Data Storage Corporation

Good day, ladies and gentlemen, and welcome to the Data Storage Corporation's second quarter 2022 conference call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, David Waldman, Investor Relations. Sir, the floor is yours.

Thank you. Good morning, everyone, and welcome to Data Storage Corporation's 2022 second quarter, end of June 30th, 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 second 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, performances, or achievements expressed or implied by such forward-looking statements, statements preceded by, followed by, or that otherwise include the words believe, expects, anticipates, intends, projects, estimates, plans, and similar expressions 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 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 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 The benefit from the IBM cloud migration underway, the company's ability to position itself for future profitability, the company's ability to maintain its NASDAQ listing. These risks should not be construed as exhaustive and should be read together with other cautionary statements, including the company's quarterly report on 10Q for the quarter ended June 30th, 2022, and annual reports on Form 10K and current reports on Form N8K, followed by 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 we achieved solid revenue growth in the second quarter of 2022, with total revenue increasing by $1.3 million, or 37%, compared to the same period last year. For the six months ending June 30th, 2022, our revenue increased 121% over the same period last year. As stated in our press release this morning, the higher increase in revenue for the six-month period relates to the timing of one-time equipment sales, which were front-loaded in the first quarter. Equipment sales by nature are very lumpy and can cause large swings in our revenue from quarter to quarter. And while we are continuing and will continue to take advantage of opportunities to sell equipment to enterprise-level customers, however, our primary focus is on high-margin recurring subscription-based cloud and managed services, which increased 47% in the second quarter of 2022 compared to the same period last year. Ultimately, this is where we see the future of the company and the future of our industry, as more companies seek to migrate their IBM power infrastructure to the cloud. Over the years of our experience providing data storage and disaster recovery services, this has helped us establish a leading reputation in this market. And as we've discussed in the past, while Intel and Windows servers have been undergoing this migration to the cloud, the IBM server market has only begun to transition in the last few years. This is a very limited competition marketplace, and our timing is excellent to tap into this rapidly growing, multibillion-dollar market opportunity. More importantly, businesses are increasingly under pressure to improve their applications, disaster recovery, and storage systems, accelerating the migration from self-managed technical equipment on-premise to solutions to fully managed multi-cloud technologies to reduce and compete effectively. In today's environment, capital preservation is also an incentive to move from a capital-intensive, on-premise technology to a pay-as-you-go model. Basically, customers are moving from a CapEx to an OpEx model, which will continue to support growth in our subscription cloud model. Towards this end, we have built a robust sales pipeline while at the same time We are increasing our sales force, expanding our marketing initiatives, as well as investing in highly skilled personnel and infrastructure. Heading this initiative is Tom Mitchell, who joined us from Flagship as our new Vice President of Sales. Tom brings more than 26 years of management and sales experience, including 18 years at IBM. He served in IBM's Channel Partner Division, supporting several IBM largest US partners. Tom has been with Flagship for over 10 years, serving as VP of Sales, and is now responsible for all of DSC's revenue. Given the strong demand for our services, we are also expanding our sales team. We plan to hire an additional four sales reps in the coming months, bringing our direct sales team to 20. while continuing to increase our efforts to develop additional channel partners under the leadership of our director of channel, Steve Romweber. Steve has over 20 years' experience providing services and software to this community. Steve has been with us over two years and continues to build this distribution channel. We're also creating a special services group. working with partnerships with IBM and Cisco and others, alongside of their sales staff, to open joint opportunities with their clients. In addition, we're expanding within the government sector under the leadership of Tom Kemster, the Executive Vice President of Data Storage Corporation, with a particular focus on state, county, and local agencies. Government is one of the largest users of IBM's servers and storage. It's a perfect target to migrate our disaster recovery and cloud infrastructure. As a result of these initiatives, the current outstanding contract value on our client subscription services agreements is over $14 million. Moreover, we have proposals outstanding with a combined total contract value of more than $18 million. I'm also pleased to report that despite the lumpiness of equipment sales, we achieved positive EBITDA in the second quarter of 2022, and we believe we are well positioned to drive increased profitability going forward, given the scalability of our business model. At the same time, we continue to carefully manage expenses. Following the acquisition of Flagship, we are centralizing data center operations for better utilization of staff and a reduction in contractors. Overseeing this initiative is our Chief Technology Officer, Chuck Bellillo, who brings more than 20 years of industry experience. We have already identified cost savings we are implementing across the organization by further integrating our business units. Given these initiatives, let me break down the numbers a little further so you can see where we are today and why we are optimistic going forward. Our three subsidiaries, Cloud First, run by Hal Schwartz, Flagship, run by Mark Wiley and President, and John Camillo, President of Nexus, combined make up our subsidiary leadership and serve as the presidents of these units. Combining cloud-first infrastructure and disaster recovery services with flagships-managed services, our recurring subscription revenues increased by 47%. Cloud subscription is typically priced at a 50% gross profit margin. In contrast, our equipment software and hardware sales increased approximately 27% with gross profit margins estimated at 25%. On a standalone business, Cloud First, which was DSC, the operating company, is profitable and growing. Flagship will continue to fluctuate based on its heavy reliance on equipment and software sales. But as we continue, our annual recurring revenues, which are currently running at an estimated $4.3 million, and with centralized operations, and the organization, we expect this business to become consistently profitable from quarter to quarter. Based on contracted annual recurring revenue, we expect FlareShip to enter 2023 with a baseline recurring revenue of more than $5.2 million. Nexus has historically been slow and steady business with consistent gross profit margins of around 35% and is near break even on a standalone basis. As we continue to grow Nexus, it should be consistent contributor to profitability. So to wrap up, we are pleased with our progress, especially on subscription cloud-based services. DSC Solutions, built by DSC, represent the future of the company. And as I mentioned earlier, while we are prioritizing these services, we are not abandoning equipment and software sales, and see these sales as an opportunity for additional cash and add-on services to these large clients. Moreover, we were able to positive, despite significant investments in our business and sales initiatives, which has always been our strategy. Corporate expenses have grown, due in part to our focus on government sales as well as new personnel and professional expenses. We expect that as revenue grows, corporate expenses as a percentage of revenue will decrease. At the same time, we continue to carefully manage expenses and see opportunities for additional cost savings. We also ended the quarter with over $11 million of cash and cash equivalents and no long-term debt. We have a strong team, a robust proposal pipeline, and limited competition. And as a result, we believe we are well positioned to drive increased profitability given our highly scalable business model. We are excited about the outlook for the business and look forward to providing further updates as developments unfold. With that, I'd like to turn it over to Chris Panagiotakis, CFO, to discuss our first quarter financials. Please go ahead, Chris.

Thank you, Chuck. Total revenue for the three months ended June 30th, 2022 was $4.8 million, an increase of $1.3 million, or 37%, compared to $3.5 million for the three months ended June 30th, 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 June 30th, 2022 was 3 million, an increase of 1 million or 47% compared to 2 million for the three months ended June 30th, 2021. The increase of $1 million was most 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 June 30, 2022 were $2.6 million, an increase of $1 million, or 62%, as compared to $1.6 million for the three months ended June 30, 2021. The increase is primarily attributed to the increase in salaries as a result of the flagship merger, new sales and marketing staff, and increased marketing expenses. Adjusted EBITDA for the quarter was $33,000 compared to adjusted EBITDA of $249,000 for the same period last year. Net loss attributable to common shareholders for the three months ended June 30, 2022 was $857,000 compared to net income of $136,000 for the same period in 2021. We ended the quarter with cash and cash equivalents of $11.2 million at June 30, 2022 compared to $12.1 million at December 31, 2021. Thank you. I will now turn the call back to Chuck. Thanks, Chris.

I'd like to open up this portion to any questions that listeners have to ask.

Thank you. The floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. If your question has been answered, you can remove yourself from the queue by pressing 1. Again, ladies and gentlemen, it's star 1. And our first question comes from Matthew Gallenko from Maxim Group. Go ahead, Matthew.

Hi, good morning. Thanks for taking my questions. Chuck, you mentioned, you described, you know, kind of the future as a pay-as-you-go model. And, you know, we've talked about the opportunities there in the past. How is the macro environment that we're sort of looking at today between inflation and some concerns about growth in the economy impacting how your customers and, you know, prospective customer engagement is, you know, looking at that, you know, scenario of moving from an on-prem type deployment to a cloud?

You know, I believe that the recession, although hits us all personally, is excellent for this business. People will preserve their cash, and the expression pays you go, it's more as pays you grow. And if you look at it that way so that people will preserve the cash, they'll look to optimize their staff where we take care of infrastructure. It's one expense they don't need on the payroll side. along with disaster recovery, with being able to have backups that are done after hours, where our backups are done on the target side and continue to, the companies continue to receive information on how successful those backups are. So through automation, through our 24-hour-a-day monitoring, they can literally, if they want, reduce their staff, reduce their capital expenditures, and then move with us. So I think from a recession or a threat of a recession, I believe it's good for our business, Matt.

Thanks. And I guess if you could, is it possible to segment that a little further into, you know, I think you mentioned that government is maybe the, among the heaviest users of IBM Power are infrastructure. So, you know, do you see a difference in how, you know, government versus non-government customers are responding to the current environment?

You know, it's interesting that I've been dealing with, you know, some government-type sales, you know, through my career, and with this, It becomes difficult to a degree, but what's happened now is Tom Kemster, who originally was with ABC and we merged with or acquired back in 16 and 17, and he's running this right now and knows it really well. And he's responding to RFPs. There are RFPs coming out, which is great. And I believe we just took a sale with a local township in New York State. So I think it is heating up. They're seeing the advantages of it. Whether they'll move the cloud infrastructure completely, you know, I think that's maybe protective for a little while. But on disaster recovery side, I think we'll see some acceleration in that way. But Tom is responding to RFPs, and I believe we just took an order and we're fairly new at what we call GovNet, which is websites being developed for that right now, and it's directly targeted to government services for cyber security, infrastructure as a service, cloud infrastructure, and disaster recovery. So we believe that it will pick up and, you know, in a short period of time, with Tom working on it, I believe we received an order. Pretty good.

Very good. Maybe last question for me before I jump back in the queue. I think you've talked in the past a little bit about international expansion of the services business. How is that going for you to date?

You know, we've been so busy looking at where we can consolidate in the U.S., and we also have two data centers in Canada with a relationship, a partner, ABLE-1. And I will say that we have our eye on it. We know exactly where the data centers are, where there's heavy bandwidth globally, and we have designed a particular, Chuck Polillo has our CTO, where we can put a rack in a particular country and open that up. We are looking at that. We need to see who we would assigned to say they really want to run with international. I believe that we can probably put up two cities in 12 months and work with IBM partners in those countries and give them the opportunity to what we've built over 10 years with this platform. So we are looking at it. We just need to be able to find some leadership to be able to do that. So we do have our eyes on it.

Thank you. I'll jump back in the queue.

Again, ladies and gentlemen, to ask a question on the phone, it's star one. And our next question comes from Bill Jordan from TA Investments. Go ahead, Bill.

Yes, thank you. Good morning, Chuck. I was wondering if you could provide some color on how Flagship is doing on a standalone basis.

Sure. You know, I'm going to turn that over to Chris. But before I do that, you know, I will say that when we acquired Flagship, They had a baseline of recurring annual recurring revenue, which they've been growing over the years to get away from a little dependency on the equipment, and they have a very experienced sales team that has been selling equipment and software for as long as they've been in business. So there's a lot of pressure essentially on Flagship, you know, with cross-selling and their customers and all. So we're working real hard to not lose anything on the equipment and software sales, but at the same time, you know, build into the DSC, Data Storage Corporation, cloud-first data. data centers with infrastructure and DR. So we're working together with the training. Tom Mitchell is overseeing all sales, has it as a priority for cross-training, compensation, and things like that. So it's a little bit of a transition, but at the same time, we don't want to lose. There's some fairly large accounts that Flagship has, and we don't want to lose that. And there's also additional sales that come along with that that follow along with those equipment and software sales. But as to the actual numbers, Chris, I'll turn it over to you.

So, Bill, to further answer your question, if you remove the stock-based comp, the amortization expense, and the corporate allocation, Flagship did show a slight profit for the six months ended June 30, 2022. Great. Thank you, guys.

And that appears to be our last question at this time. I would now like to turn it over to management for any closing remarks. Thank you.

Thank you. Thank you for the questions. It's always good to drill down a little bit and appreciate it, Bill and Matt. Well, as we continue to generate solid year-over-year growth while continuing our focus on monthly recurring subscription-based revenue and managed services, this is what our mission is. And we have a great leadership team. running the companies, the subsidiaries, and the offices and management underneath that. And we believe we are extremely well positioned to capitalize on the growing opportunities as more companies seek to migrate their IBM power systems and infrastructure to cloud. In addition, we're well positioned to drive increased profitability going forward, given the scalability of our business model. We ended the quarter with $11 million in cash. We have no long-term debt. We have a solid foundation to accelerate our business model. Thank you all for joining today. It's appreciated, and look forward to further updates from us with press releases. Thank you.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.