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spk00: Good afternoon and thank you for joining us to discuss Falcon Store Software's Q1 2022 earnings. Todd Brooks, Falcon Store's Chief Executive Officer, and Vincent Sita, Falcon Store's Chief Financial Officer, will discuss the company's results and activities and will 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, 10-Q, and other reports filed with the Securities and Exchange Commission and the company's press release issued today. During today's call, there'll 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 Q1 2022 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.
spk03: All right. Well, thanks, Clark. I appreciate that. And I'd certainly like to thank each of you for taking your time to participate in our call today. While we've got a lot of work to do, we are certainly pleased with the progress that we're making in the market that we're serving and the value that our solutions deliver to our managed service provider partners, and enterprise customers every day. FalconStore is a trusted data protection innovator with well over 1,000 end-user customers and data under management. We enable the world's most demanding managed service providers and enterprises to modernize their data backup and archival operations for the hybrid cloud world, protecting data across on-premises data centers and public cloud environments. Migration to the cloud, data center rationalization, and increased leverage of outsourced managed services are absolutely top priorities for enterprise CIOs and are fundamental macro shifts to which FalconStor technology and market experience are 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 long-term data storage footprints by up to 95%. For this year, for fiscal year 2022, we implemented four key strategic initiatives as we continue our work to reinvent FalconStor. First, on 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 recurring revenue growth for the next decade. Second, on sharpening our commercial and R&D focus related to our business continuity-driven data replication products to ensure that we are focused on those use cases which are most important to our largest and strategic enterprise customers. Third, that I'm beginning to generate growth via M&A. And finally, on continuing to deliver consistent profitability. We're excited by these, you know, our strategic initiatives and these growth markets that we are involved with. And specifically data protection as a service, hybrid cloud and managed IT services are growing quickly and are clear reflections of macro shifts in our industry to which our technology and experience are well aligned. In fact, the data protection as a service market is predicted to grow by 31% annually to 104 billion in 2027. The worldwide hybrid cloud market is predicted to grow by 20% annually to 204 billion in 2027. And finally, the managed IT services market is predicted to grow by 8% annually to 355 billion in 2026. So our good market focus on managed service provider and hybrid cloud partners will be key drivers for us to generate recurring revenue growth over the next several years. To this point, We were thrilled to announce earlier today, if you've not seen that, that we've entered into a new hybrid cloud reseller relationship with IBM to create several new joint solutions together, which combine Falcon Store StoreSafe software with IBM Cloud Object Storage and IBM Power Virtual Server Cloud. Now, these new solutions migrate and optimize data protection in the IBM Power Cloud, and they include the following. First, it's a solution for secure and cloud-native backup. For enterprise running their applications in the IBM Power Virtual Server Cloud, they'll now be able to utilize Falcon Storage to securely and efficiently backup to IBM Cloud Object Storage. So that's the first joint solution. The second one, then, is an efficient cloud migration solution. These are for enterprises needing to migrate their existing on-premises power applications to the IBM Power Virtual Server Cloud. In this case, FalconStore StoreSafe software takes a secure snapshot of the on-premise environment and restores it into the IBM Power Virtual Server Cloud, maximizing application availability and security. For this second joint solution, a key initial target market will be enterprises that have traditionally run applications within IBM i environments on premise. According to healthsystems.com, who is a leading IBM i consulting firm, over 100,000 companies use IBM i today. Now this is a large market and one for which migrating workloads to the IBM Power Virtual Server Cloud will be very important going forward. Third thing, the third solution is an advanced hybrid cloud backup solution for MSPs looking to use the IBM Power Virtual Server Cloud for a secure air-gapped offsite storage location for data. And in this case, Val can store an IBM Deliver StoreSafe on-premise for the managed service provider. with a IBM Cloud instance for secure and encrypted offsite backups. So this new reseller relationship that we have built with IBM is clearly a material step forward for FalconStore and should be a significant contributor to our 2020 strategic goal to significantly increase the hybrid cloud recurring revenue stream for FalconStore. Really excited about that. A ton of work went into that over the last, call it six months or so, but was very proud and happy to be able to announce that for the Falcon Store team this morning. Before going any further, I would like to take this a minute and introduce our new Chief Revenue Officer, Rich Spring. Rich joined us in early March this year, so during Q1. and he has already been instrumental in helping us and he was instrumental in helping us to secure this new relationship with ibm also so going forward rich is going to be focused on realigning and expanding our sales team for hybrid cloud growth and on just improving overall sales process discipline so i am very excited to have rich join the team And we just have a really strong leadership team at Falcon Store and Rich just simply makes it that much better. Moving then to our highlight of our Q1 results, they were certainly mixed as we spent a lot of time focused on this building and finalizing the IBM relationship. One of our goals as I've already mentioned is growing our recurring revenue ARR for the Quarter did grow 4.4% year over year. And as you can see over the last five quarters, the rate at which our ARR is growing year over year is increasing. And we expect that naturally to continue that trend. As a percent of total revenue, we ended Q1 where ARR was 62% of total revenue. And that also has increased over time and it will naturally increase as we build in more and more bringing revenue through our hybrid cloud focus. The big disappointment of the quarter though was total gap revenue. And as you can see, our total gap revenue was down 46%, something that was clearly an area that we were very disappointed. And as you can see over the last five quarters, the growth has been super inconsistent. In Q1 though, The sole contributor to that result was the fact that our non-recurring legacy revenue decreased significantly. And let me just describe what non-recurring legacy revenue is. That is expansions to existing customers. So this is our legacy customer base, not our hybrid cloud base, but expansions to our legacy customer base and then also new customers within our legacy customer base. As you can see, it's been very, very consistent. But during the quarter, we dropped the ball. We were obviously very consumed with moving our relationship forward on the hybrid cloud side and with IBM. And so we've got work there to make sure that that doesn't happen again and that we stay consistent with our legacy base. It's very, very important that we simultaneously grow hybrid cloud recurring revenue while maintaining a strong legacy base within the legacy part though i didn't we didn't put it on a slide here but our legacy renewals did stay very strong at 86 percent for the quarter so here again um we know what the issue was then in q1 and we have already begun to correct that make sure that we turn focus on there and i can um although won't give exact numbers. Q2 has already started off much better in that regard. Rich has gotten embedded and is beginning to drive some sales discipline on the legacy side also. Moving to our gap operating expenses, that's an area that we've been traditionally very good at controlling and continuing to find other areas of being efficient. And so that continued again in Q1. Q1 operating expenses were down to 2.7 million. And so that's an area we'll continue to focus on. And we typically do a really good job in that area. But bottom line, though, is because of the miss on the total revenue side, we also lost about 1.1 million of net income during the quarter. So we've got a lot of work to do to be consistent. Could not possibly be more excited with our hybrid hybrid cloud growth with the relationship that we've built with just a fantastic ibm team and are really excited about what that is going to do for us going forward so with that let me turn it over to vince uh to go through some more detailed financials vince
spk02: Thanks, Michael. So looking at our income statement summary, we closed 2.1 with 2 million in GAAP revenues compared to 3.8 for the same period last year, a decrease of 46%, as Todd just mentioned. Our GAAP total gross profit was 1.6 compared to 3.2 for previous year. Gap total operating expenses were 2.7 million compared to 3.2 for the first quarter of 2021, a decrease of 14%. We incurred a gap operating loss of 1.1 in Q1 compared to a gap operating loss of 17,000 in Q1 2021. And finally, Q1 generated a gap net loss of 1.1 compared to a gap net income of $408,000 last year. Now, one point to mention is that Q1 of last year did benefit from a debt extinguishment related to a paycheck protection program or a PPP loan of $754,000. Without that gain, GAAP net income for Q1 2021 would have been a net loss of approximately $300,000 instead of a net income of $400,000. So therefore, the comparison between this year and last year without this gain would be a net loss of $1.1 million this quarter versus a net loss of $300,000 in Q1 of prior year. Moving on to the balance sheet, we ended the quarter with a cash balance of $3.4 million compared to $3.2 on December 31st, 2021, and compared to $2 million at March 31st, 2021. therefore an increase of 200,000 over Q4 and an increase of 1.4 million over Q1 2021. Just as a reminder, and as you may recall from previous announcements, in Q2 and Q3 of 2021, we raised 3.7 million net proceeds in two public offerings of our common stock at a price of $4.10. We also paid at the end of Q2 last year $1.3 million towards our notes payable balance. Looking at networking capital, so networking capital excluded deferred revenues, contract receivables, but including the redemption value of our terms note, ended at $1.8 million, a decline of $1.7 million from Q4 2021, and an improvement of $1.7 million from Q1 2021. We closed the quarter with $900,000 in accounts receivable, accounts payable and accrued expenses of $1.5 million, and deferred revenues of $5.4 million. Moving on to our next slide, given our Q1 results, specifically in terms of revenues, we are reducing full-year guidance as follows. Revenues will be in the range of 13 to 14 million, adjusted EBITDA of 2 million to 2.7, and net income of 0.8 million to 1.4 million. This versus our 2021 net income of 0.2 million. Overall for a year, this will produce an EBITDA percentage in the 16 to 19 range.
spk03: net income between six and ten percent and an eight and a r score or rule of 40 between 7 to 18. todd i'll turn it back to you uh for some final comments all right well thank you thank you vince and just to recap uh you know it was a mixed quarter we got just some super positive progress on our growth side but clearly while we're doing that we've got to be very focused on making sure that we maintain a really good, strong legacy base, not just renewals, but expansion sales and new sales to legacy customers. So that is what we're focused on. And we're focused on making sure that we launch into our new relationship with IBM in a very strong way. and couldn't be more excited about that. So with that, let me turn it back over to Clark and we can open up the floor for any questions that anyone may have.
spk00: Clark? Thanks, Todd. If anyone has any questions, you can type them in the questions dialog box. If you can't see it, you may see a rectangular red arrow Click on that and it'll open up the pane so you can see the questions dialog box. We don't have any questions at this time, Todd.
spk01: Okay, let's wait another 20 seconds or so just to make sure. All right.
spk03: Well, then with that, we'll go ahead and close the call. But thank you again for your participation, for your time, and we will chat next time. Thank you.
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