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Edited Transcript of FALC.PK earnings conference call or presentation 9-Nov-20 9:30pm GMT

·13 min read

Q3 2020 FalconStor Software Inc Earnings Call Melville Nov 10, 2020 (Thomson StreetEvents) -- Edited Transcript of FalconStor Software Inc earnings conference call or presentation Monday, November 9, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Brad Wolfe FalconStor Software, Inc. - Executive VP, CFO & Treasurer * Clark Liddell FalconStor Software, Inc. - Senior Director of Global Operations * Robert Todd Brooks FalconStor Software, Inc. - CEO & President ================================================================================ Presentation -------------------------------------------------------------------------------- Clark Liddell, FalconStor Software, Inc. - Senior Director of Global Operations [1] -------------------------------------------------------------------------------- Good afternoon, and thank you for joining us to discuss FalconStor Software's Q3 2020 earnings. 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 Q3 2020 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 Todd Brooks. -------------------------------------------------------------------------------- Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [2] -------------------------------------------------------------------------------- All right. Well, thank you, Clark, appreciate that. And I'd like to thank everyone for taking your time to participate in our call today. As we reviewed back at the beginning of 2020, we implemented 4 key strategic initiatives for this year: first, 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 for the next decade; second then, 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 we are focused on those use cases, which are important to our largest and most strategic enterprise customers; and then finally, on delivering consistent operating profitability. Our strategic focus and resulting set of products are pointed at a market reported by Verified Market Research to be currently sized at approximately $62.8 billion and predicted to grow at a compounded annual growth rate of 15.5% through 2026. This growth is being driven by 4 factors: first, on an explosion and the raw 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, on the dramatic increase in innovative 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; and then finally, fourth, the need to protect enterprises from various security threats, including ransomware. 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 data archive. Our technology allows an enterprise to leverage existing archive policies and procedures while ensuring the most stringent archive windows are met, data capacity is reduced by up to 25% and cloud storage, object storage alternatives, such as Wasabi, AWS and the Hitachi Content Platform, or HCP, Microsoft Azure, Google Cloud and IBM COS, are available for improved data storage efficiency. I'm excited by this market and by 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 4 key strategic initiatives and provide a detailed review of our Q3 financial results. Finally then, we'll open the phone line for any questions you may have. (Operator Instructions) So with that, let's dive into our Q3 headlines, our highlights. The global COVID-19 pandemic has been at the top of all of our minds as our thoughts go out to everyone impacted by its spread. The safety of our employees has been a top FalconStor priority as is ensuring we are delivering outstanding value to our global customers and partners. Despite the uncertainty and disruptions caused by COVID-19, we are encouraged with our strong operating performance in Q3. First, during the quarter, we generated 36% year-over-year increase in our global sales and bookings. This increase was driven by an increase in sales bookings within our core markets of the Americas, EMEA, Southeast Asia, Korea and Japan. New customer wins in the Americas and EMEA were especially strong. And the majority of our global wins were within the health care, technology and financial services industries. As a result, we generated a 67.8% increase in the Americas and then a 28.8% increase in EMEA. In addition, our intentional shift to subscription-based offerings continues to improve as we delivered a 9.9% increase in annualized recurring sales bookings. As a result of our strong sales bookings, total recognized GAAP revenue increased year-over-year by 11.7%. Next, the decisions we made at the beginning of Q2 to implement a proactive expense reduction plan to hedge against potential COVID-19 business disruptions, combined then with our strong revenue growth, allowed us to generate $1.1 million in GAAP net income during the quarter, which represents a 214.8% year-over-year increase in GAAP net income. The strong performance -- financial performance during the quarter allowed us to retire then a $1 million short-term loan that we secured back in Q4 of 2019. All in all, I am very pleased with the results our team produced in Q3 and with support and the engagement we are seeing with our global partner base. I'm also excited about customer and industry analyst response to our innovative StorSafe solution, which is driving strong new demand for FalconStor. Despite our strong results in not only Q3 but also the preceding quarter, Q2, we continue to keep a very close eye on any disruptions caused by COVID-19. First, to protect the health of our employees and their families, we continue to ask the majority of our employees to work from home and will for the foreseeable future. Second, despite the disruption that many industries are experiencing, our customer and partner base continue to invest in business-critical area of enterprise data protection in which we target our solutions, especially within verticals such as financial services, health care and technology. Third, as a follow-on to our successful Q3, our Q4 sales pipeline has remained solid. And then finally, regardless, we realize that future commercial delays may result from prolonged COVID-19 disruption, and we'll adjust our operating plans as necessary to continue delivering positive results. As a reminder, 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 replications. All of 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 of existing hardware and existing 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, to improve product design and to drive competitive advantage. Within the long-term archive retention and reinstatement segment, we have traditionally sold our FalconStor Virtual Tape Library, or VTL, solution and are now actively marketing our next-generation long-term archive product called StorSafe. 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 cost while improving security, portability and data accessibility. We have filed patents on these innovations and believe they can transform historic challenges in archival storage and in data management. Within the business continuity data-driven replication segment, our core products are our Network Storage Server, or NSS, solution and our Continuous Data Protector, or CDP, solution. Traditionally, these have been available as stand-alone products but can now be licensed together and used seamlessly with our VTL or StorSafe solutions. These products enable our enterprise customers to achieve superior recovery points and recovery time objectives while optimizing storage, hardware investments through advanced storage virtualization. We'll continue placing our focus within these 2 product segments for the foreseeable future. As mentioned earlier, our first key 2020 strategic initiative has been to expand our industry-leading long-term archive retention and reinstatement product line by creating flexible and extensible data storage innovations to drive our growth over the next decade. As part of this initiative, we have expanded our target to go-to-market path. These now include, first, large IBM i enterprises with diverse technology platforms, including IBM i, Windows and Linux, for example; second, then on the IBM ProtecTIER solution replacement, IBM ProtecTIER has now reached end of life; third, then on the Hitachi Content Platform, or HCP, storage integration leverage; fourth, on Hitachi's HPP or also called Sepaton end-of-life replacement; fifth, on Dell EMC's Data Domain upgrade; sixth, on legacy tape modernization; and then finally, one that we are extremely excited about, which is cloud data storage and MSP data enablement. These go-to-market paths have proven effective, and we will continue to strategically focus in these areas. Finally and in summary, and I mention this in nearly every earnings call, but I'd like to again reiterate that 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, that we provide one of the industry's most comprehensive set of solutions in this space and that we are actively innovating to deliver capabilities that change the dynamics of archival storage management well into the future. 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? -------------------------------------------------------------------------------- Brad Wolfe, FalconStor Software, Inc. - Executive VP, CFO & Treasurer [3] -------------------------------------------------------------------------------- Thank you, Todd. During Q3, we delivered 37% year-over-year total billing growth despite the economic turmoil caused by the global COVID-19 pandemic. We closed the 3 months ended September 30, 2020, with $4.4 million in GAAP revenue compared to the $4 million for the same period of the previous year, an increase of 12%. GAAP total cost of revenue for the 3 months ended September 30, 2020, decreased 46% to $0.4 million compared to $0.8 million for the prior year period. Total gross profit increased $0.8 million or 46% to $4 million for the 3 months ended September 20, 2020, compared to $3.2 million for the prior year period. Gross margin increased to 91% for the 3 months ended September 30, 2020, compared with 81% for the prior period. The increase in our total gross margin and total gross profit in absolute dollars was primarily due to our cost reduction efforts and decision to stop selling hardware. Total operating expenses for Q3 of 2020 were $2.3 million compared to $3.7 million in Q3 2019. Again, as we said the last quarter, due to the commercial uncertainty in late Q1, we developed and implemented an aggressive expense control plan. This plan reduced our annual cash expense run rate by approximately $4 million or 29% and resulted in the furlough of 21 employees. Due to the business returning to a more normal trajectory in Q2... (technical difficulty) -------------------------------------------------------------------------------- Clark Liddell, FalconStor Software, Inc. - Senior Director of Global Operations [4] -------------------------------------------------------------------------------- It sounds like we've lost Brad. -------------------------------------------------------------------------------- Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [5] -------------------------------------------------------------------------------- Yes. I think we have lost Brad. Let me -- I will finish up his segment. The last part that Brad wanted to review was the balance sheet. And Brad, if you join back in, let me know and we can let you do that. But I'll go through it real quick, no big deal. So turning now to the balance sheet. We ended the quarter with a cash balance of $871,000 compared to $1.5 million at December 31, 2019. Net working capital, excluding deferred revenue, contracts receivables but including the redemption value of our term notes, ended at $501,000 deficit, an improvement of $2.2 million over Q2 of 2020. As we mentioned last quarter, we applied for the Payroll Protection Plan loan from the Small Business Administration, have received $754,000 in May of 2020. We have applied for forgiveness for the full amount in October 2020 with the Small Business Administration and expect this amount to be forgiven. We closed the quarter with $871,000 of cash and cash equivalents, accounts receivable, gross of any reserve of $3.8 million, accounts payable and accreted expenses of $2.8 million and deferred revenue of $6.1 million. Our $1 million note payable to Hale Capital and ESW Capital was paid in full in September of 2020. And the company has weathered the COVID-19 well thus far. And we believe that we are well positioned for a strong Q4 and 2021. So sorry about that. Sorry about that technical difficulty. But we're excited, as I think you can tell and you can see from the results that we delivered in Q3. Our thoughts certainly remain with everyone as they manage through this unprecedented time with COVID-19. And as I said earlier, we'll do -- we'll continue to do what is necessary to protect our employees and to successfully operate against our key strategic initiatives throughout 2020. And so at this time, I'm going to ask Clark to open the line for any questions that we might have. Clark? -------------------------------------------------------------------------------- Clark Liddell, FalconStor Software, Inc. - Senior Director of Global Operations [6] -------------------------------------------------------------------------------- Yes. Thanks, Todd. I'm checking the questions pane. I haven't seen any yet. Give everybody just a few seconds to type a question if they have one. -------------------------------------------------------------------------------- Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [7] -------------------------------------------------------------------------------- Great. We'll wait for 15, 20 seconds and see if a question pops in. -------------------------------------------------------------------------------- Clark Liddell, FalconStor Software, Inc. - Senior Director of Global Operations [8] -------------------------------------------------------------------------------- (Operator Instructions) I'm not seeing anything yet, Todd, maybe we'll just call it a day on this one. -------------------------------------------------------------------------------- Robert Todd Brooks, FalconStor Software, Inc. - CEO & President [9] -------------------------------------------------------------------------------- Yes. No worries. And once again, thanks, everybody, for participating. And we'll talk to you next time. Thank you.