Falconstor Software

good afternoon and thank you for joining us to discuss falcon store software's q4 2021 and full year 2021 earnings todd brooks falcon store's chief executive officer and vincent sita chief financial officer will discuss the company's results and activities and will then open the call to your questions 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 Falcon Storage 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 include non-GAAP results. The reconciliation of non-GAAP results to GAAP has been posted on Falcon Store's website at www.falconstore.com under Investor Relations. After the close of business today, Falcon Store released its Q4 2021 and full year 2021 earnings. Copies of the earnings release and supplemental financial information are available on Falcon Store's website at www.falconstore.com. I'm now pleased to turn the call over to Todd Brooks.

All right. Well, thank you, Clark. Appreciate that. And I'd like to thank each of you for taking your time to participate in our call today. So we've got a lot of work to do, but I am very pleased by the progress that we are making and the market that we serve and the value that our solutions deliver to our main service provider partners and enterprise customers every day we are a trusted data protection innovator with well over 1 000 end user customers and the next divided data under management we enable the world's most demanding managed service providers and enterprises to modernize their data backup and archive operations for the hybrid cloud world protecting data across on-premise data centers in public cloud environments. Migration to the cloud, data center rationalization, and increased leverage of outsourced managed services are top priorities for enterprise CIOs. And they are fundamental macro shifts to which our technology here at Falcon Store and our market experience are very well aligned. Our solutions deliver increased data security. and provide for quick data recovery, including recovery from ransomware attacks. And our solutions accomplish these while driving down the cost of long-term data storage footprints by over 95%. For the fiscal year 2021, we implemented four key strategic initiatives. And if you've attended our calls before or reviewed our quarterly materials, you've seen these. each and every quarter over the last four quarters. But these four strategic initiatives that we executed against last year were, first, generating consistent growth by expanding our industry-leading long-term data retention and recovery product line, and by creating new, flexible, and extensible data protection innovations that we believe will drive our growth over the next decade. Second, then on sharpening our commercial and R&D focus related to our business continuity data-driven replication products to ensure that we are focused on those use cases which are important to our largest and most strategic customers. Third, on beginning to generate growth via M&A. And then finally, on delivering consistent profitability. So, how did we do um well against those four key initiatives throughout 2021 well first thing we're going to do here is go through our q4 2020 2021 results so first we increased our gap subscription revenue um year over year by 20 percent in um 20 in the q4 and for the entire year we actually increased our subscription based revenue year over year by 40 so these are certainly solid increases in our gap subscription revenue and we're very pleased about that but we think we can accelerate that even more as we continue to focus on growing our subscription based recurring revenue second then our quarterly gap total revenue consistency remains one of our top focus areas. And as you can see, Q4, we delivered a 4% year-over-year increase in total gap revenue, but it's inconsistent. So if you look over the last four quarters prior to Q4, in Q3 we were down, in Q2 we were down, Q1 we delivered a 20% increase year-over-year, But in Q4 2020, we were down. So inconsistency remains an opportunity that we are focused on driving very consistent quarterly total gap revenue. Third then, we continue to focus on tightly managing our operating expenses. And for Q4 2021, our operating expenses were down 7% year over year, so that's great. um so this is an area that we continue to focus on we continue to do well in then last fourthly our gap net income consistency remains a opportunity and that's largely driven because obviously our total gap revenue is inconsistent that growth i should say the total gap revenue is inconsistent so for the year of 2021 vince will go through these details here in a minute but the year of 2021 we delivered a net income a gap income of about 200 000 but for the quarter we did we delivered a loss of about 191 000 so consistency in this area of total gap revenue and total gap net income remains one of our top priorities so when we or i should say as you guys Probably no. We've been working on reinventing Falco Store now for a few years. And so I think it helps if we look at a few key metrics over that period of time to see how we progressed. So first, our net customer revenue retention. So that excludes hardware because we no longer treat hardware revenue. We now treat it as a pass-through. And so in 2017, our net customer revenue retention was 65%. That's grown in 2021 to 99%. Our gross margin in 2017 was 78%. That has grown to 86% in 2021. Our adjusted EBITDA was 7% in 2017. That has grown to 25%. Free cash flow, while it's improved, and we're pleased that it's improved, is certainly not delivering positive cash flow every year. So we've improved it from a $2.9 million burn in 2017 to a $1.1 million burn in 2021. You can see that we delivered positive cash flow in 2020, but we need to make that consistent, right? Year in, year out, positive free cash flow. So that remains one of our focus items. Fifth then, our R-score, and R-score, as you probably know, is simply defined as annual revenue growth percent plus annual EBITDA percent. So when we looked at that metric in 2017, we were at an R-score of 14. And then in 2021, that had grown to an R-score of 21. So that's an increase of 35 points over that period of time, which we're very pleased with. Because that's a reflection both of maintaining or growing revenue and increasing our EBITDA. And then finally, the last metric that we've been tracking and reviewing each quarter is our percent of sales from non-core markets. As an example, China. Back in 2017, our sales from those markets was about 23%, just a little over 23% of our total sales. And in 2021, that had shrunk to 4%. as we continue to focus on those markets that are efficient for us to operate in and that we believe where we have differentiation and where we can win going forward i expect that our sales from those markets will continue to be in that four percent range maybe um a bit less as we move forward so as i mentioned when we started the call um I'm excited by the growth markets that we are focused on, those being data protection as a service, hybrid cloud, and managed IT services. All of those are growing quickly, and they are clear reflections of macro shifts that are occurring in our industry, and to which FalconStor technology and experience is very well aligned. In fact, the data protection as a service market is predicted to grow 31% annually to 104 billion in 2027. The hybrid cloud market is predicted to grow 20% annually to 204 billion in 2027. And then finally, the managed services market is predicted to grow 8% annually to 355 billion in 2026. So these are exciting markets for us to focus in. and we believe that our go-to-market focus on managed service providers and on hybrid cloud partners will be key drivers for falcon store to generate growth over the next several years so today you know we have over a thousand organizations and managed service providers that manage over one exabyte of data using falcon store technology and that technology is protected by 43 patents and patent applications. 2021 featured some important commercial highlights that I'd like to review and that we're pleased with, that we're able to accomplish in 2021. First of all, we've launched a multi-tenant version of our long-term data retention and recovery product, a product we call StoreSafe. which significantly improves the ability for managed service providers or MSPs to optimize data protection for the enterprise customers that they serve. Our StoreSafe solution improves MSP tenant management, data storage, and reduces data storage costs by seamlessly leveraging public cloud storage, such as IBM Cloud, AWS, Microsoft Azure, or Wasabi. Next, we introduced what we believe is a new and disruptive per tenant per month pricing model for our MSP partners, which aligns very well with their monthly OpEx structured business models. And this move is already proven to be working. Not only were we able to secure several new MSPs toward the end of Q3, but we added three more in Q4, so we're excited about that pricing model and how that is being received in the market. Third then, we launched an initiative for our MSPs to be able to leverage either IBM Power Servers or Intel server platforms. And this flexibility is key for our MSPs that are offered backup as a service and migration as a service to customers with diverse operating environments, including environments like IBM i. Next, then fourth, we expanded our global partnership with Hitachi and Antera to provide advanced disaster recovery and cloud-enabled protection for Hitachi flash storage arrays. with our store guard technology that's data replication snapshot based technology so we were pleased to be able to launch that and then fifth finally we continue to demonstrate the ability of our data protection solutions to scale with several expansions of multi-petabyte deployments across multiple data centers large enterprises government institutions and msps so We're excited about what we were able to accomplish in 2021. As I mentioned earlier, we have a lot of work to do, but we're launching into 2022. I'm excited by the progress that we've made. So for 2022 then, we here again have set four key growth initiatives that will then track our progress against every quarter as we have our calls. First, we're focused on generating growth by targeting the market forces that are moving to cloud-based data protection, both as client-led services and by using backup as a service and migration as a service through MSP. So said another way, focused on growing through MSPs data protection that is moving to the cloud. Very important macro shift that is happening in our industry. Second then, we're focused on generating growth by expanding our reach. into mid-range storage markets through the bundling of FalconStor technology with storage market leaders like we've already done with Hitachi Venterra. We'll continue that initiative. Third then, as I mentioned earlier, we've got to become much more consistent on our quarterly profitability and increasing free cash flow every quarter. So we'll focus on that. And then last but not least, here again, I'm beginning to generate growth via M&A, which we were not able to accomplish in 2021. So we hope to begin that in 2022. So in just a minute, I'm going to turn over to Vince to go through the detailed financials for both Q4 and 2021. But before I do, I wanted to just address this ongoing crisis in Ukraine. So our thoughts and our prayers of all Falcon Store employees are with those that have been so tragically, continue to be tragically impacted. And while this crisis has the potential to cause disruption across the globe and negatively impact our business, we don't have any employees, any contractors, or any customers in either Ukraine or Russia. But regardless, we'll continue to closely monitor the situation for any potential impacts to our business. And most importantly, continue to diligently help our customers protect their incredibly valuable data. So I'd like to introduce Vince Sita before turning it over to Vince. Vince is our new Chief Financial Officer. and joined the company back in mid-February. Vince replaces Brad Wolf, who was a key asset for Falcon Store for over three years. We wish Brad well in his future endeavors and appreciate the dedication that he brought to Falcon Store every single day. Vince is inheriting a solid foundation from which that we can build Falcon Store. And I already appreciate the talent and the experience that he is bringing to our team. Vince has a very strong operational and strategic planning focus, and he's going to be a very important asset to Falcon Store as we grow. So with that, let me finally turn it over to Vince for a more detailed overview of our Q4 and full year 2021 financial results.

Vince. Thank you, Todd. Okay, so for Q4 2021, we closed the three-month period and then December 31st, 2021 with 3.8 million in GAAP revenues compared to 3.7 for the same period of the previous year, an increase of 4%. GAAP total profit for a quarter was 3.4 million compared to 3.2 for a previous year, an increase of 6%. GAAP total operating expenses were 3 million compared to 3.2. for the fourth quarter of 2020, a decrease of 7%. And so as a result, we generated a gap operating income of $385,000 in Q4 2021 compared to a gap operating loss of $47,000 in Q4 2020. However, in Q4 2021, we had a higher deferred tax expense resulting from a revaluation of our deferred tax asset. And as a result, despite generating an operating income of $385,000 in Q4 2021 versus an operating loss in Q4 2020, we ended up with a higher gap net loss in 2021 of $191,000 compared to a gap net loss of $109,000 for Q4 2020. So for the full year on slide 13, We closed total revenues of 14.2 compared to 14.8 for the same period of the previous year, a decrease of 4%. Gap total profit for fiscal year 2021 was $12.2 million compared to $12.9 million for prior year, a decrease of 6%. GAP total operating expenses were $11.6 million compared to $11.1 million for fiscal year 2020, an increase of 4%. As a result, GAP operating income for fiscal year 2021 was $634,000 versus $1.8 million for fiscal year 2020. Moreover, 2021 GAP operating income did include a benefit of $633,000 related to a gain for a legal settlement of a contractual dispute. Without that gain, we would only have produced a breakeven operating income for full year 2021. So finally, for gap net income, for 2021, we came in at $203,000 compared to a gap net income of $1.1 million for fiscal year 2020. If we turn now to the balance sheet, We ended the quarter with a cash balance of $3.2 million compared to $3.5 million in September 2021, September 30, 2021, and $1.9 million at December 31, 2020. So a reduction of $300,000 versus Q3 2021 and an improvement over Q4 of 2020 of $1.3 million. In the second and third quarter of 2021, we raised $4.5 million gross proceeds from two public offerings of our common stock at a price of $4.10. We also paid at the end of Q2 $1.3 million towards our notes payable balance. Networking capital excluding deferred revenues, contracts receivables, but including the redemption value of our term notes. ended at $3.6 million, a decline of $200,000 from Q3 2021. However, an improvement of $4.5 million from Q4 2020. We closed the quarter with $2.9 million in accounts receivable. That's gross of any reserves. Accounts payable and accrued expenses of $1.5 million and deferred revenues of $6.1 million. So for 2022, we are providing the following guidance. Revenues in the range of 14.2 to 15.5. This compares to our revenues of 2021 and 14.2. Adjusted EBITDA of 3.2 million to 3.9 million. And net income of 1.9 million to 2.3 million versus our 2021 net income of 0.2 million. This will maintain an EBITDA percentage in the 23 to 25 range, produce a net income percent between 13 and 15%, and an R-score or a rule of 40 between 23 and 34. So with this plan, we are committed to operating from a profitable base to allow for accelerated growth. Todd, I'll turn it back to you for final comments.

All right. Well, thank you, Vince.

So, quick summary. We are pleased with our 2020-21 results. We made a lot of progress commercially, especially as it relates to MSPs, hybrid cloud use cases, and with our partnership with Hitachi Venterra. So, we'll continue that in 2022 and build upon that foundation that we built, and we are We're excited about where we are, looking forward to where we are going here in 2022. So with that, let me, I'm going to turn it back over to Clark and he will open up the floor for any questions that anyone may have. Clark?

Yeah, thanks, Todd. If anyone has any questions, you can type them in the little questions dialogue. If you can't see it, you may see this little rectangular red arrow. click on that it'll it'll open up the pane so you can see the uh little dialog boxes and there's one that says questions so you can click on that okay i've got one question here todd all right from chad it says with a big market opportunity and traction in the market guidance for 2022 is flat to up nine percent versus 2021 question mark

Yes. So hey, Chad, how are you doing? Thanks for joining the call. So that is correct. So if you remember, we're continuing our shift from a perpetual license model to a subscription license model. So that impacts our short-term ability anyway to grow as we continue to work through that shift. And so it's a combination, Chad, of maintaining as much of our legacy revenue base as we possibly can right through high renewal rates through expansions for legacy customers and then layering in on top of that great subscription growth but through some of these new markets so when you net it all out um you know we we are targeting total revenue growth for the year um but you know until we get a little deeper into the a higher percentage of our total revenue being subscription-based, that growth rate's going to be diminished a little bit. But great question.

Okay, thanks, Chad. Are there any other questions?

Okay, Todd, I'm not seeing any other questions at this time.

Okay.

All right.

All right, great. Well, once again, folks, thank you for your time. We really appreciate your time and attention and look forward to speaking again here in a couple months.

Thank you. Hey, Todd. Yes. We just got a question here if you want to tackle it.

Absolutely. Go right ahead.

It's from Wallace. It says, so what is subscription growth in 2022?

Subscription growth in 2022. Great question. I think, Wallace, that we're It's right around the 30, between 30 and 40% mark. I don't have the exact number off the top of my head. I apologize. I should have that ready. But yeah, I think we, as I mentioned back in one of the slides about, you know, the Q4 being a 20% increase year over year, and then the year being a 40% year over year, I think we have an opportunity to maintain that, or have increased it some, you know, depending on how we're able to do on some of these go-to-market initiatives. That remains one of our big priorities, even though, you know, as we're making that shift to subscription, it does hurt our ability to grow total revenue a little bit.

Okay.

No more questions. Let us see, Todd.

All right. Very good. Well, once again, thanks, folks. And we will chat here in a couple months. Thank you.