Earnings Call Transcript - DTST Q4 2025

Operator, Operator

Greetings, and welcome to the Data Storage Corporation Fiscal Year 2025 Earnings Call. (Operator provided instructions.) As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Ms. Alexandra Schilt, Investor Relations. Thank you. You may begin.

Matthew Galinko, Investor Relations / Moderator

Thank you. Good morning, everyone, and welcome to Data Storage Corporation's 2025 Fiscal Year 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 fiscal year 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.

Charles Piluso, Chairman & Chief Executive Officer

Thanks, Allie. Good morning, everyone, and thank you for joining us. First, I would like to acknowledge the delay in reporting our fiscal year 2025 results, which was necessary to allow additional time to complete our year-end audit. This was primarily driven by the complexity of several significant transactions during the year, including the sale of our CloudFirst subsidiary, the classification and settlement of many of our outstanding warrants and the completion of a tender offer. However, we are pleased to be here today to discuss our results in more detail. 2025 was the most consequential year for Data Storage Corporation's 25-year history. It was a year defined not just by strong financial results but by decisive action — action that fundamentally reshaped our company, strengthened our balance sheet and positioned us for a new phase. Over the past year, we made a deliberate choice to unlock the value we had spent more than two decades building and redirect that value toward what we believe is a significantly larger opportunity ahead. We executed on that strategy in three critical ways. First, we monetized CloudFirst for a total transaction value of $40 million. That transaction generated approximately $31.6 million in net proceeds and a $20.1 million gain. We sold a strong asset at full value because we believe that capital could be deployed into opportunities with greater long-term potential. At closing, we had an estimated $41 million in the bank based on our cash balance of $10 million plus the sale of CloudFirst. Second, we returned $29.3 million of that capital directly to shareholders through a tender offer at $5.20 per share, reducing our outstanding share count by approximately 72%. That level of capital return is rare for a company of our size and reflects a core principle of ours: capital belongs to the shareholders. And when we generate it, we allocate it responsibly, whether that means returning it or investing it for growth. Third, we reset the company. We entered 2026 debt-free with over $10 million in capital, a clean balance sheet and, at this point, a simplified operating structure. From a financial standpoint, these actions resulted in record performance. We reported net income of $19.2 million for the year compared to $500,000 for 2024. At the same time, I want to be very clear with investors: this level of profitability reflects the CloudFirst transaction and other nonrecurring events. It does not yet represent the ongoing earnings power of DTST, and we are being intentional and transparent. What it does demonstrate is our ability to create value, to recognize and realize that value, and to act with discipline in how we allocate capital. Today, our core operating business is Nexxis, and it's performing. In 2025, Nexxis generated $1.4 million in revenue, representing 13.4% year-over-year growth. Gross margins expanded to 44.4%. And importantly, we improved the quality of the business by reducing customer concentration, with no single customer accounting for more than 10% of revenue. Nexxis is a lean, subscription-based, recurring revenue business with improving margins and real operating leverage. And that brings us to the most important part of our story: what comes next. We have deliberately positioned DTST as a NASDAQ-listed acquisition platform with capital, flexibility and a clear mandate to identify, acquire and scale high-quality businesses in large and growing technology markets. We are actively evaluating opportunities in areas where we believe we have both strategic alignment and the ability to add value, including AI-enabled vertical SaaS, GPU infrastructure, cybersecurity and SOC-related services, as well as scalable technology businesses with recurring revenue models. These are not abstract targets. These are markets with significant tailwinds where disciplined capital deployment can drive meaningful long-term returns. In fact, we've already identified and are actively pursuing a number of strategic opportunities within the emerging GPU infrastructure segment in enterprise technology. These areas are being shaped by strong tailwinds, including the rapid adoption of AI-driven workloads, data architecture modernization and increasing demand for scalable, resilient digital infrastructure. Our focus remains on large, evolving markets where demand visibility is high, and we believe we can deploy capital in a disciplined, accretive manner with an emphasis on opportunities that offer compelling, risk-adjusted returns and clear avenues for long-term value creation. We are actively advancing these initiatives, positioning ourselves to stay agile and selective as they develop. We expect to provide meaningful updates in the near term as these opportunities evolve. Importantly, we are only pursuing opportunities where we understand customer behavior and the business deeply, and where we see a clear and credible path to value creation. At the same time, we are focused internally on improving efficiency. As we move through 2026, we expect corporate overhead to decline meaningfully as the CloudFirst divestiture is completed. Our objective is to ensure that the earnings power of this company is driven by operations, not one-time events. So when you step back and look at DTST today, what you see is a company that has undergone a complete transformation. We have moved from a traditional cloud-based managed service model to a streamlined, well-capitalized platform with the flexibility to pursue higher-growth, higher-margin opportunities. We have demonstrated that we can build value and that we are willing to realize it when the timing is right. And now we are focused on the next phase: building a company defined by sustainable growth, disciplined execution and long-term shareholder returns. 2025 was about realizing value. 2026 and beyond will be about seeking opportunities, bringing together synergistic companies and creating shareholder value. Now I'd like to turn the call over to Chris Panagiotakos for a review of our financial results. Chris?

Chris Panagiotakos, Chief Financial Officer

Thank you, Chuck. Good morning, everyone. As discussed on our last call, on September 11, 2025, we closed the sale of our CloudFirst business for $40 million. 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 were $1.4 million for the year ended December 31, 2025, an increase of $164,000, or 13.4%, compared to $1.2 million in the prior year. The increase was primarily attributable to continued growth in our Nexxis Voice and Data Solutions business driven by the addition of new customers and increased spending from existing customers. Revenue growth during the period reflects continued demand for our voice and data connectivity solutions and the expansion of services within our existing customer base. Selling, general and administrative expenses for the year ended December 31, 2025, increased $348,000, or 9.1%, to $4.2 million from $3.8 million for the year ended December 31, 2024. The increase was primarily driven by a $507,000, or 101.6%, increase in noncash stock-based compensation primarily related to the accelerated vesting of equity awards in connection with the sale of the CloudFirst business, which triggered a fundamental transaction clause in equity award agreements with employees. Salaries and director fees increased $166,000, or 9.8%, attributable to annual merit-based salary adjustments and bonuses. These increases were significantly offset by a $301,000, or 22.8%, decrease in professional fees, primarily related to lower legal and consulting expenses in the current year. We expect expenses to decrease for the year ended December 31, 2026, as compared to the year ended December 31, 2025, since a significant number of employees are no longer working for us and are instead working for the buyer of the CloudFirst business, and we anticipate having lower legal and accounting costs. Net income attributable to common shareholders for the year ended December 31, 2025, was $19.2 million compared to net income of $523,000 for the year ended December 31, 2024. The significant increase in net income for the 2025 fiscal year was primarily driven by the gain recognized on discontinued operations. We ended the quarter with cash, cash equivalents and marketable securities of approximately $41 million at December 31, 2025, compared to $12.3 million at December 31, 2024. Thank you. I will now turn the call back to Chuck.

Charles Piluso, Chairman & Chief Executive Officer

Thanks, Chris. Before we open the call to questions, I just want to reinforce that we believe we're entering into an exciting new phase. We attended the NVIDIA conference a few weeks ago, which reinforced the magnitude of the opportunity emerging across both technology and business. The pace of innovation and the scale of investment underway are substantial, signaling a transformational shift across industries. At the same time, it sharpened our approach: rather than competing directly in a capital-intensive area such as the billions being deployed into GPUs and core infrastructure, we are focused on disciplined participation. We have identified several key areas on which to focus, and we are advancing them deliberately, allocating capital thoughtfully and concentrating on opportunities where we see clear differentiation and the potential to drive meaningful long-term value. Now I'd like to open it up for questions. Operator?

Operator, Operator

(Operator provided instructions.) Our first question comes from the line of Matthew Galinko with Maxim Group.

Matthew Galinko, Analyst, Maxim Group

And congratulations on getting to this point in the transition. Maybe you can give us some sense of what valuations look like? Is it kind of what you expected when you started this process, particularly as you look towards some of the AI and HPC opportunities? Is it within reason? Or is it overheated at all?

Charles Piluso, Chairman & Chief Executive Officer

Thanks, Matt, good to hear your voice. After attending that conference, this felt like nuclear energy: some people are frightened, but most people are very excited. On the equipment side, it's tangible; on the software side, everyone talks about training platforms and software. When we see valuations, you hear things like companies that aren't even beta are hoping to get $700 million pre-revenue. For the most part, as I walked the conference, I would say NVIDIA's presence dominated—it was huge. After spending 25 years in disaster recovery and business continuity, I went there with one of our board members, and we think we have an idea for a potential opportunity where we can cost something out. That's something we know pretty well. We're still testing the waters and have a lot of research to do over time, but there are parts in which you can participate without getting crushed by competitors spending tens of billions on GPUs. So there are some opportunities, based on our past experience, that we see. Valuations are all over the place. Since September, and after we closed, we've spoken to 21 companies that we have either pursued or passed on; they range from SaaS AI offerings to MSPs to VoIP companies. On the MSP side, most are trading at roughly 1x revenue, but sellers often try to get 2.5x revenue depending on size. On some of the AI stuff, I have to say that 95% of the people we've spoken to are not yet ready to deliver—they are still preparing—and many are hoping for outsized valuations. The excitement is incredible. I think we potentially have some ideas on where we can play that separate us a little bit, but to answer your question, valuations are all over the place: some very reasonable, some quite frothy.

Matthew Galinko, Analyst, Maxim Group

No, I appreciate the color. Maybe does having cash in the bank ready to deploy get counterparties a little more interested in conversation? Or is that helping to move things along in some of these conversations?

Charles Piluso, Chairman & Chief Executive Officer

There are a few things we're looking at. One is whether there's a reverse merger out there that would provide shareholder value; we're not rushing into that, but people are approaching us and asking why they can build value and we can't. We're open to opportunities because they come to us. We're also looking at what I call the medium-tech space—the parts that aren't on fire—where you can participate without the extreme capital intensity. There are some strong MSPs that have developed AI software and we've been talking to them about separating the software from services and focusing on the core 'meat and potatoes' MSP business. For software that is still in training phases, we might structure joint ventures or arrangements where we can deploy and evaluate before committing to acquisition, or have the option to buy after deployment. You need to get creative because organic growth is tough; there may be good cross-selling opportunities with these existing customer bases. So we're focusing on medium-tech plays while keeping an eye on larger infrastructure opportunities in AI and GPUs where appropriate.

Matthew Galinko, Analyst, Maxim Group

Got it. And then maybe just a last question for the existing business. Is it possible to give us a sense of what the quarterly run rate or burn would look like operating without a transaction currently? And generally, what are your expectations for Nexxis over the next year operating independently?

Charles Piluso, Chairman & Chief Executive Officer

Sure. I'll handle the Nexxis commentary and I'll turn the burn estimate over to Chris. Chris, do you have a range for the run rate?

Chris Panagiotakos, Chief Financial Officer

So I think the burn rate for 2026 will be approximately $2 million for the year, reflecting the costs of being a public company.

Charles Piluso, Chairman & Chief Executive Officer

Yes. We think we can reduce some of that in certain areas because legal fees were pretty high, and we're still incurring some as we work through matters. That's an estimate and a range—don't hold us strictly to it—but it's what we're expecting. On the Nexxis side, the business is growing. We own 80% of Nexxis. John Camello runs it and does a great job. He has a small staff and is adding a few folks. I think we need to allocate a little more money—not much—to improve inbound leads; he does great work with agents, shows, associations and so forth, but we haven't invested heavily in digital marketing or SEO. Historically we've put money in as needed rather than committing to large growth initiatives. We're trying to preserve cash and be disciplined for the first acquisition. We have roughly 2.1 million shares outstanding, give or take a bit. If we decide to raise funds, we want any raise to correspond with an increase in value.

Operator, Operator

(Operator provided instructions.) Mr. Piluso, I see no other questions at this time. I'll turn the floor back to you for final comments.

Charles Piluso, Chairman & Chief Executive Officer

Thank you. Thanks for the questions, Matt. As we enter this next phase from a position of real strength — with capital on the balance sheet, a clean simplified structure and a clear strategic mandate — that combination gives us the ability to be selective, disciplined and focused only on opportunities that we believe can create meaningful long-term value for our shareholders. At the same time, we remain grounded in execution. Our priorities are clear: continue improving performance of Nexxis, deploy capital thoughtfully into areas that enhance our scale, expand our margins and strengthen the overall quality of our earnings. We are building with intention, and we are building for durability. We appreciate the trust and support of our shareholders and look forward to updating you on our progress as we move through 2026 and execute on the opportunities ahead. Thank you.

Operator, Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.