Executive Summary

Q2 2022 delivered sequential revenue growth to $2.40M from $2.05M in Q1 but declined year-over-year versus $3.26M in Q2 2021; GAAP net loss widened to $(0.93)M, with diluted EPS of $(0.18) . Management attributed the YoY revenue decline primarily to reduced non‑recurring legacy revenue while recurring ARR continued to grow .
FalconStor finalized and initiated sales under a new IBM hybrid cloud reseller agreement; several joint IBM/FalconStor customers were secured late in Q2, with MSP partner additions supporting recurring revenue momentum .
Full‑year 2022 guidance was cut: revenue lowered to $10–$12M (from $13–$14M in May and $14.2–$15.5M in March), Adjusted EBITDA to $(0.5)M–$1.2M, and net income to $(1.8)M–$(0.5)M; management still expects sequential revenue growth and GAAP net income positive in Q3 and Q4 .
Operating discipline continued: GAAP operating expenses fell to $2.5M (−9% QoQ, −17% YoY), and ending cash was $1.8M; ARR represented 66.8% of GAAP revenue as the company shifts to subscription/consumption models .

What Went Well and What Went Wrong

What Went Well

Early commercial traction under IBM hybrid cloud reseller agreement with joint solutions for backup/migration on IBM Power VS cloud; “we have secured several new customers with IBM throughout the back half of Q2” .
ARR growth and mix shift: “annual recurring revenue increase…4% year-over-year…ARR represented 66.8% of our total GAAP revenue” .
Cost control: GAAP operating expenses decreased to $2.5M (−9% QoQ; −17% YoY), aiding operating loss improvement vs Q1 .

What Went Wrong

Total GAAP revenue down 27% YoY due to reduced non‑recurring legacy revenue; total revenue growth consistency remains the “biggest focus area and challenge” .
GAAP net loss widened YoY to $(0.93)M, and diluted EPS was $(0.18), reflecting top‑line pressure despite lower OpEx .
Guidance cut twice YTD: from $14.2–$15.5M in March to $13–$14M in May, then to $10–$12M in August; EBITDA and net income ranges reduced materially, evidencing slower-than-expected legacy and transition dynamics .

Financial Results

Metric	Q4 2021	Q1 2022	Q2 2022
Total Revenue ($USD)	$3,809,938	$2,049,107	$2,394,335
Gross Profit ($USD)	$3,389,695	$1,633,839	$1,995,925
Total Operating Expenses ($USD)	$3,004,891	$2,746,510	$2,504,088
Operating Income (Loss) ($USD)	$384,804	$(1,112,671)	$(508,163)
Net Income (Loss) ($USD)	$(191,304)	$(1,109,406)	$(931,226)
Diluted EPS ($USD)	$(0.07)	$(0.20)	$(0.18)
Ending Cash ($USD)	$3,181,209	$3,381,639	$1,808,118
Adjusted EBITDA ($USD)	$432,457 (Non‑GAAP, Q4)	$(1,103,743) (Non‑GAAP Op Income); $(1,092,776) (Non‑GAAP Net Income)	$(318,055) (Adjusted EBITDA)

Segment Revenue Breakdown

Metric	Q4 2021	Q1 2022	Q2 2022
Product Revenue ($USD)	$1,965,724	$594,928	$962,898
Support & Services Revenue ($USD)	$1,844,214	$1,454,179	$1,431,437

KPIs and Operating Metrics

KPI	Q4 2021	Q1 2022	Q2 2022
ARR YoY Growth (%)	40% (subscription revenue YoY; company KPI context)	4%	4%
ARR as % of GAAP Revenue	—	62%	66.8%
Total Cost of Revenue ($USD)	$420,243	$415,268	$398,410
Accounts Receivable ($USD)	$2,855,135	$825,598	$1,552,626
Deferred Revenue, Current ($USD)	$4,557,317	$4,049,503	$3,576,161

Notes: GAAP gross margin was 86% in FY 2021 and 80% in Q1 2022 (company disclosed); Q2 2022 gross margin can be inferred from disclosed gross profit and revenue but the company did not explicitly state a percentage in the Q2 materials .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Total Revenue	FY 2022	$14.2–$15.5M (Mar 2022)	$10–$12M (Aug 2022)	Lowered
Total Revenue	FY 2022	$13–$14M (May 2022)	$10–$12M (Aug 2022)	Lowered
Adjusted EBITDA	FY 2022	$3.2–$3.9M (Mar 2022)	$(0.5)M–$1.2M (Aug 2022)	Lowered
Adjusted EBITDA	FY 2022	$2.0–$2.7M (May 2022)	$(0.5)M–$1.2M (Aug 2022)	Lowered
GAAP Net Income	FY 2022	$1.9–$2.3M (Mar 2022)	$(1.8)M–$(0.5)M (Aug 2022)	Lowered
GAAP Net Income	FY 2022	$0.8–$1.4M (May 2022)	$(1.8)M–$(0.5)M (Aug 2022)	Lowered
Qualitative	H2 2022	Sequential quarterly GAAP revenue growth; GAAP net income positive in Q3 & Q4	Reiterated	Maintained (trajectory)

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4 2021 and Q1 2022)	Current Period (Q2 2022)	Trend
IBM Hybrid Cloud Partnership	Announced work to expand hybrid cloud/MSP offerings; Hitachi Vantara reseller progress	Formal IBM reseller agreement signed; several joint customers secured; solutions for IBM Power VS cloud (backup/migration/offsite)	Strengthening
Recurring Revenue Shift (ARR)	Subscription revenue +40% FY21; focus on subscription/consumption models	ARR +4% YoY; ARR 66.8% of GAAP revenue; expect acceleration with IBM	Positive mix shift
Legacy Non‑Recurring Revenue	Inconsistency cited; legacy expansions/new acquisitions pressured; Q1 legacy revenue miss	YoY total revenue decline driven by reduced non‑recurring legacy revenue	Ongoing headwind
Operating Discipline	OpEx −7% YoY in Q4’21	OpEx $2.7M in Q1; continued focus	OpEx $2.5M; −17% YoY; −9% QoQ
Pipeline & H2 Trajectory	2022 plan to operate from profitable base; guidance initially $14.2–$15.5M	Reiterated sequential growth and GAAP net income positive in Q3/Q4; pipeline growing (hybrid cloud)	Cautiously constructive

Management Commentary

“We finalized our new relationship with IBM… we’re thrilled to report that our early sales have already started, as we have secured several new customers with IBM throughout the back half of Q2.” — CEO
“As we make the strategic shift from perpetual to recurring revenue… annual recurring revenue increase…4.2% year-over-year… ARR represented 66.8% of our total GAAP revenue.” — CEO
“Q2’s GAAP operating expenses decreased to $2.5 million… 17% year-over-year; and… about 9% decrease [QoQ].” — CEO
“We are reducing and revising our full year 2022 guidance… total revenues $10 million to $12 million, adjusted EBITDA minus $0.5 million to $1.2 million, net income minus $1.8 million to minus $0.5 million.” — CFO
“We believe that, over the next couple of quarters, we’re actually going to be able to see growth on each one of these dimensions [revenue/ARR], and… GAAP net income positive in Q3 and Q4.” — CEO

Q&A Highlights

The retrieved transcript concluded with management emphasizing sequential revenue growth and the expectation for GAAP net income positive in Q3 and Q4, underscoring confidence in pipeline and IBM-led hybrid cloud initiatives .
Additional Q&A details were not available due to incomplete transcript retrieval in our source. Prepared remarks consistently highlighted ARR mix shift and cost control .

Estimates Context

Wall Street consensus EPS and revenue estimates for Q2 2022 were unavailable via S&P Global due to access limits at the time of analysis. As a result, comparison to consensus cannot be provided here [GetEstimates error: Daily Request Limit Exceeded].
Actuals: Revenue $2.40M; diluted EPS $(0.18). Without consensus, we cannot quantify a beat/miss; however, management framed the YoY decline as driven by non‑recurring legacy revenue reduction while recurring ARR grew .

Key Takeaways for Investors

Hybrid cloud commercialization is underway: IBM reseller agreement is producing initial customers, offering a credible path to accelerate ARR and improve revenue consistency into H2 2022 .
Mix shift continues: ARR accounted for 66.8% of GAAP revenue in Q2, reinforcing the transition to subscription/consumption models that should support recurring visibility over time .
Near-term headwinds: Total revenue declined 27% YoY as non‑recurring legacy revenue fell; watch for stabilization in legacy expansions/new logos while hybrid cloud ramps .
Cost control mitigates losses: OpEx down 17% YoY and 9% QoQ; operating loss improved versus Q1, providing leverage if sequential revenue growth materializes .
Guidance reset lowers H2 bar: FY22 revenue now $10–$12M, Adjusted EBITDA $(0.5)M–$1.2M, net income $(1.8)M–$(0.5)M; management still targets sequential growth and GAAP net income positive in Q3/Q4—key milestones to track .
Liquidity watch: Cash declined to $1.8M from $3.4M in Q1; monitor collections (A/R $1.55M) and deferred revenue trends as hybrid cloud pipeline converts .
Tactical: Near-term stock narrative likely hinges on confirmation of sequential revenue growth and evidence of IBM channel scale; medium-term thesis depends on sustained ARR acceleration and improved revenue consistency .

FALCONSTOR SOFTWARE INC (FALC)·Q2 2022 Earnings Summary