FalconStor: Fiscal 2Q15 Financial Results

FalconStor Software, Inc. announced financial results for its second quarter ended June 30, 2015.

“During the second quarter of 2015, to further position the company for future success, we completed our transition from relying solely on point solution transactions to our new ‘pay-as-you-grow’ subscription-based model based on capacity with our FreeStor software-defined storage and data services platform,” said Gary Quinn, president and CEO. “While this change in market strategy has impacted our business over the past twelve months, we feel that the long-term benefits associated with this quarter’s launch of FreeStor will be well worth the efforts we have made thus far and place us in the strongest position of maintaining and growing organizational health. We strive to maintain the momentum of FreeStor’s successful launch and continue to leverage that goodwill by signing additional customers, service providers and OEMs worldwide.”

Revenue
Q2 2015 revenue totaled $9.6 million compared with as adjusted revenue in Q1 2015 of $10.1 million and $11.3 million in Q2 2014. In Q1 2015 revenue totaled $19.9 million, which included $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  
Q2 2015 total bookings were $8.3 million compared with $11.7 million in Q1 2015 and $13.3 million in Q2 2014. In Q2 2015, approximately 58% of our total product bookings were ratable as compared with 46% in Q2 2014. For the first half of 2015, approximately 65% of our total product bookings were ratable as compared with 41% during the first half of 2014, all of which is a clear indicator of our business moving to over-time revenue recognition model.

Deferred revenue
Excluding the impact of our joint-development agreement, deferred revenue as of June 30, 2015 increased 3% and 5% compared with June 30, 2014 and December 31, 2014, respectively.

Cash
The company closed the quarter with $18.8 million of cash, cash equivalents and marketable securities, compared with $21.8 million at December 31, 2014. Cash used in operations was $1.4 million for the three months ended June 30, 2015, compared with cash provided by operations of $1.1 million for the three months ended June 30, 2014.

Non-GAAP expenses and margins
Non-GAAP expenses totaled $12.3 million in Q2 2015, compared with non-GAAP expenses of $13.0 million in Q1 2015 and non-GAAP expenses of $14.1 million in Q2 2014. Non-GAAP gross margins were 73% in Q2 2015, compared with non-GAAP gross margins of 76% in Q1 2015 which excludes the accelerated revenue associated with our joint-development agreement recognized during Q1 2015, and 76% in Q2 2014.

Other items  
On May 7, 2015, we released for availability a new solution which is agnostic to any server hardware or storage hardware manufacturer; a horizontal software-defined storage platform inclusive of converged data services called FreeStor.
 
During the current quarter, the company signed three OEM agreements with manufacturers located in North America, EMEA and Asia, and four service providers located in North America, Latin America and Europe. In total for the first half of 2015 it signed six OEMs and four service providers, all of which have chosen FreeStor technology in various go-to-market strategies to align with their present-day business goals.

During the quarter, the company repurchased 92,161 shares of its common stock at an aggregate purchase price of $1.50 per share, under its stock buy-back program.

Financials
Total revenue for the second quarter of 2015 was $9.6 million compared with $11.3 million in the same period a year ago. GAAP loss from operations for the second quarter of 2015 was $3.1 million, compared with operating income of $1.4 million for the second quarter of 2014. Operating income for the three months ended June 30, 2014, benefited from a litigation settlement of $5.3 million associated with then outstanding lawsuit with the estate of former CEO, as compared with a benefit of less than $0.1 million during the same period in 2015.

Also included in the operating results for the three months ended June 30, 2015 and 2014 were: $0.4 million of share-based compensation expense in both periods; and less than $0.1 million and $0.6 million, respectively, of restructuring costs.

GAAP net loss for the quarter was $2.7 million compared with net income of $1.3 million for the same period a year ago. Included in our net (loss) income for the three months ended June 30, 2015 and 2014 was an income tax benefit of $0.4 million and a provision of $0.1 million, respectively. GAAP net loss attributable to common stockholders for the second 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 $3.0 million, or $0.07 per diluted share, compared with net income of $1.0 million, or $0.02 per diluted share, for the same period a year ago.

Non-GAAP loss from operations was $2.7 million for the second quarter of 2015, compared with $2.8 million for the same period a year ago. Non-GAAP net loss was $2.2 million, or $0.05 per diluted share, in the second quarter of 2015, compared with $3.0 million, or $0.06 per diluted share, in the second 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.

Total revenue for the six months ended June 30, 2015 was $29.5 million compared with $23.3 million in the same period a year ago. Included in total revenue for the six months ended June 30, 2015 was $11.3 million of revenue associated with our joint-development agreement, of which $9.9 million was accelerated during the six months ended June 30, 2015.

GAAP income from operations for the six months ended June 30, 2015 was $3.2 million, compared with an operating loss of $1.2 million for the six months ended June 30, 2014. Our operating results for the six months ended June 30, 2014, benefited from a litigation settlement of $5.3 million associated with our then outstanding lawsuit with the estate of our former CEO, as compared with expense of less than $0.1 million during the same period in 2015.

Also included in the operating results for the six months ended June 30, 2015 and 2014 were: $0.8 million of share-based compensation expense for both periods; and $0.1 million and $0.8 million, respectively, of restructuring costs.

GAAP net income for the six months ended June 30, 2015 was $2.6 million compared with a net loss of $1.5 million for the same period a year ago. Included in our net income (loss) for both the six months ended June 30, 2015 and 2014 was an income tax provision of $0.3 million. GAAP net income attributable to common stockholders for the six months ended June 30, 2015 and 2014 was $1.9 million, or $0.05 per diluted share, compared with a net loss of $2.1 million, or $0.04 per diluted share, for the same period a year ago.

Non-GAAP income from operations was $4.2 million for the six months ended June 30, 2015, compared with a non-GAAP loss from operations of $4.7 million for the same period a year ago. Non-GAAP net income was $3.6 million, or $0.08 per diluted share, for the six months ended June 30, 2015, compared with a non-GAAP net loss of $5.0 million, or $0.10 per diluted share, for the six months ended June 30, 2014.

The company closed the quarter with $18.8 million in cash, cash equivalents and marketable securities.

Cash flow used in operations for the six months ended June 30, 2015 was $1.6 million compared with cash provided by operations of $1.4 million during the same period in 2014.

Deferred revenue at June 30, 2015 was $26.4 million, compared with $33.1 million at June 30, 2014.