Data Storage Corp (DTST) 2021 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Data Storage Corporation third-quarter 2021 conference call. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Alexandra Schilt, Director of Account Management at Crescendo Communications. Alexandra, the line is yours.

Thank you, Paul. Good morning, everyone, and welcome to Data Storage Corporation's third-quarter 2021 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.

The Company issued a press release this morning containing third-quarter 2021 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 would 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, 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 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 the other cautionary statements included in the Company's annual report on Form 10-K for the year ended December 31, 2020, subsequent quarterly reports on Form 10-Q, and current reports on Form 8-K filed with the Securities and Exchange Commission.

Any forward-looking statements speaks only as of the date on which it was initially made. Except 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 would now like to turn the call over to Chuck Piluso. Please go ahead, Chuck.

Thanks, Allie. Good morning, everyone. I am pleased to be here with you as we continue to make meaningful progress throughout the third quarter. The progress is not just in revenue, but also in the assimilation of Flagship into our organization. We continue to work on programs together to leverage each of our three subsidiaries, their solutions and teams.

We are proud to announce that Mark Wyllie, CEO of Flagship, is now a Board member and most recently a Corporate Officer. We are investing and accelerating existing programs while introducing new programs, campaigns, and investing in our capital with employees and distribution to set the groundwork for 2022 and beyond.

We achieved a 42% increase in revenue for the three months ending September 30, 2021, compared to the same period last year. And we continue to generate positive net income. We saw a meaningful increase in sales across infrastructure, disaster recovery and cloud-type services, which increased 27%, and approximately $390,000. Managed services also increased. And Nexxis VoIP services increased 17%. These increases across product lines were partially offset by a decline in equipment and software sales, reflecting our focus on recurring high-margin, cloud-based subscription services.

Our solid results for the quarter are a direct reflection of our new sales and marketing strategy, as well as continued growth and synergies that are being realized from the recent merger of Flagship. Getting into our business activities during the quarter, we entered into a strategic collaboration agreement with Precisely and established a managed service model.

Precisely as a global leader in data integrity software and brings innovative security solutions to our cloud platform, expanding our offering and providing new and valuable opportunities. In the past, we successfully partnered with Precisely on projects within the disaster recovery space on IBM Power systems. As more and more organizations are migrating to the cloud, it's critical to have security features in place that protect information, data privacy, and adhere to compliance standards.

The addition of Precisely's expanded solutions within a cloud environment allow us to offer even more robust full-featured offering that addresses the most common IT security exposure issues, including ransomware. Ultimately, our goal is to provide an organization with peace of mind, strengthening security of their systems while comply with cybersecurity regulations. The combination of our expertise on IBM Power systems and cloud solutions, coupled with Precisely's robust security software solutions, make this a natural step in our evolution.

Precisely and the merger of Flagship demonstrates our commitment to providing customers with the most cutting-edge and comprehensive technologies. We intend on continuing these efforts as well as explore and identify opportunities we felt that was important to strengthen an already established team and new team members. And these team members encompass decades of experience in key areas, including marketing, infrastructure, and data analytics.

Today, the Company has over $16 million in total contract value and outstanding client proposals. This is for our subscription solutions alone, and we have a remaining contract value on existing services of more than $14 million, combining that with our 94% contract renewal rate. We continue to see an uptick in interest in our solutions and a desire from the IBM user community to find out how to migrate their IBM systems to the cloud.

To support this statement, we had over 50,000 visitors to our site since January. This migration is underway. The opportunity presents not just the infrastructure, but layering solutions on our cloud infrastructure such as the disaster recovery, cybersecurity, and data analytics.

During the quarter, we welcomed Ed Grossman and promoted Larry Pannullo. Both have incredible backgrounds within the industry. Ed will guide the Company's data science and artificial intelligence initiatives, moving us into high-growth areas that complement existing solutions. Larry is taking on the new role as Director of Infrastructure, where he will be responsible for overseeing our data centers and hardware resources. We believe their expertise, their experience will prove invaluable as we continue to grow.

Most recently, we welcomed Kristi Cates as our Director of Marketing to spearhead our sales and marketing initiatives. In the short time since joining our team, we are already seeing variable insights Kristi provides to the business. We expect her extensive experience to significantly increase our marketing capabilities, so we can maximize our outreach and achieve our growth objectives. We look forward to Kristi leading this initiative and we are already seeing an increase in demand for our solutions.

In addition, we are also expanding our distribution channels through new partnerships. We are also exploring opportunities for international expanding. We will work with local IBM partners. Our intention is to build upon relationships with existing customers while adding new customers under long-term, high-margin recurring revenue contracts. It's not unusual each month to see clients adding additional services such as increased compute power, storage, management, and security monitoring.

As I previously mentioned, the marketplace we are targeting is extensive. We have only scratched the surface. Our primary objectives going into 2022 are to establish more accretive partnerships and to increase our sales presence across all product lines. We believe we are on the cusp of significant, organic growth, and we are well-positioned to execute our strategy moving forward.

Previously, we lacked the capital to fully execute and accelerate and take full advantages of opportunity. We are now deploying the capital to increase distribution, expand our data analytics and AI practice, and grow our cybersecurity practice while continuing to provide our clients infrastructure, disaster recovery, as well as direct Internet access.

Overall, we have a strong team, robust contract pipeline with upselling and cross-selling opportunities with limited competition today. To date, we have completed meaningful acquisitions, entered into strategic partnerships that provide more inclusive features and services for our clients.

With our strong balance sheet, we believe we are fully capable of executing on our organic growth strategy, as well as additional accretive acquisitions, given the highly fragmented nature of this multi-billion-dollar market. We have made meaningful progress and have established a scalable global business model, and we believe will sustain Data Storage is a leader in the industry.

With that, I would like to turn it over to Chris Panagiotakos, our CFO, to discuss the third-quarter financials. Please go ahead, Chris.

Thank you, Chuck. Total revenue for the three months ended September 30, 2021, was $3.9 million, an increase of 42% compared to $2.7 million for the same period last year. The increase is primarily attributable to the additional sales from the Flagship merger and an increase in monthly subscription revenue. Cost of sales for the three months ended September 30, 2021, was $2.2 million, an increase of 34% compared to $1.6 million for the three months ended September 30, 2020.

The increase was most related to variable costs incurred to produce and sell our products and services. For the nine months ended September 30, 2021, selling, general and administrative expenses were $2 million, compared to $1 million for the three months ended September 30, 2020. The increase was primarily attributable to an increase in salaries related to higher headcount, professional fees, and advertising expenses due to the additional Flagship marketing campaign launched post-merger.

Net income attributable to common shareholders for the three months ended September 30, 2020, was $136,000, compared to $10,000 for the three months ended September 30, 2020. Cash and cash equivalents at September 30, 2021, were $12.9 million.

Thank you. I will now turn the call back to Chuck.

At this point, we can open up for questions.

Certainly. (Operator Instructions) Matthew Galinko, Maxim Group.

Hey, good morning, guys. I appreciate you taking my question. I guess jumping into your plans for 2022, can you talk a little bit about the pipeline for partner expansion? I think you touched on maybe expanding into international markets that way, but how advanced are you in discussions in adding new partners? And are there specific areas other than international that you are targeting?

Sure. Thanks, Matt. First, let me separate things. We have three subsidiaries. Each subsidiary has a different distribution approach. The distributors in these companies that sell software or hardware in the IBM marketplace, we talked about the United States and Canada primarily where we are focused initially right now. They are companies that have sold equipment and software for many years and have a customer base.

These clients -- I'm not going to say that factually that these clients will come directly to us. They are going to depend on a trusted advisor, which was the company that sold them the equipment or software, and say what are they doing with infrastructure-as-a-service and DR in the cloud. And so with that, we have a team that reaches out to these companies. We have templates, marketing programs, and we assist them in learning everything there is to learn about how to move those customers to the cloud, and we have white papers as well.

But the thing is, if they didn't support these clients, these clients may come directly to us as well. So what we will do at that point is we turn these clients and leads over to our distributors. So we have a full approach on expanding the partnership program. We have a Director of Channel which is Steve Romweber, has been involved more than 20 years in selling software to these partnerships. And we are groping this channel, fairly -- I believe fairly aggressively and pretty successfully today. We will continue to do that and we will also look for unique ways to be able to leverage it, which might not be the traditional IBM partner. So that's on the partnership side.

In the case of, for example, with Flagship, they have a direct selling that goes on, as well as a relationship with partnering with IBM and supporting IBM, as IBM now has a program where they are only keeping their top couple-of-hundred accounts, and the rest of it is being pushed to partners. Mark is extremely -- and his team -- extremely involved with working with IBM to be able to satisfy those client requirements. So each company is slightly different in their approach, Matt.

Got it. That's helpful. And maybe just following up on Flagship, it's pretty substantial acquisition size for you. And now that the integration, I guess, nearing completion -- I don't -- I guess I'm putting words in your mouth. Apologies, and you can push back on that. But how do you see the M&A opportunities in 2022 as well? Do you see more Flagship-style acquisitions that expand your footprint in IBM? Or just how do you frame that? And how do you think about your capacity for integrating additional acquisitions?

Well, thanks, Matt. First, the strategy of the Company is to make sure that each of the subsidiaries are -- they have their marketing and their business plans, and they are run by the -- either the founder or the CEO. And we really just -- finance and administration and HR is controlled through a headquartered type of approach. So each of these companies run completely separately, and then we have cross-selling, and cross-selling opportunities between the customer bases and shared technical resources.

Where there are some economies of scale, we may consolidate data centers which we look at, but we don't move too fast on that initially because you can do some damage to clients, from past experiences and past lives. So we move slowly with that. But Mark -- if we can do more acquisitions like Mark, that will be wonderful. But -- so we are talking to folks in areas which I don't think would be a secret: cybersecurity, data analytics.

We are talking to companies that have a good client base within the VoIP and carrier services because we believe that the combination of VoIP and Microsoft Teams is going to be accelerating at a good rate. So we are looking and doing those things -- carrier services for direct Internet access -- those are the types of companies that we are engaged with, talking with on a continual basis, and looking for the right ones.

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

Thank you. (Operator Instructions)

I must have done a good job.

There are no other questions at this time. I will now hand the call back to the management team from Data Storage for any closing remarks.

Okay. Well, thank you for the question, Matt. I see that we do not have some additional questions there. That would be great, but that's fine. Hopefully, we will get some of that from other additional investor presentations that we are making during the course of the rest of this year. But to wrap it up, we are very pleased with the advancements we have made, and we believe that we are well-positioned to continue to execute on our growth strategy going forward.

We are very pleased with the new team additions, the partnership agreements, and expansion of our solutions. Our goal for the remainder of 2021 and heading into 2022 is to increase our presence in the IBM Power infrastructure cloud and business continuity marketplace in order to position ourselves as a clear leader in these markets. And we look forward to reporting on additional developments as they unfold. Thank you all for joining us today.

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