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Edited Transcript of FALC earnings conference call or presentation 14-Nov-18 9:30pm GMT

Q3 2018 FalconStor Software Inc Earnings Call

Melville Jan 10, 2019 (Thomson StreetEvents) -- Edited Transcript of FalconStor Software Inc earnings conference call or presentation Wednesday, November 14, 2018 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

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Conference Call Participants

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* Bill Dawkins

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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 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 will 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 Q3 2018 earnings. Copies of the earnings release and supplemental financial information are available on FalconStor's website at www.falconstor.com.

I am 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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Thank you, Vicky. I'd like to thank each of you for taking your time today to participate in our call. I'm excited by the progress the FalconStor team has made over the last 5 quarters 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 the 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 reported in 2017 by IDC to be sized at approximately $7 billion and predicted to grow at a compounded annual growth rate of over 13% through 2021. This growth is being driven by 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 or IoT.

The ever-expanding capacity of data captured is driving the need for enterprises to cost effectively, securely and intelligently manage this data. I'm excited by this market and the technology that FalconStor has created over the last 18 years.

During Q3, we focused on 3 key initiatives: first, on continued delivery of operating profitability; second, on beginning to generate year-over-year billings growth again; and third, on expansion of key product value drivers. For the balance of today's call, we'll elaborate on each of these key initiatives, provide a detailed review of Q3 financial results and then open the phone lines for any questions you may have. So let's get started.

On operating consistency, the restructuring that we've started and completed in 2017 paired with continued efforts to create additional operating efficiency over the last couple of quarters and focus on improved commercial discipline have allowed the company to create consistent operating profitability. As evidence, Q3 marks the fifth consecutive quarter of profitable operating margin delivered by our team. These efforts allowed the company to generate a non-GAAP net income of $103,000 during the quarter despite new growth investments which we made to expand product development, increase general marketing and rebuild the commercial team.

Our cash and cash equivalents increased to $2.8 million at the end of Q3 from $1 million at the end of 2017. In addition, our non-GAAP gross margin increased to 83% from 80% in Q3 of 2017 as we continue to place additional focus on software sales.

Finally, we continued our shift to subscription-based licenses during the quarter and increased annual recurring revenue or ARR to 75% from 60% in Q3 of 2017. I'm excited by the operational consistency and the profitability the team continues to deliver quarter-over-quarter.

However, the real excitement will begin when we're able to begin generating year-over-year billings growth once again. In Q3, we're able to do just that and generate a 24% year-over-year billings growth in our Americas region after rebuilding the commercial team in Q1 and Q2 of this year and increasing focus on engaged partners. We began our commercial restructuring in our EMEA region in Q2. And while year-over-year billings growth declined by 14% in Q3, we're confident that the changes that we've made will gradually generate billings growth that we expect in this region also.

Our most challenging region continues to be Asia Pacific, and our commercial restructuring efforts there have just begun. Key to that growth, similar to the Americas and EMEA, will be rebuilding our commercial team and simplifying our partner focus to a select group of global partners and strong core existing regional partners.

The financial stability that we've been able to create over the last 5 quarters has enabled us to begin placing increased attention and investment into our go-forward product strategy and our efforts are being recognized.

During the quarter, the Evaluator Group conducted benchmark performance testing of our latest Virtual Tape Library or VTL solutions, which optimizes general backup and recovery to improve speed, reduce storage requirements and enable rapid remote disaster recovery. Results demonstrated that our single-node configuration produced backup and data deduplication throughput speeds of nearly 40 terabytes per hour, significantly better than any similarly configured solution in the industry.

While VTL is certainly considered to be a legacy solution in the marketplace, Forbes reported in April of this year that 80% of the world's data continues to be backed up to tape. As a result, our VTL solution provides an important anchor point for us within large enterprises for adoption of additional products that we offer like our FalconStor data mastery platform, which will be the next major release of our FreeStor product and is scheduled for general release at the end of this quarter.

This innovative solution will build upon our uniquely comprehensive powerful and patented technology, including RecoverTrac, which was awarded its third U.S. patent in Q3. It will be biased towards ease-of-use, performance and interoperability with modern cloud and hyper-converged technology. It will continue to be -- target larger, more complex enterprise customers. It will be a logical extension of existing data management use cases for our customers. And most importantly, will be hardware and cloud vendor agnostic.

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

So with that, I'll 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. The third quarter of 2018 marked our fifth consecutive quarter of non-GAAP operating profitability. During the 3 months ended September 30, 2018, we delivered non-GAAP operating income of $103,000 as compared to non-GAAP operating net income of $1.1 million during the same period in the previous year.

Our results for the current quarter were significantly impacted by adoption of new revenue recognition accounting guidance on January 1, 2018, which resulted in a $580,000 decrease in revenue. Our gross margins increased to 83% from 80% from third quarter of 2017, and net cash used by operations decreased by $1.2 million to $332,000 for the 9 months ended September 30, 2018, as compared to $1.6 million of net cash used by operations during the prior year period.

Overall, total revenue for the current quarter decreased 33% to $4.1 million compared to $6.1 million in the prior year period. $0.6 million of this decline resulted from our adoption of new revenue guidance on January 1 as previously discussed. The remaining decrease in revenue was driven by the volume of new product licenses and maintenance sales during the current year period.

As a result of our cost control and realignment initiatives, our non-GAAP operating expenses continue to trend lower at $4 million as compared to $5 million during the 3 months ended September 30, 2017, representing a decline of 21% over the same period of the previous year.

Turning now to the balance sheet. We ended the quarter with cash balance of $2.8 million. Net working capital, excluding deferred revenue, contract receivables and the Hale Capital financing ended at a negative $0.3 million. We closed the quarter with accounts receivable of $1.6 million, accounts payable and accrued expenses of $3.3 million and deferred revenue of $9.6 million.

The decline in deferred revenue as compared to the same period of the previous year was primarily related to the implementation of ASC 606 effective January 1, 2018.

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

I'll 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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Thank you, Brad. So in summary, we are very pleased with the progress that we've made in Q3. We certainly have significant work ahead of us. But we do believe the company's performance over the last 5 quarters has set up a very interesting opportunity for FalconStor.

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

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Bill Dawkins with Burleson Dawkins.

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Bill Dawkins, [2]

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Just really a couple of questions for you. On the VTL side, what kind of dollar figure can you put out in the market for all of your product?

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Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [3]

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Good question. We have not calculated a global TAM for VTL, but let me just give you a simple example. One of the areas for VTL that we're seeing a pretty big uptick in interest is with enterprises that utilize the IBM i platform. And you'll see various figures out there for how many IBM i enterprises are out there today, but it's at least 4,500 and probably actually quite a bit more than that, and these are largely midsized and larger enterprises. And we are seeing a significant increase with those customers.

And so the VTL market, as I said earlier, data, strangely enough, continues to be backed up to tape. I mean, it's cost-effective. They're legacy backup processes that are in place that enterprises are kind of hesitant to change. And while it's certainly not going to last forever, that's for sure, as I said earlier, it does provide a really interesting entry point for us with not only the existing enterprise customers that we have, but also future or new enterprise customers that we can land just simply by giving them a better way to back up your core data.

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Bill Dawkins, [4]

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Okay. And on your revenues for the company as a whole, is this $4 million a quarter -- is this kind of the bottom in here?

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Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [5]

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Q2 and Q3, as you probably will remember, Bill, because you've been involved with the company for quite a while, is always the company's lightest quarter, right? And so certainly, the same was held true this year. Q4 and Q1 are always the big quarters, and so you'll see a significant increase in Q4 as in Q1.

But I would certainly hope -- and there's no crystal ball here, but I certainly would hope that we're beginning now to drive growth. It won't be a straight line, right, perfect path to the -- on growth, but it will certainly -- we'll get there in one region at a time. We're able to begin some growth in the Americas region, as I stated earlier, this quarter.

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Bill Dawkins, [6]

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And do you feel like possibly Q2 and Q3 of 2019, we could possibly see some decent year-over-year growth?

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Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [7]

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That's the plan. That's what certainly we're working toward.

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Operator [8]

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(Operator Instructions) And we have no more questions at this time. So I'll hand the call back over to our speakers for any additional or closing remarks.

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Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [9]

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Well, once again, thanks for taking your time today. And as I've said several times now, I'm really excited about the opportunity that we have here. And the feedback that we continue to get from our clients is great. As most of you probably know, the process of rebuilding a mature software company like FalconStor, we've got to be very focused on what we're going to target in the future. And I think we've made great progress on that and have built a good financial stability around the company, and so I'm excited. Thanks again, and we will talk to you next time.

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Brad Wolfe, FalconStor Software, Inc. - Executive VP, CFO & Treasurer [10]

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Thank you.

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Operator [11]

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This does conclude today's conference. We thank you for your participation.