Data Storage Corporation

Good day, ladies and gentlemen, and welcome to the Data Storage Corporation Fiscal Year 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, David Waldman, Investor Relations. Sir, the floor is yours.

Thank you, Holly, and good morning, everyone, and welcome to Data Storage Corporation's fourth quarter and year-end 2021 business update conference call. On the call with us this morning are Chuck Beluso, Chairman and CEO, and Chris Panagiotakis, Chief Financial Officer. The company issued a press release this morning containing 2021 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 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 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, 2021, and quarterly reports on Form 10-Q and current reports on Form 8-K, followed with the Securities and Exchange Commission. Any forward-looking statement speaks only of the date on which it was initially made and 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 Peluso. Please go ahead, Chuck.

Thank you, David. Good morning, everyone. I'm pleased to report that 2021 was a transformational year for the company. Among the accomplishments, we uplisted to NASDAQ, completed the acquisition of Flagship, grew our customer base, and expanded both domestically and internationally. I'm pleased to report we achieved revenue growth of approximately 97%, 60% for the fourth quarter and full year, respectively. We also achieved positive adjusted EBITDA for both the fourth quarter and the full year. As a result, we are well positioned heading into 2022. We are already realizing the synergies of the flagship acquisition, which complements our overall business strategy and expands our offerings with an impressive roster of Tier 1 customers. Since closing the acquisition, we are already witnessing increased cross-selling activity and were awarded a multimillion-dollar contract with one of the nation's premier professional sports teams. We expect to recognize this sale as revenue in the first quarter of 2022. We have increased our outstanding proposals to over $20 million in total contract value, which is an historic high for the company. Our contract renewal rate is 94%, which further validates the quality of our services and customer loyalty. We have placed a heavy emphasis on growing subscription sales. which provide long-term, high-margin revenue streams. In particular, we are seeing increased interest in our digital infrastructure, data integrity, and disaster recovery services. It is clear that these services are more important than ever, given the heightened risk with cybersecurity from foreign nations and rogue actors. It's important to point out that we're protecting our clients' data and providing secure hosting environments for over 15 years. This is not new to us, but current events are only heightening awareness of the need for these services, and we can offer our customers a complete end-to-end security and data recovery offering. As I have always stated, not all attacks or national disasters can be avoided, and it's crucial that organizations are prepared. Even though companies have firewalls and other protective measures, just like having a smoke detector in your home, what do you do when the fire starts? You need to have a fire extinguisher for rapid response. Companies need to back up data off-site so information can be recovered, restored, and available within an hour or hours. Additionally, we provide critical security features that protect information, data privacy, and adhere to compliance standards. As an example, we recently partnered with Precisely, a global leader in data integrity and cybersecurity software solutions. the addition of precisely expanded solutions within a cloud environment that allows us to offer an even more robust full-feature offering that addresses the most common IT security exposure issues, including ransomware. Our customer base now includes more than 400 customers and 30 active distribution companies. Without question, we are successfully executing on our strategy to establish data storage as a leading provider of business continuity solutions, ranging from managed cloud infrastructure to cybersecurity, to direct internet access, VoIP integrated with Microsoft Teams, and an array of managed services. And with the acquisition of flagship solutions, we are positioned as a leading one-stop provider for multi-cloud IT solutions. The time is now. The IBM on-premise service market has only begun to transition to the cloud in the last few years. Over 1 million plus virtual IBM power servers, only 50% of these servers have begun to migrate to the cloud. We believe this represents a multi-billion dollar global addressable market, and we are ideally positioned to capitalize on this trend. We are also expanding domestically and internationally with the opening of operations in Austin, Texas earlier this year as well as in Canada through the addition of two new data centers that went live in our partnership with AbleOne. The partnership with AbleOne fills an important need for cloud services in Canada among businesses that run IBM power systems on IBM i, AIX, and Linux operating systems. So to wrap up, we are growing rapidly. We have completed meaningful acquisitions, entered into strategic partnerships that provide a more inclusive feature and services to our clients, demonstrating our commitment to offering customers the most cutting edge and comprehensive technologies. We are also boosting our infrastructure, increasing sales, our marketing initiatives, as well as investing in personnel and infrastructure to support our continued growth. As an example, we added business development team members as well as a director of marketing. We are already seeing the benefits from these additions. We have also added technical personnel to support our anticipated growth. In addition to personnel, we've invested in expanding our cloud infrastructure, storage, network equipment, and computer power with IBM Power Service. We have a strong balance sheet with over $12 million of cash as of December 31st 2021, enabling us to execute on our growth strategy, as well as explore opportunistic creative acquisitions that will further enhance our offering and geographic presence. As a result of our strong balance sheet, we have no need to raise capital, and would not do so at the current levels. We are also very proud of our accomplishments we achieved in 2021, and we believe the outlook for business is brighter than ever. We have a strong team. robust contract pipeline with upselling and cross-selling opportunities with limited competition. To date, we have completed many acquisitions and entered into strategic partnerships that provide us with more inclusive features and services for our clients. As a result, we believe we are well positioned for growth and improved profitability, given our highly scalable business model, which we expect to drive significant value for shareholders in the years to come. I'd like to turn the call over to Chris Panagiotakis, our CFO, to discuss the year-end financials. Please go ahead, Chris.

Thank you, Chuck. Total revenue for the year-ended December 31st, 2021 was $14.9 million, an increase of 60% compared to $9.3 million from last year. The increase is primarily attributable to the additional sales from the flagship merger and an increase in monthly subscription revenue. Cost of sales for the year ended December 31st, 2021 was 8.5 million compared to 5.4 million for the year ended December 31st, 2020. The increase was mostly related to variable costs incurred to produce our products and services. As a result, our gross profit margin was 43.7% versus 41.7% in 2020. For the year ended December 31st, 2021, Selling, general, and administrative expenses were $7.2 million compared to $3.9 million for the year ended December 31, 2020. The increase was primarily attributable to an increase in salaries related to higher headcount, professional fees, and advertising expenses due to additional flagship marketing campaigns launched post-merger. A majority of these expenses in SG&A are positioning us for 2022 and beyond. Our adjusted EBITDA for 2021 was 825,000 or 5.6% of revenue. Net income attributable to common shareholders for the year ended December 31st, 2021 was 260,000 compared to net income of 174,000 for the year ended December 31st, 2020. We ended the year with cash and cash equivalents of 12.1 million at December 31st, 2021 compared to $894,000 at the same time last year. Stockholders' equity increased to $22.6 million compared to $1.9 million as of December 31, 2020. I am also pleased to report that we have remediated the material weakness that appeared in last year's 10-K, illustrating the improvement in our overall financials. Thank you. I will now turn the call back to Chuck. Thanks, Chris.

I think at this point we can open up the call for questions.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Matthew Galenko. Please announce your affiliation, then pose your question.

Hi. Good morning, guys. I appreciate you taking my question, Max and Rup. Congrats on the strong close of the year. Chuck, you mentioned, I think in your press release and your commentary, some uptick. But I guess, you know, since the federal government started raising their warning about cyber attacks in recent weeks. Have you seen a change in customer behavior or willingness to move towards adopting DR solutions or any sort of security options?

Thanks, Matt. Great question. First of all, we roll out cybersecurity software right to the end user because of the remote worker. Also, all of our infrastructure clients were actually going to provide them and have been providing them with software cybersecurity. In a sense, they really need to be able to put this on there already. Some have it on it already, but we're kind of, you know, in a way insisting upon it. So there's a huge uptick that's going on in cybersecurity across the board, and we're hearing information from insurance companies that they're taking a beating, you know, on cybersecurity. on these types of claims for the breakthroughs, because as we know, if they want to break through the hackers, they're going to break through. So the strongest piece for us, essentially, even though we take all the preventive measures for our clients, is we maintain their data encrypted in our data vaults. So, you know, we have it on both sides of it, the cybersecurity and the warning with, let's say, a cue radar that's giving the alerts to SOPA software, but the point, if someone does get through, we have all the versions by the hour, by the day, by the week for all of our encrypted data faulting customers. So we are seeing that uptake and we are rolling that out in a large way as cybersecurity as a service.

Got it. That's helpful. And then I guess big picture, if you had to give your opinion on on customer willingness to move towards sort of, you know, infrastructures or just kind of a power cloud infrastructure model. How have those conversations changed, you know, today versus how they were a year ago?

Well, you know, we're seeing the migration, and that's represented in our Salesforce pipeline. You know, we have various levels of judging that, whether it's a quote or whether it's someone that's negotiating a contract with us. So there's been an uptake. We had 55,000 visitors to our site in 2021, which is extremely unusual compared to previous years. So if you were to look at that, you'd have to say that uptake is actually there and proposals continue to grow. The presentations that happen, they happen typically through our channel partners and our distributors and our business development team. So we're seeing that uptake proposals are being generated constantly. We have a thousand plus companies that are just in our nurture list that continue to ask for information and not even yet a quote. So it's moving. It's moving and it's moving at a pretty good rate. And Matt, by the way, we've actually increased our infrastructure, which I mentioned in the earnings call, based on what we're seeing in this uptake.

Got it. Yeah, I heard you mention that. I figured it wasn't without cause, so that's good to hear. All right, last question for me before I jump back in the queue. About that $20 million sales pipeline, I guess help us break that down a little bit. How much, how prominent is flagship there? How much of that is recurring services versus sort of product sale? And is that mostly for 2022 projects, or does that go out multiple years? Just help us frame what that means.

Sure. Well, first of all, we have a backlog, I would say, Chris, probably around $2 million in equipment plus. That's correct. And around $500,000 in total contract value in the DSC subsidiary. Let's keep in mind, we operate through three subsidiaries, Flagship, Nexus, and DSC. Flagship's funnel is... There's a number of equipment proposals in there. It's around $6 million, $14 million or so, 13 or 14 in DSCs. Of DSCs, that's primarily subscription services. Got it, okay. We talk about 14, it's total contract value. And, you know, our average term typically that occurs the most is 36 months. So you can divide that out to get a feel for it. But, you know, we understand the marketplace. It's around $46 billion, you know, in Canada and the United States that we're focused on. Even though the total marketplace is $600, $700 billion, we're highly focused for this next few years at capturing, you know, a percentage of this $46 billion that's transitioning to the cloud based on our estimates.

Got it. So of the, you know, I think you said about 14 or so million in DSC, How much of that is realistically, is a customer going to make a decision on in 2022, whether it's you or somebody else?

Well, that just brings up my religious background. I'd have to go to church and light candles to really answer that question 100%. It's really very, very tough. I'd have to drill down. What happens is in our sales force, everything is calculated. So when it's a 90% in sales force that comes up, what it does is it means you're negotiating with terms and conditions within the agreement itself. So, you know, it's a question of how much is in 10%, 20%, and higher percentages. So it's tough for me to give you that actual answer on that at this time.

No, no, that's fair. I guess the last question, and then I'll be back in the queue, but is that 20 million weighted for kind of your probabilities that you just talked about, or is that just a straight number?

Everything is weighted by probabilities within Salesforce on the $14 million. $14 million is we've delivered a proposal to an end-user client, either through the channel partner or through one of our direct business development team members. The $6 million that's in Flagship's funnel is what's expected to come in in 2022. We don't really go out You know, when we send a proposal out, it's not because they're doing something in 2023, although it could just be a quote. Typically, it's an effort for the prospect and an effort for the company to be able to generate that, even though it's automatically done through Salesforce, it's still a process. So these are folks that we are anticipating. We've seen a close rate of around 23% on our subscription proposals, if that's a number. I would estimate that at around 23%. And I believe in the case of Mark Wiley at Flagship, his $6 million, his proposals that are outstanding for 2022, how Schwartz, he talks about a 23% close rate, which is pretty good.

It's estimated, but... Yeah, no, that's helpful, Collar. I'll turn back in the queue. Thank you.

Thank you, Matt.

Once again, if there are any questions or comments, please press star 1 on your phone at this time. Your next question for today is coming from Ryan Joseph. Please announce your affiliation, then pose your question.

Hey, this is Ryan Joseph with RS Capital. Thanks for your time today. You kind of touched on this a little bit, talking about the market opportunity, but with only 15% or so of IBM services moved over to the cloud. What would you see as the market opportunity here with such a large yet underserved industry?

Thanks, Ryan. First of all, let me be clear on the 15%. When we talk about 15%, it doesn't mean that they are using infrastructure to serve as cloud infrastructure. It could be that they're using cloud for disaster recovery, mirroring, and data backup. So it doesn't necessarily mean cloud infrastructure. The migration that we're seeing is actually moving from on-premise to actually cloud infrastructure in one of our six data centers in the United States. So just to clarify that, we've been offering cloud to IBM since we acquired SafeData in 2010. But it is a $46 billion industry in the sense that we're saying that target market with Canada and the United States, we're focused on offering disaster recovery. But the migration that Amazon, and I'll use Amazon because they've been there the longest. Microsoft came in a little later and Google later than that. They have 51% of the marketplace today and 1,000 others have all of the others. So we're seeing the migration from on-premise to off-premise you know, I'm saying off-premise, to cloud happening. And that's really what I'm referring to. So 50% is using some type of cloud services. So Amazon... Yeah, go on, Brian, sorry.

Well, that makes sense. I mean, it does seem like a very large market and fragmented for that matter, though. And to that extent, could you speak more to upcoming M&A opportunities to help kind of break down that already fragmented market that you just described?

Right. I can talk about M&A a little bit. But before, I just want to go back on what your point was. When you say it doesn't seem like a very large market, first of all, we're focused on this space with probably three competitors. You know, you might see many more. They're probably distribution companies, channel partners of ours. So, you know, at our pro forma revenue with flagship nexus for a full year of flagship, we're talking about $23 million. So I wouldn't mind capturing 10% of that marketplace or 5%, which pushes our revenue up to significant in the billions. So I think it is a significant sized marketplace because of the limited competition. If we're focusing on Windows and Intel, which we do have a cloud for that, you're competing with 1,000 people there. It's not what our approach is exactly at this particular time. So it is fairly significant, and we have the ability, I believe, and we're positioned and have the infrastructure and data centers to be able to do that. Just to go back to your M&A question on that, we're looking for folks that might have sold equipment for 20 years, have a very reliable, loyal customer base, and those customers are now ready to move towards infrastructure as a service. We probably have 125 companies under contract, but we have 30 active ones. You know, we don't bring up the 100 plus. It's just, you know, it's the ones that are really active on it. So we're looking at M&A in that area. We're looking for M&A in the area of VoIP that's integrated with Teams. We know that this is in the billions as well, and people are using Teams, but certain industries will always require, you know, handsets and some type of voice VoIP type services integrated with Teams. We're looking at data analytic companies as well, the folks that are doing that as a service where it's recurring and not just a consulting contract. You know, we're focused on healthcare, media, entertainment. Tom Kemster now is running government where we have an offering for government. And with that, we're also looking for M&A activity where folks already have the relationships with government as an M&A target. Very good.

Well, you definitely answered both questions. They relate pretty well to each other about the strategies, so that makes a lot of sense. That's all I've got. I appreciate your time, though.

Oh, thank you, Ryan.

Your next question is a follow-up question coming from Matthew Galenko. Matthew, your line is live.

Oh, thanks for taking this again. I guess drilling a little bit further into the M&A topic, Chuck, I think you mentioned that, you know, you don't have a willingness to capital raise at this, you know, in this equity market. So is it reasonable to think about, you know, deal size that you're looking at now as tuck-in or, you know, and I guess what are you seeing in terms of, you know, valuation expectations from investors? from the companies you're engaged with?

Well, you know, with a few million dollars in backlog, with a backlog in subscription total contract value of $500,000, with probably $5 million plus in assets deployed, we shouldn't be trading it at liquidation value. I mean, it really is, you know, keeps you up at night, but every CEO of a company is probably saying their company is undervalued, but... You know, it's a difficult one. We have $12 million in the bank, deals that we're looking at. You know, we would put that, you know, the payout over several years because we want the CEOs, the entrepreneurs that founded these companies to stay with us, form another subsidiary if it makes sense, unless it makes more sense to blend it together. And we're seeing economies of scale with work groups between Flagship and DSC. So on the capital raise, Yeah, we wouldn't do it at this particular point in time. I just can't even imagine the stock staying where it is for more than six months or a year. We have warrants outstanding. I believe it's 2.2. Chris can correct me on that, 2.2, Chris. And if we get over north of $7, it's $13 million in additional cash in the bank. You know, can't imagine that a pro forma for 2021 with a full year of flagship Nexus and DSC is $23 million in revenue. You know, we're on fire, and it's just not being noticed yet. Matt, I don't know if that answers your question.

Yeah, no, no. Look, it makes total sense to me. But I guess on the other side of the equation, you know, are the people you're talking to to culminate deals you know, seeing the same pressure and valuations as you're seeing in the public equity markets?

Well, you know, we're seeing, you know, somewhere between eight and ten times multiple of, let's call it, you know, EBIT, not EBITDA. And on equipment deals, you know, one to one and a half times on that. We're really looking for recurring revenue. And any deal that we would structure with someone that, is in the equipment business looking to convert their customers over, you know, they would be on earnouts. So, you know, we're looking at deals also. I remember the other part of your question. Usually it's somewhere between, you know, $8 and $15 million positive cash flow companies.

Got it. Thanks. And then last one for me. You mentioned adding on the technical side. I think on the maybe advertising and I'm not sure where else in the organization, but what are you facing in the labor market? Is it difficult to add people? Are you feeling wage inflation? How has it been to try to build?

Well, Mark's done a great job at bringing on a great team. Mark had a plan, and we agreed, and he's increased that. So he is well-connected, Mark, and has done an unbelievable job with adding those folks in the marketing and also in the tech space. I believe in the case of DSC and with Nexus, you know, we're not looking to add 20 people. We have a very senior staff, so we've added more junior people so that we bring them up. And that really hasn't been too difficult. We've been getting, you know, interviewing continues always. But we haven't had a difficult time. I think it's more in the case of anybody that was senior was brought on because there was relationships. Anyone that's junior, we're... bringing them out of schools and instructing them and coaching them and training them on our services or they're going to school, you know, for whether it's IBM school or it's software that we're selling. So we're not finding it difficult at this point, but we're not adding 20 salespeople, you know. That could be extremely difficult.

Got it. Okay, fair enough. Last one for me is on the flagship deal that you talked about, is that, all expected to be recognized in the first quarter or is there more of a tail to it?

Chris, I'll turn it over to Chris.

What exactly do you mean by that? So I think the, the commentary in the press release was that, you know, you announced the multimillion dollar deal at the end of the, at the beginning of this year. And it's a, Yeah, so it sounds like it's going to be the RevRec will be in the first quarter, but I'm just curious if there's going to be, you know, follow-on revenue recognition or if it's sort of a one-shot deal in the first quarter.

Yeah, so we're still analyzing that. You know, we're getting ready to start our Q1 review, so we will be looking at that and recognizing revenue under 606 accordingly.

And also, keep in mind, too, Matt, that we hope that it all goes into the first quarter, but for the most part, we don't want to commit on that. So we'll see what that is shortly. But when you sell equipment, there's always follow-along revenue on that with hardware maintenance and software renewal for these systems. Sometimes you'll sell a three-year agreement, and then that kicks in in the fourth year. Sometimes it's annual. So anytime you're usually selling equipment, it always has follow-on recurring revenue.

That's helpful. Thanks so much.

Your next question for today is coming from Carl Comu. Please announce your affiliation, then pose your question.

Hi. Private investor. We only own 20,800 shares. But I have a naive question. It seems that everything I read is DTSP is selling IBM products. I know that you... I'm sure you have other products available, but my question is how... And when will you have your own proprietary product? Thank you.

You know, Carl, that was brought up and said, you know, you folks look like you're a reseller for IBM. And we've been trying to improve our messaging. So we have a corporate website that should be going up in April that really positions us to understand what we really do. So when we sell equipment, It could be IBM equipment. Most of the time it is IBM equipment. But when we talk about subscription services, this is our own product. This is a product where we buy particular elements and technology. I don't know how technological you are, but we'll buy storage, we'll buy compute power, networking, and we assemble this under a method that we've been doing since 2012, and that is our offering. not reselling IBM. So it's a little bit different. I understand that the messaging may be off on that, but this is our offering. You know, the majority of the customers are all on disaster recovery where we might have, we subscribe to a particular software. We then put it on data vaults and replicate it to other data centers that we have. So it really is our proprietary offering. You know, two or three other competitors that we may have in the space may do it a little bit differently. But for the most part, we're a build partner of IBM. So, we've assembled all of the elements and it's our offering. Now, in the case of Flagship, just to follow it along, Flagship, working closely with IBM, they may be using IBM's cloud based on a customer's requirement for certain types of compliance. But out of DSC, it's a DSC offering out of that subsidiary that we put together that's in six data centers in the United States. It's not an IBM offering. It's an offering where we can take someone's IBM equipment and move it to cloud infrastructure on their infrastructure. So it is our offering. Did I help, Cole?

Thank you. I appreciate it.

Okay. And thank you for being a shareholder.

There are no further questions in queue. I would like to turn the floor back over to management for any closing comments.

Thank you, Holly. Thank you all for the questions. Just to wrap it up, we're very pleased with our accomplishments in 2021. We believe we're well positioned to continue to execute on our strategy and our growth strategy, M&A strategy, and we look forward to reporting on additional developments as they unfold.

Thank you all for joining us today.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.