Data Storage Corporation outlines post-CloudFirst sale strategy and $24M capital return plan while targeting AI, cybersecurity, and SaaS expansion

Earnings Call Insights: Data Storage Corporation (DTST) Q2 2025

MANAGEMENT VIEW

* Charles M. Piluso, CEO, announced a proposed sale of CloudFirst Technologies for $40 million, emphasizing, "At $40 million, the deal represents a substantial premium to our entire market cap prior to the announcement. And after fees, taxes, working capital, commissions to investment banks, we -- the approximate net amount is $24 million, and that's $24 million plus the cash in Data Storage Corporation that can be returned to shareholders and reinvested in future growth." Piluso stated the transaction represents a transformative opportunity, but clarified, "our long-term strategy is not contingent on the outcome of this transaction. Whether the sale is approved by the shareholders or not, we are moving forward with purpose and ambition."
* Piluso revealed that the Board has authorized a tender offer to purchase up to 85% of the company's outstanding common stock using 85% of cash on hand, including the proceeds from the sale, with 15% earmarked for acquisitions and expansion.
* Piluso outlined strategic priorities: "We are rebranding the company to reflect our new direction. We are investing in next-gen growth verticals like AI, cybersecurity and SaaS."
* Christos H. Panagiotakos, CFO, reported, "Total sales for the 3 months ended June 30, 2025, were $5.1 million, an increase of approximately $236,000 or 4.8% compared to the 3 months ended June 30, 2024." He attributed growth to subscription-based services and highlighted, "Cloud infrastructure and disaster recovery revenue increased by approximately $193,000 or 6.1% due to the addition of new subscription clients and expanded services for existing clients. Nexxis also contributed significantly with an increase of approximately $48,000 or 17.3%, reflecting successful sales initiatives."

OUTLOOK

* Piluso stated, "Whether we complete the CloudFirst sale, our capital allocation remains rooted in balance. We will continue to look for opportunities to return value to shareholders while retaining the flexibility to invest in new platforms, products and partnerships."
* The CEO described a two-pronged strategy: if the CloudFirst sale is approved, capital will be returned through a large tender offer and the company will pursue acquisitions and innovation in AI, cybersecurity, and SaaS. If the sale is not approved, CloudFirst remains a core asset, with ongoing optimization and investment, while actively evaluating strategic partnerships and technology extensions.

FINANCIAL RESULTS

* Panagiotakos reported a shift in revenue composition: "Total sales for the 6 months ended June 30, 2025, were $13.2 million, an increase of approximately $84,000 or 0.6% compared to the 6 months ended June 30, 2024. The relative stability in total sales was the result of a significant shift in our revenue mix. Growth was primarily driven by a $600,000 or 9.8% increase in our core cloud infrastructure and disaster recovery services, and a $79,000 or 14.3% increase in Nexxis services." Equipment and software sales declined by approximately $615,000 or 12.6%.
* Cost of sales for the 3 months ended June 30, 2025, were $2.6 million, up $108,000 or 4.3%, attributed partly to investment in the new U.K. entity. SG&A expenses rose to $3.3 million, up $536,000 or 19.2%, due to increased salaries, directors' fees, and stock-based compensation.
* Net loss attributable to common shareholders for the quarter was $733,000 compared to a net loss of $244,000 a year prior. The company ended the quarter with $11.1 million in cash, cash equivalents, and marketable securities.

Q&A

* Matthew Evan Galinko, Maxim Group, asked about the post-transaction cash position. Piluso responded, "We have $24 million in there, and we believe that, that kind of is approximately the bottom of where it is. We really don't know fully because of taxes and other things that we have, net working capital adjustments. So we believe it could be more, but we're cautioned with that to say it's $24 million. And that with the $11 million would lead us to $35 million."
* Galinko inquired about the cloud pipeline through the balance of the year. Piluso answered, "We normally always have around $10 million in opportunities." He noted ongoing customer expansion and a steady contract value pipeline.
* Galinko also asked for an update on European expansion. Piluso said, "Everything is installed in three data centers. I think we have 10 partnerships...and each one of those companies have partnership arrangements." He reported additional hires in Europe and a strengthening sales funnel.
* An unidentified analyst questioned the rationale for selling CloudFirst, given its revenue contribution. Piluso explained challenges in unlocking value as a public company, stating, "We weren't able to do M&A. We weren't able to use the stock. Our volume was low, and we have a cash machine. If it stayed as a private company, it's a cash machine." Panagiotakos added, "The EBITDA for CloudFirst for Q2 was approximately $1 million, and then for the 6 months, it was approximately $2.5 million."
* The same analyst asked about post-sale operations. Piluso described a leaner structure focused on Nexxis and new investments: "Our intention is first on the AI in this area. We're in the process of putting together some very experienced adviser group...we're going to look to do some investing into companies that are developing AI vertical software."

SENTIMENT ANALYSIS

* Analysts focused on specifics of the capital return, the pipeline, European expansion, and post-sale operations, with a neutral-to-clarifying tone. Direct questions about rationale and future plans indicated an interest in understanding risk and clarity around the strategic shift.
* Management maintained a confident tone in prepared remarks and Q&A, with Piluso stating, "We are confident that either path leads to a stronger, more focused and ultimately more valuable Data Storage Corporation." There was transparency about the rationale for the transaction and future intentions, but also caution regarding execution details and post-transaction cash levels.
* Compared to the previous quarter, analysts’ tone shifted from exploring growth and recurring revenue to probing the rationale, execution, and implications of the CloudFirst sale. Management’s tone evolved from emphasizing operational performance to justifying strategic change and aligning expectations around transformative decisions.

QUARTER-OVER-QUARTER COMPARISON

* The current quarter is dominated by the proposed CloudFirst sale and a shift in capital allocation strategy, whereas the previous quarter focused on operational growth, recurring revenue, and European expansion.
* Strategic focus has shifted from infrastructure and recurring revenue growth to monetizing assets and redeploying capital into new tech verticals and returning capital to shareholders.
* Analysts in the prior quarter asked about recurring revenue, European market development, and contract value; this quarter, attention turned to the rationale for divestiture, impact on operations, and details of the capital return.
* Key metrics reveal a significant increase in net loss and a stable cash position, while revenue growth remains modest and driven by subscription services. Management’s confidence remains high but is now framed around executing a strategic reset rather than purely operational growth.
* The tone has moved from steady optimism and operational confidence to a blend of assertive justification and future-facing strategic ambition.

RISKS AND CONCERNS

* Management acknowledged uncertainty around the CloudFirst sale approval and potential net proceeds after taxes and adjustments.
* There is execution risk around rebranding, new investment initiatives in AI, cybersecurity, and SaaS, and the ability to deploy capital effectively post-sale.
* Elevated SG&A expenses and a rising net loss present ongoing operational and financial risks.
* Analysts raised concerns about the company’s ability to generate growth and value without CloudFirst and pressed for clarity on operational plans and capital allocation should the sale proceed.

FINAL TAKEAWAY

Data Storage Corporation’s Q2 2025 call centers on the proposed $40 million CloudFirst sale, with management emphasizing a transformative capital return and a pivot toward high-growth tech sectors including AI, cybersecurity, and SaaS. The company’s leadership remains confident that either outcome—sale or retention of CloudFirst—positions it for long-term value creation, supported by a shareholder-aligned strategy and sustained investment in next-generation opportunities.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/dtst/earnings/transcripts]

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