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FALCONSTOR SOFTWARE INC (FALC)·Q4 2022 Earnings Summary

Executive Summary

  • Q4 revenue was $2.55M with GAAP net income of $0.02M; sequentially, second-half 2022 revenue rose 26% vs first half, while Q4 revenue fell 18% sequentially from Q3 as the company transitions from perpetual licenses to ARR .
  • Hybrid cloud momentum accelerated: hybrid cloud ARR run-rate up 20% QoQ and 222% YoY; MSP-driven hybrid cloud ARR up 14% QoQ and 104% YoY, supported by IBM partnership formal launch and first Azure IBM Power VS DRaaS customer managed by Skytap .
  • Operating discipline offset topline pressure: Q4 opex fell 27% YoY to $2.2M, yielding positive net income despite a 30% YoY revenue decline; ending cash improved to $2.0M from $1.7M in Q3 .
  • Guidance cadence: management reduced FY2022 guidance in Q2 and later maintained it in Q3; Q4 focused on building a 2023 foundation with IBM-centric hybrid cloud but did not provide explicit 2023 numeric guidance .
  • Near-term catalysts: IBM reseller ramp (PowerVS/COS), MSP expansions, and Azure Power VS adoption; risks include near-term GAAP revenue variability as ARR mix shift continues .

What Went Well and What Went Wrong

  • What Went Well
    • Hybrid cloud ARR growth accelerated: +20% QoQ and +222% YoY, validating IBM-based go-to-market momentum and MSP adoption .
    • Second-half execution: revenue +26% HoH; opex -14% HoH; GAAP net income +$0.2M in H2, demonstrating cost control and improving profitability trajectory .
    • Strategic expansion: first customer leveraging Microsoft Azure IBM Power Virtual Server (Skytap) for DRaaS; broadened IBM-focused hybrid cloud offerings (StorSafe VTL + IBM COS + IBM Power/PowerVS) .
  • What Went Wrong
    • Year-over-year pressure: Q4 revenue down ~30% YoY to $2.55M as legacy perpetual revenues declined during the ARR transition, constraining near-term GAAP revenue growth .
    • Sequential volatility: Q4 revenue down vs Q3 ($2.55M vs $3.06M) amid sales realignment and mix shift; operating income near breakeven in Q4 (-$0.02M) .
    • Common EPS remained negative due to preferred dividends despite positive net income: diluted EPS was -$0.06 in Q4 and -$0.03 in Q3 as accruals and accretion on Series A preferred impacted common shareholders .

Financial Results

MetricQ2 2022Q3 2022Q4 2022
Revenue ($USD Millions)$2.394 $3.059 $2.550
GAAP Net Income ($USD Millions)$(0.931) $0.221 $0.020
Diluted EPS ($USD)$(0.18) $(0.03) $(0.06)
Gross Profit ($USD Millions)$1.996 $2.679 $2.179
Gross Margin (%)83.4% 87.6% 85.5%
Operating Income ($USD Millions)$(0.508) $0.383 $(0.019)
EBIT Margin (%)-21.2% 12.5% -0.8%
Net Income Margin (%)-38.9% 7.2% 0.8%

Notes: Margins computed from GAAP totals cited in the same cells.

Segment breakdown (reported line items)

SegmentQ2 2022Q3 2022Q4 2022
Product Revenue ($USD Millions)$0.963 $1.568 $1.120
Support & Services Revenue ($USD Millions)$1.431 $1.491 $1.429

KPIs and operating metrics

KPIQ2 2022Q3 2022Q4 2022
Hybrid Cloud ARR Run-Rate (Change)n/an/a+20% QoQ; +222% YoY
MSP Hybrid Cloud ARR Run-Rate (Change)n/an/a+14% QoQ; +104% YoY
Ending Cash ($USD Millions)$1.808 $1.666 $2.011
Total Operating Expenses ($USD Millions)$2.504 $2.296 $2.198

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
FY2022 (Revenue/Profitability framing)FY 2022Guidance reduced; reflected expectation of sequential revenue growth and GAAP net income positive in Q3 and Q4 (no explicit numeric ranges disclosed) Maintained FY2022 guidance post-Q3; no explicit numeric ranges disclosed Lowered (Q2), then Maintained (Q3)
FY2023FY 2023Not disclosedNo explicit numeric guidance in Q4 materials; management emphasized building a foundation for growth with IBM-centric hybrid cloud and profitability focus n/a

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2022)Previous Mentions (Q3 2022)Current Period (Q4 2022)Trend
IBM partnership (PowerVS/COS)Reseller relationship launched; first customers secured Expanded with new customers; “1-Click” install in IBM Cloud Catalog Sales increased in Q4; key driver of ARR growth and revenue mix shift Strengthening
MSP expansionAdded new MSP partners; existing MSPs expanded usage Added MSP partners; MSP growth aligned with hybrid cloud focus MSP ARR run-rate +14% QoQ; MSPs using hybrid cloud backup solutions Strengthening
ARR transition (subscription/MRR)Continued shift; near-term GAAP revenue pressure ARR base growth (TTM ARR +4.5%) Hybrid cloud ARR +20% QoQ/+222% YoY; retained 100% hybrid cloud customers in H2 Accelerating
Profitability/OpEx disciplineReduced opex; planned further adjustments Opex down 8% QoQ; GAAP net income positive $0.2M Opex down 27% YoY; net income positive; H2 GAAP net income +$0.2M Improving
Azure IBM Power VS (Skytap)Not mentionedNot mentionedFirst customer in Q4 for DRaaS Newly positive
Regional trendsNot mentionedNot detailedWins across Americas/APAC/EMEA; installed base capacity +3.3% avg monthly in H2 Positive breadth

Management Commentary

  • “Q4 was... important... as we increased our hybrid cloud annual recurring revenue, delivered positive net income, added new customers through our partnership with IBM, expanded our MSP business and improved legacy customer retention.” — CEO Todd Brooks .
  • “Our joint solutions... combine FalconStor StorSafe VTL software with IBM Cloud Object Storage, IBM Power Hardware and IBM Power Virtual Server Cloud... sales began to increase with IBM in Q4.” — CEO Todd Brooks .
  • “Total revenue declined by 30% year over year in 2022... [but] increased by 26% in the second half of 2022 compared to the first half... [we] maintained tight control of operating expenses, resulting in positive net income in the second half of 2022.” — CEO Todd Brooks .
  • “We closed Q4 with $2.5 million in revenues... operating expenses were $2.2 million... net operating loss of $19,000 and net income was positive $20,000.” — CFO Vincent Sita .

Q&A Highlights

  • The call invited questions after prepared remarks; the available transcript reflects prepared commentary focused on hybrid cloud strategy, IBM partnership progress, ARR transition, and cost discipline. Specific Q&A exchanges are not included in the provided transcript content .

Estimates Context

  • Wall Street consensus estimates via S&P Global (EPS, revenue, EBITDA, target price) for Q2–Q4 2022 were unavailable due to access limitations at request time. Without consensus, formal beat/miss determinations cannot be made; the company disclosed GAAP results as shown above [GetEstimates error — S&P Global data unavailable]*.

*Values retrieved from S&P Global.

Key Takeaways for Investors

  • Hybrid cloud ARR inflection is real: IBM reseller traction and MSP growth drove +20% QoQ/+222% YoY hybrid cloud ARR; watch for continued IBM PowerVS/COS pipeline conversion and Azure Power VS DRaaS adoption .
  • Near-term GAAP volatility likely persists as mix shifts to ARR; monitor sequential revenue cadence and common EPS sensitivity to preferred dividends accruals despite positive net income .
  • Cost discipline is a lever: Q4 opex -27% YoY with H2 profitability; sustaining opex control underpins margin resilience during ARR transition .
  • Cash improved sequentially ($2.0M vs $1.7M), providing some flexibility; track deferred revenue trends and working capital dynamics as recurring model scales .
  • Strategic focus areas for 2023: deepen IBM-centric footprint, extend hybrid cloud data protection to Azure/Google/AWS, and accelerate ARR run-rate while keeping profitability intact .
  • Trading lens: headlines around IBM partnership wins/MSP additions and any explicit 2023 guidance could be stock catalysts; conversely, quarter-to-quarter revenue fluctuations and negative common EPS could pressure sentiment short term .
  • Update models: with estimates unavailable, anchor forecasts on disclosed sequential revenue improvements and ARR momentum; revisit EPS assumptions to reflect preferred dividend impact on common EPS .