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Data Storage (DTST) Q2 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q2 FY26)· Information Technology· Aug 14, 2026

Source: earnings call transcript

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

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

Segment performance

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

Deals & partnerships

CloudFirst Sale of CloudFirst business. $40 million

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

Risks & headwinds

Unrealistic valuations in M&A market Current 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 expenses Q2 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

M&A deal progress (LOI signing)

Within 60 days
Current Active evaluation of over 124 companies.
Target LOI 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.

Find out whether DTST delivers this. Inve re-checks your case every morning.

Q&A highlights

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 read 5 chapters

Detailed narrative

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.

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.

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.

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.

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.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.