FalconStor Software, Inc.

Gary Quinn - CEO Lou Petrucelly - EVP and CFO

John Zaro - BCM

Thank you, operator, and good afternoon to everyone on the call. The 2015 calendar year started off with increased activity and excitement within the FalconStor team and outside from the storage industry community with the rebirth of the FalconStor brand with the introduction of its new flagship offering FreeStor.

The FreeStor converge data services platform has received high marks from many industry analysts, bloggers, editorial reviewers as well as customers and partners. We will be releasing this exciting new software defined storage offering in the next few weeks and we have already received significant interest from partners and customers around the globe.

Our recent public relations activities in the Americas, EMEA and APAC have brought FalconStor back on the map in the exciting new categories of flash and private cloud. And for FalconStor to return to the growth ease of the mid-2000’s decade we need to execute the three pronged approach flawlessly.

Number one, in OEM strategy of technology to no storage hardware manufacturers who have no software stack to compete against the branded giants. Number two embed our data services into those private and hosted private cloud providers and then finally number three, reach those enterprise customers looking to modernize their data centers with agility, efficiency, lower risk and more productivity.

FreeStor delivers that evolutionary approach versus the revolutionary Greenfield hyper-converged marketers for enterprise customers. As I have mentioned before the adoption of FreeStor and FreeStor technology to those hardware manufacturers whether the branded or unbranded as well as adoption by private and hosted cloud providers will be the early indicators of the success we may achieve.

I am pleased to announce that we have been able to execute two new OEM agreements in Asia with a minimum $1 million bookings value commitment for each partner over the next 12 months as well as an additional new OEM agreement in EMEA over the next 12 months. These hardware manufactures located in Asia will be private labeling our FreeStor technology with their trusted brands to address the continuous data availability requirements to deliver four way high availability and resiliency in [indiscernible] environments.

Our EMEA partner will be delivering a FalconStor branded data protection offering to their customers. All three of these recent OEM partners have already concluded initial transactions with the company but due to the private labeling of the technology we are unable to reveal their names.

We’re excited about this recent success, we look to build upon these transactions more over the coming quarters with other OEM partners as they are signed and finally when they place their initial orders to FalconStor. We will begin to provide quarterly updates on OEM partners of FreeStor and FreeStor technology beginning with the Q2 2015 results.

Finally our business continues to move ahead in a positive way within the international geographies, even with some recent currency headwinds that Lou will speak about later on both of our international geographies in EMEA and APAC either overachieved or reached our internal bookings metrics with unadjusted currency. With the adjusted currency the success was significantly higher than our expectations with very controlled expenses and cash margins.

We believe our futures in the growth of the top-line through bookings improvements and not through any further expense reductions. We continue to have softness in our Americas bookings business even with some of the adjustments we have made there; our results were approximately half of our expected bookings targets although our cash billings and expenses were in line with expectations.

I can assure you that even though we've spoken about this marketplace over the last three quarters we are committed to getting it to execute at the expected internal metrics we have set as a company. I would now like to turn it over to Lou who will take you through our financial results.

Thank you Gary and good evening to everyone. As we pointed out on our last call bearing 2015 we believe that the year-over-year comparisons should be more comparable as we enter our second full year of offering customers our flexible purchasing options.

As we've highlighted over the past 18 months we may still experience some bumpy revenue quarters from a GAAP perspective as a result of the mix of business we transact which offers our customers flexibility in their purchasing preferences. Our earnings release distributed earlier today contained our year-over-year results in all these applicable disclosures in accordance with GAAP.

Now I would like to provide you with a brief update on some of the key metrics we use to measure a progress we've made during the quarter. For the first quarter of 2015 GAAP revenues totaled 19.9 million compared with 12 million in the first quarter of 2014.

Excluding 9.9 million of accelerated revenue facilitated with our joint development agreement, our first quarter revenues would have totaled 10.1 million. In 2013 we entered into a joint development agreement whereby final acceptance of all milestones occurred in November of 2014 and entered into a two year maintenance and support agreement to commence on January 1st of this year.

During the fourth quarter of 2014 we begin to recognize the total committed fee ratably over a 25.5 month period and we anticipated recognizing approximately $1.4 million per quarter associated with this agreement over the next eight quarters. However in March 2015 the customers like to determinate their maintenance and support agreement and as a result all the unrecognized deferred revenue of approximately $9.9 million was accelerated and recognized at product revenue during this quarter.

As of march 31, 2015 there is no remaining deferred revenue related this agreement and there are no further obligations under the agreement with the customer. During the quarter approximately 72% of our total product bookings resulted in ratable recognition as compared with 38% for the same period in 2014 which contributed to the decline in total revenues excluding the impact from the accelerated revenue associated with our joint-development agreement.

During the first quarter we had one customer who was accounted for 10% of our total revenues [indiscernible] which was 56% of our total reported revenue or 40% of total revenues one excluding the accelerated revenue of 9.9 million. From a bookings perspective our Q1 bookings totaled $11.7 million compared with 14.4 to Q1 2014.

Overall while we fell short on our internal expectations we were pleased with our bookings performances in our European and Asia Pacific markets despite the currency challenges each region faced during the quarter. As we indicated on our previous call we anticipate some headwinds as a result of the impact of foreign currency exchange rates specifically in our European and Japan markets.

On a constant currency basis our Q1 bookings would have hold 12.8 million or 9% increase over the reported bookings of 11.7 million during the quarter. Geographically our EMEA region achieved our Q1 internal expectations and the prior year performance despite an average decline in the euro of approximately 20% on a year-over-year basis.

Our Asia Pacific region met our Q1 internal expectations that fell just short of the prior performance primarily due to the average decline in the Japanese yen of approximately 15% on a year-over-year basis. Finally we continue to experience softness in our Americas business and this region fell well below both our internal expectations and our prior year performance.

We continue to see improved maintenance renewals from our store base and our primary focus continues to be improving on our new customer acquisitions and expenses within our store base of new license sales which will be the primary driver growth opportunity moving forward. Overall the Americas, EMEA and Asia Pacific regions each contributed 25%, 30% and 37% respectively of our total Q1 bookings.

Approximately 13% of our Q1 bookings were derived from new customers. Finally, we anticipate that we may continue to experience some bumps along the way because we continue to work closely with each local region, partner and customer through this period in an effort to building more robust and particular pipeline within each region.

Next I’d like to turn to our non-GAAP expenses, which exclude restructuring charges, legal costs and stock-based compensation. We are pleased that we have maintained our cost structure and during the quarter, our non-GAAP expenses totaled $13 million, compared with $13.9 million in Q1 of 2014.

Our non-GAAP operating expenses were 10.6 million compared with 11.2 million in Q1 ‘14 and non-GAAP income from operations of 6.9 million compared with non-GAAP loss from operations of 1.9 million compared with the prior year. Included in our non-GAAP income from operations is the impact from the accelerated revenue of 9.9 million associated with our joint development agreement during the quarter.

Excluding the impact of the accelerated revenue during the quarter our non-GAAP loss from operations totaled $3 million. Our non-GAAP gross margins excluding joint development accelerated revenue were 76% compared with 78% in the first quarter of 2014.

We closed the quarter with 254 employees worldwide compared with 263 at the end of the year. As we discussed on previous calls we will continue to strategically invest back in the business both from a sales and marketing at product development perspectives.

We believe our existing expense structure has been optimized and we expect to have a consistent expense run rate throughout the year even as we make incremental investments to support of our near term objectives. However, we will continue to monitor our expense structure closely and continue to drive a bottom line culture across the entire company.

For the quarter cash flow from operations totaled [$300,000] compared with cash flows [$300,000] Q1 of ‘14. As we’ve stated on the previous call our goal is to achieve breakeven or better on cash flows from operations with full year basis.

Turning to the balance sheet, as of March 31st, we had cash of $21 million compared with 21.8 million as of December 31st. Our Q1 2015 cash balances include $200,000 of payment associated with our restructuring efforts.

While we continually monitor our cash balances we believe that the best use of our cash currently would be in acquiring the company’s common stock through an active buyback program as such today the company’s Board of Directors approved a new three year buyback program whereby the company has the authority to repurchase up to 5 million shares of common stock based upon predefined cash requirements. This new buyback program replaces the historical buyback program in place and we believe will be the best use of our cash balances today.

As of March 31st our deferred revenue totaled $26.7 million compared with 36.5 million at December 31st a decrease of 27%. If we exclude the impacts from our joint development agreement our deferred revenue balances increased approximately 1.5 million or 6% compared with December 31st and $800,000 or 3% compared with the prior year 2014.

We are pleased that we have been able to grow our deferred revenue balances and continue to focus on securing bookings and approving our maintenance and support renewals. As of March 31st approximately 24% of our deferred revenue balances were related to product revenues compared with 22% at year end and 15% at March 31st 2014.

Finally we believe we are on the correct path to execute our plan, we continue to look to improve on all of our internal objectives primarily on growth of our bookings and revenues and we remain excited and focused on executing our objectives. Gary and I look forward to update you upon our progress on our next call.

And now I would like to turn the call back over the Gary.

Thank you Lou. We still have work to do on our execution of the business and delivering growth.

Our new initiatives into the Flash array and private Cloud technologies we believe will provide the catalyst. Those two legs of the stool we believe will then drive the third leg which is enterprise customer adoption.

Our FreeStor technology will provide enterprise customers the ability to choose the right storage paradigm in the right location for the right price without compromising high availability, continuous data availability and economics which only require a page you grow model. Until we demonstrate that growth as Lou mentioned we will look utilize any excessive cash we may have to buyback our shares to increase shareholder value.

Companies who are private and in the software defined storage market place are receiving far higher multiples on revenue that is equal to or less than FalconStor today. Although while they are spending more than they taking and continue to raise additional capital.

As we see the opportunities to acquire technology to fill the gap in our portfolio we will use our stock as a currency as well as look to license technology in a way that makes us more competitive. The future is bright for FalconStor we just need to be patient, execute flawlessly and seize the opportunities as they present themselves.

Thank you. Operator can you please compile the Q&A roaster.

If I don't sound particularly clear but can you just explain what went on [indiscernible] I missed part of this.

So as I stated in the comments we completed our milestones and the project back in November of 2014. We had entered into a two year maintenance support agreement which was to run from basically November of 2014 through the next 25.5 months essentially to the end of 2016.

They notified us in the middle of Q1 that they no longer required our services and the agreement was then terminated and both parties are now have no further obligations to each other. So based on that just a future deliverables or obligations the deferred revenue we had in our books we had to accelerate into revenue for the quarter.

But they basically had to tell you what they were supposed to pay you upfront?

We've received that, if you recall we received the four milestone payments were received, two of them received in 2013 and the other two were received in 2014.

I understand you had to receive revenue all at once. Is that because in some sway is you are a competitor to them or it doesn't have anything to do with that.

John we don't know they just [indiscernible] we accepted it, and it was business as usual.

And then you signed up two new OEMs,

Three. It was two in the Asia Pacific region and one in Europe.

And then going back to the path, the roadmap that you guys put together, I assume that you have some people out there basically testing up the software and those things were sort of…

John in February we announced the general availability of the version 8 which was of underlying technology of our [SS] technology, that product we shipped to 28 customers in Q1 so far with additional customers upgrading, adopting or refreshing and so that is already out the door. The FreeStor technology which is the integrated platform which starts out with a base component of NSS version 8 with some additional features and capability built into it will be delivered in the next couple of weeks.

So no one has an earlier copy that they’re testing out.

Those customers that are using that in the market place or partners right now but as far as general availability of that if you wanted to order one you need to wait to later on in May.

Okay. As there no further questions we want to thank everybody for joining us today on our call.

As Gary indicated we believe the future is bright for FalconStor. We appreciate everybody’s patience as we work through our transition and look forward to updating everybody on our next call.

Thank you.