guess one other financial one. Yeah. One thing I noticed in your balance sheet this quarter was your receivables were very low ending 2023, I think it was maybe your lowest level since before the acquisition of Flagship. So anything — was there any specific programs to kind of drive the receivables number lower or kind of get collections done faster? Just anything you could talk about there on how do you get it to that level at the end of the year and what should we expect going forward?

Charles Piluso: I’ll turn it over to Chris, Matt.

Chris Panagiotakos: Yeah. So Matt, so we have improved our collections and we’re looking at our collections more closely. And as things hit the 30-day mark or so, we do start making collection calls, which have improved our collection efforts.

Matthew Galinko: Perfect. Thanks. I’ll turn back in the queue.

Operator: [Operator Instructions] Okay. We do have a follow-up with Matt from Maxim.

Matthew Galinko: Okay. I wanted to touch again on the international opportunity. I know we’ve talked about it for a little while now. How is that initiative progressing? Can you provide a little bit more color on what’s going on there and if we should expect to see anything signed in brand distribution in 2024.

Charles Piluso: I happen to have with me Hal Schwartz. He is the President obviously of the public company, also he is running CloudFirst and we both just got back from the U.K. I guess a couple of weeks ago. Maybe Hal you want to respond to that?

Hal Schwartz: Okay. Matt, can you repeat the question, so I know I’m answering correctly?

Matthew Galinko: Sure. I just – I have – just wanted to get more color on how that international distribution effort is going and whether we should expect to see anything signed or if it’s reasonable for us to expect something to be signed in 2024 that might contribute to late year or next year?

Hal Schwartz: Yeah. Right now, we’re getting our ground works a foundation set in U.K. right now with a — with an organization that’s assisting us in our entry point there and that is going to take a while for us to build out. So we do anticipate or we are hoping to have substantial contracts before the end of 2024 in U.K. Now that’s going to be DST only situation, it’s not CloudFirst, but we are CloudFirst is assisting with that build-out right now and getting that launched in the U.K.

Charles Piluso: Yeah. I’ll give a little bit background too also, just to be a little more color on that. So we started around six months ago with reaching out to MSPs in the U.K. And then Hal and I spent a significant amount of time talking to different folks. And one organization we picked is just very well connected the folks that are expertizing the ex-British Telecom and also what we’re trying to do first is set up a distribution network, get that going in place, identifying the data centers that we want to go into. So our first thing is to really lock up our distribution right now, I would say, yes. So we’re trying to lock that up and we’re trying to do that over the next three months actually through the summer. And then if things go really well, we’ll deploy assets into two data centers in the U.K. But first, it’s about distribution and getting comfortable with that.

Matthew Galinko: Got it. That’s helpful. And then maybe a follow-up on the — I think the cross-sell team and effort that you talked about for mid and large enterprise clients. Talk about when did that — when did you assemble that team? How long have they been operating and what are you seeing so far and what do you expect going forward?

Charles Piluso: Matt, I’ll talk a little bit out of school for a moment. With Flagship, they were very much focused on equipment and software type sales. And what ended up happening was we had cross-selling training going on from the minutes that we actually closed with Flagship, but it got stalled out. Tom Kempster got involved and took over as CEO in November 2022, 2022. And with that, Tom and Schwartz, and I don’t want to use the term, force that, but compensation was changed. Education was changed on that and then that cross-selling actually really started building up. So we really started this as I’m going to say, cross-selling in November of 2022, and there’s been ongoing training going on. In fact, recently, a very large sale was taken by 1 of the sales folks at Flagship that now are all part of CloudFirst on it. And so that is actually it’s moving along. But it was still I’m going to say for the first year, right? I’m going to say.

Hal Schwartz: Yeah. Yes, it was. But in addition to our CloudFirst solutions going on Flagship because we definitely have a lot of momentum there. We’re also integrating some of the products and services on the security front, especially the Flagship specialized into the CloudFirst accounts, that initiative is just underway, but we feel we have good momentum there as well.

Matthew Galinko: Got it. And I guess kind of — help me understand what that pipeline is? I think you said those Flagship closed in mid — what was it mid-‘21 and maybe you had three quarters of all on that. And you said maybe like two or three quarters into really getting your paces with the cross-sell efforts. So how much low-hanging fruit is there out there?

Charles Piluso: Well, The low-hanging fruit, Matt, it’s interesting you say that, first of all, we have a significant number of proposals outstanding. And just because someone doesn’t give us their business, it doesn’t mean that we lost it to a competitor. They’re just not ready to go yet. They might be collecting things for quotes and budget. Should we buy equipment and put it into a data center or should we outsource this for cloud infrastructure and disaster recovery. So sometimes those cycles can take some time on it. That’s why in our sales force, it could be a 20% probability, a 10% probability or a 50% probability. So it continues to move along with it. So when we say low-hanging fruit, it’s more low-hanging fruit is the lead generation program that Hal and his team has put together, we are — have a very, very good lead.

So if someone is coming in on a lead generation program that’s low-hanging fruit. The nurture list that we have with 25,000 companies in that, that have either met with us, talk to us, downloaded white papers, we believe that, that is low-hanging fruit. But when you say low-hanging fruit, the easiest low-hanging fruit is when god forbid something happens, in a particular region of the country, and they thought they had a good DR program, disaster recovery program in place, and it just didn’t work like one of the cases that I brought out in this earnings call. And when we do it, we’re pretty good at it, and it works. So — and we guarantee it with service level agreements. So low-hanging fruit, the best low-hanging fruit you could say really is our nurture list and leads that come in that folks are anxious to get up on a surface.

But the 25,000 in that nurture list is with Hal has folks working on to be able to say come on, speak to our solution architects, speak to our senior team members to be able to move them along.

Hal Schwartz: Chuck, can I add one note to that. We have pretty strong relationships with our account base and we view that as we add these products and solutions to our portfolio. We feel that those – we can leverage those relationships to gain more of the IT spend in our current account base. So that is also considered low-hanging fruit to us.

Charles Piluso: There’s a good amount of addendums that go on every month to the existing contracts. Does that help, Matt?

Matthew Galinko: It does. That’s very helpful. Yeah.

Charles Piluso: Okay. Do we have any other questions? Are we good? Okay. Matt, thanks very much for the questions. We appreciate them and are we good?

Operator: There are no further questions at this time. If you have any closing remarks.

Charles Piluso: Sure. I do. Thank you. First of all, thank you, everyone for attending. We developed a business strategy that we are very confident that will bolster our growth and ensure sustainable profitability in the long run. All while maximizing our value to our shareholders. We anticipate reaping the full rewards of our endeavors over time, and we’re excited about the business outlook and we look forward to providing meaningful updates to the shareholders, and I’d like to thank everyone once again for joining our call today. Have a great day.

Operator: Thank you. This will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.