someone did an outline from the Yahoo board - here it is.E Q U I T Y R E S E A R C H N O T E FALCONSTOR SOFTWARE FALC [NASDAQ] $8.23 www.falconstor.com FALC -Q4 Preview and Outlook • We estimate that Falconstor will report Q4 EPS of $0.02 on revenue of $11.6 million. Based on our recent checks, we expect the company will report results slightly better than our estimates and in line with street consensus of $0.03 on $11.8 million in revenue. • We continue to believe Falconstor remains among the most attractive growth stories entering 2006 given its exposure to the disk-to-disk backup market and the iSCSI space. • We maintain our Outperform rating on shares of Falconstor. We estimate that Falconstor will report Q4 EPS of $0.02 on revenue of $11.6 million. This compares to street consensus of $0.03 on revenue of $11.8 million. Based on our recent checks, we expect the company will report results slightly better than our estimates and in line with street consensus. Q4 Datapoints: • Contacts indicate that the company saw solid demand for its branded products driven by broadening market acceptance of virtual tape. From a geographic perspective we saw normal seasonal strength both domestically and in Europe. • From an OEM perspective we believe EMC's (EMC: $13.31, O-M) sales of virtual tape continue to out pace the overall growth rate of the Clariion product line and customers continue to demand higher value feature sets. Accordingly, we believe royalty revenue from EMC will grow in the 15%-20% range on a sequential basis. • Our contacts indicate that Sun-StorageTek (SUNW: $4.51, NR) saw very strong trends in the quarter, which should drive a solid contribution to Falconstor for both backup and VTL products. • We have seen some traction for Falconstor solutions at HP (HPQ: $30.78, NR), but the OEM remains fairly immaterial as a percentage of revenue at this time. Finally, our contacts indicate that IBM (IBM: $84.07, NR) saw solid interest for it's newly released VTL products, but given the timing of the launch, we believe sales in the December quarter (to be recognized in March) were likely in the $200K range. This VTL ramp is fairly consistent with the historic precedent set by EMC, which took about four quarters to surpass $1 million in revenue. Outlook: Looking to Q1:2006, we anticipate Falconstor will grow revenue by approximately 30% y/y. This assumes normal seasonality (down 5%-10%) on a sequential basis offset in part by approximately $200K in expected royalty payments for IBM's December quarter sales. We continue to believe Falconstor remains among the most attractive growth stories entering 2006 given its exposure to the disk-to-disk backup market and the iSCSI space. • We believe VTL remains a nascent market and given its OEM relationships with Morgan Keegan & Co., Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. • After years of waiting, we believe the pieces are now in place for iSCSI to take off in 2006. It is our belief that this acceleration in the iSCSI market will be driven by broad based support from the likes of Intel (INTC: $26.12, NR), Dell (DELL: $31.35, NR), HP and Microsoft (MSFT: $27.00, NR). We believe Falconstor is poised to emerge as a key provider of enabling software for the iSCSI market. Recommendation: We believe the company's exposure to high-growth emerging markets plus the expected ramp in revenue from Falconstor initiatives at HP and IBM will drive significant and profitable revenue growth in 2006. Accordingly, we maintain our Outperform rating on shares of Falconstor.
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