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Edited Transcript of FALC earnings conference call or presentation 25-Mar-19 8:30pm GMT

Q4 2018 FalconStor Software Inc Earnings Call

Melville Mar 28, 2019 (Thomson StreetEvents) -- Edited Transcript of FalconStor Software Inc earnings conference call or presentation Monday, March 25, 2019 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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Operator [1]

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Good afternoon, and thank you for joining us to discuss FalconStor Software Q4 2018 Earnings Call. 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 risk 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 Q4 2018 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 Mr. Todd Brooks. Please go ahead, sir.

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

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Thank you, Cody, and good afternoon to everyone. I'd like to thank each of you for taking your time to participate in our call today.

I'm excited by the progress that the FalconStor team has made during Q4 as we strive to empower IT professionals and enterprises across the globe achieve mastery over their data because we believe data is an organization's most precious asset and, when mastered, enables that organization to responsibly push the boundaries of what's possible in the digital economy in which they operate.

FalconStor's products are appointed at a market -- are reported in 2018 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 2 factors: first, an explosion in the amount of data generated by various digital technologies, whether it's in the form of traditional e-mail, documents, application databases, digital audio and video or Internet-connected devices; and then secondly, a dramatic increase in data storage options, whether they be located in a traditional data center, private cloud or public cloud. The ever-expanding capacity of data captured and stored is driving the need for enterprises to cost-effectively, securely and intelligently manage this data. I'm excited about this market and the business value that FalconStor delivers to its complex enterprise customers.

During Q4, we focused on 3 key initiatives: first, on continued delivery of operating profitability; second, on generating year-over-year billings growth; and then finally, on key product expansion. For the balance of today's call, we'll elaborate on each of these 3 key initiatives, provide a detailed review of Q4 financial results and then open the phone line for any questions that you may have.

Throughout 2018, we continued to improve operational efficiency and focus on consistent commercial discipline. These efforts have allowed the company to create consistent operating profitability. As evidence, Q4 marks the sixth consecutive quarter of profitable operating margin delivered by the team. These efforts allowed the company to generate a non-GAAP operating income of $654,000 during the quarter despite new growth investments we made to drive new product development, general marketing and commercial team expansion. We also finalized the final tranche of our previously announced financing, which resulted in the company receiving an additional $1 million of gross proceeds from new investors. Our cash and cash equivalents increased to $3.1 million at the end of Q4 from $1 million at the end of 2017. In addition, we continued to shift our subscription-based licenses during the quarter and increased billings-based annual recurring revenue or ARR to 70% at the end of Q4 as compared to 61% in Q4 the prior year. I'm excited by the operational consistency and profitability the team continues to deliver.

I'm also excited by the billings growth. The team is now delivering, especially in our Americas and EMEA regions. In Q4, we were able to generate 21% year-over-year growth in our Americas region and 40% billings growth in our EMEA region. These results are direct outcomes of rebuilding the commercial teams, increasing focus on key existing and new partners and improving our go-to-market messaging in each region. The dramatic growth delivered in the Americas and EMEA largely offset the Q4 billings decline we continued to experience in APAC, especially within the country of China. Throughout 2019, we expect to shift additional resources to our Americas and EMEA regions while strategically aligning our APAC focus to the most productive countries within that region.

The financial stability we have generated over the last 6 quarters has enabled us to place increased investment into our go-to-market product strategy and go-to-market efforts. Our data protection products delivered tremendous business value across 3 key solution categories: backup and archive orchestration, disaster recovery and high availability. The backup and archive orchestration category is targeted at modernization and optimization of existing backup and archive operations. This category is the foundation of daily routine data protection strategies for our complex enterprise customers. The disaster recovery category is targeted at delivering superior application-aware protection via advanced continuous data snapshot and journal-based replication and then, finally, by automated data recovery. And the high availability category delivers superior business continuity via continuous active availability of mission-critical production data. Each of these solution categories is built upon a foundation of hardware and cloud vendor-agnostic technology, which allows our customers to leverage existing hardware investments and intelligently utilize the best target storage environments for each of their specific data protection use cases. It also enables them to eliminate vendor lock-in as the need to rip and replace hardware. Our full spectrum data protection solutions enable our complex enterprise customers to virtually eliminate potential data loss.

During Q4, we continue to expand our data protection product suite. First, we repositioned our FreeStor offering as the FalconStor Data Mastery Platform to more accurately reflect the product's full value proposition to our large complex enterprise customers. The initial release of the platform also includes native cloud functionality, including the ability to utilize public cloud platforms such as AWS for data protection storage targets. Second, we expanded our core backup and archive orchestration product called FalconStor VTL to enable customers to migrate virtual tape backups to AWS S3 object storage to achieve low-cost tape archive in the cloud. In addition, data ingest performance benchmark testing was completed on our VTL solution and generated 25% better results than our nearest competitor.

FalconStor is unique. Our 18 years of technology innovation is unmatched by newer entrants in the data protection space, and we will continue to build upon this advantage. Our customers know that our solutions are powerful and comprehensive.

With that, I will turn it over to Brad to provide a more detailed overview of our Q4 financial results. Brad?

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

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Thank you, Todd. Fourth quarter of 2018 marked our sixth consecutive quarter of non-GAAP operating profitability. During the 3 months ended December 31, 2018, we delivered non-GAAP operating income of $654,000 as compared to non-GAAP operating income of $1.5 million during the same period the previous year. Our results for the current quarter were significantly impacted by our adoption of new revenue recognition accounting guidance as of January 1, 2018, which resulted in $1.2 million decrease in revenue.

Net cash used by operations decreased by $1.1 million to $1.5 million for the [8 year] (sic) [12 months] ended December 31, 2018, as compared to $2.6 million of net cash used by operations during the prior year period. As a result of improving operational efficiencies, the closing of the commitment from Hale Capital private placement providing $3 million in financing of the commitment and $1 million in gross proceeds received in connection with our previously announced private placement and approximately $500,000 we received from our warrants exercised in connection with these events, we ended the quarter with $3.1 million in cash and cash equivalents as compared to $1 million at December 31, 2017.

Overall, total revenue for the current quarter decreased 24% to $4.8 million compared to $6.2 million in the prior year period. But remember, $1.2 million of this decline resulted from our adoption of new revenue guidance on January 1, 2018, as previously discussed. The remaining decrease in revenue was driven by the volume of new product licenses and maintenance sales during the current period, but only totaled $200,000.

As a result of our cost control and realignment initiatives, our non-GAAP operating expenses continue to trend lower at $3.2 million as compared to $3.7 million during the 3 months ended December 31, 2017, representing a decline of 12% over the same period of the previous year.

Turning now to the balance sheet. We ended the quarter with cash balance of $3.1 million. Net working capital, excluding deferred revenue and contracts receivable, but including the face value of the note receivable, ended at $1.2 million. We closed the quarter with accounts receivable of $3.6 million, accounts payable and accrued expenses of $3.4 million and deferred revenue of $9.4 million. The decline in deferred revenue as compared to the same period in the previous year was primarily related to the implementation of ASC 606, effective January 1, 2018, which is the revenue recognition policy previously mentioned.

As many of you already know, on October 9, we closed the final tranche of our previously announced private placement. In connection with this event, we received an additional $1 million of gross proceeds from investors, which is in addition to the $3 million of gross proceeds previously received through Hale Capital over the previous 12 months.

Todd, I will now 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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Thanks a lot, Brad. I appreciate it. In summary, we are pleased, as I mentioned earlier, by the progress that we've made in Q4. We obviously have a significant amount of work in front of us, but we do believe the company's performance over the last 6 quarters, including growth in our Americas and EMEA regions, has created strong momentum for FalconStor going into 2019.

To our shareholders and loyal partners and customers who have joined this call today or that will listen to its recording, we are committed to delivering value, and we look forward to even more exciting days here at FalconStor.

At this time, I'll ask Cody to begin the question-and-answer session. Cody?

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Questions and Answers

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Operator [1]

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(Operator Instructions) It appears that we have no questions at this time.

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

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All right. Thank you, Cody.

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Operator [3]

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(Operator Instructions) And with no questions at this time, I'd like to turn the conference back over to management for additional or closing remarks.

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

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All right. Well, once again, thanks, everyone, for joining. We are very excited as we go into 2019, and we look forward to the next earnings call. Thank you very much.

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Operator [5]

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Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.