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FALCONSTOR SOFTWARE INC (FALC)·Q1 2023 Earnings Summary

Executive Summary

  • Q1 revenue was $2.27M, up 11% year over year but down 11% sequentially as the company continues shifting from perpetual licenses to recurring revenue; GAAP EPS was $(0.11) and gross margin was ~83.5% .
  • Hybrid cloud momentum accelerated: ARR run-rate rose 81% QoQ and 394% YoY; MSP-driven hybrid cloud ARR run-rate increased 23% QoQ, supported by 14 new hybrid cloud customers and 100% retention in the hybrid cloud base .
  • Operating discipline remained a focus: total operating expenses were $2.31M (down ~16% YoY) and net loss narrowed to $(0.45)M vs $(1.11)M a year ago; ending cash was $1.84M vs $2.01M in Q4 2022 .
  • No explicit Q1 2023 guidance was provided; prior FY2022 guidance was maintained in Q3 2022 and results reported in Q4 2022 press release. Wall Street consensus from S&P Global was unavailable due to access limits; treat estimate comparisons as N/A for this recap .

What Went Well and What Went Wrong

  • What Went Well
    • Hybrid cloud ARR surged: “81% increase in hybrid cloud ARR run-rate in Q1 compared to the previous quarter… early validation of our expanding partner sales since the formal launch of our IBM relationship” .
    • MSP momentum and retention: MSP-driven hybrid cloud ARR +23% QoQ; retained 100% of hybrid cloud customers and won 14 new hybrid cloud customers across Americas, APAC, and EMEA .
    • Operating efficiency improved YoY: operating expenses down ~16% YoY; net loss narrowed to $(0.45)M vs $(1.11)M in Q1 2022 .
  • What Went Wrong
    • Sequential revenue decline: Q1 revenue fell 11% QoQ amid continued transition to recurring revenue, pressuring near-term top-line and profitability .
    • Profitability shortfall: management acknowledged falling “short” of profitability in Q1 despite improvement in net income; GAAP net loss was $(0.45)M .
    • Cash balance decreased: ending cash declined to $1.84M from $2.01M in Q4 2022; net working capital cash fell to $0.872M from $1.2M in Q4 2022 .

Financial Results

MetricQ3 2022Q4 2022Q1 2023
Total Revenue ($USD)$3,059,141 $2,549,665 $2,268,396
Gross Profit ($USD)$2,679,037 $2,178,566 $1,893,079
Gross Margin (%)87.6% 85.5% 83.5%
Total Operating Expenses ($USD)$2,296,464 $2,197,875 $2,313,747
Operating Income (Loss) ($USD)$382,573 $(19,309) $(420,668)
GAAP Net Income (Loss) ($USD)$221,372 $20,305 $(447,770)
GAAP EPS (Basic) ($)$(0.03) $(0.06) $(0.11)
Ending Cash ($USD)$1,666,054 $2,011,062 $1,839,227
Adjusted EBITDA ($USD)$603,786 $158,381 $(431,923)

Segment breakdown

Revenue SegmentQ3 2022Q4 2022Q1 2023
Product Revenue ($USD)$1,568,110 $1,120,241 $1,022,186
Support & Services Revenue ($USD)$1,491,031 $1,429,424 $1,246,210

KPIs and growth indicators

KPIQ3 2022Q4 2022Q1 2023
Hybrid Cloud ARR Run-Rate (change)—+20% QoQ; +222% YoY +81% QoQ; +394% YoY
MSP-Driven Hybrid Cloud ARR Run-Rate (change)—+14% QoQ +23% QoQ
Revenue YoY change(6%) YoY per press narrative (30%) YoY for Q4 +11% YoY
Revenue QoQ change+28% QoQ (Q2→Q3) (30%) QoQ (Q3→Q4) per table values (11%) QoQ
Hybrid Cloud customer retention——100% retained; 14 new hybrid cloud customers

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Total RevenueFY 2022$10M–$12M (maintained in Q3) Results reported ($10.05M) Maintained; then actuals reported
Adjusted EBITDAFY 2022Maintained (Q3; value not explicitly stated in transcript) Actual FY 2022 Adjusted EBITDA $3.33M Maintained; then actuals reported
GAAP Net IncomeFY 2022$(1.8)M to $(0.5)M (maintained in Q3) Actual FY 2022 GAAP Net Loss $(0.04)M (loss $42k) Maintained; actuals better than guided range
Q1 2023 GuidanceQ1 2023Not providedNot providedNo update

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2022)Previous Mentions (Q4 2022)Current Period (Q1 2023)Trend
IBM hybrid cloud partnershipNew reseller relationship; initial customer adds; cloud-native backup, migration, MSP air-gapped solutions Formal launch in H2; sales began to increase; extended to Azure IBM Power VS via Skytap Sales continue to increase; high customer satisfaction; key driver of ARR run-rate growth Accelerating
MSP channel momentumAdded new MSP partners; existing MSPs expanded usage MSP ARR run-rate +14% QoQ MSP ARR run-rate +23% QoQ; advanced hybrid cloud backup for MSPs Strengthening
Shift from perpetual to recurringEmphasis on ARR growth; ARR 69% of TTM revenue Revenue declined YoY while recurring ramped; H2 revenue +26% vs H1 Sequential revenue -11% due to shift; ARR run-rate +81% QoQ Transition ongoing
Profitability and OpEx controlOpEx down QoQ and YoY; GAAP net income $0.2M H2 2022 positive net income; Q4 GAAP net income $20k Not profitable in Q1; net loss improved YoY; continued focus to be “profitable or very close” quarterly Mixed but disciplined
Regional traction——Wins across Americas, APAC, EMEA; 100% retention in hybrid cloud Broadening
Cloud platform expansion—First Azure IBM Power VS customer (Skytap) Strategy to extend IBM-centric position into Azure, GCP, AWS Expanding roadmap
Security/ransomware recoverySolutions enable quick recovery incl. ransomware; reduce storage by up to 95% Reinforced value proposition Reiterated as core differentiation Consistent messaging

Management Commentary

  • “We are encouraged with the progress we made in Q1, as our joint sales with IBM to deliver hybrid cloud data protection solutions to IBM customers continued to grow… Our 81% increase in hybrid cloud ARR run-rate in Q1 compared to the previous quarter continues to demonstrate early validation of our expanding partner sales” — Todd Brooks, CEO .
  • “We retained 100% of our hybrid cloud customers in Q1… storage capacity used by our installed base customers increased by 0.3% on average each month… We won 14 new hybrid cloud customers during the quarter” — Todd Brooks, CEO .
  • “We’re going to clearly continue to work hard to manage our expenses [and] make sure that we are profitable or very close to profitability every quarter… we fell short of that a little bit in Q1… we did dramatically improve our net income” — Todd Brooks, CEO .
  • “We closed Q1 with $2.3 million in revenues, operating expenses of $2.3 million, net operating loss of $421,000 and a net loss of $448,000… revenues represent an increase of 11% [YoY]… operating expenses were 16% lower than the previous year” — Vincent Sita, CFO .

Q&A Highlights

  • The published Q1 2023 transcript primarily contains prepared remarks and did not include a detailed Q&A section; management emphasized expense control and near-term profitability efforts, hybrid cloud momentum with IBM, and retention metrics in prepared remarks .

Estimates Context

  • S&P Global Wall Street consensus estimates for Q1 2023 and prior quarters were unavailable due to access limits; comparisons vs consensus are therefore N/A for this recap. Values would typically be sourced from S&P Global; none are included here due to “Daily Request Limit Exceeded.”*
  • Given the unavailability, investors should focus on company-reported YoY and QoQ performance and ARR trajectory until estimates can be retrieved .
    *Values retrieved from S&P Global.
MetricQ3 2022Q4 2022Q1 2023
Revenue Consensus Mean ($USD)N/A*N/A*N/A*
Primary EPS Consensus Mean ($)N/A*N/A*N/A*
Revenue - # of EstimatesN/A*N/A*N/A*
Primary EPS - # of EstimatesN/A*N/A*N/A*
*Values retrieved from S&P Global.

Key Takeaways for Investors

  • Hybrid cloud ARR trajectory is the central bull point: +81% QoQ/+394% YoY in Q1 with IBM partnership driving customer adds and usage; MSP ARR +23% QoQ adds channel breadth .
  • Near-term P&L remains in transition: sequential revenue decline (11% QoQ) and Q1 net loss $(0.45)M reflect the shift to recurring revenue; however, OpEx discipline (down ~16% YoY) is cushioning profitability .
  • Gross margins remain high (~83–88%), underscoring software economics and potential operating leverage as ARR scales .
  • Cash decreased to $1.84M from $2.01M; monitor liquidity and net working capital trends as recurring revenue ramps .
  • Strategic narrative is consistent and expanding: IBM remains the anchor, with planned extensions into Azure/GCP/AWS and continued MSP traction .
  • Until consensus data is accessible, focus on company-reported YoY growth (+11%) and ARR run-rate indicators to gauge near-term momentum .
  • Trading lens: stock catalysts likely tied to continued ARR acceleration and evidence of sustained quarterly profitability; any announced hyperscaler expansions or major MSP wins could be incremental drivers .