FalconStor To Push Channel Toward Services

FalconStor Software, a provider of storage management software for business continuity, is about to go through the largest transition in its seven-year history -- and the changes will have a significant impact on its channel partners.

Until now, the Melville, N.Y.-based provider of storage virtualization, replication and virtual tape library software has focused 75 percent of its headcount on engineering, development and quality control.

Those R&D investments have led to a product line based on its IPStor platform that can handle some critical storage management tasks. For example, FalconStor's software is popular for remote replication.

But with annual revenue growth slowing, FalconStor officials say now is the time for the company to enter its second phase. That means a greater focus on marketing and partner development. In the coming months, anywhere from 40 to 50 percent of FalconStor's new headcount will be dedicated to marketing, says chairman and CEO ReiJane Huai.

In a rare interview, Huai told VARBusiness that with much of its technology speced out and debugged, now is the time to shift focus by expanding FalconStor's presence in the market.

"We want to grow headcount across the board, but the most dramatic areas will be sales and marketing moving forward," Huai says. To do that, he adds, the company needs to push more of its software through its 350 solution provider partners worldwide.

Today, 60 percent of FalconStor's sales go through solution providers; the rest goes through OEM partners such as Copan, EMC, IBM, Intel and Sun Microsystems. The goal is to shift channel sales to 70 percent in a push to accelerate top-line growth.

For its 2006 fiscal year, FalconStor's revenue grew 34 percent to $51 million, compared with 2005 when sales increased by 43 percent. Much of its sales came in the fourth quarter, which showed a 55 percent gain from $13 million to $20 million. By comparison, fourth quarter revenue increased 37 percent in 2005 over the prior year.

FalconStor's stock had been on a roll since hitting a one-year low of $5.99 in May, peaking to $11.27 last month. It was trading slightly below $10 a share on Thursday, March 1.

Now FalconStor is looking to increase the services opportunity for channel partners. The company will do that by implementing a three-level certification program that will include training to position more solution partners to implement and maintain its solutions.

"Some resellers are good at selling, but they are leaving the deployment and sustaining of revenue to us," Huai says, adding his goal is to have solution partners take on front-end support services. "We want to become the ultimate back office for our resellers and OEMs."

That is already the case with its OEMs and perhaps 5 percent of its solution providers. The push will be on to get 30 percent of its channel partners delivering implementation and support services by the end of this year.

Huai reasons that with software margins a minimum of 30 points, and thin profits on hardware these days, solution providers could double their revenues by taking on services and maintenance. "This will be very beneficial to resellers," he says.

"Doing more channel marketing and lead generation for their partners would be wonderful because they really haven't done that in the past," says John Thome, a vice president at Cleveland-based solution provider Chi.

This is a much needed shift for FalconStor, says Heidi Biggar, an analyst at Enterprise Strategy Group.

"When you are so technology-focused, it's hard to make that change, but it appears they are doing it, and I think their channel partners will benefit from it," she says.

Look for FalconStor to also forge a presence in the area of managed services this year. Huai says the company is looking now at forming partnerships with large hosting providers, a move will allow channel partners to resell co-location and backup services.

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