Background Information on Fusion Io

It’s not too late to get in on the ground floor of a new high-tech venture. How about an undertaking so new it has yet to complete its first year as a public company, but is already playing with the big boys? Take a look at Fusion-io Inc (FIO), a company producing a storage memory platform combining non-volatile NAND Flash memory and virtualization software, which  together improve processing capabilities in enterprise data centers. The company’s founders saw a gap in the market created by the failure of traditional storage architecture to keep pace with increasing digital processing power, and the demand for faster and more frequent access to an ever-increasing quantity of data. The need for peak capacity can be reduced by using Fusion-io’s ioMemory products to relocate critical data from central storage to the processing server. Much high performance storage can be eliminated, costs reduced and efficiency increased, in a process described as ‘data decentralization’ in the company overview. 

Fusion-io’s combined hardware and software solutions are sold through their global direct sales team and by leading OEMs with whom strategic partnerships have been developed. These OEMs include Dell, IBM, Hewlett-Packard and Supermicro. The company believes that it has achieved a significant advantage by being first-to-market with its data decentralization storage platform, and it intends to leverage this position with continued product development. R&D expenditure reached $27 million in 2011, and more than 150 out of the total 440 employees were engaged in R&D. The recent acquisition of caching solution provider IO Turbine will provide access to the virtualized server and desktop markets.

Direct engagement with customers, whether through the company’s own sales force or with the assistance of OEMs, provides valuable feedback used in product development. At the same time Fusion-io is seeking to further extend its OEM relationships, since they are an extremely valuable source of product endorsement as well as generating sales from the integration of the Fusion-io platform into OEMs’ own equipment. International markets, particularly in Asia Pacific and Europe, are being targeted as a growth opportunity. Manufacturing is outsourced to AlphaEMS Manufacturing in Fremont, California and to Jabil Circuit Inc (JBL).

In spite of the distinctive nature of its products, Fusion-io still faces competition from traditional data storage providers like EMC and NetApp, and enterprise solid state disk vendors such as Intel, SanDisk, Seagate and Western Digital. Competition is likely to increase as other companies seek to emulate Fusion-io’s specialized products. As a technology pioneer, Fusion-io relies heavily on patents to assist in the protection of intellectual property. It has 7 issued and 87 pending US patents, and 94 corresponding foreign patents pending.

Such a young company can only provide limited financial history. Total revenue in 2009 was $10 million, growing to $36 million in 2010 and $197 million in 2011, an almost 20-fold increase in two years. Apple (AAPL) accounted for 24% of FY 2011 revenue,  Facebook (IPO expected in May 2012) for 36% and HP for 14%, so Fusion-io will need to concentrate on growing its customer base to reduce its dependence on such a small number of purchasers. However, the company says that it expects this limited number of major customers to continue for the foreseeable future. It also cautions that it does not expect the percentage growth rate achieved during its infancy to be achievable as it becomes a more mature business. The enormous growth rate it has already experienced has presented Fusion-io with difficulties in recruitment and training of personnel, forecast and control of expenses and management of supply chain and inventory, among other challenges.

Revenue growth does not necessarily translate into immediate profit in an enterprise’s early years. The third quarter of FY 2011 was Fusion-io’s first profitable quarter. FY 2010 resulted in a net loss of $32.5 million, and FY 2011 in a net profit of $4.5 million. Accumulated losses of $65 million remained at the end of FY 2011. Investors will definitely need to have a focus on future potential rather than current earnings. The company’s balance sheet benefited from the June 2011 IPO, resulting in a cash balance of $220 million at June 30. More financial data is available in Fusion-io’s 2011 Form 10-K.

Fusion-io has now completed the second quarter of FY 2012. Revenue for the six months was $158 million, 172% higher than comparable 2010. Net income was $1.48 million, compared with an $8.2 million loss for the first six months of 2010. All the profit, and more, was earned in the first quarter, with the second quarter resulting in a reported loss of $5.7 million. However, the company’s press release provided a GAAP to non-GAAP reconciliation which turned the first quarter loss of $5.7 million into net income of $5.6 million, while the six months reported net income of $1.48 million grew to $21 million, largely by eliminating stock based compensation.

During the Q2 2012 earnings conference call  the continued strength of business with Apple and Facebook was emphasized, as well as a new significant relationship with cloud provider (CRM), which Fusion-io believes to be of strategic importance for the future, demonstrating that its products can bring benefits for all enterprise users, from small to medium businesses through to major corporations. Six customers each placed orders worth $1 million during the quarter, said president and CEO David Flynn, indicating the accelerated breadth and depth of adoption in the customer base.

Nobody rings a bell to draw attention to the stocks that are tomorrow’s Microsoft, Apple or Google. Investors need to consider the available information about this new technology company, and decide whether its current management can continue to leverage what began as one very good idea into a broader product and customer base, while constantly innovating to maintain the first-to-market advantage when the current dramatic growth rate inevitably slows.