Q3 2024 Data Storage Corp Earnings Call
Greetings, and welcome to the Data Storage Corporation 2024 Fiscal Third Quarter Business Update.
At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host, Alexandra Schilt, Investor Relations. Thank you. You may begin.
Alexandra Schilt: Thank you. Good morning, everyone, and welcome to Data Storage Corporation's 2024 third quarter 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.
Alexandra Schilt: The company issued a press release this morning containing its 2024 third quarter financial results, which is also posted on the company's website.
Alexandra Schilt: 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.
Alexandra Schilt: 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.
Alexandra Schilt: 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.
Alexandra Schilt: to differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements.
Alexandra Schilt: statements preceded by, followed by, or that otherwise include the words believe, expect, anticipate, intend, project, estimate, plan, 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.
Alexandra Schilt: 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 be correct.
Alexandra Schilt: 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.
Alexandra Schilt: The company's ability to position itself for future profitability and the company's ability to maintain its NASDAQ listing.
Alexandra Schilt: 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 7Q for the quarter-ended
Alexandra Schilt: September 30, 2024 Annual reports on Form 9K and current reports on Form 8K filed with the Securities and Exchange Commission.
Alexandra Schilt: Any forward-looking statements speak only as of the date on which it was initially made.
Alexandra Schilt: Accepted 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, change circumstances, or otherwise.
Speaker Change: I'd now like to turn the call over to Chuck Piluso. Please go ahead Chuck.
Thank you, Allie, and good morning, everyone.
Speaker Change: We have made important progress during the recent months, including penetrating strategic markets, forging important partnerships, and establishing new regional data centers.
Speaker Change: Before we get into the detail on those achievements, I'd like to report that we generated 5.8 million dollars in revenue for the third quarter.
Speaker Change: While this reflects a decline of three percent from the previous year, it does align with our strategic focus on building recurring subscription revenue, rather than relying on one-time, non-recurring sales.
Speaker Change: As I've mentioned in the past, we will continue to support our clients and sell equipment and software.
Speaker Change: Our primary objective remains the same, securing ongoing service contracts with our enterprise infrastructure platform, which creates a stable revenue foundation and supports our long-term growth and profitability.
Speaker Change: When we look at a 3% decline in revenue, consider the recurring subscription agreements, their length of agreement, and then our excellent renewal rate.
Speaker Change: While there is a 3% decline to the quarter, what's not stated is the increase in baseline revenue for 2025 in monthly subscription billing.
Speaker Change: We achieved profitability for the three months and a gross profit margin of 43.2% in the third quarter of 2024, up from 38.9% in the same period last year.
Speaker Change: This improvement is an increase in our infrastructure, cloud-based solutions on our enterprise platform.
Speaker Change: For the nine-month period, we generated $19 million in revenue and achieved profitability.
Speaker Change: I'd like to get into some of the developments during the quarter.
Speaker Change: This quarter, we expanded our presence into high-growth, highly-regulated sectors where data security, compliance, and reliability are paramount.
Speaker Change: We expanded our partnerships with a billion-dollar insurance firm that selected us to enhance its cloud infrastructure and cybersecurity framework.
Speaker Change: This reflects the client's confidence in our reliable security services that we've been providing for years.
Speaker Change: Additionally, it underscores the strength of our enterprise infrastructure cloud-based platform in supporting large organizations that handle sensitive compliance heavy data.
Speaker Change: Working with such a prominent player validates our focus on the insurance sector where demand for secure and scalable cloud solutions is increasing and our services are recognized as above industry standard.
Speaker Change: In healthcare, another highly regulated industry, we signed a contract with a leading medical center that required robust, compliant cloud hosting service.
Speaker Change: This agreement highlights our capacity to meet stringent industry requirements for data protection and HIPAA compliance.
Speaker Change: Healthcare organizations are seeking trusted cloud partners to ensure that data is always accessible, secure, and protected from cyber threats, and this agreement strengthens our position in this sector.
Speaker Change: We also secured a significant contract in the education sector, partnering with a music publishing organization.
Speaker Change: This six-figure agreement emphasizes our flexibility in addressing diverse client needs and our adaptability to data-intensive sectors.
Speaker Change: With the rise of digital learning and content, education and publishing sectors are now required.
Speaker Change: They require secure cloud infrastructure for data storage, content delivery, making this an excellent growth avenue for our solutions.
Speaker Change: Collectively, we believe that these agreements showcase our growing reputation as a trusted provider in industries with stringent data requirements, where reliability, security, and regulatory adherence are critical.
Speaker Change: We are confident that our expanding footprint in these fields will drive long-term value as we continue to innovate and tailor our offerings to meet the needs of our clients.
Speaker Change: To accommodate our growing client base in the United States, we expanded our infrastructure platform to Chicago.
Speaker Change: This facility enhances our national coverage, it reduces latency, and straightens our capacity to provide reliable, enterprise-level, high-availability cloud services.
especially across the Midwest.
Speaker Change: With this strategic expansion, we are well equipped to meet rising demand while ensuring an exceptional client experience.
Speaker Change: Recently we provided a letter to our shareholders highlighting achievements within our cloud first subsidiary which achieved 5.5 million in revenue for the third quarter and positive net income.
Speaker Change: This is a direct result of our progress at Cloud First as we continue to be a leader in cloud hosting, disaster recovery, and cybersecurity.
currently serving over 425 companies across diverse industries.
Cloud First is on track.
Speaker Change: to reach over $20 million in projected recurring revenue for 2025, given our 12-month term agreements renew. Not only is our renewal rate excellent at over 90%, our clients continue to add and expand their services with us. An excellent vote of confidence.
Speaker Change: Our recent expansion into the UK market and the successful integration of flagship solutions further strengthens our global footprint and operational efficiency.
setting the stage for accelerated growth and global reach.
Speaker Change: recently announced with the appointment of Colin Friedman as Managing Director of Cloud First Europe, an important step of our strategy to expand across the European market and deliver our solutions to this key market.
Speaker Change: With Colin's leadership experience, we are confident he will be instrumental in accelerating our growth in the region.
Speaker Change: In addition to his appointment, we are establishing infrastructure deployment in data centers in the UK, positioning us to make a strong entry and enhance our footprint in this key market.
Speaker Change: These milestones are key steps in organic growth to capture new opportunities and expand our impact.
Speaker Change: We are excited to build on this momentum as we continue delivering innovative, reliable solutions and creating lasting value to our shareholders.
Speaker Change: Over the past nine months, our cloud-first website attracted more than 65,000 visitors.
Speaker Change: underscoring the growing interest and engagement we are seeing around the IBM power server migration.
Speaker Change: To support this rising demand, we are strategically expanding our technical and business development teams, readying ourselves to sustain both client acquisition and maintain impressive client renewal rates.
Speaker Change: Additionally, we are focused on nurturing a significant pipeline of potential clients globally.
Speaker Change: Our nurture list includes thousands of organizations interested in the potential implementation of our services across various industries and regions.
Speaker Change: By cultivating these relationships and providing tailored support, our aim is to convert this interest into new contracts.
Speaker Change: Our new expanded addressable market in Europe and companies doing business cross-border exceeds over 50,000 companies.
Speaker Change: We have increased our addressable market, positioning ourselves with enterprise level infrastructure with assets deployed in 11 data centers by January 2025.
We are positioned to capture the migration.
Speaker Change: These initiatives allow us to engage with future clients while capitalizing on opportunities to expand our reach and solidify our reputation as a leading provider in the space.
Speaker Change: Overall, we are proud of our execution, including expanding contracts, international reach, and rising industry prominence.
This foundation allows us
to consider targeted acquisitions that complement and enhance our operations.
Speaker Change: positioning us for the greatest success as new shareholders see our value and our share price becomes reflective of the value of the company.
Speaker Change: At the same time, we are in strong financial position with a solid balance sheet.
Speaker Change: holding $11.9 million in cash and marketable securities and no long-term debt.
Speaker Change: This stability provides flexibility to invest efficiently, ensuring we are ready to seize growth opportunities that create value for our shareholders.
Speaker Change: 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. Good morning, everyone. Total revenue for the three months ended September 30th, 2024 was $5.8 million, a decrease of approximately $178,000, or 3%, compared to $6 million for the three months ended September 30th, 2023.
Chris Panagiotakos: The decrease is primarily attributed to lower one-time equipment and software sales during the current period and a decrease in managed services partially offset by increases in all other revenue sources.
Chris Panagiotakos: Total revenue for the nine months ended September 30th, 2024 was $19 million, an increase of approximately $184,000, or 1%, compared to $18.7 million for the nine months ended September 30th, 2023.
Chris Panagiotakos: The increase is primarily attributed to the increase of 29% in infrastructure and disaster recovery cloud services, offset partially by a decrease in one-time equipment sales and managed services during the current period.
Chris Panagiotakos: The cost of sales for the three months ended September 30, 2024 was $3.3 million, a decrease of approximately $359,000, or 10%, compared to $3.7 million for the three months ended September 30, 2023.
Chris Panagiotakos: The decrease of 10% was mostly related to the decrease in one-time equipment and managed services related cost of sales.
Chris Panagiotakos: Cost of sales for the nine months ended September 30, 2024 was $11.1 million, a decrease of approximately $703,000, or 6%, compared to $11.8 million for the nine months ended September 30, 2023.
Chris Panagiotakos: The decrease of 6% was mostly related to a decrease in one-time equipment sales.
Chris Panagiotakos: Selling general and administrative expenses for the three months ended September 30, 2024 were $2.5 million, an increase of approximately $221,000, or 10%, as compared to $2.3 million for the three months ended September 30, 2023.
Chris Panagiotakos: Selling general and administrative expenses for the nine months ended September 30, 2024 were $8.1 million, an increase of approximately $1.2 million, or 17%, as compared to $6.9 million for the nine months ended September 30, 2023.
Chris Panagiotakos: The increases were primarily due to an increase in professional fees, salaries,
Chris Panagiotakos: stock-based compensation and travel as a result of our international expansion efforts.
Chris Panagiotakos: Adjusted EBITDA for the three months ended September 30, 2024 was $515,000 compared to adjusted EBITDA of $486,000 for the same period last year.
Chris Panagiotakos: Adjusted EBITDA for the 9 months ended September 3, 2024 and 2023 was $1.4 million.
Chris Panagiotakos: Net income attributable to common shareholders for the three months ended September 30, 2024 was $122,000 compared to net income of $179,000 for the three months ended September 30, 2023.
Chris Panagiotakos: Net income attributable to common shareholders for the nine months ended September 30, 2024 was $235,000 compared to $456,000 for the nine months ended September 30, 2023.
Chris Panagiotakos: We ended the period with cash and marketable securities of approximately $11.9 million at September 30, 2024, compared to $12.75 million at December 31, 2023.
Speaker Change: Thank you. I will now turn the call back to Chuck.
Thanks Chris. Let's open up the call for
Speaker Change: Operator. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line from the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Speaker Change: Thank you. Our first question comes from the line of Matthew Galinko with Maxim. Please proceed with your question.
Hey, thanks for taking my questions.
Can we start on the services renewal?
Speaker Change: I think you mentioned $20 million, or maybe it was north of that, but what is your line of sight to 2025 services revenue as of now? Just so I could get that correct.
Speaker Change: Thanks, Matt. Thanks for the question. Good hearing your voice. When we say service renewals, I think that
Speaker Change: If you're talking about managed services, you know, we can give a number on that, Chris. You have a managed services that we have on the revenue side. I think what we average.
Speaker Change: between $175,000 a month to $200,000 a month on managed services.
Speaker Change: But you know when we I'm not sure if you're talking about software renewal and hardware maintenance But I just give some of those numbers. So typically on managed services. We're between
Speaker Change: between 175 and 200. That'll also include professional services that are part of the implementation of our subscription services.
Speaker Change: So for example, if we were to take a look, you know, let's say in our sales funnel You usually can look at around 10% for implementation services
Speaker Change: So when we take a look at that you can kind of work backward on that on what our numbers have been. On the actual software and hardware renewals, we run between
Speaker Change: We run between 5 and 6 million dollars annually, and that's what creates a lumpiness sometime. You know, one company, large company, has around 2.9 million dollars to 3 million dollars that occurs. What month does that occur? March. In March. So you'll see that move up.
Speaker Change: You know, so it's not only equipment that gives it a lumpiness. But if we were to look at our baseline, okay, what's going to move over into
2025
Speaker Change: Let's just say, for example, that our annual agreements, and when we talk about the annual agreements, I'm really referring to, and that's why I was bringing it up, software renewal and hardware maintenance at that five to six million dollars. We're talking about, Chris, what's that number on 21 million? Yeah, it's over 20 million. Yeah, so it's over 20 million that we create a baseline.
Speaker Change: from that and you know with the degree and the amount that existing customers add for storage and compute power on that alone we have growth demands on it. So you'll see this lumpiness that goes on.
Speaker Change: So, what ends up happening is if we take someone that's got software renewal and hardware maintenance, and they're an on-premise customer, obviously, but we're most likely doing disaster recovery to them, you know, as well.
Speaker Change: If we move them to cloud hosting, well, then we're going to lose that revenue. They could move off the platform to, you know, another platform, not an IBM power platform, let's say to Intel, whatever. You know, you would lose that. But typically,
Speaker Change: They'll move to our hosting and they're currently using disaster recovery. So on baseline You're looking at around 21 million which includes 5 to 6 million of software renewal and hardware maintenance
Speaker Change: and you're also looking at around let's just call it 2 million to 2.4 million of managed services that's part of that number.
Speaker Change: Got it. That's very helpful. Sorry, go ahead. No, that's it. I just want to make sure I'm answering that.
So I guess that number is inclusive of any
Speaker Change: Does that assume kind of the 90% renewal rate, or north of 90% so you'll have some churn built into that number? How should we see that number? Is that pre or post expected churn?
Speaker Change: You know when we look at the churns on our calculations it's around 92% and you know I'm going to give an estimate I want to give exact numbers but 92% on the client revenue side and 94% on the actual client side.
Speaker Change: So, you know with only four or five competitors. I'll use six competitors two of them one was purchased by a PE firm another one was purchased by I think Kindrall so usually now
Speaker Change: when PE firms and other companies buy firms, sometimes, you know, they don't, leadership leaves and, you know, you'll, but you know, you'll have.
People leave, but the customers typically don't leave because
Speaker Change: There's enough business out there and they don't want to migrate their data again.
So, I would say that when we look at this...
Speaker Change: 94% renewal rate, that I'm going to say is an estimate. They just continue to stay.
Speaker Change: So, what really comes in jeopardy is people, larger companies, you're not going to get Deutsche Bank or Citibank to go into a cloud over the next few years, my belief. You know, they're bigger than anybody, their platforms.
Speaker Change: So, you'll see that five to six million dollars maybe dwindle down as our hosting moves up.
So you won't get that one big-time, you know,
Speaker Change: pop for that $2.9 million, but that's at a 15% margin, gross profit margin. If we move that to cloud hosting, we're talking about north of 50% today. You know, our estimated calculations are really on our cloud services around a 60% margin.
Thank you.
Speaker Change: When you look at managed services, we continue to do monitoring and managing the infrastructure for the clients.
Speaker Change: So, but you know, our main focus is really, is supporting, and so many of our clients
Speaker Change: have Intel platforms with us, as well as the IBM platform, cybersecurity, we're doing monitoring.
Speaker Change: So it's kind of a bundle that it's, you know, it's kind of tough to migrate away from us unless the company was purchased, you know, most likely they're not going out of business. Our clients are midsize or enterprise level, but they could be acquired and moved to a different platform. So what we do is extremely sticky.
Speaker Change: helpful. Very much appreciate it. And I've got one more and then I'll jump in the queue so I'm not hogging the line.
Speaker Change: if we could go a little bit deeper into that. So if we take just the cloud subscription renewals
Speaker Change: Is it reasonable to say that those really sticky customers that have already migrated to cloud subscriptions are north maybe like 95%, 96%? And are they, on a revenue basis,
Speaker Change: They're generally growing, so like, are the renewals generally bigger than the prior contracts as they, if they push more into the cloud, or if their cloud services come under higher demand?
Speaker Change: It's an interesting question because the first thing I want to approach is the
Speaker Change: Years ago, we would always say we would have an automatic renewal on it. Most of our term contracts are 36 months. We have 12 months as well, and we have 60 months, but most of them are 36 months. And what we were doing in the past is we had an automatic renewal, and the automatic renewal was just for a year. So if they had a three year term, it was one year.
So we picked up on this from
I'm going back a bunch of years.
Speaker Change: they renew for the actual term that was the original term. So it would go for three years and then renew for three years. But what ends up happening is our account management team is in constant touch with these clients.
Speaker Change: You know, and Chris, you know, a CFO, puts out a weekly report, KPIs.
Speaker Change: And I keep looking at that and it's actually like a three to one ratio that our clients continue to add storage and compute power or other services, whether they were on IBM Power or Intel or now Intel moving to IBM Power or different levels of disaster recovery or cybersecurity.
Speaker Change: So, what ends up happening is that we're in constant touch, and it's growing. It looks like a three-to-one ratio. I'm not saying on the revenue side, but on the actual contract side, addendums.
Speaker Change: When it renews, we can increase up to 10%. We have the right to increase up to 10% on their actual monthly term.
Speaker Change: So, which is good. So we can go back and increase that. We're not stuck with keeping that because years ago, I mean, we have clients for, you know, over a decade and they were maintaining the same price.
Speaker Change: and other services that might be software would continue to move up. So with that, you know, we have a built-in 10% on top of that, along with, if you remember that whole model years ago, it would say data grows.
Speaker Change: That's what we've been doing. We've been doing data vaulting since 2002, you know, and it's only really since you know Raising the money and all of that and moving on to NASDAQ that has given us the opportunity to really get very aggressive
and Get Smarter.
Great, thank you.
Speaker Change: Thank you. Mr. Piluso, we have no further questions at this time. I'd like to turn the floor back over to you for closing comments. Thank you.
Mr. Piluso: Since our NASDAQ uplisting and capital raises in 2021, we have developed a business strategy that we believe will accelerate our growth.
drive long-term profitability and maximize value to our shareholders.
Mr. Piluso: We are optimistic about the potential of our initiatives and we are executing. We remain committed to providing our shareholders with meaningful updates.
Mr. Piluso: And I would like to thank everyone who joined our call today. We appreciate it. Thank you.
Speaker Change: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.