FalconStor Software Announces Q3 Quarterly Results

FalconStor Software, Inc. (NASDAQ:FALC), the market leader in disk-based data protection solutions, today announced financial results for its third quarter ended September 30, 2007. Revenues for the third quarter of 2007 increased 43% to $18.5 million, compared with $13.0 million for the same period a year ago. Net income for the quarter was $6.3 million, or $0.12 per diluted share, which includes $2.1 million in expenses related to stock-based compensation and an income tax benefit of $4.5 million, compared with a net loss of $1.3 million, or $0.03 per diluted share, in Q3 2006, which included $2.4 million in expenses related to stock-based compensation. The income tax benefit of $4.5 million recorded in the third quarter of 2007 was primarily associated with the reversal of deferred tax asset valuation allowances in response to continuing favorable developments in operating results and financial projections. Pro forma income before income taxes, which excludes stock-based compensation expense, was $3.9 million or $0.07 per diluted share in the third quarter of 2007, compared with pro forma income before income taxes of $1.2 million or $0.02 per diluted share for the third quarter of 2006. Pro forma operating margins increased to 17% in the third quarter of 2007 compared with pro forma operating margins of 5% in the same period a year ago. For the nine months ended September 30, 2007, revenues increased 51% to $52.6 million, compared with $34.8 million for the same period a year ago. Net income for the nine-month period was $7.1 million, or $0.13 per diluted share, which includes $6.2 million in stock-based compensation expense and an income tax benefit of $4.6 million, compared with a net loss of $6.2 million, or $0.13 per diluted share, in the same period a year ago which included $7.1 million in stock-based compensation expense. Pro forma income before income taxes, which excludes stock-based compensation expense, was $8.7 million, or $0.17 per diluted share, compared with pro forma income before income taxes of $1.0 million, or $0.02 per diluted share, in 2006. The Company closed the quarter with $59.8 million in cash, cash equivalents and marketable securities. Cash flow from operations was $6.5 million in the quarter and $18.0 million year to date. Deferred revenue at September 30, 2007 was $17.6 million, which increased 47% compared with the same period a year ago. "We are pleased with the consistent expansions of our product portfolio, strategic partners, sales channel and operating margins," said ReiJane Huai, Chairman and CEO of FalconStor. "Besides continuing growth in the enterprise space, we will be creating additional growth drivers by leveraging our software to enable our OEM partners and distributors to create easy-to-deploy turnkey appliances to expand our market coverage to include remote offices and mid-range accounts.” The company will host a conference call on Thursday, October 25th at 4:30 p.m. ET, to discuss the results. To participate in the conference call, please dial: Toll Free: 1 866-249-5225 International: 1 303-262-2137 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= 102987297&RG=1&UID=0 (Due to its length, this URL may need to be copied/pasted into your Internet browser's address field.  Remove the extra space if one exists.) Meeting: FalconStor Q3 2007 Earnings Meeting password: q3numbers Meeting Number: 483 737 776 A conference call replay is scheduled to be available beginning 10/25 at 6:30 PM ET through 11:59 PM ET on 10/30. To listen to the replay of the call, dial toll free: 1 800-405-2236 or International: 1 303-590-3000, passcode: 11099526#, 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 to 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) 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 technology-independent solutions, built upon the award-winning IPStor® virtualization platform, include the industry-leading VirtualTape Library (VTL) with Single Instance Repository (SIR) for de-duplication, Continuous Data Protection (CDP), Storage Virtualization, and Replication for disaster recovery and remote office protection. Our products are available from major OEMs and solution providers including EMC, SUN, Brocade, H3C, and COPAN 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 (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 Software, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS     September 30, 2007   December 31, 2006 (unaudited) Assets Current assets: Cash and cash equivalents $ 29,980,400 $ 15,605,329 Marketable securities 29,854,300 25,354,259 Accounts receivable, net 18,116,546 24,134,257 Prepaid expenses and other current assets 1,625,876 1,244,937 Deferred tax asset, net   2,074,034   -   Total current assets   81,651,156   66,338,782   Property and equipment, net 7,320,238 5,960,317 Goodwill 3,512,796 3,512,796 Other intangible assets, net 431,549 407,316 Deferred tax asset, net of current portion 2,749,300 - Other assets   2,286,990   2,011,433   Total assets $ 97,952,029 $ 78,230,644   Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 839,058 $ 1,432,510 Accrued expenses 5,960,221 6,505,536 Deferred revenue   13,382,272   11,466,552   Total current liabilities 20,181,551 19,404,598   Other long-term liabilities 131,377 137,317 Deferred revenue   4,214,591   3,645,482   Total liabilities   24,527,519   23,187,397   Commitments and Contingencies   Total stockholders' equity 73,424,510 55,043,247 Total liabilities and stockholders' equity $ 97,952,029 $ 78,230,644 FalconStor Software, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS       Three Months Ended September 30, Nine Months Ended September 30, 2007   2006 2007   2006 (unaudited) (unaudited) Revenues Software license revenue $ 12,209,650 $ 8,685,667 $ 34,627,635 $ 23,088,377 Maintenance revenue 4,771,952 3,315,771 13,641,271 8,815,288 Software services and other revenue   1,545,935   964,673   4,349,853   2,938,993 18,527,537 12,966,111 52,618,759 34,842,658   Operating expenses: Amortization of purchased and capitalized software 33,869 81,334 83,691 334,389 Cost of maintenance, software services and other revenue 2,852,236 2,246,085 8,058,574 6,550,747 Software development costs 5,647,805 5,067,882 16,505,471 14,580,122 Selling and marketing 6,978,239 5,809,706 21,447,423 16,400,453 General and administrative   1,944,521   1,489,537   5,805,024   4,200,971   17,456,670   14,694,544   51,900,183   42,066,682 Operating income (loss)   1,070,867   (1,728,433)   718,576   (7,224,024) Interest and other income   682,132   514,415   1,775,879   1,185,075   Income (loss) before income taxes   1,752,999   (1,214,018)   2,494,455   (6,038,949)   (Benefit) provision for income taxes   (4,507,287)   44,353   (4,590,824)   161,103   Net income (loss) $ 6,260,286 $ (1,258,371) $ 7,085,279 $ (6,200,052)     Basic net income (loss) per share $ 0.13 $ (0.03) $ 0.14 $ (0.13)   Diluted net income (loss) per share $ 0.12 $ ( 0.03) $ 0.13 $ (0.13)   Weighted average basic shares outstanding   49,686,430   47,990,558   49,223,884   48,014,662 Weighted average diluted shares outstanding   53,482,577   47,990,558   52,744,600   48,014,662 FalconStor Software, Inc. and Subsidiaries PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three and Nine Months Ended September 30, 2007 (unaudited) GAAP Reconciliation   Three Months Ended September 30, Nine Months Ended September 30, 2007   2006 2007   2006 (unaudited) (unaudited) Income (loss) before income taxes (GAAP) $ 1,752,999 $ (1,214,018 ) $ 2,494,455 $ (6,038,949 ) Adjustment (1)   2,107,489   2,423,273     6,235,595   7,083,895   Pro forma Income before income taxes (2)     3,860,488   1,209,255     8,730,050   1,044,946       Net income (loss) (GAAP) $ 6,260,286 $ (1,258,371 ) $ 7,085,279 $ (6,200,052 ) Adjustment (1)   2,107,489   2,423,273     6,235,595   7,083,895   Pro forma net income (2)   8,367,775   1,164,902     13,320,874   883,843       Basic EPS (GAAP) $ 0.13 $ (0.03 ) $ 0.14 $ (0.13 ) Adjustment   0.04   0.05     0.13   0.15   Pro forma Basic EPS   0.17   0.02     0.27   0.02       Diluted EPS (GAAP) $ 0.12 $ (0.03 ) $ 0.13 $ (0.13 ) Adjustment   0.04   0.05     0.12   0.14   Pro forma Diluted EPS   0.16   0.02     0.25   0.02       Weighted average basic shares outstanding   49,686,430   47,990,558     49,223,884   48,014,662   Weighted average diluted shares outstanding   53,482,577   49,194,707     52,744,600   48,859,480   Footnotes: (1) Represents non-cash stock-based compensation charges as follows:       Three Months Ended Nine Months Ended September 30, September 30, 2007   2006 2007   2006 (unaudited) (unaudited) Cost of maintenance, software services and other revenue $ 283,860 $ 361,263 $ 793,162 $ 1,060,812 Software development costs 792,000 1,100,510 2,471,950 3,233,609 Selling and marketing 776,840 758,718 2,210,367 2,104,256 General and administrative   254,789   202,782   760,116   685,218   Total non-cash stock-based compensation expense $ 2,107,489 $ 2,423,273 $ 6,235,595 $ 7,083,895 (2) Pro forma amounts exclude stock option expenses recognized for GAAP purposes under FAS 123R. As discussed earlier in this release, these supplemental non-GAAP financial measures should not be used as a substitute for their comparable GAAP measures. The pro forma amounts exclude any tax related effects of FAS 123R.