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Edited Transcript of FALC earnings conference call or presentation 10-May-18 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2018 FalconStor Software Inc Earnings Call

Melville May 14, 2018 (Thomson StreetEvents) -- Edited Transcript of FalconStor Software Inc earnings conference call or presentation Thursday, May 10, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brad Wolfe

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

* Robert Todd Brooks

FalconStor Software, Inc. - CEO

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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 Q1 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 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 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. Please go ahead, sir.

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

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Thank you, Gwen, and I'd like to thank everyone that took your time today to participate in our call. Q1, we're excited about the progress that the FalconStor team continues to make, and our operating performance during Q1, provides clear support that we are positioned to excel and deliver long-term value to our customers and shareholder base. Our products and solutions play valuable role in managing and protecting critical data within large enterprise organizations around the world. Our customers depend on our solutions to cost-effectively and securely protect their critical data from unexpected disasters and unplanned outages while helping them comply with regulatory requirements. As detailed during our last earnings call, our products are pointed at a market reported in 2017 by IDC, to be sized at approximately $7 billion and predicted to grow at a compound annual growth rate of over 13% through 2021. This growth is being driven by an exponential expansion 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. The ever-expanding capacity of data capture is driving the need for enterprises to cost effectively, securely, intelligently manage this data. So I'm very excited about this market. And specifically, about our ability to expand our presence within this market. During the quarter, we focused on three key initiatives: number one, on continuing to deliver operating consistency; number two, on positioning the company for organic growth; and number three, on beginning to develop our M&A strategy. For the balance of today's call, we'll elaborate on each of these key initiatives. And then at the end, we'll open the phone following for any questions that you might have regarding either of these initiatives or our financial results for Q1.

So first, on operating consistency. The restructuring completed in 2017 and the efforts to improve commercial discipline, pipeline management and partner relationships over the last 9 months have allowed the company to create dramatically improved operating consistency. As evidence, Q1 marks the third consecutive quarter of double-digit profitable operating margin delivered by our team. Their efforts allowed the company to generate a non-GAAP net income in excess of $363,000 during the quarter. This is a $1.5 million improvement from the $935,000 non-GAAP net loss generated in Q1 of 2017. Our go-to-market path is primarily through a network of global technology partners. As a result, reenergizing our relationships with these partners is perhaps the most important step in our second key initiative, which is returning to organic growth. Our reengagement efforts, improved operating results and strengthening balance sheets have combined to yield positive results for many of our partners. Significantly reducing the year-over-year billing decline that the company has experienced over the last several years. So as an example, let me highlight three stats from the quarter: first, FalconStor billings generated by 6 of our top 12 partners, more than doubled in Q1 as compared to Q1 2017; second, billings for FreeStor, our newest and most powerful product, increased by 58% across all partners in Q1 as compared to Q1 of 2017; and finally, number three, our global book-to-bill ratio, in Q1 was 103.3%. That's the first time that the company has exceeded 100% book-to-bill ratio since Q4 2016. Obviously, you know that book-to-bill ratio in excess of 100% is a key leading indicator for future growth. So obviously, we're encouraged by the progress we delivered toward returning the company to organic growth in Q1. Final key initiatives that we began focus on is our M&A strategy. And M&A will absolutely become a key component to our long-term growth strategy as we move forward. While our plan is in early stages right now, we are developing a strategy that will include acquiring, and fully integrating companies that offer complementary storage-related technologies or storage-centric vertical applications and solutions. So as our planning evolves, we will provide more details in future earning calls. So -- but for now, let me turn it over to Brad, and he will provide an overview of our Q1 earnings results. Brad?

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

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Thank you, Todd. As previously announced in the fourth quarter, we entered into a $500,000 secured short-term loan with Hale Capital. With the closing of the $3 million finance commitment on February 26, we received an additional $2.5 million with maturity date of June 30, 2021. We are pleased to report that Hale Capital has agreed to postpone the date of the mandatory redemption of the Series A preferred stock from August 5, 2017, to July 31, 2021. And waive the prior breaches of the terms of the Series A preferred stock. The continued support of Hale Capital and specifically the closing of this financing provides a solid financial foundation for the future. Hale Capital exercised 53 million warrants on April 23, 2018, as provided under the financing arrangement. But again, this financing arrangement resulted in almost $3 million of capital infusion and strengthened our balance sheet. The Financial Accounting Standards Board issued ASC 606 revenue from contracts with customers, replacing virtually all existing guidance on revenue recognition for all industries including software, construction, nonprofits, et cetera. Public companies were required to apply ASC 606 for annual periods beginning after December 15, 2017. This has had a significant impact on our revenue recognition and on our deferred revenues for the quarter 1 of 2018. ASC 606 required that a large portion of our deferred revenue, as of December 31, 2017, be taken directly to retained earnings. You can reference a more detailed explanation in our 10-Q that walks through the ramifications of this. The financial highlights for the quarter was the delivery of $620,000 in non-GAAP operating income, which represented a 12% operating margin. Revenues declined 21% versus Q1 -- Q4 2017 and 17% versus Q1 2017. Similarly, bookings have declined 13% versus Q4 2017 and 9% versus Q1 2017. Our expectations is bookings and resulting revenue will stabilize over the next few quarters as we continue to reengage our customer base and implement our refocused commercial strategy. And as Todd had mentioned in his section, our bookings ratio went over 100%. So we're very encouraged by that. Gross margins continue to trend higher, increasing to 85% from 83% versus Q4 2017 and 76% versus Q1 2017. This increase is attributable to cost reductions and product mix. As a result of our cost control and realignment initiatives, our non-GAAP operating expenses continue to trend lower at $4.4 million, representing a decline of 8% over Q4 2017 and 37% over Q1 of 2017.

Turning now to the balance sheet. We ended the quarter with a cash balance of over $4.5 million, up from $1 million at the end of Q4 2017. Net working capital excluding deferred revenue ended at $5.2 million, which is up by $4.6 million over the previous quarter, primarily due to the additional Hale Capital financing of $2.5 million. We closed the quarter with accounts receivable of $3.1 million, down from the $4.2 million at the end of Q4. Accounts payable and accounts -- and accrued expenses ended at $3.9 million, down from the $5.5 million in Q4. Deferred revenues ended at $13.1 million, down from $18.4 million at the end of Q4. This decline was primarily related to implementation of ASC 606 effective 01/01/2018. Todd, I'll now turn it back over to you for some final comments.

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

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Thank you, Brad. I appreciate that summary. In summary, we are very excited about the progress that we can continue to make quarter-over-quarter. Clearly, there's a lot of work ahead of us and a lot of work to be done, but to our shareholders, and to our loyal customers, who have joined this call today or that will listen to its recording in the coming days, we are committed to delivering value, and we look forward to exciting days at FalconStor. So with that, Gwen, let me turn it back to you, and we will begin our question-and-answer time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And there are no questions at this time.

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

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Well, all right. Thank you, Gwen, very much. And once again, thank you, everyone, for attending our call today.

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

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Thanks, everyone.

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Operator [4]

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Thank you, everyone. That concludes today's conference. We thank you for your participation. You may now disconnect.