FalconStor: Fiscal 3Q18 Financial Results

(in $ million)	3Q17	3Q18	9 mo. 17	9 mo. 18
Revenue	6.1	4.1	18.9	13.1
*Growth*		-33%		*-31%*
Net income (loss)	1.4	(0.3)	(0.3)	(0.8)

FalconStor Software, Inc. announced financial results for its third quarter ended September 30, 2018.

Key Financial Highlights for 3FQ18:

Achieved non-GAAP operating Income of $0.1 million, marking the fifth consecutive quarter of non-GAAP operating profitability.
Non-GAAP gross margin increased to 83% from 80% in 3FQ17.
Cash and cash equivalents increased to $2.8 million from $1.0 million at December 31, 2017.

Key Product Highlights

RecoverTrac automated data recovery technology was awarded its third patent (United States Patent and Trademark Office, No. 10,073,745).
VTL solution has been tested by Evaluator Group, an independent lab, and verified to achieve 39TB/hour single-node backup speeds without affecting application performance.
FreeStor solution is being renamed FalconStor Data Mastery Platform, and three cloud data management use cases are now supported for customers seeking to migrate and replicate data to and from the cloud.

“I am pleased with the operating profitability which continued in the third quarter, and the commercial foundation we are building to begin driving growth”, said Todd Brooks, CEO. “While we are likely a quarter or two away from returning to growth across the globe, billings in our Americas region increased by 24% in the quarter as compared to 3FQ17. The efforts of our team to redefine our product vision, rebuild our marketing engine, and re-engage our partner base are clearly beginning to deliver results.”

Additional Financial Highlights for 3FQ18
While non-GAAP operating Income was $0.1 million for the quarter, the company recorded a GAAP net loss for the three months ended September 30, 2018 of $0.7 million, as compared to GAAP net income of $1.2 million for the same period of the previous year, in part as a result of the impact of new revenue recognition guidance, in addition to other non cash restructuring charges incurred in connection with our cost reduction efforts. Excluding the effects of stock-based compensation, restructuring costs and the effects of our Series A redeemable convertible preferred stock, the company delivered a GAAP net income of $0.0 million, as compared to GAAP net income of $1.2 million in the prior year period.

Overall, total revenue for the three months ended June 30, 2018 was $4.1 million as compared to $6.1 million in the prior year period. This decline in revenue was impacted by the adoption of new revenue recognition accounting guidance under Topic 606 on January 1, 2018 using the modified retrospective transition method, which resulted in a $1.7 million decrease in revenue.

Net cash used by operations decreased by $1.2 million to $0.3 million for the nine months ended September 30, 2018, as compared to $1.6 million of net cash used by operations for the nine months ended September 30, 2017.

The firm ended the quarter with $2.8 million of cash and cash equivalents, as compared to $1.0 million at December 31, 2017.

Comments

FalconStor continues to survive but with continuing poor performance.

Tiny revenue are a little better (+2%) at 4.1 million compared to $4.0 million on former quarter, but -33% Y/Y. Note that the results for the current quarter were impacted by adoption of new revenue recognition accounting guidance on January 1, 2018 which resulted in a $580,000 decrease in sales.

The software publisher recorded operating profitability for 5 consecutive quarters but continues to accumulate net loss.

Cash and cash equivalents increase to $2.8 million at the end of 3FQ18 from $1 million at the end 3FQ17.

Non-GAAP gross margin increased to 83% from 80% in 3FQ17.

The firm continued its shift to subscription based licenses during the quarter and increased Annual Recurring Revenue (ARR) to 75% from 60% in 3FQ17.

Product revenue of $1.0 million for the three months ended September 30, 2018 decreased $1.1 million from $2.1 million in the prior year period. It represented 25% and 35% of total revenue for the three months ended September 30, 2018 and 2017, respectively.

Maintenance and technical support services revenue for the three months ended September 30, 2018 decreased to $3.0 million, compared with $3.8 million in the prior year period.

Professional services revenue for the 3 months ended September 30, 2018 remained constant Y/Y, at $0.1 million.

Product revenue decreased $2.6 million to $3.9 million for the 9 months ended September 30, 2018 from $6.5 million for 9 months ended September 30, 2017. It represented 30% and 35% of total revenue for the 9 months ended September 30, 2018 and 2017, respectively.

Professional services revenue for the 9 months ended September 30, 2018 decreased to $0.3 million, compared with $0.5 million for the same period one year ago.

Maintenance and technical support services revenue for the 9 months ended September 30, 2018 decreased to $8.9 million, from $11.9 million in the prior year period.

Geographically, FalconStor generates a 24% year-over-year billings growth in 3FQ18 in the Americas region after rebuilding the commercial team the two first quarters of fiscal year, and increasing focus on engaged partners. It began commercial restructuring in EMEA region in 2FQ18 and while year-over-year billings growth declined by 14% in 3FQ18. The most challenging region continues to be AsiaPac and commercial restructuring efforts have just begun.

Worldwide headcount was 88 employees as of September 30, 2018, compared with 83 as of September 30, 2017

Last October 9th, the company closed on the final tranche of its previously announced private placement. In connection with this event, it received an additional $1 million of gross proceeds from new investors, which is an addition to the $3 million of gross proceeds previously received through the Hale Capital over the last year.