Data Storage Corp Q3 FY2025 Earnings Call

Greetings, and welcome to the Data Storage Corporation Third Quarter Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alexandra Schilt, from Investor Relations. Thank you. Please go ahead.

Thank you. Good morning, everyone and welcome to Data Storage Corporation's 2025 Third 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 third 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, please note that today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to various risks and uncertainties described in the company's filings with the SEC. Except as required by law, the company assumes no obligation to update or revise forward-looking statements. I'd now like to turn the call over to Chuck Piluso. Please go ahead, Chuck.

Thank you, Alex. We appreciate everyone joining us today. First, I want to acknowledge the delay in the reporting of our financials. We require additional time to finalize the accounting adjustments related to the sale of our CloudFirst subsidiary, and the team worked diligently to complete this as quickly as possible. However, we're happy to be here with you today to discuss our results and our strategy moving forward. This quarter represents a defining period for Data Storage Corporation as we completed the sale of our CloudFirst subsidiary, and repositioning the company for its next phase of disciplined growth, what we call DSC 2.0. The CloudFirst sale completed on September 11, 2025 was a significant milestone for our company. That provided a strong financial foundation while simplifying our structure and allowing us to focus on long-term shareholder value creation. In addition, the Board of Directors established a special committee to oversee our tender offer and buyback process, ensuring full transparency and alignment with shareholder interest. Once the tender process is completed, we'll be able to determine our final cash position, which will reflect the balance after completing all buyback transactions. We expect to move forward shortly with the tender and also a plan to launch our new corporate website in the coming weeks to highlight the company's streamlined profile and future direction. Before discussing our broader strategy, I'd like to turn this over to Chris Panagiotakos, our CFO, for a review of our financial results. Chris, take it from here.

Thank you, Chuck. Good morning, everyone. As Chuck mentioned, on September 11, 2025, we closed the sale of our CloudFirst business for $40 million. At the time of the sale, CloudFirst was projected to generate approximately $25 million in annual revenue and $5.5 million in EBITDA with no debt. As a result of the transaction and in accordance with auditing and reporting standards, our ongoing financial reporting now reflects only our continuing operations, specifically our Nexxis subsidiary. Sales from continuing operations, which consists of our Nexxis subsidiary, were $417,000 for the 3 months ended September 30, 2025. An increase of $92,000 or 28.2% from $325,000 in the same period last year. The increase was primarily driven by the continued expansion of our voice and data telecommunication solutions to new and existing customers. Sales from our continuing operations were $1.1 million for the 9 months ended September 30, 2025, an increase of approximately $159,000 or 17.6% from $900,000 in the same period last year. The increase was primarily driven by an expanding customer base in our Nexxis Voice and Data Solutions business. Selling, general and administrative expenses for the 3 months ended September 30, 2025, increased $313,000 or 31.8% to $1.3 million from $984,000 for the 3 months ended September 30, 2024. The increase was primarily driven by an increase in noncash stock-based compensation, primarily related to the accelerated vesting of equity awards in connection with the divestiture which triggered a fundamental transaction clause in the equity award agreements with employees as well as an increase in salaries and directors' fees due to the annual merit-based adjustments. These increases were partially offset by a decrease in professional services as certain legal and consulting projects from the prior year were completed. Selling, general and administrative expenses for the 9 months ended September 30, 2025, increased $376,000 or 13.1% to $3.2 million from $2.9 million for the 9 months ended September 30, 2024. The increase was primarily driven by an increase in noncash stock-based compensation, primarily related to the accelerated divesting of equity awards in connection with the divestiture, which triggered a fundamental transaction clause in the equity award agreements with employees as well as an increase in salaries and director fees due to the annual merit-based adjustments. These increases were primarily offset by a decrease in professional fees as certain legal and consulting projects from the prior year were completed. Net income attributable to common shareholders for the 3 months ended September 30, 2025, was $16.8 million compared to net income of $122,000 for the 3 months ended September 30, 2024. Net income attributable to common shareholders for the 9 months ended September 30, 2025, was $16.1 million compared to net income of $235,000 for the 9 months ended September 30, 2024. The significant increase in net income for the 2025 3- and 9-month period was primarily driven by the gain recognized on discontinued operations. We ended the quarter with cash, cash equivalents and marketable securities of approximately $45.8 million at September 30, 2025. This compared to $12.3 million at December 31, 2024. However, as Chuck noted, our final cash position will depend on the outcome of the tender offer and share buyback process, which will commence shortly. Thank you, and I will now turn the call back to Chuck.

Thank you, Chris. The sale of CloudFirst was a transformative event for our company and our shareholders. It allowed us to unlock value, strengthen our financial position and focus on building DSC 2.0, a streamlined company pursuing selective opportunities in high-value markets. Our near-term emphasis is on disciplined execution, prudent capital allocation and operational efficiency. We are currently exploring strategic acquisitions that provide recurring revenue streams within emerging areas, such as GPU-based computing, AI-enabled infrastructure, and cybersecurity, but we are approaching these opportunities carefully and strategically. They remain areas of active interest, not current commitments. Our Nexxis subsidiary continues to perform well and provides a stable recurring revenue base. We see ongoing opportunities to expand Nexxis organically and through targeted acquisitions that complement our communications and data services offerings. We are also in the process of forming a special advisory group composed of experienced leaders in technology, infrastructure, and cybersecurity to help identify and evaluate strategic opportunities that align with our long-term growth objectives. In addition, we are actively engaging strategic consultants to ensure that every potential investment or acquisition supports our long-term vision of profitability and sustainable growth. Looking ahead, our priorities are to complete the tender offer and share buyback process, after which our cash position and capital allocation plans will be finalized. Launch a new corporate website reflecting the company's refined focus. Also to close on an acquisition that will provide recurring revenue and to continue to strengthen Nexxis, our core operating platform today. Our experience and disciplined management philosophy, combined with our NASDAQ listing and clean balance sheet, position us to act decisively as we uncover opportunities to invest in while continuously focusing on shareholder value. With that, I'd like to open up the call for questions. Operator?

Our first question today is coming from Matthew Galinko of Maxim Group.

Maybe firstly, can you just remind us on what the possible outcomes of the tender look like for your cash position? Like can you bound what the low end and high end might be?

Matt, that's challenging. I've modeled various scenarios to assess the situation and have also spoken with some of our major investors following the announcement of the tender. I can't provide a precise estimate. If we tendered everything, the lowest estimate would be around $5 million, while the higher end could reach between $10 million and $15 million. So, I believe it's within that range of $5 million to $15 million, but it's really difficult to predict accurately. These are rough estimates with a low level of confidence. Additionally, we have a $10.8 million ATM available if we find the right opportunity to invest that money in a way that enhances shareholder value rather than diluting it. Ideally, we want to retain at least $10 million to $11 million in the company while considering acquisition opportunities through the ATM or other means. We won't proceed just to cause dilution; we want to have a solid reason for any action taken. We are currently working on identifying potential acquisitions and aiming to achieve something by the end of March. However, smaller companies often lack audits and need to get them done first, which adds some complexity. We've realized that targeting companies valued under $5 million or $10 million poses challenges, so we need to shift our focus to firms valued between $10 million and $20 million. If the right opportunity arises, we may consider larger investments, depending on the quality of their bank debt. Overall, if I were to estimate, it would be ideal to end up with between $10 million and $15 million.

Got it. I appreciate the information. That's very helpful. As a follow-up, I have a housekeeping question. You mentioned there were nonrecurring fees in SG&A for '24 compared to '25. Was there anything in the third quarter SG&A for '25 that was nonrecurring? In other words, should we expect SG&A to decrease in the fourth quarter as we complete the major part of the carve-out of the segment? Or is the third quarter SG&A number still a good rate to consider?

Chris, do you want to answer that, Chris?

So there were not any nonrecurring charges in the quarter. All the transactions associated with the sale were booked with the sale. So I think the Q3 number is a good number to use going forward.

Got it. Very good. And then one more, and then I'll jump back in the queue. But with respect to the direction you go for acquisitions, I think you mentioned in the script that you'd consider doing a tuck-in or something small to bolster Nexxis. I'm wondering if that could end up being with some of the volatility we're seeing around expectations in the AI and infrastructure space and HPC, if kind of data and voice might be a quiet but productive use for deployment. So is there a scenario where you push harder exclusively into Nexxis? Or is that not realistic as a use of capital?

Let me respond like this. John Camello is doing an excellent job managing Nexxis, and he has a small team that we're continuing to expand. The platform and the infrastructure make it easy for us to potentially acquire a $5 million VoIP company. Many VoIP companies have approximately 40% of their revenue coming from Internet access data services, which could be acquired at a reasonable multiple. There is generally a lack of loyalty with dial tone services, so as long as we maintain good customer service, it can be an easier target. We have experience with roll-ups in telecommunications from years past, and while technology has evolved, the multiples have not significantly increased. We are actively searching for VoIP and data access companies that align with what John is doing to enhance that base. I believe that John can quickly grow from $1.5 million to $5 million in revenue, and then potentially to $10 million. While this may not be the most exciting for shareholder value, we are running a solid company with manageable expenses. Our typical run rate in the public company is around $2 million annually, so acquiring dial tone revenue and data circuits, as John does, could help mitigate or eliminate that burn. Therefore, this is indeed a positive focus. On the AI front, the market with GPUs is quite volatile, with companies generating $750 million in revenue being valued at $16 billion. We are monitoring this space and have some strategies in mind. We've been in discussions with various stakeholders, but regarding Nexxis, pursuing expansion makes sense because John has established a strong platform and billing system. One of our board members, who previously sold his business to Magic Jack, is assisting us by connecting with brokers to initiate discussions with VoIP and data access companies.

Our next question is coming from Sean Lee of Private Investor.

I'm curious about your stance on the tender offer. Is it likely to occur, and what are the chances of that happening?

Yes. Well, we stated that in the proxy when we did that. So we need to do the proxy. It's stated in there and we will be doing it. I believe that we have 90 days from close to get that actual done. So yes, that is going on. The special committee is evaluating what the price of that buyback should be for the per share, but just that's happening.

Thank you.

Thank you. At this time, I would like to turn the floor back over to Mr. Piluso for closing comments.

Thank you. Thank you for the questions. In closing, this quarter represents a turning point for Data Storage Corporation. The successful sale of CloudFirst provided both capital, strength, and strategic clarity. As we advance our M&A growth strategy, we remain focused on disciplined execution, operational excellence, and shareholder value creation. We continue to evaluate new technology-driven opportunities that complement our history in enterprise infrastructure while maintaining a conservative and focused approach. I'd like to thank our employees, our Board of Directors, advisers, and shareholders for their continued confidence and support. We look forward to updating you on our progress in the months ahead. Thank you for joining today.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.