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    DTST
    Earnings call· Jun 2026(Q2 FY26)

    Data Storage Q2 FY26 earnings call DTST

    Aug 14, 2026 Source

    Executive summary

    Data Storage Corporation Q2 FY26 — Strategic M&A Focus and Nexxis Growth

    Data Storage Corporation is strategically transforming following the CloudFirst sale, focusing on disciplined capital deployment for M&A in AI infrastructure, cybersecurity, and communications. The Nexxis subsidiary provides a stable, growing recurring revenue base, with Q2 FY26 revenue up 9.3% and gross profit up 21.9%. The company maintains a strong balance sheet with $9.3 million in cash and no long-term debt, enabling a patient and selective approach to acquisitions, prioritizing quality businesses with predictable cash flow and strong management.

    Highlights

    4

    • Revenue from continuing operations (Nexxis) increased 9.3% year-over-year to $359,000.

    • Gross profit for continuing operations increased 21.9% year-over-year to $168,000.

    • Gross profit margin improved to 47% from 42.1% in the prior period.

    • Ended the quarter with approximately $9.3 million in cash and marketable securities and no long-term debt.

    Concerns

    3

    • Net loss attributable to common shareholders was $1.2 million, compared to a net loss of $732,000 in the prior year.

    • Selling, general and administrative expenses increased $362,000 or 33.2% to $1.5 million, primarily due to a $328,000 increase in noncash stock-based compensation.

    • Unrealistic valuations in the M&A market are a hurdle, with some companies seeking $500 million valuations on $5-6 million in revenue.

    Guidance & targets

    1
    CategoryTargetConfidence
    M&A deal closure timeline
    close something towards the end of the year or definitely the first quarter
    high materiality
    Medium

    Segment performance

    1
    SegmentRevenueYoYQoQMargin
    Nexxis (Continuing Operations)
    Revenue increase primarily attributable to continued growth in Nexxis voice and data solutions business, driven by new customers and increased spending from existing customers. Gross profit margin improved due to favorable sales mix and operating leverage.
    Prior period revenue: $328,000Gross profit growth YoY: 21.9%Gross profit margin: 47%Prior period gross profit: $138,000Prior period gross profit margin: 42.1%
    		$359,0009.3%—$168,000

    Operational metrics

    6
    Cash and investments balance
    $9.3 million
    Q2 FY26

    Ended the quarter with approximately $9.3 million in cash and marketable securities.

    Selling, general and administrative expenses
    $1.5 millionincreased $362,000 or 33.2%
    Q2 FY26

    Primarily driven by a $328,000 or 99.1% increase in noncash stock-based compensation and a $58,000 or 26.2% increase in professional fees.

    Stock-based compensation
    $328,000increased 99.1%
    Q2 FY26

    Noncash stock-based compensation increased as a result of grants to certain executives and employees.

    Professional fees
    $58,000increased 26.2%
    Q2 FY26

    Attributable to higher fees paid relating to legal and consulting services.

    Net loss attributable to common shareholders
    $1.2 millioncompared to the net loss of $732,000
    Q2 FY26

    Net loss for the 3 months ended June 30, 2026.

    Proceeds from sale of marketable securities used for stock repurchase
    $29.5 million
    Q2 FY26

    Used $29.5 million of the proceeds from the sales of marketable securities to repurchase common stock from shareholders in connection with the tender offer.

    Deals & partnerships

    1
    CloudFirstSale of CloudFirst business.$40 million

    The sale of the CloudFirst business closed on September 11, 2025.

    Risks & headwinds

    2
    Unrealistic valuations in M&A marketCurrent M&A environment

    Companies with $5-6 million in revenue seeking $500 million valuations.

    Mitigation: Maintaining discipline around valuation and structure, pursuing selective opportunities, and waiting for realistic asks.

    Increased operating expensesQ2 FY26

    SG&A expenses increased $362,000 or 33.2% to $1.5 million.

    Mitigation: Primarily driven by noncash stock-based compensation and professional fees, implying these are largely non-recurring or strategic investments.

    What to watch in Q3 FY26

    3

    M&A deal progress (LOI signing)

    Within 60 days
    CurrentActive evaluation of over 124 companies.
    TargetLOI signed.

    Why it matters

    Signals tangible progress on the core M&A strategy to deploy capital and build scale.

    I would love to get, let's say, an LOI signed that's nonbinding within, let's call it, 60 days, 40 by the 60, and I'd love to close something towards the end of the year or definitely the first quarter.

    Q&A highlights

    4

    What are the biggest challenges in the M&A environment, specifically regarding recurring revenue, scalability, sustainability, and valuations?

    Management has evaluated over 124 potential M&A transactions since September 2025, finding many with unrealistic valuations (e.g., $5-6M revenue seeking $500M valuation). They are interested in distressed companies with strong IP (e.g., cybersecurity software), niche GPU infrastructure plays, and sovereign AI, leveraging their technical advisors. They are patient and disciplined. Management cited an example of a company like 'packet 8' (likely 8x8 or RingCentral) having $700-800 million in revenue but only a $200-300 million market cap, contrasting this with smaller companies seeking much higher valuations.

    “we looked at over probably 15 people calling us. It really wasn't a strategy of ours to do that. But if something fantastic came up, well, you got to look at it. We just didn't see that. On the other side, you look at some of the valuations and what happens, some of these companies, they go out -- I'll give you a very simple example that they're at $5 million to $6 million in revenue. They have a $500 million valuation, and they raise some money from friends and family. So there's a lot of unrealistic -- no one is going to write a check out for $500 million for them.”

    asked by Matthew Galinko · answered by Charles Piluso

    2 min read5 chapters

    Detailed Narrative

    01

    Strategic Transformation Post-CloudFirst Sale

    Data Storage Corporation is undergoing a significant transformation following the sale of its CloudFirst business for $40 million on September 11, 2025. This has resulted in a focused position, with financial reporting now reflecting only continuing operations (Nexxis subsidiary). The company aims to deploy capital with discipline, explore acquisitions, and build sustainable recurring revenue.

    02

    M&A Strategy and Focus Areas

    The company's strategic pipeline is active, evaluating businesses in AI infrastructure, cybersecurity, communications, and software. The common thread for potential acquisitions includes recurring revenue, predictable cash flow, strong customer relations, capable management teams, and a clear path to operational and financial growth. Specific interest lies in niche plays like sovereign AI, cybersecurity software with strong IP, and telecommunications.

    03

    Capital Deployment and Valuation Discipline

    With approximately $9.3 million in cash and marketable securities and no long-term debt, DTST possesses significant financial flexibility. Management emphasizes a selective, valuation-conscious approach to M&A, avoiding transactions that do not meet strategic and financial criteria. They are wary of unrealistic valuations, citing examples of companies with $5-6 million in revenue seeking $500 million valuations.

    04

    Nexxis as an Operating Foundation

    The Nexxis subsidiary, providing managed business voice, Internet, data transport, and SD-WAN solutions, serves as a stable operating base. It delivered a 9.3% year-over-year revenue increase from continuing operations to $359,000 and a 21.9% increase in gross profit to $168,000 in Q2 FY26, with gross margin improving to 47%. Nexxis's recurring revenue model, high-touch support, and integrated connectivity are seen as valuable assets for future growth.

    05

    Shareholder Value Creation

    The company's strategy is centered on creating long-term shareholder value by leveraging its public company platform, growing operating business, and available capital to achieve greater scale and stronger earning power. Management acknowledges the current stock trading below liquidation value and is committed to delivering measurable progress through disciplined execution of its M&A and organic growth strategies.

    AI-generated summary of the company’s earnings call. Not investment advice.