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Edited Transcript of FALC earnings conference call or presentation 12-Mar-20 11:30pm GMT

Q4 2019 FalconStor Software Inc Earnings Call

Melville Mar 31, 2020 (Thomson StreetEvents) -- Edited Transcript of FalconStor Software Inc earnings conference call or presentation Thursday, March 12, 2020 at 11:30:00pm 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 day and welcome to the FalconStor Software's Q4 2019 Earnings Conference Call. Today's call is being recorded. At this time, I would like 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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All right. Travis, thank you very much. Travis, if you don't mind, before we get started, would you mind reading the safe harbor statement? Or if you don't have that, I'll be happy to?

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Operator [3]

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I have no statement.

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

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All right. I'll tell you what, all right. No problem. Let me read it just for everyone's benefit. So 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 Q4 2019 earnings. Copies of the earnings release and supplemental financial information are available on FalconStor's website at www.falconstor.com.

Okay. With that, let's go ahead and launch into it. Thanks, everyone, for taking your time today to participate in our call. We really appreciate it. I'm pleased by the progress the FalconStor team made in 2019 as we have aligned our efforts to 4 key strategic drivers: first, on 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; secondly, on increasing our commercial investment and focus to regions where we have demonstrated growth and the ability to win; and then third, on sharpening our commercial and R&D focus related to our business continuity driven data replication products to ensure that we are focused on those use cases, which are important to our largest and most strategic enterprise customers; and then finally, delivering consistent operating profitabilities -- operating profitability, sorry.

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% through 2022. This growth is being driven by 3 factors: first, an explosion in the amount of data generated by various digital technologies, what is in the form of traditional e-mail, documents, application databases, digital audio and video or Internet-connected devices or IoT; and second, dramatic increase in data storage options, whether they be located in a traditional data center, private cloud or public cloud; and then finally, third, 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 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 up to 95%, and cloud storage alternatives, such as AWS, Hitachi Content Platform, Wasabi and the IBM Cloud Object Storage are available for improved data storage efficiency.

I'm excited by this market and the business value that FalconStor delivers to its complex enterprise customers. For the balance of today's call, we'll elaborate on each of these key strategic initiatives, provide a detailed review of Q4 and full year financial results and then open the phone line for any questions that you may have.

All right. Our products are utilized by enterprises and managed service providers across the globe and address 2 key areas of enterprise data protection: first, long-term archive retention and reinstatement; and then secondly, 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 over 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 our long-term retention and reinstatement segment, we have traditionally sold our FalconStor Virtual Tape Library, or VTL, solution. However, I'm excited to announce that we will shortly launch our next-generation long-term archive product called StorSafe. More on that here in a few minutes. 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 costs while improving archive security, portability and accessibility.

Then within our business continuity data replication segment, our core products are our Network Storage Server, or NSS, solution; and our Continuous Data Protection, or CDP, solution. Traditionally, these products have been available as stand-alone products or could be licensed together through 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'll continue to place our focus going forward within these 2 product segments for the foreseeable future. So let's take a look at each of these, though now in a bit more detail, if I can.

All right. We introduced our Virtual Tape Library products in the early 2000s and was one of the first software providers to introduce this innovative solution, allowing enterprise customers to emulate and replace cumbersome legacy physical tape libraries for archive-related data protection without being forced to replace their enterprise backup and archive software and associated processes. Our VTL product continues to be a leading Virtual Tape Library solution, and we believe it is unmatched in terms of performance and scalability. With our VTL, our enterprise customers are able to complete their data archive operations more reliably, with minimal change needed to their legacy archive environment, they're also able to leverage 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 VTL 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 benchmark testing, which has demonstrated that our product is 25% faster than the closest competitor and can be executed on hardware that is 1/3 cost of that required by our closest competitor. Beyond allowing our customers to benefit from shared data archive speed, we also enable them to dramatically reduce the amount of data that needs to be archived by processing their archive data through our integrated data deduplication engine. By eliminating redundant archive data, the archive storage capacity 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.

Now as far as StorSafe goes, as I mentioned, we're very excited to announce that the launch of this product -- traditionally, enterprises have had limited choice 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 called 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. With general availability scheduled for this year, StorSafe, like our proven VTL solution, provides sophisticated physical tape emulation and seamless integration with an enterprise's legacy backup and archive source -- software and processes. In addition, it continues to utilize 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 dramatically improves archived data portability, accessibility, security and the integrity -- and integrity validation, especially as it relates to multi-cloud data storage use. As a result a full spectrum of archived data storage options is made available to our enterprise customers to effectively utilize essentially any storage environment while confidently ensuring data security and efficient archive access. We've designed StorSafe to significantly reduce long-term archive data storage and legal or regulatory mandated compliance cost, and to redefine long-term archive storage optimization and accessibility for the next decade.

In addition to our long-term archive data, enterprises routinely maintain short-term copies or backups of data generated by various user applications to protect against a 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 in 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 continuing -- 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 numerous applications, including Microsoft, Oracle, SAP and other large-scale business applications, ensuring high-performance and stability for even the most complex business environment.

Finally, the ever-expanding capacity of data managed by enterprises creates a continual challenge in ensuring the organization has an adequate amount of available data storage. FalconStor NSS is a scalable, highly available solution that enables data storage virtualization and business continuity in heterogeneous environments. Supporting existing third-party disc 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 enterprise. Moving data between different storage platforms can be complex, complicated, time-consuming and disruptive to business operations. Our core data storage -- our core storage virtualization technology provides a nondisruptive approach to data mobility. With NSS, it becomes a simple operation to move data from older platforms to newer platforms or to introduce storage -- to introduce new store capacity in tiers. This allows enterprises to respond to evolving performance and capacity requirements as to where -- as well as changing data protection mandates.

Our core long-term archive and business continuity driven products are complemented by a set of underlying technologies that streamline usability and overall solution performance. As a prime example, we are currently in the process of launching an expanded version of our unified management console, which, prior to this year, prior to 2020, simply managed our business continuity driven products. Our expanded console though, which we are calling StoreSight, gives our enterprise customers and managed service providers, the ability to administer long-term archive and business continuity driven data replication, all from one centralized management point and to easily test additional FalconStor products, they may not be currently licensing. Our StoreSight user console provides deep analytics relative to each FalconStor product as they are utilized in production. StoreSight also includes a full array of functionality, key to our managed service provider customers, such as multi-tenancy and charge-back.

All right. As mentioned earlier, our first key strategic initiative during 2019 was to expand our industry-leading, long-term archive retention and reinstatement product line. As part of this initiative, we have expanded the go-to-market path that we reviewed during last earnings call and our go-to-market path now include these 6 paths, which includes large enterprises with diverse technology platforms, such as IBM i, Windows and Linux; secondly, IBM ProtecTIER product replacement; third, the leverage of the Hitachi Content Platform or HCP; fourth, Hitachi's Sepaton replacement; fifth, Dell EMC Data Domain upgrades; and then finally, legacy tape replacement. These expanded go-to-market paths have proven to be quite effective in 2019. In fact, during 2019, looking at the middle chart here on the slide, our global long-term product sales grew by 38% compared to 2018 and grew by 20% -- 55%, sorry -- grew by 55% when we exclude China, which we intentionally began to deprioritize in 2019 through our second key strategic initiative we mentioned earlier.

As it relates to our third key 2019 strategic initiative, our efforts to sharpen our commercial and R&D focus within our business continuity driven product lineup created a 28% global reduction in those product sales and a 22% reduction when we exclude China. As we continue to sharpen our focus in this area, we expect to begin stabilizing this segment of our sales while continuing to drive growth through our long-term archive product lineup.

Finally, when we look at all product sales, the graph that you see on the left, we increased sales across the entire globe across all product lineups or all product lines by 6% in 2019 when you exclude China.

So I'm pleased by this performance in 2019, and I'm excited to continue building on this momentum in 2020. FalconStor is unique. Our nearly 2 decades of technology innovations unmatched by newer entrants in the data protection space, and we will continue to build upon these advantages. Our customers know that our solutions are powerful, comprehensive and innovative.

Finally, we are focusing our strategic operating attention on delivering consistent profitability. During the quarter, we delivered GAAP operating income of $561,000. For 2019 as a whole, we reduced operating expenses by 7.1% as compared to 2018. And then fundamentally, we've anchored our 2020 plan on delivering cash flow positive operations.

One final comment I'll make before I turn it over to Brad for his review, it looks like that slide didn't make it into the deck for some reason, but that's okay. Let me just make a quick comment as it relates to coronavirus. So as we've noted several times in previous earnings calls, we have worked hard to dramatically improve our internal operating efficiency over the last 2 years. As part of these efforts, we have moved the majority of our key internal operating systems to the cloud and have enabled our employees to work from home. Given this operating flexibility, on February 26 of this year, so about a little over 2 weeks ago now, we suggested that our employees across the globe work from home to protect their health and the health of their families. To date, we are not aware of any negative operating or commercial impact to FalconStor caused by the global coronavirus pandemic. However, we realize that we could experience short-term commercial impact with new deal closings as our customers and prospects also deal with the situation and work to protect the health of their employees. We will obviously keep -- continue to keep a very close eye on this situation and pray for the best outcome that there possibly can be. All right. So at this point, I'll turn it over to Brad to provide a more detailed review of our Q4 and full year 2019 financial results. Brad?

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Brad Wolfe, FalconStor Software, Inc. - Executive VP, CFO & Treasurer [5]

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Thank you, Todd. While we delivered a 6% sales increase within our core regions: Americas, EMEA, Japan and Southeast Asia, total global sales revenue for the 3 months ended December 31, 2019, decreased to $4.1 million compared to $4.8 million in the prior year. This global revenue decrease was primarily driven by our international strategy to decrease commercial focus in China and work to focus development efforts within our business continuity driven data replication products to those enhancements and innovations aligned with our largest and most strategic customers.

Overall, our total operating expenses decreased 7.1% from $3.6 million for the quarter ended December 31, 2018, to $3.3 million for the quarter ended December 31, 2019. This decrease was primarily attributable to tighter expense controls and overall operational efficiencies, which better align our current business plan on a run rate basis. These efficiencies, including, among other items, streamlined personnel costs, global overhead costs and efficiencies realized on our redesigned go-to-market coverage model. We'll continue to evaluate the appropriate account levels to properly align our resources with our current and long-term outlook and to take actions in areas of the company that are not performing.

Total cost of revenue decreased 77.7% to $0.2 million for the 3 months ended December 31, 2019, compared to $0.9 million for the same period of the previous year. Cost of sales during the current period -- current quarter reflects a cumulative $0.4 million one-time correction to properly eliminate intercompany transfer pricing adjustments associated with our Asia Pacific sales during the previous 3 quarters of the current year. Excluding this correction, we recorded $0.6 million of cost of sales compared to $0.9 million during the fourth quarter of 2018. Total gross profit decreased from $0.4 million or 11.5% to $3.4 million for the 3 months ended December 31, 2019, compared to $0.9 million for the prior year period. Total gross margins increased to 84.4% for the 3 months ended December 31, 2019, compared with 81.5% for the prior year period.

During the 3 months ended December 31, 2019, we recorded GAAP operating income of $0.6 million compared to GAAP operating income of $0.3 million for the prior year period. After taxes, interest expense and preferred dividends, we reported a GAAP net loss of $0.3 million for the current quarter compared to GAAP net loss of $0.4 million from the prior year period.

Moving forward to the annual results. For the year ended December 31, 2019, we recognized $16.5 million of revenue as compared to $17.8 million during the prior year period. While revenue benefited from a 22% increase in new customer sales for the current year compared to 2018, this benefit was offset by a decline in revenue from sales in China and support and services revenue from legacy contracts, which have termed. Despite these challenges, we are very pleased with the success of our Virtual Tape Library, VTL, product offering, which captured 38% sales growth year-over-year and by continued record sales in the Americas, where billings grew by more than 74% compared with same period during 2018.

Total cost of revenue for the year ended December 31, 2019, decreased 2% to $2.9 million for the year ended December 31, 2019, compared to $3.0 million for the year ended December 31, 2018. Total gross profit decreased $1.2 million or 8% to $13.6 million for the current year compared with $14.9 million for 2018. Total gross margin decreased to 82% for the current year compared with 83% for 2018. The decrease in our 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 yields significantly less profit margins 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 personnel headcount and related costs, and our product offerings and mix of sales.

Overall, our total operating expenses decreased 4.2% from $14.9 million for the year ended December 31, 2018 to $14.3 million for the year ended December 31, 2019. Our net loss for the year ended December 31, 2019 was $1.8 million compared to a net loss of $0.9 million for the previous year. Results also included $0.2 million of severance expense incurred in connection with our 2019 restructuring. Net loss attributable to common stockholders includes the effect of Series A preferred dividend. Including accrued dividends and accretion, was $3.3 million for the year ended December 31, 2019, compared with a net loss of $4.5 million for the year ended December 31, 2018. We ended the quarter with $1.5 million of cash and cash equivalents compared to $3.1 million at the end of December 31, 2018.

We ended the quarter -- turning now to the balance sheet, we ended the quarter with cash balance of $1.5 million. Net working capital excluding deferred revenue, contract receivables, but including redemption -- the redemption value of our term note ended at a deficit of $1.9 million. We closed the quarter with $1.5 million of cash and cash equivalents, accounts receivable of $3.4 million, accounts payable and accrued expenses of $3.8 million and deferred revenue of $7.4 million. Todd, I'll turn it back over to you now for final comments.

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

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All right. Thank you, Brad. Appreciate that. So in summary, we are very pleased with the progress that we made in 2019 and we do believe that the company's performance over the last year has set up a fantastic opportunity for FalconStor and its shareholder. So at this time, I'll ask Travis to begin the question-and-answer period. Travis?

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Operator [7]

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(Operator Instructions) There are no questions in the queue at this time.

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Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [8]

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All right. Travis, thank you very much. Right. Once again, folks, thank you again for taking your time to participate in our call, and we look forward to speaking again in the future. Thank you.

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Operator [9]

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Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.