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Edited Transcript of FALC earnings conference call or presentation 19-Nov-19 9:30pm GMT

Q3 2019 FalconStor Software Inc Earnings Call

Melville Dec 15, 2019 (Thomson StreetEvents) -- Edited Transcript of FalconStor Software Inc earnings conference call or presentation Tuesday, November 19, 2019 at 9:30:00pm 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 & Director

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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's Q3 2019 Earnings Call. Todd Brooks, Falconstor's Chief Executive Officer; and Brad Wolfe, Chief Financial Officer, will discuss the company's results and activities, and will open the call to your questions.

The company's results and activities -- I 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 the 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, and 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 Q3 2019 earnings. Copies of the earnings release and supplemental financial information are available on FalconStor's website at www.falconstor.com. As a reminder, today's conference is being recorded.

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

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

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All right, Casey, thank you very much, appreciate that. And I'd like to thank each of you for taking your time today to participate in our call.

I'm pleased by the progress that FalconStor has made thus far in 2019 as we have aligned our efforts to 3 key strategic drivers: first, on generating consistent growth by continuing to expand our industry-leading backup and archived data optimization technology; second, extending growth over the next decade by creating flexible and extensible data storage innovations; and then third, on delivering consistent operating profitability.

Our products are pointed at a market reported by IDC to be sized at approximately $10.7 billion and predicted to grow at a compounded annual growth rate of 14.7% during -- through to 2022. This growth is being driven by 3 factors: first, an explosion in the amount of data generated by various technologies, whether it's in the form of traditional e-mail, documents, application databases, digital audio and video or Internet-connected devices; and then second, the dramatic increase in data storage options, whether they be located in a traditional data center, a private cloud or a public cloud; and then third, on the ever-expanding need to retain data for lengthy periods of time to ensure legal and regulatory compliance. This dramatic growth 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 IDC, up to 75% of data managed by an enterprise is directly related to routine backup and archive. Our technology allows an enterprise to leverage existing backup policies and procedures while ensuring the most stringent backup windows are met. Data capacity is reduced by up to 95% and cloud storage alternatives, such as AWS, the Hitachi Content Platform, or HCP, and IBM's Cloud Object Storage are available for improved data efficiency. I'm excited, if you can't tell, about this market and the business value that FalconStor delivers to its complex enterprise customers. For the balance of today's call, we will elaborate on each of these key initiatives, provide a detailed review of Q3 financial results and then open the phone line for any questions you may have.

All right. Let's get into it. So I'm pleased to announce and to report that we delivered double-digit billings growth for a second consecutive quarter, as Q3 billings grew year-over-year by 11%. The primary contributor to our Q3 growth continues to be our backup and archived data optimization solution, which grew 65% year-over-year in Q3, continuing a growth trend we reported in both Q1 and Q2 of this year.

FalconStor has historically been an industry leader in backup and archived data optimization with our VTL or Virtual Tape Library solution. However, what has historically been targeted as a backup tape replacement technology has evolved into a much more powerful and modern solution for our enterprise customers.

As a result, we are now leveraging 4 additional go-to-market paths. And maybe then the right slide here, I apologize. Here we go. So as a result, we are now leveraging 4 additional go-to-market paths. First, on large enterprises with a diverse set of technology environments, including IBM i , Windows and Linux; second, on enterprises that have traditionally used IBM's protect your solution, but that now are being forced to migrate off that solution due to the product being retired from the marketplace; third, similarly, enterprises that have traditionally used the Hitachi HPP or Sepaton solution, which has also been recently removed from the market; and then finally, enterprises that are upgrading from Dell EMC's Data Domain product.

As we approach these expanded go-to-market paths. We were able to do so leveraging a set of expanded key differentiators, and these include: first, 100% freedom from any data storage hardware vendor or cloud vendor lock-in; secondly, 95% reduction in the amount of data and archives or backup and archived data that must be stored; third, the single highest-performing solution in the marketplace, as judged by the Evaluator Group; and then finally, a proven solution with enterprise-scale and true multi-cloud data storage functionality.

Today, our customers are able to leverage our solution to completely optimize their routine backup and archive operations and easily leverage modern, flexible and lower-cost storage options, such as AWS, Hitachi's Content Platform and IBM's Cloud Object Storage.

FalconStor has delivered industry-leading innovations to the marketplace for nearly 20 years. We're not a start-up. Beyond our backup and archived data optimization technology, our enterprise customers also depend on our advanced disaster recovery solution, which delivers superior application-aware data protection via advanced continuous data snapshot and journal-based replication.

In addition, our customers utilize our high availability technology to deliver or to achieve superior business continuity via continuous active availability of mission-critical production data. Each of these solution categories built upon a foundation of hardware and cloud vendor-agnostic technology, which allows our enterprise 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 allows them to eliminate vendor lock-in and the need to rip and replace hardware. Our full spectrum data protection solutions enable our complex customers, enterprise customers to virtually eliminate potential data loss.

Our second key strategic initiative has been to invest in new and innovative -- we're back on the right slide, there we go. Our second strategic initiative has been to invest in new and innovative technology. While we won't release specifics until early 2020, we are excited by our progress and believe the new advances will define data storage innovation for the next decade. We anticipate a launch of these innovations in early 2020, and believe they will provide the next level of security, flexibility and choice for our customers to truly exploit the market options for enterprise-class data protection. I look forward to some exciting and innovative product announcements throughout 2020.

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 upon this advantage. Our customers know that our solutions are powerful and comprehensive.

All right. And then finally, during the quarter, we focused our strategic operating attention on delivering consistent profitability. During the quarter, we reduced quarterly operating expenses by approximately $600,000 compared to Q2 of 2019 or last quarter, and we'll see additional expense savings reflected in our Q4 results. So fundamentally, we are anchoring our 2020 plan on cash flow positive operations.

All right, at this point, I'm going to turn it over to Brad to provide a more detailed overview of our Q3 financial results. Brad?

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

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Thank you, Todd. We closed the 3 months ended September 30, 2019, with $3.2 million in billings as compared to $2.9 million for the same period of the previous year. This 11% growth in billings year-over-year was driven by record sales in the Americas, where billings increased 40% as compared to the prior year.

On a product-specific basis, as Todd highlighted, this also reflects impressive progress with VTL, where Q3 billings grew by 65% as compared to the previous year.

During the 3 months ended September 30, 2019, we recognized revenue of $4.0 million as compared to $4.1 million in the prior year period. Revenue recognition on sales is driven by several factors. First, the volume of new product licenses and maintenance sales both for expansion in our existing installed base and the acquisition of new customers. Second, customer retention, which sustains maintenance renewal revenue over the long-term sales arrangements.

Total cost of revenue for the 3 months ended September 30, 2019, increased 9% to $0.8 million compared with $0.7 million in the prior year period.

Total gross profit decreased $0.2 million or 5% to $3.2 million for the 3 months ended September 30, 2019, compared to $3.4 million for the prior year period. Total gross margin decreased to 81% for the 3 months ended September 30, 2019, compared with 83% for the prior year period. The decrease in total gross margin and total gross profit in absolute dollars was primarily due to a decline in revenue and product mix as a result of higher-than-anticipated hardware and appliance sales during the current period, which yield significantly less profit margin as compared to our key proprietary software license offerings.

Generally, our gross profit and total gross margins fluctuate based on several factors including: one, revenue growth levels; two, changes in personnel head count and related costs; and three, our product offerings and mix of sales.

Overall, our operating expenses for the 3 months ended September 30, 2019, increased $0.1 million or 3% to $3.7 million as compared to $3.6 million for the same period of the previous year. The current quarter reflects a $0.2 million in severance charges incurred in connection with our 2019 restructuring plan, which was adopted during the 3 months ended September 30, 2019, in order to better align the company's cost structure with the skills, resources required to more effectively execute the company's long-term growth strategy and support revenue levels the company expected to achieve on a go-forward basis.

Turning now to the balance sheet. We ended the quarter with a cash balance of $1 million. Net working capital, excluding deferred revenue, contract receivables, but including redemption value of our term note, ended at $1.9 million deficit. We closed the quarter with accounts receivable of $2.0 million, accounts payable and accrued expenses of $3.5 million and deferred revenue of $8.2 million.

Finally, due to cash constraints, we have added a going concern language to our 10-Q. We have a signed term sheet with our 2 largest shareholders to secure a $1 million loan, and management believes that the company will be able to execute the terms for such borrowing facility in the near future.

Also, as stated above, we have reduced our operating expenses to reduce our cash burn.

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

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

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All right. Brad, thanks very much. So in summary, I think that we've made a lot of very good progress in 2019. We certainly have a longer way -- long ways to go to reach our ultimate goals, but I think that we've made -- there's some tremendous progress, especially as it relates to our backup and archive modernization or optimization solution.

So with that, Casey, let me turn it back over to you, and let's begin the question-and-answer time.

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Operator [5]

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(Operator Instructions) At this time, I'm showing no questions in the questioning queue. I'll turn it back to today's speakers for closing remarks.

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

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Okay. Once again, thank you, Casey, very much for your assistance, I appreciate that. And thank you, everyone, for taking your time to attend our call. We hope you have a very good evening. Bye-bye.

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Operator [7]

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Ladies and gentlemen, this concludes today's teleconference, and you may now disconnect.