Executive Summary

Q3 2022 showed sequential improvement: revenue rose to $3.06M (+28% q/q; -6% y/y), GAAP net income turned positive at $0.22M (from $(0.93)M in Q2), and adjusted EBITDA improved to $0.60M from $(0.32)M in Q2, driven by IBM hybrid-cloud traction and tight OpEx control .
Mix shift continues: ARR grew 4.5% y/y and reached 69% of trailing 12-month GAAP revenue; management expects ARR growth to accelerate as IBM reseller momentum builds .
Guidance maintained: FY22 outlook held at revenue $10–$12M, adjusted EBITDA -$0.5M to $1.2M, and net income -$1.8M to -$0.5M (revised down in Q2 from Q1’s higher ranges) .
Key near-term catalysts: visible IBM pipeline conversion (including 1‑Click install via IBM Cloud Catalog), continued sequential revenue growth, and sustained operating discipline; risks include small cash balance and preferred dividend burden that keeps net income to common negative despite GAAP profitability .

What Went Well and What Went Wrong

What Went Well
- IBM reseller traction and cloud go-to-market: “secured several new customers and assisted several existing customers to expand their monthly usage through our relationship with IBM in Q3” .
- Sequential revenue and profitability: “Total revenue increased to $3.1 million… Our continued focus on tightly managing operating expenses resulted in delivering $0.2 million in GAAP net income during the quarter” .
- ARR momentum and mix: ARR grew 4.5% y/y and represented 69% of trailing 12-month GAAP revenue; management expects ARR growth to accelerate .
What Went Wrong
- Year-over-year revenue decline persists during the model transition: Q3 revenue $3.06M vs $3.28M in Q3 2021 (-7% y/y) .
- Cash drifted lower: ending cash $1.67M vs $1.81M in Q2 2022 and $3.5M in Q3 2021, limiting flexibility .
- Capital structure drag: despite GAAP net income, net income attributable to common stockholders was $(0.21)M due to preferred dividends and accretion; GAAP EPS to common was $(0.03) .

Financial Results

P&L summary (oldest → newest)

Metric	Q1 2022	Q2 2022	Q3 2022
Revenue ($USD)	$2,049,107	$2,394,335	$3,059,141
Gross Profit ($USD)	$1,633,839	$1,995,925	$2,679,037
Gross Margin (%)	80%	83.4% (calc)	87.6% (calc)
Operating Income ($USD)	$(1,112,671)	$(508,163)	$382,573
Operating Margin (%)	(54%)	(21.2%) (calc)	12.5% (calc)
GAAP Net Income ($USD)	$(1,109,406)	$(931,226)	$221,372
Net Income Attrib. to Common ($USD)	$(1,425,142)	$(1,305,236)	$(209,667)
Basic EPS (GAAP, common)	$(0.20)	$(0.18)	$(0.03)
Diluted EPS (GAAP, common)	$(0.20)	$(0.18)	$(0.03)
Total Cost of Revenue ($USD)	$415,268	$398,410	$380,104
Total Operating Expenses ($USD)	$2,746,510	$2,504,088	$2,296,464
Adjusted EBITDA ($USD)	N/A	$(318,055)	$603,786

Revenue mix

Revenue by Type ($USD)	Q1 2022	Q2 2022	Q3 2022
Product	$594,928	$962,898	$1,568,110
Support & Services	$1,454,179	$1,431,437	$1,491,031
Total	$2,049,107	$2,394,335	$3,059,141

KPIs and balance sheet items

KPI / Metric	Q1 2022	Q2 2022	Q3 2022
ARR YoY Growth (%)	4%	4%	4.5%
ARR as % of TTM GAAP Revenue	62%	66.8%	69%
Ending Cash ($USD)	$3,381,639	$1,808,118	$1,666,054

Notes: Adjusted EBITDA excludes depreciation & amortization, restructuring, severance, board costs, stock-based comp, and non-operating items (taxes, interest & other) per company’s non-GAAP policy .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue	FY 2022	$13M–$14M (Q1 guide)	$10M–$12M (maintained in Q3 after Q2 cut)	Lowered (Q2), Maintained (Q3)
Adjusted EBITDA	FY 2022	$2.0M–$2.7M (Q1 guide)	-$0.5M–$1.2M (maintained in Q3 after Q2 cut)	Lowered (Q2), Maintained (Q3)
GAAP Net Income	FY 2022	$0.8M–$1.4M (Q1 guide)	-$1.8M–-$0.5M (maintained in Q3 after Q2 cut)	Lowered (Q2), Maintained (Q3)

Earnings Call Themes & Trends

Topic	Previous Mentions (Q1 2022)	Previous Mentions (Q2 2022)	Current Period (Q3 2022)	Trend
IBM hybrid cloud reseller traction	New IBM reseller relationship announced; focus on IBM i/AIX migration/backup use cases	First customers secured; pipeline building	“Secured several new customers… existing customers expanding monthly usage” and launched 1‑Click IBM Cloud Catalog install	Improving
Recurring revenue/ARR mix	ARR +4% y/y; ARR 62% of revenue	ARR +4.2% y/y; ARR 66.8% of revenue	ARR +4.5% y/y; ARR 69% of TTM revenue; expect acceleration	Improving
Revenue trajectory	Q1 top-line miss on legacy non-recurring; sequential rebound expected	Sequential growth to $2.4M; YoY pressure persists	Second straight q/q growth to $3.06M; still -7% y/y	Improving sequentially; YoY weak
Operating discipline	OpEx down 14% y/y in Q1	OpEx down 9% q/q and 17% y/y	OpEx down 8% q/q and 4% y/y; GAAP net income positive	Improving
MSP channel	Added 4 new MSPs	Added 3 new MSPs, expansion at existing MSPs	Added MSP partners and expansion aligned to hybrid cloud	Steady-to-improving
M&A	Strategic pillar (no specific actions)	Strategic pillar reiterated	Remains a strategic initiative	Neutral

Management Commentary

Strategic message: “Our focus on recurring revenue growth through hybrid cloud data protection solutions and increased profitability enabled delivery of quarter-over-quarter revenue and net income growth for the second consecutive quarter.” — Todd Brooks, CEO .
IBM partnership: “We secured several new customers and assisted several existing customers to expand their monthly usage through our relationship with IBM in Q3.” — Todd Brooks .
Mix and profitability: “Q3 GAAP operating expenses decreased to $2.3 million… Due to our increasing revenue and tightly managed operating expenses, we delivered $200,000 in net GAAP income during the quarter.” — Todd Brooks .
Guidance stance: “Given our Q3 results, we are maintaining our full-year 2022 guidance.” — Company press release/CFO .

Q&A Highlights

Guidance: Management reiterated maintaining FY22 guidance (revenue $10–$12M; net income -$1.8M to -$0.5M; adjusted EBITDA per Q2 ranges) while highlighting sequential growth momentum into Q4 .
Pipeline and trajectory: Management emphasized growing IBM-led hybrid cloud pipeline as the key driver of ARR and sequential revenue gains .
Note: The provided transcript does not include detailed Q&A exchanges; commentary above reflects prepared remarks and guidance clarifications within the call materials –.

Estimates Context

Wall Street consensus estimates via S&P Global were unavailable for Q1–Q3 2022 at the time of retrieval due to API limits; as a result, we do not present beats/misses vs. consensus for revenue/EPS/EBITDA. We instead benchmark sequential and year-over-year performance using company-reported figures [GetEstimates error].

Key Takeaways for Investors

Sequential inflection: Two consecutive quarters of q/q revenue growth culminating in positive GAAP net income in Q3 suggests execution progress during the subscription/consumption transition .
IBM channel is the swing factor: Early customer wins, expanding usage, and simplified 1‑Click deployment in IBM Cloud should support ARR acceleration; watch conversion velocity and deal sizes through Q4 .
Operating leverage emerging: OpEx discipline drove a move to positive operating income and adjusted EBITDA; sustaining this while scaling ARR would support a more durable margin profile .
Capital structure overhang: Preferred dividends/accretion keep net income to common negative despite GAAP profitability; this remains a headwind to EPS optics until addressed .
Cash prudence required: Cash declined to $1.67M; continued positive cash generation or external support may be needed to fund growth if scaling is slower than expected .
Guidance credibility test: Maintaining FY22 guidance after Q3 is constructive; delivery in Q4, particularly on revenue and profitability ranges, will be a key stock narrative driver .
Monitor legacy-to-cloud balance: Management must both sustain legacy base and scale hybrid cloud ARR to deliver YoY growth; any slippage could reintroduce top-line volatility .

Supporting documents and sources: Q3 2022 8‑K/press release and financials ; Q3 2022 earnings call transcript ; Q2 2022 8‑K/press release and financials ; Q2 2022 earnings call transcript ; Q1 2022 8‑K/press release and financials ; Q1 2022 earnings call transcript .

FALCONSTOR SOFTWARE INC (FALC)·Q3 2022 Earnings Summary