Data Storage Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2025

There are 6 speakers on the call.

Operator

and welcome to the Data Storage Corporation First Quarter twenty twenty five Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Alexandra Schultz, Investor Relations for Data Storage Corporation.

Operator

Thank you. You may begin.

Speaker 1

Thank you. Good morning, everyone, and welcome to Data Storage Corporation's twenty twenty five first quarter business update conference call. On the call with us this morning are Chuck Paluso, Chairman and Chief Executive Officer and Chris Panagiotaco's Chief Financial Officer. The company issued a press release this morning containing its twenty twenty five first quarter 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.

Speaker 1

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 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 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.

Speaker 1

These risks should not be construed as exhaustive and should be read together with the other cautionary statements included in the company's annual report for the year ended 12/31/2024, quarterly reports on Form 10 Q and current reports on Form eight ks filed with the Securities and Exchange Commission. Any forward looking statements speaks only as 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 Paluso. Please go ahead, Chuck.

Speaker 2

Thank you, Ali. Good morning, everyone, and thank you for joining us on today's call to review our first quarter twenty twenty five results. We appreciate the opportunity to update you on our progress. Before diving into our operational highlights, let me briefly touch on our first quarter financial performance. Revenue was $8,100,000 with our core cloud infrastructure and disaster recovery services growing 14% year over year.

Speaker 2

We delivered $2,860,000 in gross profit, maintaining margin stability. Adjusted EBITDA came in at $497,000 reflecting our ongoing focus on operational efficiency, even as we make targeted investments such as Cloud First Europe. Finally, we closed the quarter with $11,100,000 in cash and marketable securities, and we remain debt free, a position we believe is critical as we explore future growth opportunities and strategic alternatives. I will now shift over to what we've built and how our strategy is enabling us to scale faster and smarter. At Data Storage Corporation, our mission is to support enterprises and institutions with cloud infrastructure, disaster recovery and business continuity solutions that are mission critical in nature.

Speaker 2

This includes protecting core business systems, ensuring regulatory compliance and enabling operational resilience in an increasingly complex IT environment. Our operating platform, Cloud First Technologies, is purpose built for reliability, scalability and security, particularly for IBM Power Systems. These workloads remain prevalent in financial services, healthcare, manufacturing and public sector organizations, sectors where performance and uptime are non negotiable. Cloud First is optimized to meet these specialized needs. And as the migration is underway and these industries and companies look towards cloud based solutions.

Speaker 2

The uniqueness of our offering rooted in deep IBM Power infrastructure expertise sets us apart. We are not chasing commodity cloud workloads. We are delivering enterprise grade hosting backup recovery to clients with rigorous infrastructure requirements, many of whom operate under regulatory oversight. It's a deliberate model. We've built our value proposition around long partnerships.

Speaker 2

That foundation is increasingly attractive as clients prioritize resilience, compliance and predictability. A key part of this momentum is our expanding infrastructure footprint and partner ecosystem in The UK through Cloud First Europe. Over the past several months, we formed strategic relationships that significantly extend our capabilities in the region. In November, we partnered with BrightSolid, a trusted data center operator in Scotland with Tier three facilities. This partnership gives us secure, high availability infrastructure in the region and enables Cloud First to serve regulated clients in Scotland and Northern England with enterprise grade redundancy and performance.

Speaker 2

In January, we expanded our relationship with Megaport into The UK, enabling private cloud connectivity via their Direct Connect platform, positioning us to provide direct, secure, high speed access to AWS, Azure and Google Cloud without traversing the public Internet. This improves performance, enhances security and enables seamless hybrid cloud deployment. Later in January, we launched a partnership with Pulsant, the most geographically diverse edge data center provider in The UK. Through this relationship, Cloud First now operates across multiple edge locations throughout the country, embedding our IBM power based infrastructure directly into PulseIn's footprint. This accelerates our time to market and introduces us to new enterprises that already were within the Polson ecosystem.

Speaker 2

These partnerships are highly strategic. They allow us to meet clients where they are geographically, operationally and technologically, while offering the flexibility, compliance assurance and performance they expect. Each relationship is built to support long term delivery, deep integration and scalable growth. While we are encouraged by the ongoing performance of our business and overall financial position, we must acknowledge a disconnect between our operating fundamentals and our current equity valuation. Our stock price does not, in our view, reflect the value of the business, particularly the recurring nature of our cloud infrastructure revenues, our high retention rate and our differentiated platform.

Speaker 2

We will continue to seek ways to unlock value for our shareholders. As we look ahead to the remainder of 2025 and beyond, I want to take a moment to reflect on how far we've come and where we're headed. Through a combination of targeted geographic expansion and a clear focus on our core strengths, we have laid the groundwork to become a global leader in cloud infrastructure services. Today, we are proud to stand as one of the very few global single source providers of both disaster recovery and multi cloud hosting solutions, including integration with AWS, Microsoft Azure and Google Cloud. This is particularly true of our IBM Power Platform, where we continue to lead with unmatched specialization and performance.

Speaker 2

Our ability to support IBM I and AIX workloads gives us a valuable market advantage and a distinct competitive edge, especially as enterprise look to modernize our infrastructure without compromising legacy reliability. Our differentiation here is not incidental, it's intentional. It's built on decades of expertise, long term client relationships and the proven ability to deliver. As we move forward, our priorities are clear: grow our high margin recurring cloud first revenue, expand our global infrastructure, expand our partnership ecosystem, maintain a strong financial footing to support scalable operations, and continue to evaluate paths that will enhance long term shareholder value. We are now operating across 10 global data centers serving over 400 clients and managing over 600 contracts.

Speaker 2

We are proud of what our team has accomplished operationally and financially and remain confident in our staff and our platform. While we operate in a complex and evolving IT environment, our core value proposition remains clear and relevant, ensuring continuity, security and performance for mission critical systems while delivering a high level of client satisfaction.

Speaker 3

With that, I'd like to turn the call over to Chris Penergietakis, our CFO, to discuss our financials. Please go ahead, Chris. Thank you, Chuck. Good morning, everyone. Total revenue for the three months ended 03/31/2025 was $8,100,000 a decrease of approximately 2% compared to $8,200,000 for the three months ended 03/31/2024.

Speaker 3

The decrease is primarily attributed to a decrease in one time equipment sales during the quarter. Cost of sales for the three months ended 03/31/2025 was 5,200,000 a decrease of approximately $45,000 or 1% compared to $5,300,000 for the three months ended 03/31/2024. The decrease was mostly related to the decrease in one time equipment related cost of sales. Selling, general and administrative expenses for the three months ended 03/31/2025 were approximately $3,000,000 an increase of approximately $200,000 or 2% as compared to $2,800,000 for the three months ended 03/31/2024. The increases were primarily due to an increase in professional fees, stock based compensation and an increase in headcount.

Speaker 3

Adjusted EBITDA for the three months ended 03/31/2025 was $497,000 compared to adjusted EBITDA of $680,000 for the three months ended 03/31/2024. Net income attributable to common shareholders for the three months ended 03/31/2025 was $24,000 compared to net income of $357,000 for the three months ended 03/31/2024. We ended the quarter with cash and marketable securities of approximately $11,100,000 at 03/31/2025 compared to $12,300,000 at 12/31/2024. Thank you. And I will now turn the call back to Chuck.

Speaker 2

Thanks, Chris. Let's open it up for some questions.

Operator

Thank Our first question comes from the line of Matthew Galinko with Maxim Group. Please proceed with your question.

Speaker 4

Hey, good morning. Thanks for taking my questions. Maybe we could start with where should we where are we on the European expansion? I guess, like in terms of the business development side, I know you've sort of gone through the infrastructure side in Europe now. What where are we in the business development and sort of bringing business into those assets now?

Speaker 2

Thanks, Matt, for the question. On the business development side, so we had started investing in The UK in October timeframe with some consultants and then we solidified all of that. Now we have a Managing Director there. We have a Solution Architect and a Partner Manager. In the January, we installed the equipment in three data centers in The UK.

Speaker 2

During the time of the from consultant to employee, let's call it six months, we've established approximately I think it's there might be more right now, but the last number I saw was 10 partnerships distributors that we have established. And the folks are out there doing training on those three data centers. The data centers that we're in actually were training their sales reps so that they can actually take the orders and build them out. So we've installed it and we're part of their, we'll call it product list or service or solution list today. So training has been going on.

Speaker 2

A lot of meetings have been going on to be able to educate them so that they can bring that out to their existing clients because we're talking about going after their client base and our folks are involved when they go on those calls because we find a much higher close ratio when our folks are with the partner. But these are actually partnership type arrangements, not just a rack of equipment and we're putting salespeople on the ground. We're going after essentially with them their client base. So they have, we'll call it, suspects, prospects. We're expecting to hopefully, I would anticipate revenue to start in the fourth quarter of twenty twenty five.

Speaker 2

We're hoping, I would imagine that we're hoping that the month of January 2026 is that month will be the first month to breakeven. Chris, how much money has been invested so far in The UK? For the quarter, it

Speaker 3

was around $450,000

Speaker 2

So that's why you'll see that decrease in inhibitor, right, Chris? Correct. And if that helps?

Speaker 4

Yes. Maybe if you could also just give us some color on where the from what you're seeing, where the European market is on shifting to more cloud services consumption model versus just buying for their own data center and managing their own infrastructure? Are they further along that process than U. S. Market?

Speaker 4

Or are we sort of getting to an inflection point there?

Speaker 2

It would be a lot of speculation on my part to actually give you an answer that's kind of definitive. But I will say that we know that IBM stated that there's approximately $90,000,000 a year in revenue that will be migrating each year. So that we know that that and that was a conference we attended in Europe. So we were in the common, which is a user event that takes place every year. They've made that statement.

Speaker 2

And by the count of their customers that they actually have, I believe that Cloud First has more customers at that time than they do, from side meetings. But I don't want to make a commitment on that, but that's what it seemed like. But it's a migration is going across the board that people are moving to it. The big obstacle in a lot of cases was that people were concerned about security when they're moving to the cloud. And I think that that pretty much has been showing with the momentum that's going on that the security objections and stuff, we're able to overcome that today.

Speaker 2

And actually in many cases have newer equipment, a better environment, Tier three data centers. I think we're positioned very well. We may move into Europe itself so that we can serve it. A couple of the distributor partners that we do have that are very large are saying their customer base is also in Europe. So we're expecting and I would anticipate seeing something in Europe to be able to tie that together.

Speaker 2

Our CTO, Chuck Pillolo is working on all of the security requirements and regulations in Europe as we speak.

Speaker 4

Thanks. Great color. I'll jump back in the queue.

Operator

Thank you. Our next question comes from the line of Adam Waldo with Lismore Partners. Please proceed with your question.

Speaker 5

Good day Chuck and Chris. I hope you can hear me okay.

Speaker 2

Sure, Adam. How are you?

Speaker 5

I'm well Chuck. How are you?

Speaker 2

Good. Thanks.

Speaker 5

So if you don't mind, I'm going to start with a couple of financial reporting housekeeping questions for Chris and then turn to strategic and capital allocation questions for Chuck. Chris, when do you expect to file your Form 10 Q for the quarter?

Speaker 3

It's going to be filed today.

Speaker 5

Great. Okay. And then as you exited the first quarter, how did the run rate annual recurring revenue of the business compare with the $21,500,000 that you had exiting the fourth quarter that you reported with fourth quarter results back in March?

Speaker 3

So the annual recurring revenue for the quarter was about $6,700,000 The new estimate for the annual recurring revenue is a little bit over $22,000,000 for the year, the estimate.

Speaker 5

Okay. All right. Good. And then the remaining customer contract value at the end of the first quarter was what is compared with the $39,200,000 that you reported at the end of the fourth quarter?

Speaker 2

I don't have a number for you right now. On that, I could give you some color on a little bit differently is that all of the contracts that are in place today, the total contract value on that was in excess of $41,000,000 And I would say that more than 95% of those have an auto renewal clause in there that auto renews at their initial term. But for the most part, it's the total contracts that are in existence today when they were signed up and that are billing around $41,000,000

Speaker 5

So that's really helpful. And will the Q contain a specific number on that, Chris, as we've seen in the K and some of the Qs in the past? Or is that kind of No. Okay. We're

Speaker 3

not going be reporting that number in Q1.

Speaker 2

Just to give some color on that a little bit, so we're very transparent on it. What ends up happening is the renewal rate that we have is very significant. So what happens is, as you have a sales organization, some people that if they've turned over a little, what ends up happening is when a renewal takes place, they have to put in the new beginning and end of the term because it just renewed over. And what ends up happening is that we're making a major effort to be able to say beginning and end turn on the new agreement. So we keep on trying to refine that.

Speaker 2

But what we do know is that those initial terms were the $41,000,000 So when we work with sales force on this, we're always kind of looking what that is, looking who has an automatic renewal rate and whatever their term is that they renew. In very few cases, we have folks that are there, I'm going to say probably less than 10, that are on short term agreements because, let's say, they're trying to move off of the platform, which is very hard for them to do. But let's say they're doing that, so they might be on a six month agreement to transition off of the platform. So those folks we have as non automatically renewable. But there's not many of them.

Speaker 2

So we're really trying to refine that. But we always look at what the total contract value is of who's billing today. And in our agreements that we have, House Schwartz made some adjustments to that, I think a few years ago, where in the agreement, it says that we have the right to increase them 10% at the end of the term. So that when you look at that $41,000,000 if all of them move over again, you're looking at $4,000,000 on top of that unless they fall out or something. But so that's pretty good.

Speaker 2

We've made those adjustments Hal did in the past. We like that and that's what's happening. So when they renew, it's 10% higher.

Speaker 5

Okay. That's really helpful. One last financial reporting question and then I'll jump back in queue for the strategic and capital allocation questions for Chuck later. On the financial reporting side, can you just give us a sense for what the revenue would have been in the first quarter of this year and what it would have been last year in the first quarter of twenty twenty four. If we stripped out just the equipment sales from both quarters numbers, what would the year over year revenue growth rate of that?

Speaker 3

I can get you that number Adam and e mail it to you.

Speaker 5

But back in the envelope, it'd be strongly into the double digits,

Speaker 3

I'm not sure. I'd rather just look at the numbers just give you definite answer.

Speaker 5

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

Speaker 4

Okay.

Operator

Thank you. Our next question is a follow-up from the line of Adam Waldo with Lismore Partners. Please proceed with your question.

Speaker 5

Okay. Thanks. On the strategic and capital allocation side Chuck, in your prepared remarks you made reference to strategic alternatives, you made reference to continued understandable frustration with the stock price relative to the sort of private market value of the company. This has been a source of frustration I know for a number of quarters. What steps might the Board pursue here?

Speaker 5

Does that include potentially pursuing strategic alternatives? Could management start to institute quarterly and annual financial performance guidance for the markets? What are some of the things that you all are thinking about to try to close that valuation disconnect between where your stock is trading and the private market value of the company?

Speaker 2

We were in OTC held from 02/2008 to 2021. Now we're in micro cap space, which we have some great institutions that have invested in the company. They're there long term. And then we have retail that moves us up and moves us down. We need to be able to see a very stable share price for us to be comfortable that's in line where Matt, who follows us and writes about us, and we're not seeing that $9 So as to strategic alternatives, I mean, it's everyone's strategic alternatives.

Speaker 2

What would it be? If I went into ChatGPT and say, give me the strategic alternatives for every micro cap that has a great subsidiary, what would it be? Undervalued with cash in the bank, well, buy back shares, carve out the company and sell it to someone to a PE firm, buy back warrants, just suffer along and watch the thing at $3.5 and others take advantage for a short period of time of running it up $2 and running it back. I mean, it's just you can go into ChatGPT and get like five alternatives. I mean, they're just I mean, there's probably five alternatives that go on.

Speaker 2

We're just looking at everything quite frankly. But it is, we just need to deliver shareholder value. We just need to do that. And where it's sitting right now and for me, with various trusts or individually, have 13% of the company. So it's not that much, not that little.

Speaker 2

But for the most part, I'm with everyone else on this. And our objective is to be able to deliver shareholder value. So as I say, all the alternatives, it's like when you meet with somebody and you say, gee, what's your plan? Do you have a great company? What's the exit?

Speaker 2

You always ask that question. So, frankly, think there's a number of different alternatives and we'll see what that is, but our focus is on shareholder value. We have insiders own 41% of the company. And frankly, we're always focusing on the other folks that are all owning public shares and feel that responsibility to be able to deliver that and not languish it where we are. So it's very frustrating, Adam.

Speaker 5

No, understood. And just to follow-up though, do you all are you all considering instituting a formal quarterly and annual financial guidance process to the Street to potentially help close that valuation gap? Or is that still something that is really not being contemplated?

Speaker 2

We've been encouraged by folks that actually own shares when we have investor conferences and things like that to do that. And even though Cloud First had about $1,000,000 in EBITDA $1.5 EBITDA for the first quarter, I'm not going to say that it's $6,000,000 for 2025. I'm not going to say that, but that would be great. But it's $1,500,000 for the quarter. We've been encouraged to do that.

Speaker 2

We probably could, but I don't think we want the it's just we've been advised against it quite frankly. So we're taking the advice that we pay for not to do that.

Speaker 5

Okay. Well, thank you very much and best wishes for the rest of 2025.

Speaker 2

Thank you. Thanks, Adam. Thanks for the questions.

Operator

Thank you. Ladies and gentlemen, there are no other questions in line. I'll turn the floor back to Mr. Paluso for any final comments.

Speaker 2

Thank you. Thanks for the questions, Matt and Adam. Before we conclude, I want to reiterate that our priorities remain clear, delivering reliable, high performance infrastructure to organizations with complex regulated IT environments, expanding into new markets and geographies and doing so with financial discipline and operational integrity. We recognize that our current market valuation does not reflect the true strength of our core business, particularly the performance of Cloud First, our growing international reach and our recurring revenue model. That is why we've shared with the Board and the leadership team, they were actively evaluating a range of strategic alternatives to unlock and deliver long term shareholder value.

Speaker 2

We appreciate your continued support and interest in Data Storage Corporation and thank you once again for joining us today and we look forward to keeping you informed as we move ahead. Thank you.

Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Powered by Quartr

Key Takeaways

  • Data Storage reported Q1 revenue of $8.1 million, with core cloud infrastructure and disaster recovery up 14% year-over-year, gross profit of $2.86 million, adjusted EBITDA of $497 000, $11.1 million in cash and marketable securities, and remains debt-free.
  • The company’s Cloud First platform is tailored for IBM Power workloads in regulated industries such as financial services and healthcare, focusing on enterprise-grade hosting and disaster recovery rather than commodity cloud services.
  • In its UK expansion, Data Storage forged partnerships with BrightSolid for Tier III data center capacity, Megaport for private high-speed cloud connectivity, and Pulsant for edge deployments, with first revenues expected in Q4 2025 and a target breakeven in January 2026.
  • Current contract metrics include an annual recurring revenue run-rate of approximately $22 million and remaining contract value exceeding $41 million, with over 95% of contracts auto-renewing to fuel predictable revenue.
  • Management noted a disconnect between the company’s operating fundamentals and its equity valuation, and is “actively evaluating a range of strategic alternatives” to unlock long-term shareholder value, though it is not introducing formal financial guidance at this time.
AI Generated. May Contain Errors.
Earnings Conference Call
Data Storage Q1 2025
00:00 / 00:00