FalconStor Software, Inc.
Q3 2022 Earnings Call Transcript
Published:
- Clark Liddell:
- Good afternoon, and thank you for joining us to discuss FalconStor Software's Q3 2022 Earnings. Todd Brooks, FalconStor's Chief Executive Officer; and Vincent Sita, 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 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.
- Todd Brooks:
- 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. Q3 was an important quarter for FalconStor, as we grew total revenue quarter-over-quarter for the second straight quarter, delivered positive net income, adding new customers through our partnership with IBM and continue to grow our recurring revenue base. We are a trusted data protection innovator with well over 1,000 end user customers and over an 1 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 top priorities for enterprise CIOs and are fundamental macro shifts to which our technology and 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 accomplish these while driving down long-term data storage footprint by 95%. For fiscal year 2022, we implemented 4 key strategic initiatives as we continued our work to reinvent FalconStor. First, on generating consistent growth by expanding our industry-leading long-term data retention and recovery product line by creating 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 use cases, which are important to our largest and most strategic customers. Third, on beginning to generate growth via M&A. And then fourth, delivering constant or consistent profitability. As we set these initiatives out, we're excited by the growth markets that we are focused on and their ability to drive significant recurring revenue growth for FalconStor. Data Protection as a Service, hybrid cloud, and managed IT services are growing quickly and are clear reflection of macro shift in our industry to which FalconStor 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. Our go-to-market focus on managed service providers and on hybrid cloud partners like IBM will be key drivers to FalconStor to generate recurring revenue growth over the next several years. To this point, we are excited by our new cloud with -- our new hybrid cloud reseller relationship with IBM that we announced last quarter to provide several new joint solutions, which combine FalconStor's StorSafe VTL software with IBM Cloud Object Storage and IBM power virtual server cloud. We are even more thrilled to report that we secured several new customers and assisted several existing customers to expand their monthly usage through our relationship with IBM in Q3. Our joint solutions migrate data in applications and optimize data protection in the IBM power cloud. These solutions include, first, a cloud-native backup solution where enterprises running their applications in the power virtual server cloud can now utilize our joint solution to securely and efficiently back up to IBM cloud object storage. Second, a cloud migration solution for enterprises needing to migrate to existing on-premises power applications to the IBM power virtual server cloud. FalconStor's StorSafe takes a secure snapshot and restore it to the cloud, maximizing application availability and security. And then finally, an advanced hybrid cloud backup solutions for MSPs looking to use through cloud for a secure, air-gapped offsite location. FalconStor and IBM deliver an on-premise virtual tape library solution with a cloud instance for secure and encrypted offsite backs. This partnership with IBM is a material step forward. For FalconStor should be a significant contributor to our long-term strategic goal to significantly increase hybrid cloud recurring revenue. Now moving on to our Q3 results. First, as we make a strategic shift in perpetual to recurring revenue, we continue to deliver annual recurring revenue or ARR growth during the quarter with 4.5% year-over-year increase. We expect our ARR growth rate to accelerate further in the coming quarters. At the end of Q3, ARR represents 69% of our trailing 12-month total GAAP revenue. While this percentage may vary during the coming quarters, we are intentionally working to increase this percentage each quarter, look like we've done over the last 4 or 5 quarters. Next, we continue to focus or second, I should say, that total -- second, despite the fact that total GAAP revenue grew for a second consecutive quarter, our year-over-year total GAAP revenue decreased by 7% in Q3 of this year. As we continue to grow our recurring revenue, expand our results from IBM though, we do expect to deliver year-over-year revenue growth in the next 2 quarters. Next, as we continue to focus on tightly managing our -- we do continue to focus on tightly managing our quarterly operating expenses. Q3 GAAP operating expenses decreased to $2.3 million, which represented a year-over-year improvement of 4% and a quarter-over-quarter improvement of 8%. Due to our increasing revenue and tightly managed operating expenses, we delivered $200,000 in net GAAP income during the quarter. And while we work to deliver consistent growth each quarter, I couldn't be more excited by the progress the entire FalconStor teams made to accelerate our shift to the hybrid cloud solutions and secure relationships validating of FalconStor's future growth and success. At this point, I'll turn it over to Vince to provide a more detailed overview of our Q3 2022 results. Vince?
- Vincent Sita:
- Thanks, Todd. So to reiterate some of the key numbers we just reviewed on the previous slides, we look at the income statement summary on Page 9. So again, our Q3 revenues were $3.1 million compared to $2.4 million in the previous quarter. So we increased 28%. And this compares to $3.3 million for the same period last year, so an increase of 7%. Total operating expenses were $2.3 million compared to $2.5 million in the previous quarter, so an increase of 8% and compared to $2.4 million in the third quarter of 2021, a decrease of 4%. From a GAAP operating income, we generated $303,000 in Q3 2022. This compares to an operating loss of $508,000 in the previous quarter and a GAAP operating income of $449,000 in Q3 2021. And finally, from a net income perspective, we generated $221,000 in Q3 of this year compared to a net loss of $931,000 in the previous over and a net income of $249,000 last year. If we turn to the balance sheet, so we ended the quarter with a cash loan of $1.7 million compared to $1.8 million last quarter of June 30, 2022, and compared to $3.5 million at September 30, 2021. So therefore, a decrease of $100,000 from the previous quarter, Q2 2022, and a of over Q3 of . Looking at net working capital. So if you look at net working capital cash, which excludes contract assets and deferred revenues that includes the value of our terminals. So we ended at $900,000 [indiscernible] $0.2 million from Q2 [indiscernible] that declined to $2.9 million from Q3 2021. We closed the quarter with $2.4 million in accounts receivable, accounts payable and accrued expenses of $1.8 million and deferred revenues of $4.8 million. So if you turn to the next page, given our Q3 results, we are maintaining our full year 2022 guidance. So revenues in the range of $10 million to $12 million, adjusted EBITDA of and net income of minus $1.8 million to minus $0.5 million. Todd, I'll turn it back to you for any final comments.
- Todd Brooks:
- Thank you, Vince. As I mentioned, we are -- we couldn't be more excited by our new relationship with IBM and some of the early results and the number of clients that we've been able to secure in that relationship so far and how those are expanding. And we'll continue to work hard to grow that partnership significantly over the next couple of quarters. So with that, let me turn it back over to Clark and open up to see if we have any questions that we can answer.
- A - Clark Liddell:
- Todd Brooks:
- All right. Well, thank you, Clark. And once again, thanks, everyone, for taking your time to join us today. We're excited by Q3 and looking forward to meeting again here and another quarter with our Q4 results. So thank you, and hope you have a great evening.