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FalconStor: Fiscal 1Q15 Financial Results

Revival: sales up 69% Q/Q and 66% Y/Y, back to profit

(in $ million) 1Q14 1Q15 Growth
Revenue
12.0 19.9 66%
Net income (loss) (2.8) 5.6  

FalconStor Software, Inc. announced financial results for its first quarter ended March 31, 2015.

During the first quarter of 2015, the FalconStor team accomplished many of the goals which it had set out for itself. We released new technology that enabled customers to modernize their storage infrastructure. We reinvigorated our position in the marketplace with the introduction of FreeStor through a global public relations campaign while continuing the drumbeat of #BEFREE,” said Gary Quinn, president and CEO. “We saw bookings in both of our international geographies which exceeded or equaled our internal projections even with currency headwinds in Europe and Japan. We have already seen significant progress in installations of our new products by new and existing customers. This quick adoption is a key indicator, as our sales cycle is typically longer than one-quarter. We believe that throughout 2015, we will measure our success by the partnerships we deliver within the all-flash array community, hybrid/private cloud service providers, and large enterprise customers. We are proud to announce that we have finalized three OEM relationships, who trust their business to the FreeStor technology, using either their private-labeled brand or the FalconStor brand. As we continue to improve on our execution, we are also delivering on our vision to simplify storage environments at maximum overall value, and have multiple indicators showing FalconStor is on the right path for growth.”

Financial and business highlights

  • Q1 2015 revenue totaled $19.9 million compared with $11.8 million in Q4 2014 and $12.0 million in Q1 2014.
  • Q1 2015 revenue would have totaled $10.1 million, excluding $9.9 million relating to the acceleration of previously deferred revenue recognized as a result of the termination of ongoing maintenance services during the first quarter of 2015 associated with our joint-development agreement.

Bookings

  • Q1 2015 total bookings were $11.7 million compared with $13.6 million in Q4 2014 and $14.4 million in Q1 2014.
  • In Q1 2015, approximately 72% of our total product bookings were ratable as compared with 57% in Q4 2014 and 38% in Q1 2014, which is a clear indicator of our business moving to an over-time revenue recognition.

Dederred revenue

  • Excluding the impacts of our joint-development agreement, deferred revenue as of March 31, 2015 increased 3% and 6% compared with March 31, 2014 and December 31, 2014, respectively.
  • Deferred revenue as of March 31, 2015 totaled $26.7 million, a decrease of 16% compared with March 31, 2014, and a decrease of 27% compared with December 31, 2014. The company recognized revenue of $11.3 million during the first quarter of 2015, which was included in our deferred revenue as of December 31, 2014, related to our joint-development agreement. In summary our deferred revenue continues to grow after excluding the joint-development agreement amounts during the comparison periods.

Cash

  • Cash used in operations was $0.3 million for the three months ended March 31, 2015, compared with cash provided by operations of $0.3 million for the three months ended March 31, 2014.
  • The company closed the quarter with $21.0 million of cash, cash equivalents and marketable securities, compared with $21.8 million at December 31, 2014.

During the first quarter of 2015, the company made $0.2 million in payments associated with the “rebalancing” program from 2013.

Non-GAAP expenses and margins

  • Non-GAAP expenses totaled $13.0 million in Q1 2015, compared with non-GAAP expenses of $14.0 million in Q4 2014 and non-GAAP expenses of $13.9 million in Q1 2014.
  • Non-GAAP gross margins were 88% in Q1 2015, compared with non-GAAP gross margins of 78% in both Q4 2014 and Q1 2014.
  • Non-GAAP gross margins excluding the $9.9 million of accelerated revenue associated with our joint-development agreement, was 76% in Q1 2015.

Other items

  • On February 18, 2015, the company introduced FreeStor, an horizontal converged data services platform which is scheduled to be released during the second quarter of 2015.
  • The company signed three OEM agreements with manufactures located in Asia, Europe and North America, who chose its solutions to embed technology to add value to either their all-flash storage arrays, servers or services.
  • The company announces a new stock buy-back program, whereby the board of directors has authorized the company to purchase up to five million shares over a three-year period based upon certain cash requirements.
  • In 2013, the company entered into a joint-development agreement whereby final acceptance of the software delivered under the joint-development agreement occurred on November 16, 2014. During 2014 the company began to recognize the total committed fee as revenue ratably over a twenty-five and a half month period which began on November 16, 2014 which included a contractual twenty-four month maintenance period. The company anticipated recognizing approximately $1.4 million per quarter associated with this agreement. During the first quarter of 2015 the customer elected to terminate their maintenance agreement and as such all unrecognized deferred revenue of approximately $9.9 million was accelerated and recognized as product revenue during the quarter.
  • During the three months ended March 31, 2015, the company recorded product revenue of approximately $11.3 million related to this agreement. As of March 31, 2015, there is no deferred revenue related to this agreement.

Financials
Total revenue for the first quarter of 2015 was $19.9 million compared with $12.0 million in the same period a year ago. Included in total revenue for the first quarter of 2015 was $11.3 million of revenue associated with our joint-development agreement, of which $9.9 million was accelerated during the first quarter. GAAP income from operations for the first quarter of 2015 was $6.4 million, compared with an operating loss of $2.6 million for the first quarter of 2014. Included in the operating results for the three months ended March 31, 2015 and 2014 were; (i) expense of less than $0.1 million and $0.1 million, respectively, of investigation, litigation and settlement related costs; (ii) $0.4 million for both periods of share-based compensation expense; and (iii) $0.1 million and $0.2 million, respectively, of restructuring costs. GAAP net income for the quarter was $5.3 million compared with a net loss of $2.8 million for the same period a year ago. Included in our net income (loss) for the three months ended March 31, 2015 and 2014 was an income tax provision of $0.6 million and $0.2 million, respectively. GAAP net income attributable to common stockholders for the first quarter of 2015, which includes the effects of the accretion to redemption value of the Series A redeemable convertible preferred stock and the accrual of Series A redeemable convertible preferred stock dividends, was $4.9 million, or $0.10 per diluted share, compared with a loss of $3.1 million, or $0.06 per diluted share, for the same period a year ago.

Non-GAAP income from operations was $6.9 million for the first quarter of 2015, compared with a non-GAAP loss from operations of $1.9 million for the same period a year ago. Non-GAAP net income was $5.8 million, or $0.11 per diluted share, in the first quarter of 2015, compared with a non-GAAP net loss of $2.1 million, or $0.04 per diluted share, in the first quarter of 2014. Non-GAAP results exclude the effects of stock-based compensation, costs associated with the company’s investigations, litigation and settlement related costs, restructuring costs and the effects of our Series A redeemable convertible preferred stock.

The company closed the quarter with $21.0 million in cash, cash equivalents and marketable securities. Cash flow used in operations for the three months ended March 31, 2015 was $0.3 million compared with cash provided by operations of $0.3 million during the same period in 2014. Deferred revenue at March 31, 2015 was $26.7 million, compared with $31.9 million at March 31, 2014.

Comments

Abstracts of the earnings call transcript:

Gary Quinn, CEO:
" (...) we have been able to execute two new OEM agreements in Asia with a minimum $1 million bookings value commitment for each partner over the next 12 months as well as an additional new OEM agreement in EMEA over the next 12 months."

Lou Petrucelly, CFO:
"During the first quarter we had one customer who was accounted for 10% of our total revenues [indiscernible] which was 56% of our total reported revenue or 40% of total revenues one excluding the accelerated revenue of 9.9 million.
"Overall the Americas, EMEA and AsiaPac regions each contributed 25%, 30% and 37% respectively of our total Q1 bookings. Approximately 13% of our Q1 bookings were derived from new customers.
"We closed the quarter with 254 employees worldwide compared with 263 at the end of the year."

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