FalconStor Software, Inc. (FALC) CEO Todd Brooks on Q1 2019 Results - Earnings Call Transcript

May 15, 2019 6:25 PM ETFalconStor Software, Inc. (FALC)
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FalconStor Software, Inc. (OTCQB:FALC) Q1 2019 Earnings Conference Call May 15, 2019 4:30 PM ET

Company Participants

Todd Brooks - Chief Executive Officer

Brad Wolfe - Chief Financial Officer

Conference Call Participants

Operator

Good afternoon and thank you for joining us to discuss FalconStor Software's Q1 2019 Earnings Call. 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 and 10-Q and other reports filed with 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 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 2019 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 Todd Brooks.

Todd Brooks

All right. Thank you, Ryan. I appreciate that, and I'd like to thank each of you that took your time to participate in our call today to listen in. I am very pleased with the progress that the FalconStor team has made thus far in 2019 as we strive to empower IT professionals and enterprises across the globe achieve mastery over their data. Because we believe data is an organization's most precious asset, and when mastered enables the organization to responsibly push the boundaries of what's possible in the digital economy in which they operate. FalconStor's products are appointed at a market reported in 2018 by IDC to be sized at approximately $10.7 billion and predicted to grow at a compounded annual growth rate of 14.7% throughout 2022.

This growth is being generated by two factors, first an explosion in the amount of data generated by various digital technologies whether it's in the form of traditional email, documents, application databases, digital, audio and video or Internet-connected devices also known as IoT. And then second, the dramatic increase in data storage options whether they be located in a traditional data center, private cloud or public cloud. The ever expanding capacity of data captured and stored is driving the need for enterprises to cost effectively, securely and intelligently manage this data. I'm excited by this market and the business value that FalconStor delivers to its complex enterprise customers.

During Q1, we focused on three key initiatives; first, on continued delivery of operating profitability; second, on generating year-over-year billings growth; and then third, on key product expansion.

For the balance of today's call, we'll elaborate on each of these key initiatives, provide a detailed overview of Q1 financial results, and then open the phone line for any questions you may have.

All right. Let's launch into first the operational consistency. So throughout Q1, we continued to improve operational efficiency and focused on consistent commercial discipline. These efforts have allowed the company to continue delivering operating profitability.

And as evidence, Q1 marks the seventh consecutive quarter of profitable operating margin delivered by the team. These efforts allow the company to generate a non-GAAP operating income of $395,000 during the quarter despite new growth initiatives -- investments that we made to drive new product development and new investments in general marketing and commercial team expansion. I'm very excited about the operational consistency and profitability the team continues to deliver.

So next let's dive into billings review. The billings growth that the team is now delivering especially within our Americas region is very encouraging. In Q1, we were able to generate 112% billings growth in our Americas region. These results are direct outcome of rebuilding the commercial teams, increasing focus on key existing and new partners, and improving our go-to-market messaging.

Now while we didn't deliver year-over-year billings growth in Q1 across all of our regions, several key wins in late Q1 and early in April have allowed us to generate 6% year-over-year billings growth across the entire company through the end of April so far in 2019. Very exciting.

And significant portion of this growth is a result of increased adoption of our data backup and archive orchestration solution called VTL, which empowers our customers to meet the most stringent backup windows reduced storage capacity by up to 95% leverage 100% of their existing investments and use the public cloud for archive and recovery all with zero vendor lock-in. Our pipeline for the balance of 2019 has continued to improve and our expectation at this point is that we will deliver year-over-year billings growth for 2019.

Next, let's talk a little bit about some product expansion that we successfully completed in Q1. The financial stability we have generated over the last seven quarters has enabled us to place increased investment into our go-forward product strategy and go-to-market efforts.

Our data -- our FalconStor Data Mastery Platform delivers tremendous business value across three key solution categories; backup and archive orchestration, disaster recovery, and high availability.

The backup and archive orchestration category is powered by our VTL technology and is targeted at modernization and optimization of existing backup and archive operations. This category is the foundation of daily routine data protection strategies for our complex enterprise customers.

And Q1 included a very important milestone for our VTL solution as the Evaluator Group and an information management and data storage analyst firm completed their independent testing of our VTL solution through which they have verified our technology delivers up to 6x times better twice the performance than the leading competitor. This validation is exciting and is being noticed in the marketplace by our existing complex enterprise customers and prospects.

Next, the disaster recovery category is targeted at delivering superior application-aware protection via advanced continuous data snapshot and journal-based replication. Finally, the high-availability category delivers superior business continuity be it continuous active availability of mission-critical performance or a production data.

Each of these solution categories is built upon a foundation of hardware and cloud vendor-agnostic technology which allows our customers to: first leverage existing hardware investments and intelligently use the best target storage environments for each of their data protection use cases.

And then secondly, it then allows them to eliminate vendor lock-in and the need to rip and replace hardware. Our full spectrum data protection solutions enable our complex enterprise customers to virtually eliminate potential data loss.

FalconStor is unique. Our nearly two decades of technology innovation is unmatched by newer entrant into the data protection space. And we'll continue to build upon this advantage. Our customers know that our solutions are powerful and comprehensive.

All right, with that I will turn it over to Brad and he will provide a more detailed overview of our Q1 financial results. Brad?

Brad Wolfe

Thank you, Todd. The first quarter of 2019 marked our seventh consecutive quarter of non-GAAP operating profitability. During the three months ended March 31, 2019 we delivered non-GAAP operating income of $395,000 and as compared to non-GAAP operating income of $363,000 during the same period of the previous year, an increase of 8.8%.

Overall total revenues for the three months ended March 31, 2019 decreased 10% to $4.5 million compared to $5 million in the prior year period. Despite the year-over-year revenue decline in Q1, total 2019 billings through the end of April have increased compared to 2018 by 6%.

Q1 delivered several key wins highlighted by one with a large financial entity which included over $590,000 of billings that will be recognized in Q2. Total cost of revenue for the three months ended March 31, 2019 decreased 15% to $0.6 million compared with $0.8 million in the prior year period.

Total gross profit increased -- decreased $0.4 million or 9% to $30.8 million for the three months ended March 31, 2019 compared with $4.2 million for the same period of the previous year. Total gross margin increased to 86% for the three months ended March 31 2019 compared with 85% for the prior year period.

The decrease in our total gross profit in absolute dollars was primarily due to the decrease in revenue. The increase in total gross margin was primarily due to the mix and timing of sales and our cost reduction initiatives.

Overall, our total operating expenses for the three months ended March 31, 2019 declined $0.1 million, or 2% to $3.6 million as compared to $3.7 million from the same period of the previous year.

Turning now to the balance sheet. After our $0.5 million term loan repayment, we ended the quarter with a cash balance of $2.4 million. Net working capital defined as excluding deferred revenue, operating lease liability and contracts receivable, but including our term note ended at $0.9 million.

We closed the quarter with accounts receivable of $3.3 million, accounts payable and accrued expenses of $3.1 million and deferred revenue of $9.3 million.

I will turn it back over to you now for final comments.

Todd Brooks

All right. Thank you very much Brad. So in summary, we are very pleased with the progress made thus far in 2019. And we do believe the company's performance over the last several quarters has set up a fantastic opportunity for FalconStor and its shareholders.

To this point, I'd like to take this opportunity to highlight the experienced team we have assembled here at FalconStor. First, our dedicated and loyal employee base has an impressive amount of domain experience in our industry at an average tenure of over nine years.

Second, the leadership team that we have built over the last 16 months, 17 months or so is unique at a company like FalconStor, and has proven experience in growing mature software companies and delivering shareholder value.

Finally, our Board of Directors is seasoned and includes top minds from our industry and complementary disciplines. We recognize the opportunity that we have and we are excited to be a part of the FalconStor story. So to our shareholders and loyal partners and customers who have joined this call today or that will listen to its recording, we are committed to delivering value and we look forward to the future at FalconStor.

All right. At this time, I'll ask Ryan to begin the question-and-answer session. Brian -- or Ryan?

Question-and-Answer Session

Operator

Todd Brooks

Okay. Fantastic. All right. Well, thanks again folks once again for taking your time to listen in to our call today. We are -- I hope everybody feels the excitement that we have on the team and we look forward to the next call here in a few months. Thank you very much.

Operator

Ladies and gentlemen, thank you for joining today's conference call. The call has now concluded. Please disconnect your lines and have a great day.

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