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.