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FalconStor's turnaround prospects see glimmer of progress

FalconStor's annual revenue continues to slump, but an increase in net income, new customer bookings and a renewed focus on cloud data storage bring hope to the company.

FalconStor's fourth-quarter and fiscal year 2020 results show the company still hasn't fully rebounded. There is good news for customers that rely on the long-struggling vendor's legacy-friendly technology, however: Its focus on the cloud may yet turn things around.

Total revenue for 2020 was $14.8 million, down from $16.5 million in 2019. Generally accepted accounting principles (GAAP) net income was $1.1 million, up from a loss of $1.8 million in 2019. However, fourth-quarter revenue was $3.7 million, down from $4.1 million in 2019. GAAP operating income for that quarter fell to zero, compared with $0.6 million in Q4 2019.

New customer bookings stood at $3.1 million, up from $2.4 million in 2019.

Sales fell due to FalconStor's retreat from non-core markets such as China, CFO Brad Wolfe said on a conference call. FalconStor has also stopped selling hardware and no longer counts hardware revenue in its earnings.

Both decisions will lead to a healthier company further down the line, Wolfe said. "The company's weathered COVID-19 disruptions well so far, and we believe we have created a stable operating foundation," he said. Combined with the $754,000 Payroll Protection Plan loan FalconStor took out in May 2020 -- which he expects to be forgiven -- the company is on solid financial footing heading into fiscal year 2021, Wolfe said.

FalconStor CEO Todd Brooks attributed the increase in profit and rise in new customer bookings to the company's focus on subscription-based, recurring revenue and on delivering to the long-term storage use case more than business continuity.

Competition in the long-term retention market is significantly lower, Brooks said. Rather than directly going up against Commvault, Veritas or other backup vendors, there are instead partnership opportunities to have those backup products feed data to FalconStor, which then deduplicates it and stores it in whatever low-cost medium the customer wants.

"We sit in the middle, and we help our customers consolidate their backup and archive," Brooks said.

Good news in store?

FalconStor has had a troubled decade, said Marc Staimer, president of Dragon Slayer Consulting. The company's annual revenue was as high as $89.5 million in 2009, but the following years were marred by poor sales, being delisted from Nasdaq, fraud charges and five CEO changes, including one resulting from founder ReiJane Huai's resignation due to "improper payments." Brooks has held the CEO position since August 2017.

FalconStor supports many mainframe protocols, making it a good choice for organizations that can't get rid of legacy systems. Redefining itself as an archiving vendor with wide support for legacy infrastructure is a good pivot, Staimer said, as that's a niche but growing market.

"They're migrating into a space without much competition. Ultimately, they'll be competitive with Komprise, Aparavi, StrongLink and a couple of others," Staimer said.

Protecting a legacy-heavy data center

Although FalconStor is putting less emphasis on its backup, disaster recovery and business continuity use cases, it still serves a critical purpose for many customers saddled with legacy systems, making its financial future cause for concern.

FalconStor serves as the main backup technology for the city of Huntsville, Ala., said Randy Silk, senior systems administrator.

The city departments that Silk's team serves aren't consolidated on the same software, nor are they always using the latest versions. FalconStor is able to support the various versions of Windows Server running across the city.

Some of our servers are old, but FalconStor can still back them up. Veeam can't do that.
Randy SilkSenior systems administrator, City of Huntsville, Ala.

"Some of our servers are old, but FalconStor can still back them up. Veeam can't do that," Silk said.

Silk uses FalconStor's StorSafe to perform nightly backups for the city's 300 servers, which are about 200 GB each. Incremental backups take less than a minute; full backups take three or four minutes; and restores take around 20 minutes, Silk said.

The city started using StorSafe (formerly called FreeStor) before Silk's tenure, but he still has "artifacts" from what came before it: tapes. Having worked with tape earlier in his career, Silk said there is no way tape backups would achieve the speeds he gets from StorSafe.

Boxes of tape sit in Silk's office, but he said he has no intention of ever using them again. The only reason they're still around is because he hasn't yet hired a data destruction company to securely destroy them, Silk said.

Huntsville's government has been extremely reluctant to adopt the cloud, Silk said. The main concern is the security of the data that is put on the cloud, followed by the risk of losing access to that data, he said. Huntsville does use Office 365 for email, and Silk has dabbled in Azure, but its overall cloud presence is slim.

Security is a top concern because bad actors are specifically targeting the public sector right now, Silk said. He is combating this by launching a major project to bring every departments' hardware and software up to date. He has started setting up Microsoft Authenticator and Google Authenticator and implemented other methods of multifactor authentication across the city's systems.

"Security is a huge thing right now. Every day, it's becoming more and more necessary to be fully updated," Silk said.

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