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FalconStor Software Announces Q4 and Full Year Financial Results Achieves Profitability and Positive Cash Flow for Q4 2004 Revenues Increase 87% from Same Period A Year Ago

MELVILLE, N.Y., February 8, 2005—FalconStor Software, Inc. (Nasdaq: FALC), a leading provider of network storage software solutions, today announced financial results for its fourth quarter and fiscal year ended December 31, 2004.

The Company reached profitability for the first time in the fourth quarter of 2004. Revenues for the quarter increased 87% to $9.5 million, compared with $5.1 million for the same period a year ago. Net income for the fourth quarter of 2004 was $0.3 million, or $0.01 per share, compared with a net loss for the fourth quarter of 2003 of $2.2 million, or $0.05 per share. Non-GAAP net loss for the fourth quarter 2003 was $1.6 million, or $0.03 per share, which excludes a lease abandonment charge of $0.6 million.

For the twelve months ended December 31, 2004, revenues increased 69% to $28.7 million compared with $16.9 million for the year ended December 31, 2003. Net loss for 2004 was $5.9 million, or $0.13 per share, compared with a net loss for 2003 of $7.4 million or $0.16 per share. Non-GAAP net loss was $3.6 million, or $0.08 per share for 2004 and $6.8 million, or $0.15 per share for 2003. Non-GAAP net loss for 2004 excludes a litigation settlement charge of $1.3 million and legal fees of $1.0 million, each associated with patent infringement litigation that was resolved in the third quarter of 2004. Non-GAAP net loss for 2003 excludes a lease abandonment charge of $0.6 million.

Revenues for the fourth quarter of 2004 increased 27% compared with the previous quarter from $7.5 million to $9.5 million. Net income for the fourth quarter of 2004 was $0.3 million, or $0.01 per share, compared with a net loss for the third quarter of 2004 of $2.3 million, or $0.05 per share. Non-GAAP net loss for the third quarter of 2004 was $0.6 million, or $0.01 per share, which excludes a litigation settlement charge of $1.3 million and related legal fees of $0.4 million.

The Company achieved positive cash flow for the first time, closing the quarter with $34 million in cash, cash equivalents and marketable securities, an increase of $1.1 million compared with the previous quarter. Deferred revenue at December 31, 2004, increased by $2.8 million, or 107%, compared with the same period a year ago and by $1.2 million, or 28%, compared with the balance at September 30, 2004. Gross margins for the fourth quarter increased to 86% compared with 77% in the same period a year ago and 80% in the third quarter of 2004.

“In addition to the profitability and positive cash flow milestones, 2004 was a year of continued expansion across our product portfolio and global customer base, and in our market recognition and strategic partnerships with major players in the industry,” said ReiJane Huai, Chairman and CEO of FalconStor Software. “We will leverage our business momentum to further our growth in 2005 and beyond.”

2004 Company highlights include:

Strengthening FalconStor´s leadership position in the network storage market through the development and delivery of innovative disk-based backup, business continuity/disaster recovery, compliance, information lifecycle management, and iSCSI-based software solutions for a wide range of customers including the SMB market and large enterprises.

The general availability of a disk-based library from a Tier 1 OEM powered by FalconStor´s VirtualTape Library software.

The launching by another Tier 1 OEM of iSCSI Storage Services, powered by FalconStor´s award-winning iSCSI Storage Server for Windows Storage Server 2003 software solution.

Establishment of new, and expansion of existing, agreements with OEM partners and distributors to deliver advanced storage services powered by FalconStor software.

Continued recognition by leading industry publications and events, including:

  • FalconStor´s VirtualTape Library solution - named “Editor´s Choice” by Storage Pipeline magazine, and “best of the best” by Computer Technology Review magazine
     
  • FalconStor´s iSCSI Storage Server—Network Computing Editor´s Choice Award, Best of Microsoft TechEd Europe 2004 in the Data Management Solution category, and Best of Microsoft TechEd China 2004 in the Software Solution category.

Successful deployment of FalconStor´s Business Continuity/Disaster Recovery (BC/DR), VirtualTape Library (VTL) and iSCSI Storage solutions in the financial, legal, telecommunications, insurance, manufacturing, healthcare, entertainment, retail, education, and government sectors around the world.

Joint certifications with technology companies to optimize interoperability in an IT environment including:

  • IPStor® Enterprise Edition solution- completed certification with LSI Logic PCI-X Fibre Channel HBAs.
     
  • iSCSI Storage Server solution - received Novell´s "YES CERTIFIED" status for NetWare 6.5
     
  • VirtualTape Library solution - obtained Enterprise Backup Solution (EBS) certification from HP; certified with Sony Electronics´ SAIT drives and PetaSite storage systems; IBM´s TotalStorage Proven for TotalStorage FAStT, Enterprise 3494 Tape Library, Enterprise Tape Drive 3592 Model J1A, and 2109 Model S16 SAN Fibre Channel Switch; Network Appliance NearStore nearline storage systems and the NetApp Data ONTAP operating system; and Engenio Information Technologies.

The company will host a conference call on Tuesday, February 8th at 4:30 p.m. Eastern Time, to discuss the results. To participate in the call, Toll Free: 800-218-8862 or International: 303-262-2052. To view the presentation, please copy and paste the following link into your browser:
https://falconstor.webex.com/falconstor/j.php?ED=85002977&UID=26933067
Follow the instructions to register and join this meeting.
Meeting Name: FalconStor Q4 Earnings 
Meeting password: ipstor
Meeting number: 761 431 625
A conference call replay will be available beginning 2/8 at 6:30 PM ET through 6:30 PM on 2/9. To listen to the replay of the call, dial Toll Free: 800-405-2236 or International: 303-590-3000
Passcode: 11022157# or visit our website at www.falconstor.com/en/company/index.cfm?do=Investors.

About FalconStor
FalconStor Software, Inc. (Nasdaq: FALC) is a leading developer of network storage software designed to optimize the storage, protection and availability of enterprise data. FalconStor´s flagship product, IPStor, enables corporate IT to deploy a hardware-agnostic, network-centric foundation to maximize operating efficiency and business continuity, and to meet the availability requirements of mission-critical applications. IPStor-powered network storage solutions are available and supported by major OEMs, as well as system integrators and resellers worldwide.

Founded in 2000, FalconStor is headquartered in Melville, NY, with offices throughout Europe and the Asia Pacific regions including Paris, Tokyo and Taiwan. FalconStor is an active member of the Technical Support Alliance Network (TSANet), Storage Networking Industry Association (SNIA) and Fibre Channel Industry Association (FCIA). For more information, visit www.falconstor.com or call 1-631-777-5188.

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 storage networking 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.

Reconciliation of GAAP to Non-GAAP
 

  Three Months Ended
December 31,
Year Ended
December 31,
  2004 2003 2004 2003
Reconciliation of GAAP to Non-GAAP:        
Non-GAAP net income (loss)..............  $ 338,834 $ (1,606,817) $(3,588,847) $ (6,818,793)
Lease abandonment charge.................  _ 550,162 _ 550,162
Payment of settlement related to patent litigation................... _ _ 1,300,000 _
Legal fees associated with patent litigation ___________ ___________ 1,000,000 ___________
GAAP net income (loss).......................  $ 338,834 $ (2,156,979) $(5,888,847)



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 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.

 

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FalconStor and IPStor are registered trademarks of FalconStor Software, Inc. All other company and product names contained herein may be trademarks of the respective holders.




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