FalconStor Software's (FALC) CEO Gary Quinn on Q2 2016 Results - Earnings Call Transcript

| About: FalconStor Software, (FALC)

FalconStor Software, Inc. (NASDAQ:FALC)

Q2 2016 Earnings Conference Call

July 27, 2016 4:30 PM ET


Gary Quinn - Chief Executive Officer

Louis Petrucelly - EVP and CFO


Chris Nielsen - Nielsen Technical Services

John Zaro - BCM


Please, standby. Good afternoon and thank you for joining us to discuss FalconStor Software Q2 2016 Earnings. Gary Quinn, FalconStor’s Chief Executive Officer; and Louis Petrucelly, Executive Vice President and Chief Financial Officer, will discuss the Company’s results and activities, and will 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 will 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 Q2 2016 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 Gary Quinn.

Gary Quinn

Thank you, operator, and good afternoon ladies and gentlemen. And welcome to the FalconStor Q2 2016 earnings call.

Before we get to the numbers with Lou, I wanted to give you an update on our progress with FreeStor and the year ahead. Our FreeStor product which was launched in May 2015 was included in our Q2 2015 earnings call is now one year old. During the last 12 months, we’ve continued to drive FreeStor sales to our regionally [ph] targeted routes to market which include OEMs, MSPs and enterprise customers. We gained exceptional customer and marketplace credibility with those early adopters from the OEM community and MSPs and I am happy to report that during the last 12 months we’ve executed in every one of those routes to market with success. And during the last six quarters of our FreeStor technology, we’ve captured almost $14 million in committed business for our award winning FreeStor product.

I believe that it is a significant accomplishment in a very competitive and sometimes uncertain storage marketplace. We have won over 10 industry awards which validate that FreeStor is a software defined storage solution which is setting the bar for others to achieve.

During the last 12 months we have added real-time heterogeneous analytics to the FreeStor platform. We have delivered an enterprise class set of data management services at Amazon prices. We have provided customers and partners real economic value with a hardware agonistic platform, ready for storage hardware commoditization and we have enabled a hybrid cloud for customers wishing to deliver an on-premise solution with public cloud connected offerings from Amazon and Microsoft Azure.

In addition, we are enabling private cloud adoption with our OpenStack implementation. We do not believe that there is another block based storage software solution in the marketplace today which compares to FreeStor.

On this slide, you will see the most recent July 2016 Gartner Hype-Cycle report which concludes that FreeStor is the only independent storage software vendor and public company solution for the management software defined storage SDS category. The maturity of this category is emerging. The market penetration according to Gartner is 1% to 5% on a scale of 100 and the benefit to customers and to partners is considered to be high.

Another category in the report that includes FreeStor is a network based replication appliance. Once again FreeStor is the only solution from a publicly traded independent storage software vendor. And the maturity of this category is early mainstream which means it falls somewhere between 5% and 20% on a scale of 100. And Gartner’s view is that customers who adopt this solution will be gaining a moderate improvement to their overall storage portfolio.

Finally, the report includes FreeStor in the external storage virtualization category which also has a maturity level of early mainstream. The market penetration is also 5% to 20% on a scale of 100 and the benefit is considered moderate.

This report recently came out and covers many many areas of the storage marketplace and I think it's important for customers to see as well as partners and investors along the curve where these actual technologies, as you can see some of them you may know better than others where we are in that actual life cycle. So I hope this is helpful to those of you who are on the call as we look forward to reporting on FreeStor.

I'm happy with the fact that we were able to achieve healthy sequential bookings and revenue increases from Q1 which did include a significant amount of our original slipped deal that’s closing in Q2 and we have not lost any of those deals with more of them closing in Q3 and beyond.

The level of customer deal elongation as well as customer indecisiveness to purchase in a timely manner is something we at FalconStor as well as the industry are increasingly experiencing. Customers are delaying purchases to evaluate cloud strategies, both public and private, migrate to new platforms such as all flash arrays or AFA and determine that some of those new AFA suppliers do not have the enterprise class technology to support things like synchronous replication, clustering from a local metro and geographic perspective.

Decisions are also being impacted by the demands of their constituents who are looking for faster deployment, cheaper cost and more flexibility. FreeStor delivers what customers need which is flexibility to deploy, faster implementations and no dependence on hardware type operating systems, hypervisors, network protocols or location along with the pay as you grow licensing model.

And now I'd like to turn it over to Lou for some official financial discussions. Lou?

Louis Petrucelly

Thank you, Gary and good afternoon to everyone on the call tonight. Most of our discussions this afternoon will focus on non-GAAP financial measures and on key business performance indicators for the quarter. The balance of our financial details can be found in our press release, which was distributed earlier today which contains our year-over-year results and all the applicable disclosures in accordance with GAAP.

During the second quarter of 2016, our consolidated GAAP revenues totaled $8.1 million compared with $7.4 million in the previous quarter or 9% sequential growth. In the same period in 2015 consolidated revenues totaled $9.6 million. During the quarter we had one customer which accounted for more than 10% of our total revenues which was HDS and that was at 11%.

From a bookings perspective, Q2 bookings totaled $8.8 million compared with $7.4 million in the previous quarter and $8.3 million in the prior year, an 80% and 5% increase respectively. We are pleased that we were able to achieve a healthy sequential bookings and GAAP revenue increases as well as an improved bookings performance in the prior year which we believe was primarily driven from the continued market adoption of our FreeStor platform which we will provide more color on later in the presentation.

On the downside, as Gary mentioned earlier, one of the more significant headwinds we continued to experience and expect to continue moving through the second half of 2016 is the level of customer deal elongation as well as customer indecisiveness to purchase in a timely manner as a result of customers working through with their organizational purchasing strategies.

Looking at our bookings, we have breakdown for the first half of 2016. You will notice that in the second quarter FreeStor and the FreeStor technology combined for 44% of our total bookings as compared with 35% in the previous quarter.

As we look at the first half booking results for 2016 and 2015, the first half of 2015 had a minimal subscription based FreeStor bookings due to the timing of the release of the FreeStor product in May 2015. However we had a healthy adoption from our OEM partnerships and a few existing customers who adopted the FreeStor technology platform under our traditional perpetual licensing models.

Our first half 2016 bookings reflects a better mix of the overall FreeStor technology bookings versus existing customer renewals, expansions and traditional point solutions bookings as a result of the continued adoption and acceptance of FreeStor platform since released in the first half of 2015.

Next, I will turn to our non-GAAP expenses which exclude any restructuring charges, legal costs and stock based compensation. We are pleased that we have maintained our cost structure and during the quarter our non-GAAP expenses totaled $10.5 million compared with $10.6 million in the previous quarter, and $12.3 million in the prior year.

Our non-GAAP operating expenses were $8.2 million compared with $8.7 million in the previous quarter and $9.6 million in the prior year. As we head into the second half of 2016 we anticipate that our non-GAAP expenses will continue to decrease as we continually look to optimize our cost structures and allocate resources in order to gain operational efficiencies.

Our non-GAAP gross margins were 72% compared with 73% in the previous quarter and prior year. We closed the quarter with 211 employees worldwide compared with 247 in the same period last year. And we believe our existing expense structures have been optimized but we will continue to focus on improving the productivity of the existing resources while prudently reinvesting back into the business.

Turning to the balance sheet. As of June 30, we had $9.4 million of cash, cash equivalents and marketable securities compared with $13.4 million at December 31, 2015. As we have discussed previously, we have continued to make strategic investment back into the business in support of our new product releases. We have also made incremental investments in advanced technology activities to further develop our FreeStor for future generations including FreeStor analytics, which we completed during the first half of this year. However we continue to look to optimize our cost structure and allocate resources in order to gain operational efficiencies to match our projected run rate of bookings, billings and total revenues to ensure that we are adjusting our business plan and the strategies in response to our anticipated sources and uses of cash as we move forward.

As of June 30, our deferred revenues totaled $25.4 million compared with $25.7 million in the prior year. Deferred revenue continues to be a key metric for our company and one of the primary focuses is to maintain and grow our deferred revenue balances and continue to focus on securing bookings and improving our maintenance and support renewals.

As of June 30, approximately 31% of our deferred revenue balances were related to product revenues as compared with 28% at year end and our average life of deferred revenues was approximately 2.3 years.

Now before I turn the call back over to Gary, I’d like to let you know that when we file our quarterly report on Form 10-Q later this week we will also be filing an S-8 registration statement. This registration statement is requiring procedural filing to merge the underlying equities of the 2016 stock incentive plans which were both approved by the shoulders at the annual meeting of shareholders this past April. Both plans replace existing plans and are not incremental to our existing stock plans.

Now I’ll turn the call back over to Gary where he will provide you an update on the software defined storage marketplace and some more color on the FreeStor routes to market and adoption success rate. Gary?

Gary Quinn

Okay, thank you Lou. And now I’d like to get back to some more FreeStor. And looking back over the last twelve months, you can see that we are gaining significant traction with FreeStor in all of our routes to mark, whether it's associated dollars, numbers of accounts or numbers of transactions.

And when looking at the slide, you can see that our total bookings value for the first half of 2016 has exceeded our total bookings value for all of 2015 in the subscription category of FreeStor. As I mentioned on our last call, when looking at our three pronged approach to the marketplace, OEMs are cooling in terms of additional new partnerships, although our three China based partners have met or exceeded their annual commitments.

The MSP marketplace we believe is our best opportunity for new growth and expansion. But we're also very pleased with our recently new enterprise customer acquisitions. And we are now beginning to see our existing enterprise customers converting taking place.

During the first twelve months of FreeStor, we've delivered a little over 260 customers by the following routes to market. Six OEMs, 15 MSPs, 21 enterprise subscription and 219 enterprise perpetual. We've seen a recent uptick in existing customers beginning to convert to FreeStor and during the first half of 2016 we converted 9 out of a total of over 200 existing customers to FreeStor so far. So we have a ways to go there. The customers are already POC-ing and moving forward and the last quarter was fairly significant with a couple of large customers that actually moved ahead.

Our total number of transactions during the last 18 months equals 365 which is almost one for every working day during that period. What is not included in the first 18 months is the number of customers using FreeStor or FreeStor technology who are customers of our OEM partners and our MSP partners. One fact you should know is that in Q2 2015 we sold two transactions of FreeStor to two MSP partners in Latin America. Those respective MSPs have subsequently increased their capacity 100% and 20% during the last twelve months. Although a very small sample size will continue to update you on the annual growth of capacity for the FreeStor product within the FreeStor customer base.

During Q2 of 2016 we executed 16 six-figure transactions of which three were new customers. During the first half of 2016 we executed a total of 27 six-figure transactions of which eight of those were FreeStor of which three were new and five were existing customers who converted. That clearly shows the viability of FreeStor and FalconStor as a company was trusted by these global enterprise customers.

We did begin the conversion of two of our largest NSS customers. One is a big four global accounting firm with 11 petabytes under management and the other is a large outsource or with five petabytes under management today.

As you've seen from Lou's presentation and from the slides I've just shared with you, we believe we have the right product in FreeStor. The marketplace has validated that with over 10 industry awards and in the last six quarters with over 260 customers and 365 transactions which we did not include customers of our MSPs and OEMs. We are on the right track for the future of the storage software marketplace.

During Q2 we saw that our existing customers are renewing with the consistency we have projected. They are expanding and converting to FreeStor with the forecast we put in place at the beginning of the year and we are gaining traction with 37 new new customers in Q2 and 60 new new customers for both FreeStor and legacy products during the first half of 2016.

For us, though, it’s not enough to cover our current operating cost model and both Lou and I as well as the rest of the management team continue to work on the optimization of our cost structures while ensuring that we do not disrupt the momentum of FreeStor. We continue to innovate and we will be releasing a new distribution of FreeStor in early October which is primarily focused on the needs and requirements of the service provider community, the public cloud marketplace as well as enterprises looking to deliver self-service storage capabilities along with real time analytics for those tenants and users end to end and from the core to the edge.

Now I'd like to address some of the current conditions in the marketplace. During the first half of 2016, FalconStor has been approached by a number of privately backed and publicly traded companies who are looking to find ways to partner or transform themselves into a new entity. As many of you know a lot of the VC backed privately held companies in the storage software category during the last several months have been unable to obtain additional capital to support their vision and they also do not have any commercially viable operations to sustain themselves. Some of those technologies would be excellent additions to the FreeStor product offering.

We have also been approached by some public and private entities to explore partnerships, technology licensing or possible new combinations. Over the next few quarters we will continue to review these various opportunities with a view to augmenting shareholder value.

Finally, we are very cognizant of the road ahead both from the opportunity for FreeStor and the cost to achieve it. We are diligently looking for ways to increase our quarterly billings as well as preserving our precious cash. We are making adjustments every quarter to keep up with the marketplace results available to FreeStor. We believe as we head into 2017 we will deliver upon the promise that FreeStor has for this company, its shareholders and its employees.

Thank you operator and can you compile the Q&A roster?

Question-and-Answer Session


[Operator Instructions] We’ll take our first question from Chris Nielsen with Nielsen Technical Services.

Chris Nielsen

I was wondering if you could speak briefly to the issue that’s pending now on everyone's mind on the Internet of Things and will your company address storage needs for that?

Gary Quinn

Well, currently at this time our product is not specifically dedicated to the Internet of Things marketplace. Obviously the Internet of Things devices which come in all shapes and sizes today create a lot of data to present back to either consumers or to businesses on how to market to them. And that data should reside either in an enterprise environment or a service provider data center or public cloud, the FreeStor technology can provide data management services whether that’s the protection of that data, providing additional copies or the ability to provide a disaster recovery environment to allow the Internet of Things devices to continue to produce information and share that with the consumers or the marketeers, that's basically how our product works. It is a tool to manage large quantities of data in either data center or public or private cloud.

So I think as you see the amount of data that's being produced today, the capacity is becoming voluminous which you would believe is a good thing for all storage hardware and software vendors today. But the challenge that I think many of us are having is that enterprise customers, service providers with the idea of transforming that infrastructure as a service from the traditional data center with traditional vendors, people are looking at ways to utilize the cloud for economic gains. They're looking to move off of traditionally named hardware vendors, I mean that becomes an opportunity for us to actually get in there as people are making new choices with the new makeup of their infrastructure. So I think as the Internet of Things continues to build voluminous capacity, I think over time as people start to settle into the future of what their modern data center looks like, or the use of a public or private cloud provider, FreeStor has a tremendous opportunity ahead just due to the amount of capacity that's being generated. Does that help, Chris?

Chris Nielsen

Yes, it does. I just thought with your acquisition of the analytics companies that are looking at analytics with a possibility of looking for data that’s coming in from something like the Internet of Things might be an option.

Gary Quinn

But the analytics -- just to come back to analytics, it is a very critical piece of technology for FreeStor going forward and at the moment the initial use case was built around capacity utilization and the prediction of capacity running out or the need to expand which is very helpful to customers. So with that at the moment the FreeStor analytics capability is being expanded this fall to go from the core center, whether that's an enterprise data center, whether it’s the service provider data center out to the edge and the edge could be any different types of devices that would be connected through an IP connection. So I'm not going to say that I could monitor your iPhone when you're running around or your Apple Watch. But the ability to actually monitor the data that's being created and stored at edge devices and ultimately replicated back to a core facility is something that the analytics can give us going ahead as well as the performance from end to end with the quality of service initiative.

So there's definitely different things that can go on and the analytics is in its infancy for us. We will introduce a health capability later on this year in looking at the core to the edge again. And there’s just so many applications of the analytics on the actual storage portfolio and profile that we can continue to keep evolving. So it was an excellent acquisition for us. We've got a lot of rave reviews about it and it's also heterogeneous, so it's not specific to one storage supplier.


We'll go next to John Zaro with BCM.

John Zaro

Hey guys, a couple of things. One, can you just talk about how the orders flowed through the entire quarter? In other words, is it – can you see any signs that things are getting a little bit better, or is it sort of just that same movement along? And I don't mean that you didn't do well this quarter. What I mean is the marketplace itself.

Gary Quinn

Yeah, I mean from a marketplace perspective and I think as I'm sure you've listened to many other calls so far and ones that are continuing a lot of previews, I think you're looking for is the market getting clearer? Is it solidifying? And I think at the moment, I think that we’re probably looking forward to a little bit more of the same. Our view of – and we’re starting to kind of get a better trending, better forecasting for us. I think traditional seasonality one in three are the same and two is better than one in three and four is better than two. So I think that's kind of -- you're going to see that seasonality. But as far as customers deciding to make purchases quicker, I don't think we're going to see that, because once again just like everybody else, things build across and I'm not going to go down that path this quarter. But things build across again because customers basically are not willing to pull the trigger. And even in the case of things like request – RFPs, requests for proposals, they're being awarded but they're not actually being awarded out to the actual vendors themselves.

So I think, John, at the moment I think -- I don't think this is bad as Q1. Q1 had different macro dynamics going on other than just the cloud issues and the storage transformation issues. Q2 I think we're all seeing a bounce back from a lot of people. But I think that there still is that decision of: am I going to move something to the public cloud? Am I going to move to an all flash environment? Am I going to stay the way I am? Am I just going to add a little more from my traditional storage vendor because I haven't really figured out my plan yet? So I don't [Technical Difficulty]


Please stand by while we attempt to reconnect audio.

John Zaro

There we go. You guys back?

Gary Quinn

John, where did – I don’t know where that dropped off.

John Zaro

No, no, that I got. The second thing is that you seem to have accelerated new clients. And I guess the question is that is that becoming – as because these people that have been kicking the tires are finally a little -- that we’re getting across the finish line or is it –

Gary Quinn

Yeah, I mean like I said, I think our expectations originally based upon kind of normal deal longevity, I think you saw that we were enthusiastic as we ended last year and then obviously Q1 was a challenge for everyone. But a lot of those are starting to come around. I mean the proof of concepts that have been going on with customers which traditionally would take maybe a quarter to get through with defined criteria, are taken two quarters and three quarters. So we're not losing any business to anyone. It's just taking longer for the customer to pull the trigger. And I think you're hearing that from a lot of people because they're indecisive on what to do next. So we have a nice pipeline of POCs going on and we have a nice pipeline of existing customers looking to move forward. It's just a matter of getting them to actually issue the purchase order and that is typically adding at least another quarter in most if not all transactions.

John Zaro

And then I missed this thing with Gartner at the beginning. At some point Gartner was going to sort of write up you guys or –

Gary Quinn

Gartner does a lot – Gartner had a lot of traditional products out there that they give us really the Magic Quadrant. The Magic Quadrant came out for a few different categories and obviously all categories non storage. But they've come out with something new called the Hype Cycle report which is trying to give people a little better insight into purchasing the hype at the end of the day and whether it's hype or it's not hype. So the whole idea of the Gartner Magic Quadrant around which now most likely will be management software defined storage players and infrastructure software defined storage players which seems to be the breakdown at this time. But I can't speak for them but it seems that that's where they're going to eventually go.

We've been classified into the management software defined storage category. They've produced a very nice report that I think is extremely helpful to helping customers make decisions on their next storage, technology's direction et cetera. I mean it's an excellent document. And at the moment we’ve been put into some places where we make really -- we think really make sense. I mean we’re truly a management software defined storage platform, the ability to sit on top and virtualize disparate hardware across pretty much any type of environment, the ability to do external storage virtualization is obviously key for us with our intelligent abstraction layer, and finally the ability to replicate which becomes critical in a hybrid cloud from an enterprise data center into an Amazon or an Azure. And we had a piece of technology that's been patented for a very long time called MicroScan which is very efficient in transmitting data the way it actually does it. And when you're paying for that going in and out of the Amazon cloud or out of Azure you're going to want an efficient pipe and you're not going to want to incur a lot of costs. So we think that those are very helpful. And the report is not the traditional Magic Quadrant, that has not been produced around software defined storage yet.

John Zaro

But at some point we think they will do.

Gary Quinn

I mean I can't really speak for them. I feel they would do it but I think that that's not my decision.

John Zaro

And then along with you guys managing the cost and the cash and everything, do you guys run in -- I mean you have gotten close from time to time on these covenants?

Louis Petrucelly

We’ve actually -- we have no -- the first half of the year, John, we have met all of our covenants.

John Zaro

So you don't -- you've gotten I thought close at one point but you don't have any problems on the covenant.

Louis Petrucelly

I think in the prior year I mean we worked with the shareholders and gotten with the appropriate waivers, but yes.

John Zaro

But at this point we don't have that problem.

Louis Petrucelly

No, we've done – so far, I said the first half of the year, we’ve met all of our covenants.


We’ll go next to Anchor Sagar with W Capital [ph].

Unidentified Analyst

Hi, good afternoon. The first question I wanted to ask you is in the call and I think in the previous calls you have mentioned the conversion of some traditional customers to FreeStor, in terms of product wise you those conversions from IPStor?

Gary Quinn

So the question is are the customers who are existing customers converting from IP store to FreeStor and the answer to that is yes. This technical platform that the original network storage server or NSS or CDP continuous data protector product was built on a technology platform called IPStor. That original technology, that FalconStor developed starting back in 2005 and 2006 is the origin of the FreeStor platform. It has been significantly changed and enhanced which was part of our joint development work with a all-flash array manufacturer back in 2014, and it was modernized for all flash arrays from a performance side for throughput, latency reductions and bandwidth utilization. In addition to that, the platform was also enhanced to incorporate local HA as well as IO clustering in a network environment for two-way and four-way capability which is basically a competitive tool compared to EMC VPLEX or to an IBM SBC product. So between that and then the introduction of REST APIs for managed service providers as well as OEM manufacturers and a very simple easy to use modern interface, it’s completely different.

So to answer your question, the origin was originally IPStor back in 2005 and 2006. Technology for FreeStor today is built on that but it's significantly different as a product.

Unidentified Analyst

So during the call that you mentioned the two large customers that you moved to FreeStor. In terms of those conversions, they were from IPStor or one of the traditional products like the NSS, right?

Gary Quinn

Correct. So a natural migration of customers today is from the NSS platform which is an in-band solution taking advantage of storage virtualization as well as synchronous replication. And that technology is a natural to move to FreeStor just because of what it's capable of doing to take advantage of a modernized data center. So at the moment the big plus about those two customers moving is the significant size and complexity which then once again comes back to the validating the credibility of the product, the quality of the product and the enterprise class of the product.

Unidentified Analyst

Now, did those customers move to the perpetual licensing with the FreeStor or those are subscription deals?

Louis Petrucelly

No, they are on the subscription licensing.

Unidentified Analyst

So the way, I mean, when I look at the product from a technical view, I mean I could tell you what I think and you call me if it’s correct for us to think or not. When I look at the FreeStor, I mean you’ve put a lot of R&D into the product and where it stands basically -- it seems like a do it all umbrella product and then you have subsets of products which basically have some feature set, not all of it. And you sell FreeStor in some use case scenarios but if a customer is only targeting, let’s say, if they have a conversion where they want to basically bring in flash into their backup strategy, they'll basically go with just one portion of it and not the entire. So FreeStor is basically -- has basically a larger feature set and then you have sub products which are basically lesser features but in a similar features. Is that fair to say?

Gary Quinn

The FreeStor product is a superset of the original technology that was developed by the company years ago. The company is betting on FreeStor as we move forward. The reason being is that as people are, as you said, converting from maybe from a disk environment to a new kids on the block all flash array that that conversion or migration can be accomplished by FreeStor as a use case. The ability to deliver and always on a continuously available environment with synchronous replication, stretching metal clustering, that's not available for many of the new kids on the block all flash array manufacturers. We have recently this quarter alone won a transaction with one of those new kids on the block to provide stretch clustering capability in Europe. It was a nice win and the new guys basically do not have some enterprise class features like synchronous replication, like two and four way IO clustering or the ability to do a stretch. So that’s the kind of stuff that is obviously that's a benefit.

There also is the traditional DR as a service, back-up as a service use case which is number three and last but not least is in line de-duplication to optimize the footprint, all wrapped up in a heterogeneous analytic capabilities similar to Nimble’s Infosight, Pure1 pure on management more analytics you'd get off an XtremIO from EMC. So customers are looking for buying the right storage paradigm for the application or for the service or the cost that they are willing to bear. And then in addition to that, they want all the capabilities to go across that disparate portfolio. So FreeStor is for a large enterprise customer disparate environment looking to leverage the public cloud as needed with Azure as well as Amazon or the service provider who is looking to build DR as a service, backup as a service and have a very easy friendly simple to use interface for both their NOC or for their customers to participate in viewing the portfolio. So that's what we're doing going forward.

The existing point solutions, those products are basically for existing customers today. There is a roadmap for those. We are releasing new two major versions for both NSS, CDP and the optimized backup and dedupli this year but our efforts in marketing promotion, awareness we are putting all of our money behind FreeStor and we think that's the right answer to move forward. We are not looking to be out marketing point solutions going forward.

Unidentified Analyst

That’s where we agree with you. And when I look at the solutions which are out there in the market and FreeStor in terms of – in terms of the issues that actually enterprises face, I think it’s definitely the right solution. Now you guys don't break out the revenue in terms of the product. Can you give us some metric as to what portion of the revenue comes from FreeStor as of today, quarterly or on yearly basis?

Louis Petrucelly

So we will start doing that as it becomes more material. So as you know FreeStor is a scripture model. So right now it's probably single digits in terms of actual revenue being recognized. But obviously as these bookings are increasing and the wonderful effects are coming into play, I expect as we get to second half of this year and definitely into next year, start breaking out and giving guys more metrics around how much of the actual revenue is from the FreeStor product.

Unidentified Analyst

Now at this point, are you guys selling a FreeStor in both subscription and the lifetime deal or is it just a subscription?

Gary Quinn

So for the most part we are promoting the subscription because it basically supports the whole model from a cloud perspective of pay as you grow, whether you use a public cloud, private cloud or hybrid cloud. What's happening though is some traditional customers, they like the whole idea of pay as you grow and then when you wind up in their procurement departments, those people don't like that model. Or in the case of a public entity such as a government or a university, they're buying with a CapEx model which basically says that they have to own the asset as part of the transaction. So we are flexible on that in allowing a certain customers to own a perpetual license. But the caveat to the whole thing is even though you may own a perpetual license you buy a floor of capacity and every year you still need to true up. So you don't have an unlimited license, you have to true up every year with us. And so that's an important point even though it may not be a term license or under traditional subscription. It's still the same rules. So we've been very flexible in letting customers buy the way they want to buy provided that they follow a base model with a true up every year.

Unidentified Analyst

So one thing that you didn't mention yourself is in terms of the opportunity, I mean you have a great opportunity when you have a product which basically can help enterprise in terms of transition, whether they want to go to flash or whether they want to bring in public cloud, and it even helps in terms of lowering the cost of managing the storage infrastructure, because you have won new product [ph] and actually managing in a different sort of technologies, whatever those are. And so -- and then you have a limited cash. I mean it's not something which you can basically build upon and try to basically get more recurring revenue each quarter, and get to a breakeven at some point. So how do you quantify it? I mean with the cash that you have right now, what do you think is the breakeven number if you want to get to it? I mean is it 10 million quarterly run rate, is it 12 million? And if you can't give that number today, when can we expect that number?

Louis Petrucelly

We have – it’s a very good question and something that we are constantly looking at here and working towards and planning towards – I mean it's right in the forefront of our everyday activity. So yes, we have those numbers. We don't publicly disclose them as we're not giving guidance. But we believe that we're getting closer and closer to breakeven and we continually adjust the business as necessary, being cognizant of the fact that we are getting momentum with FreeStor, so we’re very careful with that. But we also have to make sure we are being financially responsible that we keep our cash balances at a level that could support our business.

So your question is right on point and I can tell you that is something that both myself and Gary and the board we continually monitor and work towards.


[Operator Instructions] We’ll go next to John Zaro with BCM.

John Zaro

Hey guys, one last question. Gary, you made this comment at the end -- when you're almost all done, said we have all these people because of what's been going on in the marketplace, who are approaching us both public and private people looking to potentially give partnerships for various things. Is that a change from what’s happened before? Is that because of FreeStor? Is that -- I mean the marketplace is kind of a mess, so you're going to get people who are in some cases might be desperate to do different things, but.

Gary Quinn

Yeah, I mean the real reason why I bring it up, John, is sometimes people wonder if we’re aware of what's going on out there. And I think that the FreeStor product has gotten significant visibility. It's probably as I mentioned the best block storage software solution on the market today. There's obviously another side to that which is the object storage marketplace but I think as you've all seen objects storage, although someday it's going to deliver a promise, it’s not yet delivering. If you look at hardware object storage, if you look at some of the software players, many of the software players that are venture capital backed today are people who are experiencing difficulties at the moment because they don't really have a commercially viable market yet due to the fact that that market hasn't matured yet enough.

So we have been approached by a lot of people I think due to the fact that FreeStor has gained a lot of momentum. We're very complementary to a number of people and we're looking to evaluate how we could maybe do something to enhance our position once the clarity of the storage marketplace starts to get clearer, know maybe the beginning of 2017. So I bring that up because I think sometimes people wonder if we are really engaged with everything that's going on out there. And I'd have to say we’re actively engaged. I sometimes wish we could do more but at the same time I think we have to be as loose as we need to be fiscally responsible. We need to focus on getting FreeStor further into the marketplace and then I think it will give us opportunities to do more things around either some type of new technology or any kind of partnerships or any types of new combinations as we move ahead.

End of Q&A


We have no more questions at this time.

Gary Quinn

Okay. Since there is no more questions tonight, I'd like to thank you all again for joining our call. We look forward to updating you again at the end of October and enjoy the rest of your summer.


That does conclude today’s conference. We thank you for your participation.

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