Data Storage Corporation

Good morning, ladies and gentlemen, and welcome to the Data Storage Corporation first quarter 2022 conference call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, David Waltman. Sir, the floor is yours.

Thank you. Good morning, everyone, and welcome to Data Storage Corporation's 2022 first quarter and March 31, 2022 business update conference call. On the call with us this morning are Chuck Peluso, Chairman and Chief Executive Officer, and Chris Panagiotakos, Chief Financial Officer. The company issued a press release this morning containing first 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 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 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 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 quarterly report on Form 10-Q for the quarter ended March 31, 2022, an annual report on Form 10-K and current reports on Form 8-K, followed with the Securities and Exchange Commission. Any forward-looking statements speak only 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 Peluso. Please go ahead, Chuck.

Thanks, David. Good morning, everyone. I'm pleased to report that our growth has continued into the first quarter of 2022. We have witnessed increased sales as well as growth in monthly cloud subscription services. As a result, revenue was up 236% from $2.6 million to $8.7 million for the first quarter of 2022. At the same time, we achieved positive net income and generated over $600,000 of EBITDA. while investing in our infrastructure, sales, and marketing. As you can see, we have built a highly scalable business model, and as we continue to grow revenue, we have the potential to generate significant profitability. We've been providing reliable, efficient IT solutions, including cloud infrastructure, hybrid cloud solutions, disaster recovery, IBM systems and storage, software, cybersecurity, and other managed services focused on the IBM Power Community across a variety of industries. Our DSC website that directly focuses on IBM Power Systems migration to the cloud welcomed 55,000 visitors in 2021, a clear indication that this migration is now underway. Some surveys have indicated only 15% of users are on a cloud-based solution. This migration is underway. We have the right offering at the right time to deliver critically important cloud technology solutions to a niche multi-billion dollar market estimated at $48 billion in the USA and Canada alone. Towards this end, we have invested millions to establish ourselves as a leader within the IBM Power Cloud infrastructure and disaster recovery marketplace. As anticipated, the flagship merger is proving to be highly synergistic with our existing operations. Completing the flagship merger has positioned us as a comprehensive one-stop provider with the ability to cross-sell solutions across our respective clients. We entered 2022 with a baseline annual recurring revenue of $12 million. 2022 began with a notable multimillion-dollar contract with a highly recognizable professional sports franchise. We were selected based on scalability performance of our solutions and believe this important contract illustrates the momentum we are gaining in the market. We recently announced the expansion of Flagship's partnership with PFL, the Professional Fighting League. PFL is pioneering the future of MMA proprietary technology, utilizing data analytics and AI that enables showcasing the sport like never before. They sought out our solutions and data scientists to assist in developing an unmatched MMA fan experience. Working with us, PFL has elevated the standard for measuring fighter performance. The insights gathered from smart cage technology and cagenomics data will be enhanced with IBM Watson machine learning to showcase what is taking place inside the cage and deliver an accurate matchup outcome predictions for MMA fans around the world. Our business development teams focusing on industry verticals is paying off. We have increased our outstanding proposals, of which more than half offer subscription-based prospects. At the same time, we have maintained contract renewal rate of 94%, reinforcing the quality of our services, technical team, and customer loyalty. We have placed a heavy emphasis on growing subscription sales, which provide long-term high margin revenue streams. We have witnessed particularly strong growth within our cloud infrastructure and disaster recovery services. In addition, we are increasing our sales force, expanding our marketing initiatives, and investing in highly skilled personnel and infrastructure to support our continued organic growth. It's worth noting that we did benefit from a large equipment sale in the first quarter. Equipment sales can lead to fluctuations from quarter to quarter, which is another reason we are placing heavy emphasis on subscription sales. That said, when opportunities exist for a large equipment sale, we'll certainly take advantage of those opportunities as we did in the first quarter. To summarize, we have been executing on our strategy. We have completed meaningful acquisitions entered into strategic partnerships that provide us more inclusive features and services for our clients, demonstrating our commitment to offering customers the most cutting-edge and comprehensive technologies. We have also maintained a solid balance sheet, with over $13 million of cash and cash equivalents as of March 31, 2022, and no long-term debt, providing us flexibility to take advantage of the opportunities within this emerging multi-billion dollar market. We have a strong team, robust proposal pipeline, and limited competition. As a result, we believe we are well positioned to drive increased profitability, giving a highly scalable business model. With that, I'd like to turn it over to Chris, our CFO, to discuss the first quarter financials. Chris?

Thank you, Chuck. Total revenue for the three months ended March 31st, 2022 was 8.7 million, an increase of 6.1 million or 236% compared to 2.6 million for the three months ended March 31st, 2021. The increase is primarily attributed to the additional sales from the flagship merger and an increase in monthly subscription revenue. Cost of sales for the three months ended March 31st, 2022 was 6 million, an increase of 4.6 million or 323% compared to 1.4 million for the three months ended March 31st, 2021. The increase of 4.6 million was mostly related to the flagship merger and the variable nature of costs incurred to produce and sell our products and services. Selling general and administrative expenses for the three months ended March 31st, 2022 were 2.5 million. an increase of $1.3 million, or 120%, as compared to $1.1 million for the three months ended March 31, 2021. The increase is primarily attributed to the increase in salaries as a result of the flagship merger, new sales and marketing staff, increased professional fees, and increased commissions expense. Our adjusted EBITDA for the first quarter was $604,000, net income attributable to common shareholders for the three months ended March 31st, 2022 was $135,788 compared to a net loss of $36,784 for the same period in 2021. We ended the quarter with cash and cash equivalents of $13.4 million at March 31st, 2022 compared to $12.1 million at the same time last year. Thank you. I will now turn the call back to Chuck. Thanks, Chris.

I'd now like to 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 do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star on your phone. Please hold while you poll for questions. Your first question is coming from Matthew Galenko from Maxim Group. Your line is live.

Matthew Galenko, Hey, good morning. Congrats on the strong quarter and thanks for taking my questions. Maybe to start, I think you said 12 million of ARR entering 2022. Did I get that figure correct?

Hi, Matt. Yes, it's a 12 million in annual recurring revenue as we enter it. That's December 2021 times 12. Got it. Thank you.

And do you happen to have what the number was exiting or I guess entering 2021?

You know, I do have that question, Matt. Just give me a moment. Do you have another question? While I look that up, it is in one of my investor presentations. But, you know, if you have another question.

Sure. Yeah, yeah. I guess if we could, you know, we talked last quarter about, you know, kind of expanding the partner strategy for, you know, I guess going after the the power infrastructure opportunity, just any milestones or anything on that topic that you could expand on that played out in the first quarter?

Well, in general, on the partnerships, we focus in a few different areas. The first one is the folks that have sold this equipment to begin with. That was a one-time sale for them. they have to wait three to five years to, let's say, refresh their equipment. You know, their clients now, maybe they've moved over to a managed service provider with their x86 Intel Windows applications, and now they're sitting with their IBM systems and asking these folks that sold the equipment, who do you use for an IBM cloud? With that, they become ideal clients for us, as well as software companies that sell software to... to folks that still have it on-premise. But in addition to that, we're looking at non-traditional. Cable companies right now oppress the governments trying to give away their Internet services, and they're looking to get more revenue, additional revenue from their existing clients. So we're trying to work with cable companies and telecom companies to be able to add disaster recovery and cloud infrastructure primarily onto the IBM Power, though we also have an x86 cloud. So we're looking at cable companies as well. And we're also, with distribution, we have a direct sales force. We're going to be adding to that direct sales force that's focusing on the verticals and big push towards government. But for the most part, on distribution with partnerships, I would say... folks that have sold the equipment or software initially or continue to and moving them, because they get an annuity for the life of the contract. So it's a lot better than just receiving it one time. Typically, it's around 18 months for them to break even on if they move off services in there, and then after that, with a 94% renewal rate, they can basically retire.

Thanks. That's helpful, Collar. I guess also on the business pipeline, I think you shared some numbers around that last quarter and obviously you signed a pretty potentially material order that you announced with PFL. So can you maybe Give us an update on what the pipeline looks like and maybe scope that a little bit between the large sorts of deals that you sort of get through flagship and what's coming in from the more traditional and sort of DR and other type business.

Sure. Well, to start with... So PFL and some of the other sports and media type entertainment type clients that Flagship works on, Flagship's a gold partner of IBM. And what happens is that they work very closely with Cisco, HCL, Red Hat, and IBM working closely. And with that, what happens is that There's a lead exchange that goes on. And so with that, Flagship is very close with those vendors. Those vendors typically work with partners. And so Flagship has a great technical staff. And in knowing that, those companies will pass those leads over to Flagship to work those leads with them. So that's one way that the pipeline gets filled in the Flagship. as well as they have over 100 customers and they continue to sell into that customer base. So that baseline, that pipeline continues to grow. When you look at the ratio between one-time sales and recurring sales, I'll round it out, it's around 80-20, 80% on the recurring side. But Flagship is also cross-selling data storage corporations D.S. cloud infrastructure for disaster recovery and cloud infrastructure. And between Mark and Hal, they're pretty scientific, the guys that are running those two subsidiaries, pretty scientific on how they calculate this pipeline. You know, if you were to ask Hal Schwartz, he would say right now, you know, how do you want to calculate it? Are we negotiating a contract with somebody or this is a quote that's going out? Overall, we probably have over $20 million in total pipeline to answer the question directly. That can range between $12 and $14 million on subscription services for just the data storage, the unit that sells DR on our own infrastructure and cloud infrastructure. And then you have to add in there Nexus as well for our voice and data as well as flagship. But if I gave you a number, I would say around $20 million. Got it. Thanks. It comes from a couple of different ways, Matt. It's coming from channel partners that are in their own businesses, their companies that have sales forces or owner-operator that now go into our Salesforce program, Salesforce.com, and they can configure for themselves you know, the proposal, and that becomes a quote and a proposal, and it automatically gets generated to the client or delivered to the client from the pipeline. So everything is actual flow-through proposal development on it. So it continues to grow. We continue to find people that are, you know, let's say they're not ready to refresh yet but are gathering information, and those are calculated on different percentages of where we're actually negotiating information. terms and conditions. So it varies in a number of different ways, but our systems basically flow through for proposals on cloud, infrastructure, and DR. But I would say around $20 million overall.

Okay, that's very helpful. I don't want to hog the queue if there's any other questions, but I do have a couple more if it's okay for me to keep going.

It's okay with me, Matt.

All right. Well, in the, I guess, last quarter, we talked a little bit about cyber and the elevated threat environment. Did you see any impact over the last quarter, you know, stemming from that? And, you know, just generally, how is your cyber kind of cybersecurity business performing?

First of all, our technicians... They're cross-trained on multiple products. We're looking at, I believe, setting up a completely separate cyber unit. We continue to recruit talent in that particular area, and it will be a major focus for us to have a cybersecurity unit set up. I believe that's what Hal Schwartz that runs DSC, which I think we've been changing the name to Cloud First, and Mark Wiley out of Flagship are working on together for that with Chuck Polillo, our CTO. But, yeah, there is a higher alert. People are asking the questions, but we've been rolling it out right to the end user for some time, especially when the beginning of COVID, when people were working from home. You know, they're getting instruction that they shouldn't be opening up certain things. At the same time, we've been rolling out software to the end user, to the firewall, and our technicians work on that. I believe an NFL franchise has put in – QRadar and that's an IBM software that we've implemented for them. So we're pretty active with it and it's going to be a major focus as probably a separate business unit for the company as we move forward.

Thanks. And I guess final question is kind of on macro and in two directions. One being, you know, what are you seeing in terms of macro or customers, you know, more cautious in a rising rate environment to think about refreshing infrastructure? And does that push them closer to, you know, sort of to going towards infrastructure as a service, or is that having any impact on how your customers in your pipeline are thinking about how they manage their infrastructure? And I guess the second part of that question is going to be on the M&A front, just given that we've seen such pullbacks in the public market, does that create any opportunities or more incentive for some of the targets that you've looked at in the past to think about terms differently. Thanks.

Matt, I have to see if I can remember both of those questions. But for the most part on the M&A, you know, we're fairly active with that, looking at multiple deals. We're not running towards it. The environment with our stock price where it is right now, we don't want to be using any stock at all, and we're going to watch our cash positions. So we are going to be spending some money on organic growth, continue to. We've increased the payrolls at Flagship and at Cloud First, DSC, on that, as well as Nexus. But we're going to be careful on that. The M&A, we're looking at everything from folks that are managed service providers in the IBM space, or in general cybersecurity. On the customers as it relates to the cloud infrastructure, I think in some cases many really don't realize why people go to the cloud. And for the most part, it's a pay as you grow, number one, and it's CapEx to OpEx. So the main reason why folks in the beginning didn't really move too quickly to the cloud with their x86 is because a lot of folks was concerned about security. Now that AWS, Microsoft, and Google hold 51% of the market, and that's all that they hold based on recent surveys, 51% of the market. So you can get an idea of those folks that either haven't migrated or they're using other managed service providers. They realized that cloud is secure if you're doing those things, and in some case, backup, retention, disaster recovery is more robust. It's more of a quality service when you do move to Tier 3 data centers, replication in multiple locations. So folks are more comfortable now that their x86 environment, its storage has moved over to that. So with that, as they've done that, these IBM systems are sitting still in those data centers And so with that, we're seeing that activity, that people are comfortable. And that's one of the reasons why I think we had 55,000 visitors to our site. The site that the white paper that generated the most downloads was migrating your IBM infrastructure to the cloud. So I think this migration, I know this migration is taking place, and folks now have these systems that are ready to refresh. at certain periods of time. People will just get quotes and prepare for it to happen over six months a year or two, but this information is out there by us. We really are one of the leaders in this, and I would say we were probably the first to introduce a true IBM power multi-tenant type of cloud shared storage or direct from in 2012 and 2013. But it was slow. Now that most of the x86 stuff has moved, at least a good portion of it. People are comfortable with security. This is the next stage, and we are positioned for it, and we're ready. We continue to add CapEx into our data centers, our Tier 3 data centers. We have seven data centers in the United States, two in Canada as part of that seven, and partnerships in Canada. So we're ready.

Terrific. Thank you. And last question for me is just on the hotbacks. I think you talked about, you know, internal investment. SG&A was up a little bit sequentially and up a little more meaningfully if you go back a couple quarters. So is this the new run rate we should be thinking about for SG&A, or should we be looking to go higher from Q1 as we look to the rest of the year?

Well, on the OPEX side, if we're, you know, we're talking about cost of goods sold for a minute before, let's just go into that. You know, as we add racks, as we add additional cages, that'll move up. I believe it's a smaller portion of our cost of goods sold in that area, so I don't think that that'll go up significantly. In the case of our depreciation, our leases, that'll continue to move up, but it moves up on a variable rate as it relates to revenue. On the SG&A, I would say in the case of SG&A, we are going to spend some money on building a first-class direct sales organization, business development organization over this next year. We're recruiting now. We're going after verticals that we know are powerful. Tom Kempster is now who's an officer of the company who ran all of operations for a period of time, was part of ABC, that acquisition. Tom is focused on government. Government is a very large user of IBM systems. So we'll be spending money on that, but we're not going to be the company that's going to be hopefully losing money in the sense of it, but you do have to make an investment in a sales force. The benefit is that you're not paying them evergreen. Usually they'll get paid direct sales first month, you know, first month billing. And so it doesn't go on evergreen like channel partners typically do. So we will see SG&A go up, but it will go up in the basis to hopefully ensure that we maintain positive EBITDA and profitability.

Well, thanks so much for taking my questions.

No, thanks for the questions, Matt.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star, then 1 on your phone at this time. Your next question is coming from Ellen Litzak from Forest Capital. Your line is live.

Thank you, and congrats on the strong water, guys. You announced two major customers in the sports industry. Can you talk about why data storage was selected? And beyond the sports industry, what other verticals are we focusing on?

Sure. Just to cover the verticals, finance and banking, government, the sports field, we'll call it sports and entertainment on that, and also healthcare. Those are the verticals that we are actually directly going after. But at the same time, we are servicing distribution companies as well, and retail, which are large users of IBM's power systems. On the sports side, Flagship has, I believe, between 22 and 26 events planned for 2022. We have a suite at the Atlanta Falcon Stadium. Typically the vendors, as I mentioned before, Cisco, HCL, IBM, Red Hat, they'll do events with Mark and Mark's team. And there will be a collaboration between these vendors and Flagship with inviting customers in, prospects in, and with that discussion of technologies. So we do have other sports teams as well. There's work done with the Marlins. There's a list of them. I believe they're on the websites. But they're selecting because they're We have an unbelievable technical team that's trained on these technologies. So when IBM or Cisco Red Hat have to select a partner, They're going to select the one that knows that we do a fantastic job at it and we have those references to go along with it so the clients have some comfort level and the vendors that we use have a comfort level that we can actually implement these services. And that's the reason why.

Awesome. Well, thank you so much for taking my question. Thank you for the question.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star then 1 on your phone at this time. Please hold while we poll for questions. Thank you. That concludes our Q&A session. I'll now hand the conference back to CEO Chuck Peluso for closing remarks. Please go ahead.

Thank you, and thank everyone for the questions. We continue to execute on our business growth strategy, which has resulted in acquisitions, significant contracts, and new partnerships. We have built a robust proposal pipeline and continue to support our future growth. We have and will continue to increase our sales force, expand our marketing initiatives, and invest in personnel and infrastructure. With over $13 million in cash as of March 31st, 2022, We are well-funded to take advantage of the opportunities within this multibillion-dollar market. We look forward to reporting on additional developments as they unfold, and thank you all for joining us today.

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