Zedcor Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 15, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Data Storage Corporation Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Waldman, Investor Relations.

Operator

Please, you may begin.

Speaker 1

Thank you, and good morning, everyone, and welcome to Data Storage Corporation's Q1 business update conference call. On the call with us this morning are Chuck Paluso, Chairman and CEO and Chris Pinagiatakos, Chief Financial Officer. The company issued a press release this morning containing Q1 2023 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 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 Certainities 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.

Speaker 1

Statements preceded by, followed by 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 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, 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 quarterly report on 10 Q for the quarter ended March 31, 2023, annual reports on Form 10 ks and current reports on Form 8 ks filed with the Any forward looking statement speaks only as the date on which it was initially made.

Speaker 1

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. Now I'd like to turn the call over to Chuck Paluso. Please go ahead, Chuck.

Speaker 2

Thank you, David, and good morning, everyone. We continue to make strong progress As it relates to the implementation of the business initiatives that I highlighted on our last call. These initiatives are highly targeted to accelerate our growth and should assist in achieving our goal of long term sustainable profitability. Historically, we've had an impressive 23% compounded Annual growth rate since 2017. But we believe that through these initiatives, we can generate even stronger growth going forward.

Speaker 2

In fact, our near term goal is to get to $50,000,000 in high margin revenue run rate in the coming years through a combination of both strong organic growth and strategic acquisitions. For this end, we have a number Specific activities underway, including expanding our dedicated sales team, hosting revenue Driven sales events, growing our channel partner program at Flagship Nexus as well as Cloud First, increasing our international footprint through And finally, we are actively exploring ways to increase our gross profit margins in Flagship and Nexus on recurring services closer to 50% much like cloud first gross profit on subscription services. I'd like to note that we are still assimilating Flagship, including the recent realignment of management with Tom Kempster, Flagship's new President. All of our efforts are focused on the primary goal of efficiently deploying capital based on measurable returns, while increasing our penetration into this multi $1,000,000,000 marketplace. In fact, we are increasingly being sought out for our products, Services and proven ability to execute.

Speaker 2

Validating this, our work in process on executed Subscription revenue contracts are over $5,500,000 in total contract value and this Further supported by the increasing visitation to our websites with over 19,000 visitors in the Q1 alone. Additionally, we received we announced receiving a 7 figure order from a global 2,000 listed company on Forbes. This order is from an existing customer from whom we have established relationship and with we believe will further demonstrate our ability to meet any and all of the needs of our customers, specifically large enterprise customers. To provide additional clarity for our shareholders on Performance of each subsidiary, we have decided to break out our revenue by business segment. And the Q1 is the 2nd reporting period, which we have done this.

Speaker 2

While we did report a decrease in revenue in the Q1 of 2023 when compared to 2022, I'd like to note that during the Q1 of 2022, we reported a $2,600,000 equipment sale to an NFL team. Excluding this sale, our revenues increased 14% over the same period last year. As I mentioned in the past, we are focusing our efforts on recurring revenue. We're not turning away from equipment and software sales And we continue to explore and take advantage of these opportunities since we have experienced and we benefit from the cash injection. However, our long term goal is steady profitability, which can only be sustained with long term subscription based contracts, which provide high margin recurring revenue streams.

Speaker 2

Concurrently, we're able to decrease our SG and A expenses by From $2,500,000 in the Q1 of 2022 to $2,100,000 in the Q1 of 2023, which is a result of reallocating resources and eliminating redundant expenses. As a result and very importantly, we've achieved profitability for the Q1 with $35,000 in net income And an adjusted EBITDA of $334,000 on revenue of $6,900,000 for the Q1 of 2023. With a solid experienced leadership team, we are focused on subsidiaries to secure long term recurring revenue contracts. While we believe Cloud First is hitting the mark, given its ability to sustain profitability on a standalone basis, We are extremely dedicated to having Flagship and Nexus achieve the same, thereby increasing overall profitability. We continue to drive this strategy by expanding our distribution channels, while also increasing our digital and direct marketing programs, which have been performing well, giving our social and digital lead generation programs.

Speaker 2

Cloud First alone has over 16,000 visitors to the website from the beginning of the year through April. Additionally, we continue to explore synergistic acquisitions that complement and enhance our current operations, including companies leading a technology trend, while that add important technical staff and create economies of scale to improve our gross profit margins and net income. We will also drive growth By developing and managing collaborative solutions as well as embark on joint venture, joint marketing initiatives with our established Distribution partners like IBM, our software vendors, IT resellers, managed service providers, Application support providers, consultants and others. Furthermore, we continue to believe there is a significant need for our solutions on a global scale And we are pursuing growth opportunities internationally as these markets are increasing their use of multi cloud solutions, which we are very well positioned to handle. To give you a better sense of the market, there is an estimated 160,000 systems in the market with multiple partitions.

Speaker 2

In total, there are about 1,000,000 of the unique partitions. Once virtualized, we typically price these partitions at $36,000 per year, which equates to a global addressable market of roughly $36,000,000,000 in annual recurring revenue. It is also worth noting the average contract term is about 29 months and we have maintained an impressive 94% renewal rate. So hopefully you can see with the effective rollout of these initiatives, we believe our profitability can accelerate and be maintained long term. Overall, we are positioning ourselves as a leader within the industry.

Speaker 2

There is very limited competition in the market today. And unlike others, we have a 20 year proven track record with an established 1st class customer base. With approximately $11,000,000 in cash and short term investments and no debt, we can deploy capital effectively, execute on our strategic business initiatives and substantially grow our business. We look forward to announcing additional accomplishments throughout the year. And with that, I'd like to turn the call over to Chris Panagiotakos, our CFO to discuss our Q1 financials.

Speaker 2

Please go ahead, Chris.

Speaker 3

Thank you, Chuck. Total revenue for the 3 months ended March 31, 2023 was $6,900,000 a decrease of $1,800,000 or 21 percent compared to $8,700,000 for the 3 months ended March 31, 2022. The decrease is attributable attributed to a decrease in equipment sales during the current period. Cost of sales for the 3 months ended March 31, 2023 Was $4,800,000 a decrease of $1,200,000 or 20 percent compared to $6,000,000 for the 3 months ended March 31, 2022. The decrease of 20% was mostly related to a decrease in equipment related cost of sales.

Speaker 3

Selling, general and administrative expenses for the 3 months ended March 31, 2023 were $2,100,000 A decrease of $329,000 or 13% as compared to $2,500,000 for the 3 months ended March 31, 2022. The decrease is primarily attributed to a reduction in force, a decrease in software as a service expense and a reduction in commissions. Adjusted EBITDA for the 3 months ended March 31, 2023 was 334,100 and $65 compared to adjusted EBITDA of $604,492 for the same period last year. Net income attributable to common shareholders for the 3 months ended March 31, 2023 was $50,666 compared to net income of $156,010 for the 3 months ended March 31, 2022. We ended the quarter with cash and short term investments of approximately $11,000,000 at March 31, 2023, compared to $11,300,000 at December 31, 2022.

Speaker 3

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

Speaker 2

Thanks, Chris. I'd like to open the call up for questions.

Operator

Thank you. We will now conduct a question and answer session. Our first question comes from Michael Galinko with Max Group.

Speaker 4

Hey, thanks for taking my questions. I guess, can we start with The Fortune 2000 deal that you announced late last week, was that Software equipment, was that recurring? Anything you could add to how we could expect that to Voluntary your future results.

Speaker 2

Hi, Matt. The deal was software. We with this particular company, we don't like to wait around for approvals from all these companies to Have our press releases go through their organization, so we don't actually go through who actually the client is. But this particular client, We provide managed services to this client and that was a software sale. We expect that to recur Every year hopefully, but it does go after bid, but we consider it annual recurring revenue because we've had it for the previous year, but you need to compete forward and win it.

Speaker 2

But it is a customer that we Provide a number of different managed services, software related, patch management, things like that.

Speaker 4

Got it. And I guess this year, was there an expansion of the scope of the contractor size? Or is it relatively the same as the prior year?

Speaker 2

I believe it was expanded.

Speaker 4

Got it. Terrific. I guess maybe going to a couple of the growth drivers that you're looking at. I think the first one you mentioned was expansion of the sales team. So anything new this Quarter, did you add a number of heads that you could point to or any notable hires?

Speaker 4

Just or generally, how is the process of adding Your new qualified reps.

Speaker 2

Sure. One example is Verizon's layoff of their sales organization of their mid market has We've hired 2 individuals, 1 to cover the Southeast U. S. For Nexus and Nexus also brought on someone In the New York metro area and so that was good as well as we have other candidates that are lined up. But those are two examples of that.

Speaker 2

So these layoffs to some degree has helped us, but the recruiting is ongoing.

Speaker 4

Got it. Terrific. And last one for me. You called out the M and A pipeline again, Or at least you called that M and A as a growth opportunity. So can you touch on the pipeline?

Speaker 4

Are you seeing a lot of possible Acquisition targets and are the valuations sort of in the right range these days? How do you think about that today?

Speaker 2

Well, on the last call, I believe I stated that we put out somewhere between 4 or 5 term sheets Last year alone, and these typically were companies doing $10,000,000 in revenue. They had net income, but they were very small really didn't have sales force, and we decided to try to look on the larger side to move up north of $15,000,000 Folks that are growing, growing the business have the recurring contracts going on. So this year, we Are looking internationally to find managed service providers and we're looking at that. At the same time, folks that are really trying to grow the business, Not someone that's been in the business for 25, 30 years and they have a low golf handicap, nothing that's wrong with that, but they're not really growing the business. So we are looking internationally with that as well, and we do have an investment bank that's under engagement to continue to look for M and A opportunities, but north of this $10,000,000 $10,000,000 mark.

Speaker 2

No, there's not folks that do exactly what we do. So it's not that we're focused on a cloud first where we have the $7,500,000 of assets deployed in 6 data centers and it's IBM IX and IBM I. We're looking for managed Service providers that are growing the business, they're focused on cybersecurity. Cyber has an element of AI in it. So we're looking.

Speaker 2

We continue to look, but we're just we're pretty selective and we're just not jumping into things. But we are looking internationally on the M and A side.

Speaker 4

Got it. And if I could just add one more follow-up to that. I guess the international expansion Comment that you made earlier, I guess, would be solved by you making a slightly larger MSP type International acquisition. So is that what you have in mind for international expansion? Or is there also just Organic partner expansion in the international market, can you kind of touch on that?

Speaker 4

Sure.

Speaker 2

For us to go into, for example, the U. K. And for us Set up a data center with some racks in 2 cities in the UK, it's not such a big deal for us. We really know how to do it Well, what we're looking to do is we're looking for those MSPs that are providing similar services to us As ABC did in 2017 with equipment and software focused in that same marketplace. And so if we can acquire One of those companies, now all of a sudden we can deploy that.

Speaker 2

We have that folks that are part of our organization on board and running Their own units, their own subsidiary. So we can still do that and we can still move in, spend whatever it might be, dollars 500,000 to get started in 2 cities based under our Multi tenant design for the cloud first has. We can do that, but we are looking at the same time for acquiring MSPs and MSP in that area. U. K.

Speaker 2

First because, Avinu speaking, it will be a little easier for us. We're not I don't think we're large enough now to say, oh, let's go into other parts of Europe, multilingual Asia, but the UK is a target.

Speaker 4

Got it. Thank you.

Speaker 2

Thanks, Matt.

Operator

Our next question comes from Adam Waldo with Lismore Partner LLC.

Speaker 5

Good day, everyone. Chuck, thanks very much for taking my questions. I wonder if we can start just to flush out the recent Enterprise went just a little bit more beyond Matt's questions a few minutes ago. You press released it obviously as a 7 figure deal. You've disclosed now on Call it, it's a software deal, so we have a sense for what the margins look like.

Speaker 5

Can you give any more color as to sort of how far into 7 figure deal it is? And to what extent there is opportunity for increased scope of sale based for new services based on that sale?

Speaker 2

Sure. Hi, Adam. I believe it was $2,200,000 Chris, dollars 2,200,000 I think last year, Don't hold me to it. I think it was $1,900,000 So it continues to expand on that side. But at the same time, This is an organization, a company that's growing very, very rapidly and it's a Forbes Global 2000 company.

Speaker 2

And we provide Project we have project managers on this. We have technicians on this. This is through flagship and we provide What's called Patch Management with BigFix and a number of other services to them. So it is one of the larger accounts At flagship, Tom Kempster and the team, sales team that works on that along with the technicians continue to try to penetrate more of this account. So the relationship is good.

Speaker 2

I don't know if I could say more than that, If there's proposals pending, but it's a constant working relationship. Just as an example, I believe that Our project manager meets on the phone, has set meetings twice a week with them. So we're very, very deep with the account And the account has significant opportunity to grow larger than what we're doing with them right now.

Speaker 5

That's very helpful. Stepping back a level, last quarter you gave some helpful quantification in terms of the dollar value of your new business Pipeline in your biggest segment, cloud first and then also, some quantification of the step up in Unsolicited inquiries coming from the website, if I'm remembering properly in the 6,000 range in the Q1 and that was quite a bit higher than in the Q4. Think you said earlier in today's call that you're now seeing about 19,000 so far. I don't know if that's year to date for 2023 or 19,000 new ones The Q2, can you quantify a little bit more for us the dollar value of the new business pipeline as it stands right now in each of the 3 principal business segments And the size of the backlog and then any changes recently in your close rates? Thank you.

Speaker 2

That is a multi answer. That's a lot of information. No, I know I sort of bundled together a bunch there. Sorry. Let me try to break it out a little bit.

Speaker 2

So overall on All three websites, first of all, we have Nexus, we have Flagship and CloudFirst. So CloudFirst, which was the original storage corporation operating company that we changed the name last year to cloud first to avoid confusion and allow it to be more aligned with what it does, Had 16,000 visitors to the website. I believe it was the Q1 or let's call it through April. It increased Because we started moving away, not moving away, but not just doing the eye on the IBM, but also AIX. So it's increased significantly.

Speaker 2

Hauss Schwartz does a great job with the lead generation programs on that. It is really significant. The other two companies had the difference with the 3,000 additional visitors combined. It's only beginning now since we realigned management With that, Christy Cates, who is the Director of Marketing, she's been working with Tom and they are refreshing the flagship Web site to be able to get that to be closer to a lead generating machine that the cloud first is, but that does take time. NexSys also is working on their website for lead generation on that.

Speaker 2

So the company that we've been with for a long time, Cloud First, It takes time to build up the SEO and all of the things that go on with that. But we are working on that On the pipeline, Cloud First uses salesforce.com, so do the other 2 companies' Subsidiaries and it's very sophisticated in the sense of what's rated at a 10% probability through a 90% probability. So what we use is we use anything with a proposal is 20% or more, something that we're negotiating the final terms is a 90%. But I believe it's over Chris, do you remember it's over $12,000,000 in total contract value, the pipeline?

Speaker 5

I believe so.

Speaker 2

Yes. I think it's over $12,000,000 in that pipeline on total contract value. So if that answers that question. So we had the website, we had the pipeline, But you didn't ask me the question, Adam, about the $5,500,000 in executed contracts at the service delivery team Right now with Cloud First is in the process of installing. I think that's fairly significant.

Speaker 5

No, absolutely. Maybe I wasn't clear. I was sort of hinting at that the backlog, but And that's the big that's the vast majority of the backlog at this point, right? It's just the $5,500,000 on the CloudFirst side?

Speaker 2

Yes. And that's if you break that out.

Speaker 5

That's a big uptick.

Speaker 2

And the average term, we have accounts that are Might be 6 months term to 60 months term, but when you calculate it out, it's through sales force calculations, it's a 29 month Average. And with $3,000 a month on our what I'll call the mode, the number that's occurring the most in billing is $3,000 a month. It's fairly significant. Now, we don't really take too many annual contracts. I put that at $36,000 annually, but It's typically $36,000 a month on average 29 months, but it is $5,500,000 in contracts that were taken That are executed, that are in the process of being installed.

Speaker 5

Right. And then finally, in terms of close rates, can you give some color or quantification around Those rate changes here in the Q1 and into the second, are they pretty stable? Are they improving? Can you quantify that, please?

Speaker 2

Well, what happens is on flagship, they have a smaller number of accounts than Cloud First. And typically those accounts, the relationship with these very large accounts whether it's the Miami Heat or accounts like that, the Falcons, The close rate is extremely high. The population sample is smaller. Let's call it 50 whatever accounts, but the population is small. Their close It's very high.

Speaker 2

I'm going to estimate it. It's probably like 80%. When you take Cloud First, it's dealing with a much higher volume. I believe Hal Schwartz said it's around 23%. Don't hold me to that.

Speaker 2

Nexus on the other side, I'm not exactly Sure, Whit. But I would go with a 1 out of 4 on the close rate for John Camillo and his running of Nexus. But With the flagship, the rate, I'm probably going to just estimate it around probably 80%. Very rarely they lose a deal. Sometimes the budget will be pushed off.

Speaker 2

And by the way, it's the same thing for Cloud First. What's in the pipeline sometimes It just gets delayed and pushes out because it's a big deal to move someone's on premise infrastructure to off premise and someone can easily delay that. Disaster recovery, if someone just had a whole loss, those things move kind of quick. But I think Hal said on average is around 23%.

Speaker 5

Right. Tremendously helpful. Thanks very much.

Speaker 2

We are actively pursuing aggressive growth strategies and have effectively implemented our business initiatives that we believe will drive revenue and assist in sustainable profitability. We remain committed to reducing redundant expenses, Streamlining operations and maintaining a solid balance sheet to position ourselves as a leader within this industry. We are proud of our progress and we look forward to reporting additional developments as they unfold. Thank you all for joining today.

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