FalconStor Software, Inc.
Q4 2022 Earnings Call Transcript
Published:
- Clark Liddell:
- Good afternoon, and thank you for joining us to discuss FalconStor Software's Q4 2022 and Full Year 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 Q4 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:
- Alright, well thank you Clark, and I appreciate that and I'd like to thank each of you for taking your time to participate in our call today. Q4 was obviously an important quarter for FalconStor as we increased our hybrid cloud, annual recurring revenue, delivered positive net income, added new customers through our partnership with IBM, expanded our MSP business and improved legacy customer retention. FalconStor is a trusted data protection innovator, and we enable the world's most demanding managed service providers and enterprises to modernize their disaster recovery, and data backup operations for the hybrid cloud world, protecting data across on-premise data centers, private cloud 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 FalconStor Software and Technology and 20 years, 20 plus years of market experience are well aligned. Our solutions deliver increased data security and provide for quick data recovery, including recoveries from ransomware attacks, and our solutions accomplish these while driving down long-term data storage footprint by up to 95%. Our hybrid cloud data protection solutions exceled in four key areas. First, in scalability as our solutions enable customers to protect their mission critical enterprise workloads. Second, in offsite protection as our customers have flexibility to leverage any data storage medium from tape to modern object storage, whether that storage exists on premises or in the cloud. Third, in cost savings as our industry leading patented data deduplication technology empowers our customers to decrease their data, their back up data storage by up to 95%. And then fourth, in hardware vendor flexibility. As our solutions integrate with IBMs power system hardware and Intel based hardware. So packaged together, these advantages give our solutions competitive differentiation, especially within the IBM centric enterprise IT environments. We're excited by the growth markets that we serve and their ability to drive significant recurring revenue growth for FalconStor in the future. 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 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 the managed IT services market is predicted to grow by 8% annually to $355 billion in 2026. Our go-to-market focuses on hybrid cloud partners like IBM and managed service providers like Service Express will be key drivers for FalconStor to generate consistent and meaningful recurring revenue growth over the next several years. Now to 2023, we have initiated four or - three key strategic initiatives. And one second here. Sorry about that. First, on expanding our differentiated hybrid cloud data protection leadership position for the tens of thousands of companies that operate IBM Power Systems environment. And then secondly, on extending our IBM centric hybrid cloud data protection position into Microsoft Azure, Google Cloud and AWS public cloud environments. And then third, on accelerating our ARR run rate growth while continuing to deliver consistent profitability and limiting risk. So in line with these strategic initiatives, we are pleased with the hybrid cloud reseller agreement we launched in late Q2 of 2022 with IBM to provide several new joint solutions, which combine FalconStor, StorSafe VTL software with IBM Cloud Object Storage, IBM Power Hardware and IBM Power Virtual Server Cloud. And we are even more pleased to report that our sales began to increase with IBM in Q4. Our joint solutions migrate and optimized data protection for IBM customers, and these joint solutions include first, an optimized backup and restore solution where enterprise is running their IBM applications on premises or in the IBM Power Virtual Server Cloud can now utilize our joint solution to securely and efficiently back up to IBM Cloud object storage. Second, our joint solutions include a cloud migration solution, where enterprises needing to migrate their existing on-premises power applications to the IBM Power Virtual Server Cloud to now utilize our joint solution to take a secure snapshot and restore it in the cloud, maximizing application availability and security. And then finally, the joint solutions include advanced hybrid cloud backup solution, where MSPs looking to use the cloud for a secure air-gapped offsite location to now utilize our joint solution on premises, and pair that with a cloud instance or multiple cloud instances for secure and encrypted offsite backup. So this partner with IBM is clearly a material step forward for us. It should be a significant contributor to our long term strategic goal to significantly increase our hybrid cloud recurring revenue. Now, let's move on to our results. And in line with our – actually, so we've seen material revenue growth since launching sales with IBM and with IBM partners, especially in the second half of 2022. So to illustrate this growth, that's our relationship with IBM started right in the beginning of the second half, we believe it's helpful to compare the second half of 2022 with the first half. So while total GAAP revenue as we reported this afternoon in our earnings release, for the full year of 2022 declined compared to 2021, our total GAAP revenue for the second half, of the year increased 26% as compared to the first half of the year. Within that total GAAP revenue then, the ARR run rate of our hybrid cloud business increased by 48%. Then within the cloud, hybrid cloud revenue piece, our MSP, ARR run rate increased by 36% in the second half compared to the first half. So we are pleased with this early validation of our hybrid cloud relationship with IBM, but we believe that we can increase these growth rates even further. There are a couple of other points as an aid to our hybrid cloud and MSP ARR run rate growth we retained 100% of our hybrid cloud customers in the second half. And that storage capacity used by our installed based customers increased by 3.3% on average each month. In addition, through the strong customer attention and to the installed base capacity growth, we saw wins across all three major global regions; Americas, Asia Pacific and EMEA. We also won our first customer with the Microsoft Azure, IBM Power Virtual Environment offered by Skytap and then finally we secured several key customer references, which we’ll review in a minute. It's also important to note though that we generated this revenue growth in the second half while controlling our operating expenses and delivering positive net income in the second half of the year. So as mentioned we've secured several key customer references and these include testimonials from Tupperware, [inaudible], City Furniture and Service Express. Now I'm not going to take the time to read each of these references during the call, but they are available on falconstor.com and we obviously leverage these within IBM and FalconStor marketing material. So at this point I'll turn it over to Vincent to provide a more detailed overview of our Q4 and full year of 2022 financial results. Vincent.
- Vincent Sita:
- Thanks Todd. So if we look at – we start with the income statement looking at Q4. So if we could just flip to the next slide. So looking at Q4 results, so we closed Q4 with $2.5 million in revenues, $2.2 million in gross profit. Our operating expenses were also $2.2 million, so therefore our net operating income was essentially breakeven or a net operating loss of $19,000 and our net income was positive $20,000. So this compares to year-over-year as follows
- Todd Brooks:
- All right, thanks Vince, and I appreciate that. So we are absolutely encouraged by the growth that we've delivered in the second half of 2022 and by the progress that we've made with our IBM relationship and in other areas. But we obviously have a lot of work in front of us to increase those growth rates even more and to remain profitable and to expand our growth into some other areas. But we are excited by the markets we are serving and the competitive differentiation that we deliver to our main service provider partners and our enterprise partners and enterprise customers every single day. So with that, let me – Clark ask you to see if we can open up the line for questions.
- Todd Brooks:
- Yes, absolutely. And we will see everybody next time. Thank you.