Prepared remarks
Greetings and welcome to the Data Storage Corporation First Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Alexandra Schilt, Investor Relations for Data Storage Corporation. Thank you. You may begin.
Thank you. Good morning, everyone and welcome to Data Storage Corporation's 2025 First Quarter Business Update Conference Call. On the call with us this morning are Chuck Piluso, Chairman and Chief Executive Officer; and Chris Panagiotakos, Chief Financial Officer. The company issued a press release this morning containing its 2025 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. 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 be 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. 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 December 31, 2024, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the Securities and Exchange Commission.
Any forward-looking statement 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 Piluso. Please go ahead, Chuck.
Thank you, Allie. Good morning, everyone, and thank you for joining us on today's call to review our first quarter 2025 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 $8.1 million with our core Cloud Infrastructure and Disaster Recovery services growing 14% year-over-year. We delivered $2.86 million 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 CloudFirst Europe. Finally, we closed the quarter with $11.1 million 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. This includes protecting core business systems, ensuring regulatory compliance and enabling operational resilience in an increasingly complex IT environment. Our operating platform, CloudFirst Technologies is purpose-built for reliability, scalability and security, particularly for IBM Power Systems. These workloads remain prevalent in financial services, health care, manufacturing and public sector organizations, sectors where performance and uptime are non-negotiable. CloudFirst is optimized to meet these specialized needs and as the migration is underway and these industries and companies look towards cloud-based solutions. 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 and 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-term infrastructure partnerships. 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 U.K. through CloudFirst 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 3 facilities. This partnership gives us secure high-availability infrastructure in the region and enables CloudFirst to serve regulated clients in Scotland and Northern England with enterprise-grade redundancy and performance.
In January, we expanded our relationship with Megaport into the U.K., 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 U.K. Through this relationship, CloudFirst now operates across multiple edge locations throughout the country, embedding our IBM Power-based infrastructure directly into Pulsant's footprint. This accelerates our time to market and introduces us to new enterprises that are within the Pulsant ecosystem. 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. 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. Our ability to support IBM i and AIX workloads gives us a valuable market advantage and a distinct competitive edge, especially as enterprises look to modernize their 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 CloudFirst 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.
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. With that, I'd like to turn the call over to Chris Panagiotakos, our CFO, to discuss our financials. Please go ahead, Chris.
Thank you, Chuck. Good morning, everyone. Total revenue for the 3 months ended March 31, 2025, was $8.1 million, a decrease of approximately 2% compared to $8.2 million for the 3 months ended March 31, 2024. The decrease is primarily attributed to a decrease in one-time equipment sales during the quarter. Cost of sales for the 3 months ended March 31, 2025, was $5.2 million, a decrease of approximately $45,000 or 1% compared to $5.3 million for the 3 months ended March 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 3 months ended March 31, 2025, were approximately $3 million, an increase of approximately $200,000 or 2% as compared to $2.8 million for the 3 months ended March 31, 2024. The increases were primarily due to an increase in professional fees, stock-based compensation and an increase in headcount.
Adjusted EBITDA for the 3 months ended March 31, 2025, was $497,000 compared to adjusted EBITDA of $680,000 for the 3 months ended March 31, 2024. Net income attributable to common shareholders for the 3 months ended March 31, 2025, was $24,000 compared to net income of $357,000 for the 3 months ended March 31, 2024. We ended the quarter with cash and marketable securities of approximately $11.1 million at March 31, 2025, compared to $12.3 million at December 31, 2024.
Thanks, Chris. Let's open it up for some questions.
Questions and answers
Our first question comes from Matthew Galinko with Maxim Group.
Could you update us on the status of our European expansion? Specifically, where do we stand on the business development side in terms of attracting business to our assets in Europe?
Thank you, Matt, for your question. On the business development front, we began investing in the U.K. around October, initially working with some consultants, and we have now established our operations there with a Managing Director, a solution architect, and a partner manager. In the third week of January, we installed equipment in three data centers in the U.K. Over the past six months, from transitioning from consultant to employee, we have formed around ten partnerships with distributors, although there may be more currently. Our team is conducting training at these three data centers, specifically training their sales representatives to take orders and implement the solutions. We are now included in their product or service offerings, and training sessions have been frequent to ensure they can present our solutions to their existing clients. Our strategy involves engaging with their client base, and our team members join calls with partners, resulting in a significantly higher closing ratio when they collaborate. These are genuine partnership arrangements, not just providing equipment; we are directly working with their leads and prospects. We anticipate generating revenue by the fourth quarter of 2025 and expect January 2026 to be the month we break even. Chris, could you share how much has been invested in the U.K. up to this point?
For the quarter it was around $450,000.
Right. So that's why you'll see that decrease in EBITDA, right, Chris?
Correct.
Matt, if that helps.
Could you provide some insight on the European market's transition to a cloud services consumption model compared to simply purchasing for their own data centers and managing their own infrastructure? Is this process more advanced in Europe than in the U.S., or are we nearing a turning point?
It would be speculative for me to provide a definitive answer. However, I can say that IBM indicated there is around $90 million in revenue migrating annually, which we learned during a conference we attended in Europe. At their annual user event, this statement was made. Based on their customer count, I believe CloudFirst had more customers at that time compared to their site meetings. While I don't want to commit to that, it appears that way. If migration is widespread, a significant concern has been security as customers transition to the cloud. It seems we've been overcoming those security objections recently, and in many cases, customers have newer equipment and better environments with Tier 3 data centers. I believe we are well-positioned. We may expand into Europe to better serve that market, especially since some of our larger distributor partners have their customer bases there as well. I would expect to see developments in Europe to connect those dots. Our CTO, Chuck Paolillo, is currently addressing all the security requirements and regulations in Europe.
Our next question comes from the line of Adam Waldo with Lismore Partners.
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?
It's going to be filed today.
Great. Okay. And then as you exited the first quarter, how did the run rate annual recurring revenue of the business compare with the $21.5 million that you had exiting the fourth quarter that you reported with fourth quarter results back in March?
So the annual recurring revenue for the quarter was about $6.7 million. The new estimate for the annual recurring revenue is a little bit over $22 million for the year, the estimate.
Okay. All right. Good. And then the remaining customer contract value at the end of the first quarter was what is compared with the $39.2 million that you reported at the end of the fourth quarter?
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 million. 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 million.
No, 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...
No.
Okay. Fair one. Okay.
We're not going to be reporting that number in Q1.
I want to provide some insight on this topic. We're committed to transparency. Our renewal rate is very notable. When our sales team experiences turnover, it impacts the renewal process, as new beginning and end dates need to be established for recently renewed contracts. We're actively working to refine this process. We've acknowledged that the initial terms amount to $41 million. In collaboration with Salesforce, we're continuously evaluating automatic renewal rates and their associated terms. There are very few instances, probably under 10, where clients are on short-term agreements as they might be transitioning away from the platform. These clients do not have automatic renewals. However, they are quite limited in number, and we're focused on refining our approach. We also analyze the total contract value of our current billings. A few years back, Harold Schwartz modified our agreements to allow for a 10% increase at the end of each term. This means that if the contracts amount to $41 million and they all renew, we can anticipate an additional $4 million, provided none drop out. These adjustments, made by Harold in the past, have been beneficial, and this is the current situation. Therefore, with renewals, the amount increases by 10%.
Okay. That's really helpful. One last financial reporting question and then I'll jump back in queue for those 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 2024? If we stripped out just the equipment sales from both quarters' numbers, what would be the year-over-year revenue growth rate of that?
I can get you that number, Adam, and e-mail it to you.
But back of the envelope, it'd be strongly into the double digits, right?
I'm not sure. I'd rather just look at the numbers and just give you a definite answer.
Our next question is a follow-up from Adam Waldo with Lismore Partners.
Okay. 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? 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?
We were in the OTC market from 2008 to 2021, and now we are in the microcap space with some solid institutional investors who are committed for the long term. However, retail investors tend to drive our stock price up and down. For us to feel comfortable, we need a stable share price that aligns with the expectations of our followers, and we are not currently seeing that at $9. As for strategic options, there are many available. If I asked ChatGPT for strategic alternatives for any undervalued microcap with substantial cash reserves, I might get suggestions like share buybacks, selling parts of the company to a private equity firm, or simply maintaining the status quo while watching the stock oscillate between $3.50 and temporary spikes. There are indeed several alternatives, and we are considering all of them. Our main goal is to deliver value to our shareholders. I personally own 13% of the company through various trusts, which reflects my commitment to our shared goals. Insiders hold 41% of the company, and we are focused on meeting the expectations of all shareholders, not letting our situation stagnate. This is understandably frustrating.
No, understood. And just to follow up, do you all consider implementing a formal quarterly and annual financial guidance process to the Street to potentially help close that valuation gap? Or is that still not something being considered?
We've received encouragement from shareholders during our investor conferences to consider this. Although CloudFirst reported $1.5 million in EBITDA for the first quarter, I am not suggesting it will reach $6 million by 2025, though that would be fantastic. For now, it stands at $1.5 million for the quarter. We have the capability to implement changes, but we've been advised against it and are choosing to follow that guidance.
Thank you. Ladies and gentlemen, there are no other questions in line. I'll turn the floor back to Mr. Piluso for any final comments.
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 CloudFirst, our growing international reach and our recurring revenue model. That is why we've shared with the Board and the leadership team that we are actively evaluating a range of strategic alternatives to unlock and deliver long-term shareholder value. 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.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.