FalconStor Software, Inc.
Q1 2022 Earnings Call Transcript

Published: 11 May 2022

[Clark Liddell:]

Good afternoon and thank you for joining us to discuss FalconStor Software's Q1 2022 Earnings. Todd Brooks, FalconStor's Chief Executive Officer; and Vincent Sita, FalconStor's 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 then the company's press release issued today. During today's call, there will be discussions that include non-GAAP results. A reconciliation of 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 2022 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 Brooks:]

All right. Well, thanks Clark. Appreciate that. And certainly I'd like to thank each of you for taking your time to participate in our call today. While we've got a lot of work to do, we are certainly pleased with the progress that we're making in the market that we're serving, and the value that our solutions delivered to our managed service provider, partners, and enterprise customers every day. FalconStor is a trusted data protection innovator with well over 1,000, end user customers and an exabyte of data under management. We enable the world's most demanding managed service providers and enterprises to modernize their data backup and archival operations for the hybrid cloud world, protecting data across on-premises data centers and public cloud environments. Migration to the cloud data center, rationalization, and increased leverage of outsourced managed services are absolutely top priorities for enterprise CIOs that are fundamental macro shifts to which FalconStor technology in market experience are well-aligned. Our solutions deliver increased data security and provide for quick data recovery, including recovery from ransomware attacks and our solutions accomplished these while driving down long-term data storage footprints by up to 95%. This year for fiscal year 2022, we implemented four key strategic initiatives as we continue our work to reinvent FalconStor. First, on generating consistent growth by expanding our industry-leading long-term data retention and recovery product line; thereby bringing new, flexible, and extensible data protection innovations that we believe will drive recurring revenue growth over the next decade. Second, 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 used cases, which are most important to our largest and strategic enterprise customers. Third, that I'm beginning to generate growth via M&A. And finally, I'm continuing to deliver consistent profitability. We're are excited by these -- our strategic initiatives and these growth markets that we are involved with. And specifically data protection-as-a-service, hybrid cloud and managed IT services are growing quickly, and are clear reflections of macro shifts in our industry to which our technology and experience are well-aligned. In fact, the data protection-as-a-service market is predicted to grow by 31% annually to $104 billion in 2027. The worldwide hybrid cloud market is predicted to grow by 20% annually to $204 billion in 2027. And finally, the managed IT services market is predicted to grow by 8% annually to $355 billion in 2026. So, our go-to-market focus on managed service provider and hybrid cloud partners will be key drivers for us to generate recurring revenue growth over the next several years. To this point, we were thrilled to announce earlier today, if you've not seen that, that we've entered into a new hybrid cloud reseller relationship with IBM to create several new joint solutions together, which combined FalconStor StorSafe software with IBM Cloud Object Storage and IBM Power Virtual Server Cloud. Now, these new solutions migrate and optimized data protection in the IBM Power Cloud and they include the following; first, it's a solution for secure and cloud native backup for enterprise running their applications in the IBM Power Virtual Server Cloud, they'll now be able to utilize FalconStor to securely and effectively efficiently backup to IBM Cloud Object Storage. So, that's the first joint solution. The second one then is an efficient cloud migration solution enterprises needed to migrate their existing on-premises power applications to the IBM Power Virtual Server Cloud. In this case, FalconStor StorSafe software takes a secure snapshot of the on-premise environment and restores it into the IBM Power Virtual Server Cloud maximizing application availability and security. For this second joint solution, a key initial target market will be enterprises that have traditionally run applications within IBM i Environments on-premise. According to helpsystems.com who is a leading IBM i consulting firm, over 100,000 companies use IBM i today. Now, this is large market and is one for which migrating workloads to the IBM Power Virtual Server Cloud will be very important going forward. Third, then -- the third solution is an advanced hybrid cloud backup solution for MSPs looking to use the IBM Power Virtual Server Cloud for a secure air-gapped offsite storage location for data. And in this case, FalconStor and IBM delivered StorSafe on-premise for the managed service provider with a IBM cloud instance for secure and encrypted offsite backups. So, this new reseller relationship that we have built with IBM is clearly a material step forward for FalconStor and should be a significant contributor to our 2020 strategic goal to significantly increase the hybrid cloud recurring revenue stream for FalconStor. So, really excited about that. A ton of work went into that over the last, call it, six months or so, but was very proud and happy to be able to announce that for the FalconStor team this morning. Before I go any further, I would like to take this a minute and introduce our new Chief Revenue Officer, Rich Spring. Rich joined us in early March this year, so during Q1, and he has already been instrumental in helping us and he was instrumental in helping us to secure this new relationship with IBM also. So, going forward, Rich is going to be focused on realigning and expanding our sales team for hybrid cloud growth and on just improving overall sales process disciplines. I'm very excited to have Rich joined the team and we just have a really strong leadership team at FalconStor and Rich just simply makes it that much better. Moving then to our -- highlight of our Q1 results that were certainly missed, as we spent a lot of time focused on this building and finalizing the IBM relationship, as one of our goals is -- I mentioned is growing our recurring revenue. ARR for the quarter did grow 4.4% year-over-year and as you can see, over the last five quarters, the rate at which our ARR is growing year-over-year is increasing and we expect that naturally to continue -- that trend. As a percent of total revenue by the end of Q1 where ARR was 62% of total revenue and that also is increased over time and it will naturally increase as we build in more and more recurring revenue through our hybrid cloud focus. The big disappointment of the quarter though was total GAAP revenue and as you can see, our total GAAP revenue was down 46%, something that was clearly an area that we were very disappointed. And as you can see over the last five quarters, we've -- the growth has been super inconsistent. In Q1 though, the sole contributor to that result was the fact that our non-recurring legacy revenue decreased significantly. Let me just describe what non-recurring legacy revenue is expansions to existing customers. So, this is our legacy customer base, not our hybrid cloud base, but expansions to our legacy customer base and then also new customers within our legacy customer base. As you can see, it's been very, very consistent. But during the quarter, we dropped the ball, we were, obviously, very consumed with moving our relationship forward on the hybrid cloud side and with IBM and so we've got worked there to make sure that that doesn't happen again and that we stay consistent with our legacy base. It's very, very important that we simultaneously grow the hybrid cloud recurring revenue while maintaining a strong legacy base. Within the legacy part that I didn't -- we didn't put it on slide here, but our legacy renewals did stay very strong at 86% for the quarter. So, here again, we know what the issue was then in Q1 and we have already begun to correct that, sure that we turn focus on there. And then I can -- although won't give exact numbers, Q2 has already started off much better in that regard. Rich has gotten embedded and is beginning to drive some sales discipline on the legacy cycle. So moving to our GAAP operating expenses, that's an area that we've been traditionally very good in controlling and continuing to find other areas of being efficient. And so that continued again, in Q1. Q1 operating expenses, were down to $2.7 million. And so that's an area we'll continue to focus on and we typically do a really good job in that area. But bottom-line, though, is because of the miss [ph] on the, total revenue side, we also lost about $1.1 million of net income during the quarter. So, we've got a lot of work to do, to be consistent, could not possibly be more excited with our hybrid cloud growth that with a relationship that we built with just a fantastic IBM team, and are really excited about what that is going to do for us going forward. So, with that, let me turn it over to Vince to go through some more detailed financials. Vince?

[Vincent Sita:]

Thanks Todd. So, looking at our income statement summary, we closed Q1 with $2 million in GAAP revenues compared to $3.8 million for the same period last year, a decrease of 46% as Todd just mentioned. Our GAAP total gross profit was $1.6 million compared to $3.2 million for previous year. GAAP total operating expenses were $2.7 million compared to $3.2 million for a first quarter of 2021, a decrease of 14%. We incurred a GAAP operating loss of $1.1 million in Q1 compared to a GAAP operating loss of $17,000 in Q1 2021. And finally, Q1 generated a GAAP net loss of $1.1 million compared to a GAAP net income of $408,000 last year. Now, one point to mention is that Q1 of last year did benefit from a debt extinguishment related to a Paycheck Protection Program or PPP loan of $754,000. Without that gain, GAAP net income for Q1 2021 would have been a net loss of approximately $300,000 instead of a net income of $400,000. So, therefore, the comparison between this year and last year without this gain, would be a net loss of $1.1 million this quarter versus a net loss of $300,000 in Q1 of prior here. Moving on to the balance sheet, we ended the quarter with a cash balance of $3.4 million compared to $3.2 on December 31st, 2021 and compared to $2 million at March 31st, 2021. Therefore an increase of $200,000 over Q4 and an increase of $1.4 million over Q1 2021. Just as a reminder and as you may recall from previous announcements, in Q2 and Q3 of 2021, we raised $3.7 million net proceeds in two public offerings of our common stock at a price of $4.10. We also paid at the end of Q2 last year $1.3 million towards our notes payable balance. Looking at net working capital, so net working capital excluding deferred revenues contract receivables, but including the redemption value of our terms note ended at $1.8 million, a decline of $1.7 million from Q4 2021 and an improvement of $1.7 million from Q1 2021. We closed the quarter with $900,000 in accounts receivable, accounts payable and accrued expenses of $1.5, and deferred revenues of $5.4 million. Moving on to our next slide, given our Q1 results, specifically in terms of revenues, we are reducing full year guidance as follows; revenues will be in the range of $13 million to $14 million, adjusted EBITDA of $2 million to $2.7 million, and net income of $0.8 million to $1.4 million, this versus our 2021 net income of $0.2 million. Overall, for the year this will produce an EBITDA percentage in the 16% to 19% range, net income between 6% and 10%, and R score, our Rule of 40, between 7% to 18%. Todd, I'll turn it back to you for some final comments.

[Robert Brooks:]

All right. Well, thank you, Vince. And just to recap, it was a mixed quarter, we've got some super positive progress on our growth side. But clearly, while we're doing that, we've got to be very focused on making sure that we maintain a really good strong legacy base, not just renewals, but expansions sales and new sales to legacy customers. So, that is what we're focused on and we're focused on making sure that we launch into our new relationship with IBM in a very strong way, and couldn't be more excited about that. So, with that, let me turn it back over to Clark and we can open up the floor for any questions that anyone may have. Clark?

[A - Clark Liddell:]

Thanks, Todd. [Operator Instructions] We don’t have any questions at this time, Todd.

[Robert Brooks:]

Okay, we'll just wait another 20 seconds or just to make sure.

[Robert Brooks:]

All right. Well, then with that, we'll go ahead and close the call. Thank you again for your participation, for your time, and we will chat next time. Thank you.