Falconstor Software (NASDAQ:FALC )

Q4 2012 Earnings Call

March 18, 2013 4:30 pm ET

James P. McNiel — Chief Executive Officer, President and Director

Louis J. Petrucelly — Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer

Brian S. Freed — Wunderlich Securities Inc. Research Division

John Aniblo Zaro — Bourgeon Capital Management, LLC

David Cohn

Good afternoon, and thank you for joining us to discuss FalconStor Software’s Q4 2012 and Full Year 2012 Earnings. Jim McNiel, FalconStor’s Chief Executive Officer; and Louis Petrucelly, Vice President and Chief Financial Officer, will discuss the company’s results and activities. And we’ll then open the call to your questions.

The company would like to advise all participants that today’s discussion may contain what some consider forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are discussed in FalconStor’s reports on Forms 10-K, 10-Q and other reports filed with the Securities and Exchange Commission, and in the company’s press release issued today. During today’s call, there’ll be discussions that include non-GAAP results. A reconciliation of the non-GAAP results to GAAP has been posted on FalconStor’s website at www.falconstor.com, under Investor Relations.

After the close of business today, FalconStor released its Q4 and full year earnings. Copies of the earnings release and supplemental financial information are available on FalconStor’s website, at www.falconstor.com.

I’m now pleased to turn the call over to Jim McNiel. Please go ahead, sir.

James P. McNiel

Thank you, operator, and welcome, ladies and gentlemen, to this earnings call from FalconStor. First of all, I’d like to start off with a couple of housekeeping items. In particular, there — maybe some of you are wondering what the status is of our strategic alternatives program. As we indicated, when we retained Wells Fargo back in November 2012, to assist with the exploration and evaluation of strategic alternatives, we stated that we would disclose developments regarding this process when or if the board approve any specific transaction and that remains to be the case.

In regards to the delay of this earnings call from March 5 to today, I’d like to report that given the company’s recent history, we are committed to do what is necessary to ensure that the company is adhering to all of its newly stated policies and procedures. And I’m happy to report that while this took longer than we expected, the results are as expected. There are no surprises and we’re happy that, that continues to be the case. And we are very, very diligent about these processes and it’s important that we remain so.

In regards to last year’s revenue, I’m pleased that Q4 revenue rebounded over Q2 and Q3 and this improved performance, we attribute largely to a traditionally strong Q4. Q4 is very, very good for us typically because of the flush of the IT budgets at the end of the year. In this particular quarter, we did have some activity that pushed through from Q3 that we wrapped up in Q4. We also attribute the strong performance at North America to an increasingly stronger pipeline being managed by Gary Quinn and his team in North America. Gary’s doing a great job. You recall that he joined us in April 2012 and this will be Gary’s first full year as the sales leader for North America, and we’re looking forward to that.

In terms of other recent accomplishments, you’ll note that we announced in January, that we had reached a preliminary agreement on a settlement of the class action lawsuit. The papers for this settlement are being drawn up and will be presented to the court for preliminary approval very soon, so we’re happy to put that behind us. Additionally, on March 4, 2013, the derivative action lawsuit that was pending against the company, our directors, certain officers and certain former officers and employees was dismissed as to the company and to all defendants. So that is also very good news.

We continue to improve upon and develop our partnerships and relationships with certain key strategic partners out there, most of which you’re very familiar with: Hitachi Data Systems, Dell, Fujitsu, HP and Huawei. And in particular, we have developed a number of stronger fixed configured bundles with Hitachi Data Systems. We’ve developed a much more formalized program with Dell in regards to migration and we continue to work on better programs and opportunities with Huawei and Fujitsu. So all of these activities, we believe, will strongly contribute to a more positive revenue performance in 2013.

With that, I’d like to introduce Lou Petrucelly to go through the details of last year’s revenue and Q4 performance. Lou?

Louis J. Petrucelly

That you, Jim, and good afternoon, everyone. I would like to take you through a summary of our quarter. I will discuss our results from the quarter, provide color around some of the challenges, as well as achievements we experienced. And finally, an overview of our 2012 year.

For the fourth quarter of 2012, our total revenues decreased 12% to $22.5 million, compared with $25.4 million in the same period a year ago. While the fourth quarter typically is our strongest quarter of the year and Q4 of 2012 was no different, we attribute our decline in revenues to the shortfall in both the EMEA and North America regions as compared with Q4 of 2011 as a result of the ongoing uncertainty and overall softness in the global marketplace, deeply discounted competitive pricing or the successful use of misinformation against the company by some of our larger competitors. However, we were very pleased with the sequential growth of over 30% in Q4, which was primarily driven by over 150% growth in our product revenues from North America.

Product revenue from our OEMs increased 94% or $1.5 million compared with Q4 of 2011. This was primarily due to an increase in revenue from one of our large OEM partners in China which underwent an internal reorganization, which disrupted the second and third quarters of this year and returned to a normalized business operation in Q4. Product revenue from our non-OEMs declined by 24% or $3.6 million, compared with Q4 of 2011. As we have stated, all of our regions continue to be impacted by the uncertainty in the global markets, soft economy and, to a larger extent, the competitive environment around securing market share.

In Asia-Pacific, our non-OEM product revenue was down 7% year-over-year and up 14% sequentially. While our non-OEM product revenue from Asia-Pacific showed solid sequential growth, the year-over-year decline was primarily due to a slowdown some of our partners faced as a result of economic challenges throughout the world. In North America, non-OEM product revenue was down approximately 20%, year-over-year, largely due to the impact of the current economic environment as compared to the same period a year ago. However, as I have previously discussed, we were extremely pleased with the results we experienced in North America during Q4. The North American region was up over 150% sequentially, in large part, due to a more robust and predictable pipeline under the leadership of Gary Quinn and the closing of some deals that had been delayed over the year. In our European markets, non-OEM product revenue was down approximately 35%, representing the largest decline of all of our regions on a year-over-year basis.

As we’ve discussed throughout the year, the EMEA region has been one of our more adversely impacted regions, particularly due to the overall uncertainty in the European financial markets. Our support and services revenue, which is comprised of maintenance and professional services, decreased by 9% compared with the previous year. The maintenance portion of this revenue declined 5% from $8.1 million in Q4 of 2011 to $7.7 million in Q4 of 2012. While we typically experience growth in our maintenance revenue on a year-over-year basis, our fourth quarter maintenance was adversely impacted, primarily by the decline in maintenance revenues from our OEM partners and by a number of deals that required increased pricing discounts in the competitive environment during 2012. However, maintenance revenues from our non-OEM partners increased 2% on a year-over-year basis, as compared with a decline of 30% from our OEM maintenance program revenues. Professional services decreased 48% from $900,000 in Q4 of ’11 to $500,000 in Q4 of 2012. Professional services tend to fluctuate based on the completion of deployments.

Next, I will turn to our Q4 non-GAAP results, which exclude legal costs and stock-based compensation. Our product gross margins decreased to 80% in Q4 from 82% in the same period in 2011. The decrease in product gross margin was primarily attributable to an increase in a number of fully integrated offerings, which include hardware appliances and a decline of product revenues in Q4, compared with Q4 2011. As we have stated in the past, the mix of our product revenues, for example, the number of software-only solutions versus fully integrated appliances sold during the period, and the level of product revenues can materially impact our gross margins. Our support and services gross margin increased to 66% in Q4 from 65% in Q4 of 2011. The increase in gross margin was primarily attributable to the cost efficiencies obtained within our support and services department as compared with the prior year. Overall, our total gross margins decreased to 75% in Q4 compared with 76% in Q4 of 2011. The gross margins, however, increased sequentially from 72% in Q3 of 2012.

Our operating expenses decreased 8% in Q4 to $16 million from $17.4 million in 2011. The net decrease in our operating expenses was primarily due to the 18% decline in our sales and marketing costs during the fourth quarter compared with the same period a year ago. These decreases were driven by declines in personnel related costs and lower commissions as a result of the decline of our revenues. Additionally, our G&A expenses were up 24% primarily due to increased professional fees we incurred during the quarter. During the fourth quarter, we incurred approximately $1.5 million of cost associated with the settlement of the Class Action and legal fees associated with both the Class Action and Derivative action that may not be recoverable through insurance. During the same period in 2011, we recorded $5.9 million of legal fees and settlement cost, which were associated with the then outstanding government investigation related Class Action.

In Q4, our non-GAAP operating income was $800,000 compared with $1.9 million at the same period a year ago. Our non-GAAP operating result exclude stock-based compensation expenses of $1 million for Q4 of 2012 and $1.4 million for Q4 for 2011, and $1.5 million and $5.9 million of legal costs I have previously discussed for each of Q4 2012 and 2011, respectively. Our non-GAAP net income for Q4 was $100,000 or breakeven per share, compared with a net income of $1.2 million or $0.03 per share in the same period a year ago. On a GAAP basis, our operating loss in Q4 was $1.7 million, compared with an operating loss of $5.5 million in Q4 of 2011. In Q4, we had net loss of $2.3 million or $0.05 per share compared with a net loss of $6.1 million or $0.13 per share in Q4 of 2011. For the full year 2012, our total revenues decreased 9% to $75.4 million compared with $82.9 million for the same period a year ago.

Product revenue from our OEMs declined by 25% or $1.6 million compared with 2011. This was primarily due to a decline in revenue from our previous OEM relationship with EMC of approximately $1.1 million, in addition to declining revenues from other legacy OEMs as compared with the prior year. Product revenue from our non-OEMs declined by 15% or $6.5 million compared with 2011.

As we have previously discussed, all of our regions, in particular, North America and EMEA, continue to be adversely impacted by the soft economy and the highly competitive environment for market share. However, despite the global slowdown and competitive environment, our non-OEM business in Asia-Pacific remains flat on a year-over-year basis. While this is below our expectations, it is a positive indication of our ability to maintain a market share in that region during difficult economic times. We continue to experience growth in our support and services revenue, which increased by 2% compared with the previous year.

The maintenance portion of this revenue increased 2% from $30.3 million in 2011 to $31 million in 2012, which is an indicator of our installed base’s satisfaction with our products. While we have experienced growth in our maintenance revenues, this growth was impacted by the increased pricing discounts in the current competitive market and a decline in maintenance revenue from our OEM partners during 2012. Maintenance revenues from our non-OEM partners increased approximately 13% on a year-over-year basis as compared with a decline of approximately 30% in revenues from our OEM partners. Professional services remained relatively consistent at $3.1 million for both 2012 and 2011.

Now turning to our full year non-GAAP results. Our product gross margins decreased to 80% in 2012 from 83% the same period for 2011. The decrease in product gross margins was primarily attributable to an increased number of fully integrated offerings, which include hardware appliances and the decline of product revenues in 2012 compared with 2011. Our support and services gross margin increased to 64% in 2012 from 62% in 2011. The increase in support and services gross margin was primarily attributable to the increase in both our support and services revenues during the year, as well as cost efficiencies we obtained with our support and services departments as compared with the prior year. Overall, our total gross margins decreased to 73% in 2012 as compared with 75% in 2011.

Our operating expenses, excluding stock-based compensation, restructuring and legal related costs, decreased 6% from $67.4 million in 2011 to $63.5 million in 2012. On a full year basis, our non-GAAP operating loss was $8.6 million compared with $5.6 million for the same period a year ago. Our non-GAAP operating result excludes stock-based compensation expenses of $4.6 million for 2012 and $5.5 million for 2011, $800,000 of restructuring costs for both 2012 and 2011, and a net benefit of $300,000, and an expense of $10.3 million of legal costs for each 2012 and 2011, respectively. The net benefit of $300,000 realized in 2012 was a result of a recovery of $4.9 million of costs, including any legal fees and settlements associated with the Class Action and Derivative suits and the reversal of previously accrued cost related to the government investigations of $1.7 million. These amounts were partially offset by the $5 million for the settlement of the Class Action and $1.3 million of legal fees not recoverable through insurance.

During the same period in 2011, we had recorded $10.3 million of costs associated with the then outstanding government investigations and related Class Action, which was comprised of $2.8 million of legal fees and an accrual for $7.5 million for certain costs associated with the then outstanding resolution of the investigation. Our non-GAAP net loss for 2012 was $9.9 million or $0.21 per share, compared to net loss of $6.8 million or $0.15 per share in 2011. On a GAAP basis, our operating loss in 2012 was $13.7 million compared to an operating loss of $22.2 million. In 2012, we had a net loss $15 million or $0.32 per share compared with a net loss of $23.4 million or $0.50 per share in 2011.

Our mix of revenue continues to remain relatively consistent across all regions of our business. However, we continue to see slippage in the contribution from our North America and EMEA regions as a result of the soft economy and other factors we previously discussed, and we are monitoring the impact of the global slowdown and uncertainty it may have on our growth and opportunity throughout our Asia Pacific region.

Turning to our balance sheet, as of December 31, we had $29.9 million in cash, cash equivalents and marketable securities, which is equivalent to $0.63 per basic share. We had cash flow from operations of $4.3 million in Q4. Although, we had a negative cash flow from operations of $5.3 million for the full year of 2012, this amount does include the $4.1 million of settlement payments and $900,000 of restructuring payments made during 2012.

Finally, our deferred revenues declined to $24.1 million compared with $27.1 million at the end of Q4 2011. The decline was largely due to the wind down of maintenance revenue from certain legacy OEM customers and some fee per discounts provided during the year, with the competitive environment as I discussed earlier. Additionally, we began to see more customers opting to purchase 1 year maintenance agreements at the original point of sale versus multiyear maintenance agreements in response to tightening of budgets and cash flows in the current economic environment.

To summarize, 2012 was a challenging year for the company, which we believe was due, in large part, to the uncertainty and overall softness in the global marketplace, which resulted in disruptions in closing deals from a budgetary perspective or deeply discounted competitive pricing. However, we were pleased with the solid topline performance in Q4 after 2 consecutive soft quarters. As we’ve said over the past 2 years, the impact of our legal issues has cost the company significant time, effort and resources, which adversely impacted both our financial position and, more importantly, the company’s perception in the market place.

The resolution of our outstanding legal issues should allow us to move on from the events of the past and focus all of our efforts on the company’s future. We can now focus our resources, both the capital and human, on continuing to deliver new and innovative technology to the market. Additionally, we anticipate that as we move further away from these events, this should reduce the potential for our competitors to raise concerns about the company’s business conduct and the long-term viability and allow us to compete with our competitors based on the quality and value of our products.

As we’ve discussed over the past few years, we continue to see the materiality of our legacy OEM business to decline. First, from a product revenue perspective, commencing in 2009 and, more recently, as the wind down of the related maintenance revenue. At the peak of our OEM business, OEMs made up approximately 50% of our total revenues. In 2012, it totaled approximately 14%. While this was once a significant part of our revenue stream, we have successfully transitioned to a channel and strategic partner-led business to replace these revenue sources and we anticipate that we will continue to successfully drive our revenue with a channel and strategic partner community in the future.

Finally, during 2012, we completed a restructuring with the intent to better align our cost structure to support our anticipated revenue levels in 2012 and into 2013, while preserving our ability to invest our resources in the most profitable and strategic areas of our business. We believe we have properly aligned our resources with the objectives we set forth in our restructuring plan and we continue to monitor our costs closely and to invest our capital in all areas of the business as the needs arise. We believe we are in position to execute on our plan of building new infrastructure technology into 2013 with the intent of returning the company to profitability in the near term.

And now, I’ll turn call to the operator for questions. Operator?

Question-and-Answer Session

[Operator Instructions] And our first question from the line of Brian Freed with Wunderlich Securities.

Brian S. Freed — Wunderlich Securities Inc. Research Division

So I really have 3 key questions. I guess, first, can you guys talk a little bit about your philosophy in operating expense investment at this current juncture? Obviously, you’ve kind of realigned the business to the new reality of your revenue profile, but how is your philosophy on OpEx with respect to the strategic process you’re looking at? Are you continuing to invest as if nothing is going to happen in your continuing company, or have you cut it back and driving additional leverage so to speak? Second, you didn’t give a lot of detail in terms of outlook for the March quarter. Do you have any commentary around that front? And then third, with respect to the strategic process, obviously, you said you would give an update at such point as the board had made a decision, but are you guys still engaged at this point in time?

James P. McNiel

Okay, I’ll handle the odd and I’ll give Lou the even, so in regards to OpEx, in regards to strategic alternatives. The first point, Brian, is we continue to run our business as you would expect us to do, regardless of possibilities in the future. We are very much focused on delivering new product to market now. Having said that — and you know, we have a fairly significant investment in R&D. We are diligent in improving the efficiency and the productivity of R&D. I think we can get more for our dollar, so that is an ongoing process and something that we’re very much focused on and committed to. In regards to strategic alternatives, I think we said it clearly, we’ll let you know when something of note comes up, and that would include if something does not come up. We would definitely notify you if we were no longer engaged with Wells Fargo.

Louis J. Petrucelly

And Brian, as far as the March quarter, I mean, as you know, we have not been giving guidance for some time as we are still looking to have a more predictable pipeline that we can do so. Once we achieve that particular pipeline, we’ll get back in the business of giving guidance on a go forward basis.

James P. McNiel

So one of the things that all 3 regions are very focused on is building a much more comprehensive form of metrics so that we have better understanding of lead gen, cost of lead, conversion of lead to the opportunity, conversion of opportunity to sale and what are the numbers surrounding that, so we can optimize where we spend our money on generating leads and we could figure out where things are happening and where they’re not. The other area that we’re focusing a lot of effort on is basically sticking to our knitting and focusing in the categories in which we’ve been very successful. So we’re very successful in healthcare; we’re successful in energy; we’re successful in local and state government; we’re successfully in education. So each of the regions are looking at their win areas and spending more time concentrating on those.

Our next question is from the line of John Zaro with Bourgeon Partners.

John Aniblo Zaro — Bourgeon Capital Management, LLC

So I’m going to go at this a different way. This is our second quarter that we’ve been talking about this strategic alternatives. And you didn’t address anything related to the potential settlement of the law suit with the family. I’m wondering if you can give us some update on that?

James P. McNiel

Okay. So we announced the strategic alternatives in the last quarter and we continue to run the process. So that’s my comment on that. In regards to the estate, we’re in discussions with the Huai estate and we hope that we’ll come out with a positive outcome in a reasonable timeframe.

John Aniblo Zaro — Bourgeon Capital Management, LLC

And I thought that, that was part of the reason why we were delaying all this was —I didn’t think it had to do within operations and getting the numbers out on time. Or is that just my interpretation of that?

James P. McNiel

In terms of delaying the conference call?

John Aniblo Zaro — Bourgeon Capital Management, LLC

Yes.

James P. McNiel

No, the answer is that there were certain controls and policies that we wanted to make sure were absolutely carefully scrutinized and adhered to in the correct way, and it took us longer than we expected. It was not anything in regards to the estate and it was not anything in regards to the strategic process.

John Aniblo Zaro — Bourgeon Capital Management, LLC

Okay. And then a couple of more things, just related to sort of business, in general. I mean, if you — having read through or been to a bunch of these big data conferences and sort of where the market seems to be going related to all this data and storage on the cloud and et cetera, et cetera, I mean, it would appear that you guys — if you have these products that you’ve talked about, that you should really be in sort of the sweet spot and that there should be a lot of interest, not only in your — by your customers but also by people who would be interested in you in general.

James P. McNiel

And you’re right and I think the 2 key parts of that, that support that thesis are: Number one, FalconStor has very unique replication technology in that all of our snapshots are immediately available. So if you’re just snapping an Oracle database or SQL Server and you want to do data mining on it, you can data mining on just the snapshot, not a complete image or replica of the whole database and that’s a very strong capability of FalconStor, and there’s a number of key customers of ours that take advantage of that. John, we haven’t really invested enough time and money to make that public knowledge in a grand way, but it is something that we talk about to every one of our customers at every opportunity and it’s something we continue to communicate. The second part of that is in order for people to get really keen on big data and more importantly, the private and public cloud, you’ve got to be able to migrate your information in and out of those entities and there’s no better tool, a more capable tool from a heterogeneous standpoint than FalconStor’s storage virtualization technology, NSS. So our relationship with HP leverages that technology. Our relationship for migration with Dell and Fujitsu leverages that technology. They’re using it for migrating data center to data center, but there are a number of conversations going on about moving mission-critical data in and out of clouds and there’s also going to be a number of conversations around moving data between clouds. Because what a lot of companies are afraid of is that a public cloud maybe a bit like a Hotel California, you can check in but you can never leave. You need to have a strategy to be able to move your data. So those are the substance of some of the conversations we’re having around some of those subjects.

John Aniblo Zaro — Bourgeon Capital Management, LLC

Okay. Because again, I would think that going back to the strategic alternatives, that would make — I mean, as the last 9 months have gone by, theoretically, if you guys are doing what you’re supposed to be doing and where you’re going, which it appears that you are, that it would make you ever more attractive.

James P. McNiel

I agree, John.

John Aniblo Zaro — Bourgeon Capital Management, LLC

The next question is, we, unfortunately, went through part of this whole training of sales forces and then not having the right sales force, not having the right product and we sort of went through all of this stuff. And I guess what I’m wondering is the idea of having the pipeline and guidance and sort of knowing where you are, I would think, now that we’re sort of 1.5 years into this, including a year of hiring people that didn’t quite work out and then changing them around and everything else, that we would be a little farther along in knowing that.

James P. McNiel

I think that’s a fair assessment. I guess, what I could tell you is I regret that we had to do this twice, obviously. I could comment on the progress we’re making right now and one of the indicators, I think, that is universally positive, is that Gary has increased his quota in his area by 25% and he’s doing it with fewer heads. He’s doing it with about 20% fewer heads and the reason is that he’s restructured his organization to focus on the areas in which we have the most traction. We have the most success and win rate. And he’s a man who’s really driven by data. So John, it’s a different management style than our previous VP of Sales and it’s one that we think is working in the right direction and we’ll more than likely propagate it throughout the other regions.

Our next question is from the line of Graeme Hart [ph] with Lode [ph] Capital.

Unknown Analyst

I just have a quick question about sort of what would be entitled in a 10-K as commitments and contingencies. Out of sort of all this litigation I realized that there’s sort of — I guess, the settlement with the estate outstanding, I’m just wondering where we are in terms of you guys’ commitments and contingencies and what’s left to be taken care of besides the settlement with the estate or is that it?

James P. McNiel

Well, so just to recap, we’ve resolved the Derivative suit. It was dismissed with prejudice against the plaintiff. We resolved the Class Action suit. It’s a $5 million settlement. It’s being drawn up and presented to the court. We’re in discussions with the Huai estate. That’s pretty much it.

Louis J. Petrucelly

And we have one more payment left of $1.7 million in December of this year.

Unknown Analyst

Louis J. Petrucelly

Related to the government investigations.

Unknown Analyst

I just wanted to make sure I wasn’t missing anything material.

Next questions from the line of David Cohn with Raymond James.

Jim, just a couple of quick questions. Subsequent to the resolution of the legal issues, have you seen a better tone in the marketplace from your customers and have you seen any abatement of the aggressive discounting that was going on earlier in the year?

James P. McNiel

Dave, I’d like to say yes. I had a customer meeting today and I think the harsh truth of the matter is this is a customer that I believe will remain loyal to FalconStor and that they’re a fairly large customer. They manage in the order of a couple of hundred terabytes of data using NSS and the statement they said is they get pressure from their management team because of the risk associated with working with a company that is significantly smaller than our foremost competitors. That being IBM, EMC, Dell, HP. So I think as we’ve distanced ourselves from the legal challenges, and we’re happy about that, this may become less of an issue, but we need to return to good strong growth and profitability to help our loyal customers defend against these types of attacks. The attacks will not cease. I don’t expect they will.

Okay. With respect to the seasonality of your business, do you expect that 2013 will be similar to the previous years where you’re doing, in the back half of the business, is 50%, 60% of your revenue?

James P. McNiel

I think the best thing that we can do, David, is we need to do a much better job of feeding our pipeline and we’re getting a lot smarter about that, as I said, by focusing in the areas where we have success. We have wins. We can walk into an account, we can point to 10 or 15 other local companies in the same business that are very happy. So we’re focusing our dollars in that area and I think that’s going to help. I definitely believe that this year, like all of the years in this company’s history, will tend to be somewhat back end loaded, but I think 30% is a little bit too high. I like it to be less. But all we can do is try to build a stronger, healthier pipeline to manage it.

Did you benefit in Q4 from any of the weather-related activities throughout North America?

James P. McNiel

Did we benefit from it? We had a couple of customers who benefited from being FalconStor customers. We had a number of customers who came out publicly and stated that FalconStor was the reason that they’re still in business in Long Island, as a result of Hurricane Sandy. So we had a number of very, very satisfied customers who had good recovery experiences. In terms of selling more product, I really don’t think so. When a disaster occurs, if you don’t have something in place, it doesn’t go and do any good to close the barn. It just takes them time to figure out what went wrong.

Well — but the advent of those specific events might lead someone to recognize that they weren’t properly covered.

James P. McNiel

I think that is true and I don’t have any kind of anecdotal evidence that we’ve benefited significantly, but we did have a number of events, marketing events, that took place in the fourth quarter, where we had testimonial given by customers who used our technology subsequent to Hurricane Sandy and those were responded to very well. So we will continue to use those as marketing tools.

Okay, and was there anything unusual in Q4 with respect to G&A in the quarter?

James P. McNiel

Yes. I’ve mentioned that we spent a very significant amount of time paying close attention to policies and procedures globally, and we incurred a higher than normal G&A number from professional fees as a result of that.

Okay. And you specifically did not make a comment on the first quarter revenue. And I know you don’t want to use this call to make that — to make an announcement on the revenue for the quarter, but you’re pretty far into the end of the quarter, can you just comment on overall activity?

James P. McNiel

If we did that, Dave, no one would show up for the Q1 call.

Did anybody show up in the Q4 call?

James P. McNiel

So, no, no. We’re not going to give any indication about Q1 performance at this time.

Okay. At what point in time or will you continue policy of not giving any guidance? How much further out do you think you have to be before your comfortable giving additional guidance or is it simply the current landscape?

James P. McNiel

Well, it is the current landscape and there’s 2 parts of it: there’s the part that we control and the part that we don’t. So in terms of the part that we control, we have to have a much more robust and healthier pipeline to bring predictability into our business. Because I don’t want to embarrass Mr. Freed or any other analyst who’s trying to predict this business by not making those numbers. And so until we start to see the type of behavior, in terms of conversion rates, time to close, win rates, cost per lead, those types of things, we’re not going to be prepared to do that. So do I think we can get there this year? I do. I think we can get there towards the end of the year.

Our next question is a follow-up from the line of John Zaro with Bourgeon Partners.

John Aniblo Zaro — Bourgeon Capital Management, LLC

I think I should ask this off-line.

James P. McNiel

Okay, I agree.

Mr. McNiel, there are no further questions at this time, sir. I’ll turn the conference back over to you for any closing remarks.

James P. McNiel

Great. Thank you, operator. Thank you everybody. I think your questions enhance our communication sharing, so please continue to participate and thank you for your support. Have a good day.

Thank you, sir. And ladies and gentlemen, that does conclude the FalconStor Software Q4 and Full Year 2012 Earnings Conference. We’d like to thank you all for your participation. You may now disconnect.

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