FalconStor Software Announces Second Quarter Results

FalconStor Software, Inc. (NASDAQ: FALC), the provider of TOTALLY Open™ data protection solutions, today announced financial results for its second quarter ended June 30, 2008. Revenues for the second quarter of 2008 increased 25% to $22.2 million, compared with $17.8 million for the same period a year ago. GAAP income from operations for the quarter increased 120% to $1.1 million, compared with $0.5 million in the second quarter of 2007. GAAP net income for the quarter was $1.0 million, or $0.02 per diluted share, compared with $1.4 million, or $0.03 per diluted share, in the second quarter of 2007. In the second quarter of 2008, the Company’s GAAP tax expense was $0.5 million, compared with a benefit of $0.3 million in the second quarter of 2007. Stock-based compensation expense was $2.3 million in the second quarter of 2008 and $1.9 million in the second quarter of 2007. "We are very pleased with the growth of our non-OEM revenue during the second quarter of 2008, which increased 42% compared with the prior year,” said ReiJane Huai, Chairman and CEO of FalconStor. "While our OEM revenue as a whole increased during the second quarter, we did experience a year-over-year decrease in revenue from one of our large OEM customers as a result of their product transition. We expect the revenue from this customer to rebound in the third and fourth quarters.” Non-GAAP income from operations increased 40% to $3.4 million in the second quarter of 2008, compared with non-GAAP income from operations of $2.4 million in the second quarter of 2007. Non-GAAP operating margins increased to 15% in the second quarter of 2008, compared with non-GAAP operating margins of 14% in the same period a year ago. Non-GAAP net income was $2.5 million, or $0.05 per diluted share, in the second quarter of 2008, compared with $3.3 million, or $0.06 per diluted share, in the second quarter of 2007. The decline in non-GAAP net income was due to an increase in the tax provision from a benefit of $0.3 million in the second quarter of 2007 to a tax expense of $1.3 million during the second quarter of 2008. The increase in the tax provision reflects the continued profitability of the Company and the utilization of net operating losses in prior periods. Non-GAAP results exclude the effects of stock-based compensation expense net of the related income taxes. For the six months ended June 30, 2008, revenues increased 29% to $44.0 million, compared with $34.1 million for the same period a year ago. GAAP income from operations for the six-month period increased to $2.9 million, compared with a loss of $0.4 million in 2007. GAAP net income was $2.3 million, or $0.05 per diluted share for the six months ended June 30, 2008, compared with net income of $0.8 million, or $0.02 per diluted share, in the same period a year ago. For the first six months of 2008, the Company recorded a GAAP tax provision of $1.5 million compared with a benefit of $0.1 million in the prior year period. Stock-based compensation expense was $4.6 million in 2008 and $4.1 million in 2007. Non-GAAP income from operations increased 98% to $7.5 million for the six months ended June 30, 2008, compared with non-GAAP income from operations of $3.8 million in 2007. Non-GAAP operating margins increased to 17%, compared with non-GAAP operating margins of 11% in the same period a year ago. Non-GAAP net income was $5.4 million, or $0.11 per diluted share, compared with $5.0 million, or $0.10 per diluted share in the same period a year ago. The Company recorded a non-GAAP tax expense of $3.1 million compared with a tax benefit of $0.1 million in 2007. Non-GAAP results exclude the effects of stock-based compensation expense net of the related income taxes. The Company closed the quarter with $53.7 million in cash, cash equivalents and marketable securities. Cash flows from operations for the second quarter of 2008 were $4.4 million. During the second quarter of 2008, the Company repurchased eight hundred thousand shares at a total purchase price of $6.9 million, or an average price of $8.59 per share. For the first six months of 2008, the Company repurchased a total of 2.6 million shares at a total price of $21.3 million or an average price of $8.34 per share. The Company also announced that its Board of Directors approved another increase in the size of its Stock Repurchase Program by an additional three million shares. The Company has already repurchased 3.7 million shares. As a result of this increase, the Company may repurchase up to 4.3 million additional shares. For the year ending December 31, 2008, the Company continues to anticipate: Revenues to be in the range of $100 million to $104 million Non-GAAP operating margins, which exclude stock-based compensation, to be in the range of 24% to 26% Non-GAAP net income to be between $0.31 and $0.36 per diluted share, which excludes stock-based compensation, net of income taxes. The Company will host a conference call on Thursday, July 24th at 4:30 p.m. ET, to discuss the results. To participate in the conference call, please dial: Toll Free: 1-866-249-6463 International: 1-303-262-2004 To view the presentation, please copy and paste the following link into your browser and register for this meeting. Once you have registered for the meeting, you will receive an email message confirming your registration. https://falconstor.webex.com/falconstor/j.php?ED=111332932&RG=1&UID=0 Meeting: FalconStor Q2 2008 Earnings Meeting password: q2numbers Meeting Number: 485 079 975 A conference call replay is scheduled to be available beginning July 24 at 6:30 p.m. ET through 11:59 p.m. ET on July 29. To listen to the replay of the call, dial toll free: 1-800-405-2236 or International: 1-303-590-3000, passcode: 11117503#, or visit our website at www.falconstor.com/investors.asp Non-GAAP Financial Measures The non-GAAP financial measures used in this press release are not prepared in accordance with generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. The Company’s management refers to these non-GAAP financial measures in making operating decisions because they provide meaningful supplemental information regarding the Company’s operating performance. In addition, these non-GAAP financial measures facilitate management’s internal comparisons to the Company’s historical operating results and comparisons to competitors’ operating results. We include these non-GAAP financial measures (which should be viewed as a supplement to, and not a substitute for, their comparable GAAP measures) in this press release because we believe they are useful to investors in allowing for greater transparency into the supplemental information used by management in its financial and operational decision-making. For a reconciliation of our GAAP and non-GAAP financial results, please refer to our ProForma Condensed Consolidated Statements of Operations, presented in this release. About FalconStor FalconStor Software, Inc. (NASDAQ: FALC), #5 in Forbes 2008 list of America’s Fastest-Growing Technology Companies, is the market leader in disk-based data protection. We deliver proven, comprehensive data protection solutions that facilitate the continuous availability of business-critical data with speed, integrity, and simplicity. Our TOTALLY Open™ technology solutions, built upon the award-winning IPStor® platform, include the industry leading Virtual Tape Library (VTL) with Single Instance Repository (SIR) for deduplication, Continuous Data Protector™ (CDP), Network Storage Server (NSS), and Replication option for disaster recovery and remote office protection. Our products are available from major OEMs and solution providers including Acer, Brocade, COPAN Systems, EMC, H3C, IBM, MPC, Pillar Data Systems, and Sun and are deployed by thousands of customers worldwide, from small businesses to Fortune 1000 enterprises. FalconStor is headquartered in Melville, New York, with offices throughout Europe and the Asia Pacific region. FalconStor is an active member of the Storage Networking Industry Association (SNIA). For more information, visit www.falconstor.com or call 1-866-NOW-FALC (1-866-669-3252). This press release includes forward-looking statements that involve risk and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties include: delays in product development; market acceptance of FalconStor’s products and services; technological change in the storage and networking industries; competition in the network storage software market; the potential failure of FalconStor’s OEM partners to introduce or to market products incorporating FalconStor’s products; intellectual property issues; and other risk factors discussed in FalconStor’s reports on Forms 10-K, 10-Q and other reports filed with the Securities and Exchange Commission. FalconStor, FalconStor Software, and IPStor are registered trademarks, and Continuous Data Protector and TOTALLY Open are trademarks of FalconStor Software, Inc. All other company and product names contained herein may be trademarks of their respective holders. FalconStor Software, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS     June 30, 2008   December 31, 2007 (unaudited) Assets Current assets: Cash and cash equivalents $ 30,888,015 $ 32,219,349 Marketable securities 21,448,352 30,684,206 Accounts receivable, net 22,306,050 26,141,636 Prepaid expenses and other current assets 2,130,986 1,625,417 Deferred tax assets, net   3,807,325   3,807,325   Total current assets   80,580,728   94,477,933   Property and equipment, net 8,444,858 7,945,258 Long-term marketable securities 1,389,146 - Deferred tax assets, net 6,037,536 5,969,778 Other assets, net 3,114,340 2,831,878 Goodwill 3,512,796 3,512,796 Other intangible assets, net   471,764   443,909   Total assets $ 103,551,168 $ 115,181,552   Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,207,355 $ 1,779,720 Accrued expenses 5,710,985 6,711,231 Deferred revenue, net   15,421,883   14,142,145   Total current liabilities 22,340,223 22,633,096   Other long-term liabilities 249,542 251,094 Deferred revenue, net   5,728,987   4,818,985   Total liabilities   28,318,752   27,703,175   Commitments and Contingencies   Total stockholders' equity   75,232,416   87,478,377   Total liabilities and stockholders' equity $ 103,551,168 $ 115,181,552 FalconStor Software, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)   Three Months Ended June 30, Six Months Ended June 30, 2008   2007 2008   2007   Revenues: Software license revenue $ 15,018,364 $ 11,980,480 $ 30,337,283 $ 22,417,985 Maintenance revenue 5,521,881 4,535,780 10,636,128 8,869,319 Software services and other revenue   1,686,701   1,234,284   3,060,195   2,803,918 22,226,946 17,750,544 44,033,606 34,091,222   Operating expenses: Cost of maintenance, software services and other revenue 3,524,404 2,486,336 6,838,892 5,256,160 Software development costs 6,178,097 5,341,481 12,056,882 10,857,666 Selling and marketing 9,360,539 7,500,433 18,319,290 14,469,184 General and administrative   2,066,530   1,922,723   3,967,751   3,860,503   21,129,570   17,250,973   41,182,815   34,443,513 Operating income (loss)   1,097,376   499,571   2,850,791   (352,291) Interest and other income   423,443   594,376   982,704   1,093,747   Income before income taxes     1,520,819   1,093,947   3,833,495   741,456   Provision (benefit) for income taxes   507,608   (285,621)   1,486,527   (83,537)   Net income $ 1,013,211 $ 1,379,568 $ 2,346,968 $ 824,993     Basic net income per share $ 0.02 $ 0.03 $ 0.05 $ 0.02   Diluted net income per share $ 0.02 $ 0.03 $ 0.05 $ 0.02   Weighted average basic shares outstanding   48,066,451   49,378,812   48,828,229   48,988,778 Weighted average diluted shares outstanding   50,249,824   53,007,181   50,970,034   50,802,963 FalconStor Software, Inc. and Subsidiaries Non-GAAP Operating Data GAAP Reconciliation (Unaudited)   Three Months Ended June 30, Six Months Ended June 30, 2008   2007 2008   2007   Income (loss) from operations (GAAP) $ 1,097,376 $ 499,571 $ 2,850,791 $ (352,291) Add: non-cash stock option expense (1)   2,303,701   1,938,021   4,643,347   4,128,106 Non-GAAP income from operations   3,401,077   2,437,592   7,494,138   3,775,815   Net income (GAAP) $ 1,013,211 $ 1,379,568 $ 2,346,968 $ 824,993           Add: non-cash stock option expense, net of income taxes (2)   1,502,395   1,938,021   3,044,243   4,128,106 Non-GAAP net income   2,515,606   3,317,589   5,391,211   4,953,099     Operating margins (GAAP) 5% 3% 6% (1%) Add: non-cash stock option expense (1)   10%   11%   11%   12% Non-GAAP operating margins   15%   14%   17%   11%   Basic EPS (GAAP) $ 0.02 $ 0.03 $ 0.05 $ 0.02                   Add: non-cash stock option expense, net of income taxes (2)   0.03   0.04   0.06   0.08 Non-GAAP Basic EPS   0.05   0.07   0.11   0.10   Diluted EPS (GAAP) $ 0.02 $ 0.03 $ 0.05 $ 0.02                   Add: non-cash stock option expense, net of income taxes (2)   0.03   0.04   0.06   0.08 Non-GAAP Diluted EPS   0.05   0.06   0.11   0.10   Weighted average basic shares Outstanding (GAAP and as adjusted)   48,066,451   49,378,812   48,828,229   48,988,778 Weighted average diluted shares Outstanding (GAAP and as adjusted)   50,249,824   53,007,181   50,970,034   50,802,963   Footnotes: (1) Represents non-cash, stock-based compensation charges as follows: Three Months Ended June 30,     Six Months Ended June 30,   2008   2007 2008   2007   Cost of maintenance, software services and other revenue $ 332,111 $ 224,454 $ 612,709 $ 509,303 Software development costs 851,993 756,294 1,701,591 1,679,950 Selling and marketing 843,780 714,610 1,838,729 1,433,527 General and administrative   275,817   242,663   490,318   505,326   Total non-cash stock-based compensation expense $ 2,303,701 $ 1,938,021 $ 4,643,347 $ 4,128,106   (2)  Represents the effects of non-cash stock option expense recognized for GAAP purposes under FAS 123R for the three and six months ended June 30, 2008 and 2007, net of related income tax effects. In 2007, the related income tax effects were not material.