FalconStor's Flyin'

FalconStor Software Inc. (Nasdaq: FALC) logged an impressive third quarter today, highlighted by news of OEM relationships that could help boost it to a new level.

The vendor, which makes a series of storage software packages, including backup, virtual tape libraries, and products that manage data in iSCSI as well as Fibre Channel networks, boasted a 15 percent growth in revenue, from $6.5 million last quarter to $7.3 million (see FalconStor Revenues Increase in Q2 and FalconStor Announces Strong Q3). Gross margin is also up -- to 80 percent, from 78 percent last quarter.

Though it's still posting a loss of $0.04 per share, as it did last quarter, and its net loss has increased 35 percent sequentially to $2.3 million, the company's CEO, ReiJane Huai, says FalconStor's on track for profit in the fourth quarter, though not for the full year.

FalconStor's success -- and its Achilles heel -- appears to lie in its turbulent relationships. Several analysts on today's earnings call alluded to a new OEM agreement with Hewlett-Packard Co. (NYSE: HPQ), in which HP is apparently offering FalconStor's software as part of an iSCSI feature pack for its NAS gear.

A cursory check of HP's site reveals that FalconStor technology is indeed part of HP's StorageWorks iSCSI Feature Pack, cited in the copyright credits in the software documentation. A call to HP, though, resulted in a "no comment on rumor" response.Huai and other execs refused to confirm the HP OEM, however, citing contract restrictions against mentioning their latest "Tier 1 U.S. OEM." Still, they didn't balk at saying this particular OEM would replace one announced last November that apparently has stalled. Indeed, FalconStor seems to have had to get out of an exclusivity clause with that OEM -- which shows no sign of getting its FalconStor-based product out the door anytime soon -- in order to forge ahead with the new relationship.

Meanwhile, though no single OEM represented more than 10 percent of the company's earnings this quarter, another OEM relationship with EMC Corp. (NYSE: EMC), which started in April, and a "co-sell" agreement with IBM Corp. (NYSE: IBM) appear to be going well.

FalconStor also ended another difficult relationship this quarter: Its patent litigation with Crossroads Systems Inc. (Nasdaq: CRDS) appears to have been settled for under $2 million (see FalconStor, Crossroads Settle).

FalconStor's ability to navigate the turbulent waters of storage partnerships bodes well for its future, but it still faces major competition from the likes of StoreAge Networking Technologies Ltd. and Veritas Software Corp. (Nasdaq: VRTS).

One development that could prove FalconStor's mettle once and for all could be the software compatible with the recently announced Data Protection Server (DPS) from Microsoft Corp. (Nasdaq: MSFT), a backup product in the works that a slew of vendors have sworn to be working to support. FalconStor says it will have its edition when that product ships in the second half of 2005.Mary Jander, Site Editor, Byte and Switch