Data Storage Corporation (DTST) Q3 2023 Earnings Call Transcript

Information Storage Company (NASDAQ:DTST) Q3 2023 Earnings Convention Name November 14, 2023 10:00 AM ET

Firm Members

Alexandra Schilt – Director of Account Administration, Crescendo Communications

Charles Piluso – Chairman and Chief Government Officer

Chris Panagiotakos – Chief Monetary Officer

Hal Schwartz – President, CloudFirst

Convention Name Members

Adam Waldo – Lismore Companions

Nick Pinkus – Forest Capital

Operator

Greetings, and welcome to the Information Storage Company 2023 Fiscal Third Quarter Enterprise Replace Convention Name. Right now, all members are in a listen-only mode. A short question-and-answer session will observe the formal presentation. [Operator Instructions] As a reminder, this convention is being recorded.

It’s now my pleasure to introduce your host, Alexandra Schilt. Thanks. Chances are you’ll start.

Alexandra Schilt

Thanks. Good morning, everybody, and welcome to Information Storage Company’s third quarter enterprise replace convention name. On the decision with us this morning are Chuck Piluso, Chairman and Chief Government Officer; and Chris Panagiotakos, Chief Monetary Officer.

The corporate issued a press launch this morning containing its third quarter 2023 monetary outcomes, which can also be posted on the corporate’s web site. If in case you have any questions after the decision or would really like any extra details about the corporate, please contact Crescendo Communications at (212) 671-1020.

Earlier than we start, I might prefer to remind listeners that this convention name incorporates forward-looking statements throughout the which means of the Non-public Securities Litigation Reform Act of 1995 as amended which are meant to be lined by the protected harbor created thereby. Ahead-looking statements are topic to dangers and uncertainties that might trigger precise outcomes, efficiency or achievements to vary materially from any future outcomes, efficiency or achievements expressed or implied by such forward-looking statements. Statements preceded by, adopted by or that in any other case embrace the phrases, believes, expects, anticipates, intends, initiatives, estimates, plans and related expressions or future or conditional verbs akin to will, ought to, would, could, and will, are typically forward-looking in nature and never historic info, though not all forward-looking statements embrace the foregoing.

Though the corporate believes that the expectations mirrored in such forward-looking statements are cheap, it will probably discover no assurance that such expectations will show to have been right. Necessary elements that might trigger precise outcomes to vary materially from the corporate’s expectations embrace, however aren’t restricted to, the corporate’s skill to leverage the scalability and efficiency of Flagship Options, the corporate’s skill to learn from the IBM cloud migration underway, the corporate’s skill to place itself for future profitability and the corporate’s skill to keep up its NASDAQ itemizing.

These dangers shouldn’t be construed as exhaustive and needs to be learn along with the corporate — with different cautionary statements included within the firm’s quarterly report on Type 10-Q for the quarter ended September 30, 2023, and annual report on Type 10-Okay and present stories on Type 8-Okay filed with the Securities and Alternate Fee.

Any forward-looking statements speaks solely as of the date on which it was initially made. Besides as required by legislation, the corporate assumes no obligation to replace or revise any forward-looking statements, whether or not on account of new data, future occasions, modified circumstances or in any other case.

I might now like to show the decision over to Chuck Piluso. Please go forward, Chuck.

Charles Piluso

Thanks, Alexandra. Good morning, everybody. I am proud to report we generated a 35% improve in income to roughly $6 million for the third quarter of 2023. Importantly, we achieved one other quarter of profitability with roughly $158,000 in internet earnings for the third quarter. We consider it is a direct results of our ongoing enterprise development initiatives, which we have now applied to help in accelerating our income development and elevated profitability.

Notably, CloudFirst as a stand-alone enterprise, achieved $3.7 million in income for the third quarter with a internet earnings of over $800,000 and $1.1 million in EBITDA. As well as, on the gear and software program facet, we generated roughly $2 million of income within the third quarter, in comparison with roughly $1 million for the third quarter of 2022, a rise of almost 100%.

Whereas the rise in gear gross sales had a slight influence on our total gross revenue margin, we proceed to work to assimilate Flagship enterprise unit and have actively applied methods to boost our gross revenue margin by growing subscription revenues inside Flagship and transfer nearer to the 50% margin that we generated CloudFirst.

Now we have begun the method of bringing collectively these two wonderful firms and their staff members to leverage the expertise, shopper bases, property and administration. Throughout the group, with the continued execution and additional implementation of our development initiatives, together with ongoing growth of our distribution channels, elevated utilization of our digital and direct advertising packages, optimizing our lead era program, internet hosting extra income pushed gross sales occasions and exploring strategic M&A alternatives, can proceed to extend income whereas maximizing long-term profitability.

Moreover, we plan to broaden internationally as there’s a vital want for our revolutionary options around the globe, and we intend to penetrate these massive underserved markets. In the present day, a program is underway to succeed in out to over 1,000 managed service suppliers within the U.Okay. to construct partnerships and create a distribution channel.

We’ll present updates on our progress as developments unfold. Validating the demand for our options, we have now continued to witness a rise in guests to our web site. We even have our nurture listing, which I’ve spoken about within the final quarter that incorporates over 25,000 organizations, who’re within the potential implementation of our companies. We intend to make the most of these avenues to safe new contracts and improve publicity throughout the market.

As well as, we lately launched a strategic gross sales and advertising initiative designed to capitalize on the rising demand for our services and products. We’re already witnessing the advantages of those initiatives. This consists of onboarding new gross sales representatives, who’re devoted to driving and securing new clients, which helps and works hand in hand with our ongoing lead era packages.

Our new gross sales representatives are liable for attending to our nurture listing with the aim of progressing discussions to contract. Concurrently, we launched a brand new main accounts program. This program is solely targeted on growing our penetration with an present enterprise and center market accounts to make the most of upselling and cross-selling alternatives.

In the present day, DFC receives a small phase of the ITC spend for these enterprise-level shoppers. In truth, our ongoing technique has been to land new clients and broaden {our relationships} over time as their wants develop. Land to broaden allows countless cross-selling alternatives. Nevertheless, with a devoted staff, guaranteeing these alternatives aren’t neglected, we will really capitalize on vital alternatives throughout the market.

Demonstrating this efficient technique is our latest contract announcement with one of many nation’s main sports activities and leisure firms. Now we have been working with this buyer for various years and proceed to broaden our relationship. We’re working to implement our cybersecurity options into their safety programs to help with defending their massive infrastructure, in addition to assist in response instances to sure threats. We consider this expanded contract validates how we develop with our shoppers and frequently tackle their wants.

I might additionally like to spotlight that this contract follows beforehand introduced contracts as mentioned in our final convention name, together with a subscription-based contract with the main promotional firm. We have been offering totally monitored and managed cloud options right this moment. Sadly, an sudden pure catastrophe occurred and following this, they realized they have been unable to get better and resume operations. That was inside their required time-frame. And in consequence, we have now applied cloud-based catastrophe restoration and cloud-based infrastructure, permitting the shopper to run its important functions on our totally managed, extremely safe enterprise cloud 24/7 devoted help, guaranteeing seamless fast restoration of information throughout sudden downtimes.

We additionally introduced a multimillion greenback undertaking with the identical sports activities and leisure group we touched on. This earlier contract was for a customized resolution to supply response time to information, file restoration and elevated storage capability to help their important points of the safety infrastructure, and we secured a subscription-based contract with one of many largest meals distributors within the U.S. We’re offering managed catastrophe restoration options to scale back the restoration time of important knowledge.

As you possibly can see, we’re witnessing robust contract momentum and proceed to keep up a 94% renewal fee with a mean time period of 24 months, demonstrating our skill to help shoppers whereas assembly or exceeding their wants. We presently serve over 450 firms and intend to proceed to develop this spectacular listing.

In the present day, knowledge heart firms that present infrastructure on Home windows-based sort platforms come to Information Storage Company for his or her shopper — for our IBM platforms. These infrastructure companions are a good way to broaden our distribution with their experience, wonderful workers whereas leveraging our property deployed. General, we’re executing on our strategic development plan, which has resulted in profitability for the third quarter of 2023, in addition to new and expanded contracts whereas growing our penetration throughout the market. We’re additionally actively exploring potential strategic acquisitions that will help and help our development and, extra importantly, complement and enhance our present operations.

Because of this, I consider we’re at a pivotal level within the firm the place we’re extraordinarily effectively positioned to enter massive worldwide markets, upsell and cross-sell our services and products and safe extra significant subscription-based contracts, all resulting in sustainable profitability and income development.

On the similar time, we have now rigorously managed bills and have preserved a robust stability sheet with over $11.5 million in money and marketable securities enabling us to deploy capital effectively and successfully to help our long-term development and drive worth to our shareholders.

With that, I might like to show the decision over to Chris Panagiotakos, our CFO, to debate the third quarter financials. Please go forward, Chris.

Chris Panagiotakos

Thanks, Chuck. Whole income for the three months ended September 30, 2023, was $6 million, a rise of $1.6 million or 35%, in comparison with $4.4 million for the three months ended September 30, 2022. The rise is attributed to a rise in all of our income streams throughout the present interval.

Price of gross sales for the three months ended September 30, 2023, was $3.7 million, a rise of $1.1 million or 42%, in comparison with $2.6 million for the three months ended September 30, 2022. The rise was principally associated to a rise to the rise in gross sales.

Promoting, basic and administrative bills for the three months ended September 30, 2023, have been $2.3 million a rise of $240,000 or 12%, as in comparison with $2.1 million for the three months ended September 30, 2022. The rise was primarily as a consequence of a rise in wage bills on account of a rise in different worker advantages and a rise in skilled charges, offset by a discount in promoting bills.

Adjusted EBITDA for the three months ended September 30, 2023, and was $487,000, in comparison with adjusted EBITDA of $162,000 for a similar interval final 12 months. Internet earnings attributable to widespread shareholders for the three months ended September 30, 2023, was $179,000, in comparison with a internet lack of $246,000 for the three months ended September 30, 2022.

We ended the quarter with money and marketable securities of roughly $11.5 million, in comparison with $11.3 million at December 31, 2022.

Thanks. I’ll now flip the decision again to Chuck.

Charles Piluso

Thanks, Chris. Most likely a superb time to open it up for questions.

Query-and-Reply Session

Operator

Thanks. We are going to now be conducting a question-and-answer session. [Operator Instructions] First query comes from Adam Waldo with Lismore Companions. Please go forward.

Adam Waldo

Sure, good day, Chuck and Chris, I hope you possibly can hear me okay. Congratulations on a robust quarter.

Charles Piluso

Thanks, Adam.

Adam Waldo

Chuck, I wish to see if we will drill down slightly bit on among the new enterprise pipeline and backlog metrics and likewise discuss slightly bit in regards to the kind of what you assume the medium-term margin construction and natural development profile of a Flagship may appear like now that you have kind of had it within the tent for some time and are making some robust progress with its development?

So on the brand new enterprise pipeline and backlog facet, on the finish of the primary quarter, you reported year-to-date inbound inquiries of about 6,000 on the finish of the second quarter, about 19,000, which was very robust progress. And clearly, that is now translating into the income development profile acceleration. What did that metric appear like on the finish of the third quarter when it comes to year-to-date inbound inquiries in 2023?

Charles Piluso

I will again it up just a bit bit since you talked about flagship. So proper now — that is okay since you talked about Flagship and all. So I simply wish to cowl that, and I discussed it within the earnings name, we’re just about completed with the total assimilation of Flagship and we’re bringing each Flagship and CloudFirst collectively as one firm. So we really feel that we all know the corporate effectively sufficient. We all know the expertise that is there, the shopper base. And so we’re bringing that collectively as one firm that will probably be an unbelievable staff that will probably be beneath the CloudFirst and Flagship will probably be a model, in addition to CloudFirst dis a model right this moment and so specs there will be extra branded objects on that.

As to the pipeline itself and we discuss inquiries coming into our web site, I feel on the finish of August, I haven’t got an replace proper now. There have been over 60,000 guests coming into our web site on and so they’re visiting and based mostly on the variety of pages they may go into a type of web site, it can generate and classify a lead class. I occur to have Hal Schwartz right here with me proper now, who’s the President of CloudFirst, so Hal perhaps you possibly can reply that query on the pipeline.

Hal Schwartz

Sure, we have now seen regular development within the variety of guests to our web site from — most lately, we’re within the 7,000-plus a month vary. So if you wish to do a quarterly estimate on that, you are above 20,000. And our pipeline continues to develop. We’re effectively above $10 million in complete contract worth in our pipeline for the time being, CloudFirst.

Charles Piluso

CludFirst, so I do not know if that helped, Adam on that piece?

Adam Waldo

That is very useful. Thanks, Chuck, and Hal. And in order that’s simply on the CloudFirst facet. Now if we take into consideration the enterprise and the corporate total, clearly, now with the mixing of Flagship fairly far alongside. What do you assume is an affordable mid-term gross margin for the companies? I do know the gear gross sales are very lumpy. However for the pure companies income stream, what do we predict is an affordable goal gross margin vary — after which what’s the greenback worth of our backlog on the finish of the third quarter? And that can finish my questions. Thanks.

Charles Piluso

Certain. The primary piece is that Tom Kempster that is a heads up Flagship we hope that we’re very, very profitable on promoting gear and software program and cybersecurity software program, help and upkeep on the IBM programs. And once we try this, these margins are someplace between 10% and 16% on the Flagship facet. And so once we discuss gear, there’s been some fairly good margins which have improved. Sometimes, previously, we noticed margins within the space of 15% to twenty%. These margins appears to be transferring up.

And once we take a look at the flagship, the annual recurring income usually and nothing is assured on something. However on the annual recurring income, it is round $7 million. And that $7 million consists of managed companies, which is someplace between a 25% and a 28% margin after which you will have software program renewals, {hardware} upkeep and all of that, that could possibly be someplace between 10% and 14%. However we have been seeing proposals going out and virtually, in some circumstances, at a 40% margin. So it is fairly arduous to find out as a result of, as you talked about, it is lumpy.

After we take a look at our service income, and I am speaking about subscription based mostly, it is I will say 52%, an estimated 52% on that. And remember the fact that once we take a look at the margins on that, I consider, Chris, we put round $1 million we spent on gear, on CapEx, on CloudFirst. And once you check out that, we’re not utilizing all of that, however we’re getting hit with depreciation on that. So usually, if we have been allowed to hold a list on it for unused, we’ll name it storage and the rest, you’d in all probability be north of 52. However let’s use 50 to 52 as a margin on subscription-based companies.

I might say, 25% to twenty-eight% on managed companies. And once we check out what we is likely to be getting into 2024 with I might estimate that — I provide the estimate to get the fourth quarter, I am going to let you know January 2024, I might say an estimate $18 million as a baseline proper now.

Adam Waldo

ARR on the service facet, Chuck.

Charles Piluso

Sure. ARR on the service facet, on managed companies and software program and {hardware} renewal packages.

Adam Waldo

Okay, nice. After which the greenback worth or new enterprise backlog on the finish of the third quarter was what I feel have been $5.8 million on the finish of the second quarter.

Charles Piluso

Sure, okay. On these numbers, I used to be instructed that round $3.7 million of that’s estimated. It has been put in with one other $2 million extra to go plus any new contracts which are in. However simply to again into that quantity, it mentioned, effectively, $2.8 million extra to go. I used to be simply said.

Adam Waldo

Okay. Thanks a lot. Continued needs for an ongoing robust progress. Thanks.

Charles Piluso

Thanks. Thanks, Adam.

Operator

[Operator Instructions] Subsequent query, Nick Pinkus with Forest Capital. Please go forward.

Nick Pinkus

Hey, congratulations on one other robust quarter. First query I’ve bought is, you touched on this within the final query, however may you elaborate some extra on the potential synergies of bringing Flagship and CloudFirst collectively?

Charles Piluso

Certain. The primary piece is that Flagship has 25 very massive accounts. And roughly 3 or 4 months in the past, Chuck Paolillo, our CTO, has been managing the entire service supply and operations and engineering of each CloudFirst and Flagship. In order that was the primary phases of that. So one of many advantages is leveraging the entire technical people that we have now within the firm, which is a large profit.

On high of that, we have now a Director of Gross sales, and we have now a serious account staff and folk concentrating on distribution on the information heart facet. For these firms that should not have an IBM platform, which is just about all of them. So we’re with three or 4 different main opponents. So what finally ends up taking place is by bringing it collectively the place we have now some excellent main account sort enterprise growth, very skilled gross sales people mixed with our total staff, we predict that inserting that collectively underneath one chief will probably be a superb benefit to us.

So we’ll have — we had an issue to start with with flagship, frankly, on the cross-selling of the subscription-based companies. And that has taken too lengthy in all probability 18-months to 2 years and when Tom Chemistry bought concerned over there, training began taking place increasingly, how salespeople can earn more money by promoting subscription-based companies. The shoppers are additionally transferring over from gear to cloud-based. So there’s some nice synergies there to take these 25 very massive accounts along with the opposite accounts and transferring these higher-margin companies which are our product that we create out of our six knowledge facilities. So we predict that the operations is there now, now we’re bringing collectively the gross sales in bringing collectively the gross sales piece of it.

On the accounting facet, we all the time have it arrange with the controller as a reported strong line to the CFO to Chris and dotted line to the Presidents and to Administration. So it is actually the following step for us on the gross sales facet to enhance cross-selling and bringing it collectively. I do not know if that helps, Nick, does it.

Nick Pinkus

It does. Thanks. And also you additionally talked about plans to construct partnerships and create new distribution channels within the U.Okay. Are you able to discuss slightly bit extra in regards to the U.Okay. technique?

Charles Piluso

Certain. So we’re going out day by day, there’s various e-mails that exit to — we have now a listing of 1,000 MSPs, managed service suppliers. We actually — it is arduous to inform whether or not they’re IBM, whether or not they’re x86 and the place they’re. However we’re making an attempt to focus extra on the IBM facet just for the truth that — that is — we all know the migration has taken place, and there aren’t many opponents which are doing it. I am not saying there are zero opponents, however we could possibly be one in all them on this very, very massive market of Europe.

So beginning with the U.Okay., so we have now e-mails going out saying we’re keen to make the funding. Now we have the money within the financial institution. And like we do in the USA and Canada, co-op advertising {dollars}, help, coaching, all of the advertising materials and assist them roll out a program. In order that’s sort of what’s within the e-mail that is going out to those MSPs. And we hope to line up with, frankly, 10 to fifteen can be a implausible begin.

And with that, then Hal and I’ll go over to the U.Okay. and spend slightly time and discovering out who — what people wish to be in enterprise with. If one became an acquisition, that will be nice. However proper now, we’re trying on the associate facet.

Nick Pinkus

Okay, thanks. You additionally talked in regards to the nurture listing on this name and previously, it looks like it is an vital a part of the technique. Are you able to discuss how you propose to make the most of this nurture listing?

Charles Piluso

You wish to remark. Perhaps can Hal can cowl it.

Hal Schwartz

Sure, sure. No drawback. So it is a part of our total authority-based advertising and gross sales technique. So we have now a publication — instructional publications that we produce, and we’re reaching out to this listing and signing these folks as much as get them early to get on our distribution listing and get them early within the shopping for cycle. So this has proved out to be a superb technique and really profitable so far. And we have additionally firms which are additional alongside the shopping for cycle, we’ll organize an appointment with a gross sales specialist and that is additionally proved to achieve success. So it helped us improve our alternatives considerably and helps develop our pipeline.

Nick Pinkus

Thanks. After which one final query. That is extra of a macro query. However there have been an exploding variety of circumstances of ransomware, main firms like Johnson Controls, ICBC, which I am positive you guys know is likely one of the greatest banks on the planet. It truly had a — it disrupted the treasury markets and it looks like the issue of those assaults will not be getting any higher. It is truly getting rather a lot worse. So I hoped you might discuss how that is affecting the market and the demand for catastrophe restoration. You’re taking the massive firms like this could — massive firms like these would have one thing in place. However apparently, they do not.

Charles Piluso

I will reply that in two elements. I am going to do the primary and Hal can do the second. The primary a part of it, I’ve made so many gross sales calls early years within the enterprise and even lately, and once you sit down with workplaces of the corporate and also you discuss catastrophe restoration, for essentially the most half, they’re within the dock. There’s extra consciousness now, however if you happen to ask them how lengthy it might take you to get better varied important programs, their expectations aren’t in keeping with what the know-how people inside their very own firm know. So there’s a little little bit of darkness and expectations not matching up, simply as I discussed within the earnings name with one firm with an sudden downtime.

So this alignment actually will not be there. Together with the truth that a whole lot of these issues are additionally brought on by staff that aren’t educated and the businesses aren’t educating them sufficient, they assist create the issues themselves. However as to the rising want for cybersecurity and our companies, Hal, you wish to contact on that piece? The way you see it rising.

Hal Schwartz

Sure. There’s positively an enormous demand for it. And a part of the reason being that a whole lot of firms haven’t got a holistic method to safety. Many even massive enterprises aren’t required to satisfy or acquire certification and safety requirements. And these requirements, take a look at the general massive image for coaching, greatest practices and the like. So there’s an enormous demand on the market from firms that wish to acquire this information and implement that technique. And that’s a part of our total development technique for 2024 is to assault that market and acquire traction there.

Charles Piluso

Go on, sorry.

Nick Pinkus

No. It appears to me that it is solely a matter of time when you will have an organization like ICBC that is not placing the fitting controls in place, and it is disrupting treasury markets. This is not actually a query, but it surely looks like it is solely a matter of time earlier than there’s going to be extra regulation requiring these companies.

Hal Schwartz

Sure, I might agree.

Charles Piluso

Sure. Flagship has lately offered, I feel, a big cybersecurity and I consider one of many IBM merchandise, I consider, proper?

Hal Schwartz

Sure. IBM QRadar. And we even have a number of massive safety alternatives in our pipeline for the time being.

Nick Pinkus

That is nice. Thanks guys for answering all of the questions.

Charles Piluso

Okay.

Operator

There aren’t any additional questions. I wish to flip the ground again over to administration for closing feedback.

Charles Piluso

Thanks for the questions, Nick and Adam. Now we have efficiently applied our enterprise technique, and we consider it can help our development and long-term sustainable profitability. We’ll maximize our worth to our shareholders. We anticipate to appreciate the total advantages of our initiatives over time, and we’re excited in regards to the outlook for the enterprise. We look ahead to offering significant updates to shareholders. And with that, I might prefer to thank everybody who joined right this moment on the decision. Thanks, and have an important day.

Operator

This concludes right this moment’s teleconference. Chances are you’ll disconnect your strains presently, and thanks in your participation.