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Edited Transcript of FALC earnings conference call or presentation 7-May-20 8:30pm GMT

Q1 2020 FalconStor Software Inc Earnings Call

Melville Jun 8, 2020 (Thomson StreetEvents) -- Edited Transcript of FalconStor Software Inc earnings conference call or presentation Thursday, May 7, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brad Wolfe

FalconStor Software, Inc. - Executive VP, CFO & Treasurer

* Robert Todd Brooks

FalconStor Software, Inc. - CEO & President

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Presentation

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Unidentified Company Representative [1]

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Good afternoon to everyone, and thank you for joining us to discuss FalconStor Software's Q1 2020 Earnings. Todd Brooks, FalconStor's Chief Executive Officer; and Brad Wolfe, Chief Financial Officer, will discuss the company's results and activities, and we'll then open the call to your questions.

The company would like to advise all participants that today's discussion may contain, what some consider forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are discussed in FalconStor's reports on forms 10-K, 10-Q and other reports filed with the Securities and Exchange Commission and in the company's press release issued today. During today's call, there will be discussions that include non-GAAP results. A reconciliation of the non-GAAP results to GAAP has been posted on FalconStor's website at www.falconstor.com under Investor Relations. After the close of business today, FalconStor released its Q1 2020 earnings. Copies of the earnings release and supplemental financial information are available on FalconStor's website at www.falconstor.com.

I'm now pleased to turn the call over to Todd Brooks.

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Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [2]

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All right. Thank you, [Clark], appreciate that. And I'd also like to thank everyone for taking your time today to participate in our call. As we reviewed during our last earnings call, we implemented 4 key strategic initiatives in 2019. And given the positive momentum we created in 2019, we've carried the same 4 initiatives into 2020. And these are, first, generating consistent growth by expanding our industry-leading, long-term archive retention and reinstatement product line, and by creating new flexible and extensible data storage innovations that we believe will drive our growth over the next decade. Then second, on increasing our commercial investment and focus to regions where we have demonstrated growth and the ability to win. And then third, sharpening our commercial and R&D focus related to our business continuity-driven data replication products to ensure we are focused on those areas or in those cases and use cases which are important to our largest and most strategic enterprise customers. And then finally, on delivering consistent profitability and operating cash flows, positive operations.

Our products are pointed at a market that's reported by IDC to be sized at approximately $10.7 billion and predicted to grow at a compounded annual growth rate of 14.7% through 2022. This growth is being driven by 3 factors: first, an explosion in the amount of data generated by various digital technologies, whether that is in the form of traditional e-mail, documents, application databases, digital audio and video or internet-connected devices. Second, the dramatic increase in data storage options, whether they be located in a traditional data center, private cloud or a public cloud. And then finally, the ever-expanding need to retain data for lengthy periods of time to ensure legal and regulatory compliance.

This dramatic growth is -- in the capacity of data captured and stored is driving the need for enterprises to cost effectively, securely and intelligently manage this data. In fact, according to the IDC, up to 75% of data managed by an enterprise is directly related to routine data archive. Our technology allows an enterprise to leverage existing archive policies and procedures, while ensuring the most stringent archive windows are met, data storage capacity is reduced by 95% or up to 95%, and cloud storage alternatives such as Wasabi, AWS, Hitachi Content Platform or HCP, and IBM's Cloud Object Storage are available for improved data storage efficiency. I'm excited by this market, and the business value that we at FalconStor deliver to our complex enterprise customers.

For the balance of today's call, we'll elaborate on each of these 4 key strategic initiatives, provide a detailed review of Q1 financial results and discuss the COVID-19 pandemic impacts that we have experienced. Finally, we'll open the phone line for any questions you may have. And if you'd like to ask a question, we'd ask that you use the question dialogue area within the webinar panel to enter your question. And then when we open the line, we'll call on you, live, to ask your question live.

All right. So let's talk -- discuss the COVID-19 pandemic impacts that we've seen. Certainly, the pandemic has been at the top of our minds as our thoughts go out to everyone that's been impacted by its spread. The safety of our employees has been a top FalconStor priority, as is ensuring we are prepared to commercially survive a worst-case disruption, which could extend into late 2020.

The internal operating improvements that we made during the past 2 years allowed the majority of our global workforce to work from home, beginning in late February 2020, without any significant distraction. However, during the quarter, our results were materially impacted, as Q1 revenue declined by 29% to $3.2 million compared to $4.5 million in Q1 of 2019. In addition, our Q1 non-GAAP operating income decreased to a loss of $112,000 compared to a non-GAAP operating income of $395,000 in Q1 of 2019.

Deep insights into the Q1 sales opportunities that were delayed in the quarter, point to the Q1 revenue decrease as being a COVID-19-initiated delay in both renewals and new deal closings, as opposed to a fundamental shift in the demand for FalconStor's products. In fact, as further evidence of this insight, April 2020 sales, which we just concluded, have returned to a normal level, including the closing of several Q1 renewals that were delayed into April and several new VTL wins with new FalconStor customers. However, despite our positive April sales results, we are assuming that the next 6 months will continue to produce revenue challenges as enterprises around the globe continue to deal with their own commercial impacts due to COVID-19.

Given our cost reduction efforts that we executed in 2019, total GAAP -- non-GAAP, I should say, operating expenses for Q1 of 2020 decreased to $2.3 million compared to $4.1 million in Q1 of 2019. In addition, given the commercial uncertainty caused by COVID-19, we developed and implemented an even more aggressive expense control plan at the end of Q1 that we are prepared to keep in place for the balance of 2020. This plan reduces our annual cash expense run rate by $4 million or 29% reduction. We believe the reduced expense level will enable FalconStor to operate cash-flow-positive for the remainder of 2020, even with continued revenue challenges throughout the year. Despite our planning assumption that revenues will continue to be negatively impacted during the next few quarters, our global team is absolutely engaged, and I am proud of how they have managed themselves and how they've continued to diligently work to maintain the commercial momentum that we gained in 2019.

Beyond the favorable results that the team delivered in April, we also launched our newest, long-term archive retention and reinstatement product called StorSafe and will begin installing with several existing customers during Q2. Industry feedback on the product launch has been especially encouraging. So we're excited about that. So for the balance of 2020, we'll continue to proactively manage our business and any impacts caused by the COVID-19 pandemic. Our 4 key initiatives of long-term archive product growth, targeted commercial investments, sharpened R&D focus and delivery of consistent profitability and cash-flow-positive operations will continue to guide our daily efforts.

Our products are utilized by enterprises and managed-service providers across the globe and address 2 key areas of enterprise data protection: long-term archive retention and reinstatement, and then business continuity-driven data replication. Our products are software-defined, which means that our technology allows our solutions to be hardware, cloud, and source-data agnostic, giving our customers maximum leverage of existing hardware and software investments. Our innovative integration into modern cloud-based technologies enables our customers to dramatically improve the portability, security and accessibility of their enterprise data. This accessibility is key in our modern world, where data is not only protected but also intelligently leveraged to facilitate learning, improve product design and drive competitive advantage.

Within the long-term archive retention and reinstatement segment, we have traditionally sold our FalconStor Virtual Tape Library, or VTL, solution. However, I'm excited to announce that we have launched our next-generation, long-term archive product called StorSafe. And we'll cover a little bit more on that here in a minute. Both of these products deliver innovations that enable our enterprise customers to modernize their archive operation and infrastructure, and dramatically reduce their archive data storage cost, while improving archive security, portability and accessibility. We have filed patents on these inventions and innovations, and believe that we can transform historic challenges in archive storage and data management. Then within the business continuity-driven data replication segment, our core products are our Network Storage, or NSS, solution and our Continuous Data Protection, or CDP, solution. Traditionally, these solutions have been available as stand-alone products or could be licensed together via our FreeStor platform.

These products enable our enterprise customers to achieve superior recovery point and recovery time objectives, while optimizing storage hardware investments through advanced storage virtualization. We will continue to place our focus within these 2 key product segments for the foreseeable future. So let's take a look at each of these core products in just a bit more detail.

We introduced our Virtual Tape Library product in the early 2000s. And we're one of the first software providers to introduce this innovative solution, allowing enterprises to emulate and replace cumbersome legacy physical tape libraries for archive-related data protection without being forced to replace their underlying enterprise backup and archive software and associated processes. Our VTL product continues to be a leading solution in the marketplace, and we've continually evolved the product solution to meet new demands on usability, scalability and hybrid cloud exploitation. We believe it is unmatched in terms of performance and scalability. With VTL, our enterprise customers are able to complete their data archive operations more reliably with minimal change needed to the legacy archive environment. They're also able to lever sophisticated physical tape emulation, advanced data security, data deduplication and public or private cloud-based virtual tape archive storage, which are all now seamlessly integrated into our solution.

We're dedicated to providing our enterprise customers with the highest-performing VTL product in the industry. As such, we subject our VTL solution to independent performance testing, which has demonstrated that our product is 25% faster than our closest competitor and can be executed on hardware that is 1/3 the cost of that required by our closest competitor. Beyond allowing our customers to benefit from shared data archive speed, we also enabled them to dramatically reduce the amount of data that needs to be archived, by processing their archived data through our integrated data deduplication engine. By eliminating redundant archived data, the archive storage capacity then required can be reduced by as much as 95%. Our technology allows our enterprise customers to significantly reduce the cost of storing the ever-growing volume of data, subject to long-term archive data protection mandates, while eliminating hardware and software vendor lock-in.

Moving on to StorSafe, traditionally enterprises have had limited choice, but have had -- and have been forced to store their archived data on physical tape or within storage arrays installed in an internal data center. Our newest and most innovative long-term archive data management product, StorSafe, breaks these traditional storage limitations and enables enterprises to securely and cost effectively leverage a wide array of storage options, including ultra-efficient and scalable cloud-based storage environments. StorSafe, like our proven VTL solution, provides sophisticated physical tape emulation and seamless integration with an enterprise's legacy backup and archive software and processes. In addition, StorSafe includes our advanced data deduplication technology. However, StorSafe takes long-term archive storage optimization to an entirely new and innovative level.

By leveraging patent-pending, industry-standard container technology to enable persistent long-term archive storage, our StorSafe solution is game-changing and improving archived data portability, accessibility, security and integrity validation, especially as it relates to multi-cloud data leverage. As a result, a full spectrum of archived data storage options is made available to our enterprise customers to efficiently utilize essentially any storage environment, while confidently ensuring data security and efficient archive access. We have designed StorSafe to significantly reduce long-term archive data storage in legal or legally mandated compliance costs, and redefine long-term archive storage optimization and accessibility for the next decade.

In addition to the long-term archive data, enterprises routinely maintain short-term copies, or backups, of data generated by various user applications to protect against data loss or natural disaster. Our CDP technology reinvents the way data replication and recovery are implemented and performed. Moving beyond once-a-day backup models, CDP combines local and remote protection into a cost-effective, unified, disk-based solution that allows organizations to recover data back to the most recent transaction. Combining application-aware snapshot agents and continuous journaling functions, CDP enables customers to recover data effectively at any point in time. CDP delivers instant data availability and reliable recovery, bringing business applications back online in a matter of minutes after a failure. CDP protects application-specific data for Microsoft, Oracle, SAP and many other leading business applications, while ensuring high-performance and stability for even the most complex business environments.

Finally, the ever-expanding capacity of data managed by enterprises creates a continual challenge in ensuring the organization has an adequate amount of available storage. FalconStor NSS is a scalable, highly available solution that enables data storage virtualization and business continuity in heterogeneous environments. Supporting existing third-party disk arrays, NSS eliminates storage boundaries and vendor lock-in, providing fast and secured data storage provisioning and migration. NSS is designed to meet the data storage needs of any complex enterprise.

Moving data between different data-storage platforms can be complex, complicated, time-consuming and disruptive to business operations. Our core storage virtualization technology provides a non-disruptive approach to data mobility. With NSS, it becomes a simple operation to move data from older platforms to newer ones or to introduce new storage capacity in tiers. This allows enterprises to respond to evolving performance and capacity requirements as well as changing data protection mandates.

As I mentioned earlier, our first key strategic initiative is to expand our industry-leading long-term archive retention and reinstatement product line by creating flexible and extensible data-storage innovations to drive our growth over the next decade. As part of this initiative, we have expanded our targeted go-to-market paths, and these now include: first, large IBM or large enterprises that continue to use IBM i within one of their key environments, but that also use operating systems from other vendors, such as Windows or Linux; second then, on IBM ProtecTIER replacement; third, on leveraging the Hitachi Content Platform, or HCP; fourth, then on Hitachi's Sepaton product replacement; fifth, Dell EMC Data Domain replacement and upgrades; and then finally, on legacy tape modernization. These expanded go-to-market paths have proven effective.

While the COVID-19 pandemic has certainly created challenges for FalconStor and its partners and customers, I remain very excited about this market and the dedication of our team and the business value that our solutions deliver to our enterprise customers. FalconStor is unique. Our nearly 2 decades of technology innovation is unmatched by newer entrants in the data-protection space, and we'll continue to build on this advantage. Our customers know that our solutions are powerful, we provide one of the industry's most comprehensive set of solutions in this space and are actively innovating to deliver capabilities that change the dynamics of archive storage management to the future.

And with this, I will turn it over to Brad to provide a more detailed overview of our Q1 financial results. Brad?

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Brad Wolfe, FalconStor Software, Inc. - Executive VP, CFO & Treasurer [3]

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Thank you, Todd. Despite our efforts to maintain sales momentum amid the unprecedented global outbreak of novel COVID-19 pandemic, we closed the 3-months ended March 31, 2020, with $3.2 million GAAP revenue compared with $4.5 million for the same period of the previous year. Our software solutions play a key role in efficiently managing and protecting critical data for businesses around the world. And we're confident that as the global economy recovers, our sales momentum will recapture the momentum achieved through our recent sales success in key strategic markets, such as the Americas.

As we move forward through the balance of the year, our energy will be concentrated on generating positive cash flow, capital preservation, strategic growth and continued product innovation. GAAP total cost of revenue for the 3 months ended March 31, 2020, decreased 17% to $0.5 million compared with $0.6 million in the prior year period. Total gross profit decreased $1.2 million or 32% to $2.6 million for the 3 months ended December -- March 31, 2020, compared with $3.8 million for the prior year period. Total gross margin decreased to 83% for the 3 months ended March 31, 2020, compared with 86% for the prior year period. The decrease in total gross margin and total gross profit in absolute dollars was -- sorry about that, was primarily due to decline in revenue compared to our key proprietary software license offerings. Generally, our total gross profits and total gross margins fluctuate based on several factors including revenue growth levels, changes in personal headcount and related costs, and our product offerings and mix of sales.

GAAP total operating expenses for Q1 of 2020 were $3 million compared to $3.6 million in Q1 2019. Given the commercial uncertainty in late Q1, we developed and implemented an aggressive expense control plan that we are prepared to keep in place for the balance of 2020. This plan reduced our annual cash expense run rate by $4 million or 29% and resulted in the furlough of 21 employees. We believe the reduced expense level will enable FalconStor to remain cash flow positive and profitable during the remainder of 2020, even with continued revenue challenges. During the 3 months ended March 31, 2020, we recorded a GAAP operating loss of $0.4 million compared to GAAP operating income of $0.2 million for the prior year period. After tax, interest expense and preferred dividends, we recorded a GAAP net loss of $1 million for the current quarter compared to a GAAP net loss of $0.5 million for the prior year period.

Turning now to the balance sheet, we ended the quarter with cash balance of $1 million compared to $1.5 million at December 31, 2019. Net working capital, excluding deferred revenue, contract receivables, but including redemption value of our term note, ended at $2.8 million deficit. We closed the quarter with $1 million of cash and cash equivalents, accounts receivable of $1.8 million, accounts payable and accrued expenses of $3.2 million and deferred revenue of $6.1 million. In addition, we applied for the Payroll Protection Plan (sic) [Paycheck Protection Plan] loan from the Small Business Administration and received $754,000 in May of 2020. Finally, we believe the financing commitments the company has in place and our aggressive expense control initiatives described above are sufficient for managing the uncertainty surrounding COVID-19.

Todd, I'll turn it back over to you for final comments.

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Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [4]

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All right. Brad, thank you very much. In summary, our thoughts remain with everyone as they manage through the unprecedented impacts caused by COVID-19. We'll continue to do what is necessary to protect our employees and successfully operate against our key strategic initiatives throughout 2020.

So at this time, I'll ask Clark to begin the question-and-answer session. Clark?

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Unidentified Company Representative [5]

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Yes. Thanks, Todd. If anybody has any questions, if they would just type them in the question pane of your GoToWebinar, and then we'll call on you and you can speak. So just type -- just the basics of your question, say hey, I have a question and I'll know who it is. And then we can get Todd or Brad to discuss anything you'd like to discuss.

As of now, Todd, I'm not seeing any questions.

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Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [6]

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All right. Well, once again, folks, thank you very much for taking your time with us today. As I mentioned earlier, I am really excited about the market that we serve. We deliver -- our products deliver a significant amount of value to our enterprise customers, and they know it, they see it every day. And I think that some of the new innovations, especially with our new StorSafe product are going to be extremely well received into the marketplace, and we're looking forward to continuing to execute against our plan and delivering value to our customers.

So with that, we'll go ahead and close the call. But once again, I do appreciate your time and attendance today. Thank you.