FalconStor Announces Q2 Results

MELVILLE, N.Y. -- FalconStor Software, Inc. (NASDAQ: FALC), the provider of TOTALLY Open data protection solutions, today announced financial results for its second quarter ended June 30, 2008.

Revenues for the second quarter of 2008 increased 25% to $22.2 million, compared with $17.8 million for the same period a year ago. GAAP income from operations for the quarter increased 120% to $1.1 million, compared with $0.5 million in the second quarter of 2007. GAAP net income for the quarter was $1.0 million, or $0.02 per diluted share, compared with $1.4 million, or $0.03 per diluted share, in the second quarter of 2007. In the second quarter of 2008, the Company’s GAAP tax expense was $0.5 million, compared with a benefit of $0.3 million in the second quarter of 2007. Stock-based compensation expense was $2.3 million in the second quarter of 2008 and $1.9 million in the second quarter of 2007.

“We are very pleased with the growth of our non-OEM revenue during the second quarter of 2008, which increased 42% compared with the prior year,” said ReiJane Huai, chairman and CEO of FalconStor. “While our OEM revenue as a whole increased during the second quarter, we did experience a year-over-year decrease in revenue from one of our large OEM customers as a result of their product transition. We expect the revenue from this customer to rebound in the third and fourth quarters.”

Non-GAAP income from operations increased 40% to $3.4 million in the second quarter of 2008, compared with non-GAAP income from operations of $2.4 million in the second quarter of 2007. Non-GAAP operating margins increased to 15% in the second quarter of 2008, compared with non-GAAP operating margins of 14% in the same period a year ago. Non-GAAP net income was $2.5 million, or $0.05 per diluted share, in the second quarter of 2008, compared with $3.3 million, or $0.06 per diluted share, in the second quarter of 2007. The decline in non-GAAP net income was due to an increase in the tax provision from a benefit of $0.3 million in the second quarter of 2007 to a tax expense of $1.3 million during the second quarter of 2008. The increase in the tax provision reflects the continued profitability of the Company and the utilization of net operating losses in prior periods. Non-GAAP results exclude the effects of stock-based compensation expense net of the related income taxes.

For the six months ended June 30, 2008, revenues increased 29% to $44.0 million, compared with $34.1 million for the same period a year ago. GAAP income from operations for the six-month period increased to $2.9 million, compared with a loss of $0.4 million in 2007. GAAP net income was $2.3 million, or $0.05 per diluted share for the six months ended June 30, 2008, compared with net income of $0.8 million, or $0.02 per diluted share, in the same period a year ago. For the first six months of 2008, the Company recorded a GAAP tax provision of $1.5 million compared with a benefit of $0.1 million in the prior year period. Stock-based compensation expense was $4.6 million in 2008 and $4.1 million in 2007.Non-GAAP income from operations increased 98% to $7.5 million for the six months ended June 30, 2008, compared with non-GAAP income from operations of $3.8 million in 2007. Non-GAAP operating margins increased to 17%, compared with non-GAAP operating margins of 11% in the same period a year ago. Non-GAAP net income was $5.4 million, or $0.11 per diluted share, compared with $5.0 million, or $0.10 per diluted share in the same period a year ago. The Company recorded a non-GAAP tax expense of $3.1 million compared with a tax benefit of $0.1 million in 2007. Non-GAAP results exclude the effects of stock-based compensation expense net of the related income taxes.

The Company closed the quarter with $53.7 million in cash, cash equivalents and marketable securities. Cash flows from operations for the second quarter of 2008 were $4.4 million. During the second quarter of 2008, the Company repurchased eight hundred thousand shares at a total purchase price of $6.9 million, or an average price of $8.59 per share. For the first six months of 2008, the Company repurchased a total of 2.6 million shares at a total price of $21.3 million or an average price of $8.34 per share.

The Company also announced that its Board of Directors approved another increase in the size of its Stock Repurchase Program by an additional three million shares. The Company has already repurchased 3.7 million shares. As a result of this increase, the Company may repurchase up to 4.3 million additional shares.

For the year ending December 31, 2008, the Company continues to anticipate:

FalconStor Software Inc.0