Server flash array vendor Fusion-io saw stonking quarterly revenues but disappointed with a loss despite unexpected higher sales. Did it under-price its ioDrive 2 products?
Fusion ships PCIe-connected flash memory cards for servers – ranging up to 10TB in size – which store primary data, replacing 15,000rpm disk drives, and dramatically lower IO access latency, enabling applications to run faster and servers to support many more virtual machines.
Second fiscal 2011 quarter revenues rose 169 per cent over the year-ago quarter to $84.1 million yet the loss increased also, more than doubling from -$2.5 million a year ago to -$5.7 million. The revenue rise show the growing appeal of Fusion's technology and the efficacy of its OEMs and channel partners. The main customers are Apple, possibly for iCloud, and Facebook, with the pair providing 57 per cent of the quarter's revenue. CFO Dennis Wolf said they exhibited "continued strong demand … ahead of our expectations," indicating Fusion's loss would have been even greater without that beneficial order surge
Wolf was almost muted in his comment on the quarter: "Our execution this past quarter was again quite strong and we emerge with a healthy balance sheet that provides us with strategic flexibility. We are in the process of transitioning to our next generation ioDrive2 product that we believe will enable us to offer our customers greater performance at a more attractive price point and increase awareness and adoption of our solutions.”
"Quite strong" as in maybe not strong enough.
The gross margin of its products decreased from 58.7 per cent a year ago to 51 per cent, which was ascribed to a change in product mix to low-end products by its customers and the transition from ioDrive1 to ioDrive2 products. The influence of pricing on this change in margin was said by chairman and CEO David Flynn to be "de minimis" or not material – he commented: "Product price almost didn't matter."
As the ioDrive 2 transition, which is about halfway through, completes then then the margin should head back up to the 55 to 58 per cent or so area.
Elsewhere in the earnings conference call Flynn said Fusion saw "negligible impact from competitive pricing pressure," leaving observers to perhaps suspect that the ioDrive 2 products were priced too keenly and money was being left on the table. The competition was virtually all from hard disk drive array vendors, no other PCIe-flash vendor having a detectable market presence in Fusion accounts.
Flynn is not phased by EMC's Project Lightning; its coming supply of flash storage for servers, saying that it would help to raise awareness and EMC sales would be inhibited by it not wanting to cannibalise disk drive array sales. This could represent a misunderstanding of EMC's Lightning strategy which is surely to have its arrays manage server flash cache with FAST-VP tiering technology, loading the flash with wanted data from the arrays, not replacing the arrays.
Flynn sees Fusion-io technology, like the 10TB IoDrive Octal, being a basis from which to replace primary data storage drive arrays completely. That will be far from EMC's mind.
Flynn thinks most storage array vendors will have to respond to the server flash need and; "Unlike EMC … most storage array vendors will be forced to look outside for server flash." And there will Fusion-io be, ready and waiting and open.
Fusion's customer base is widening and hopefully weakening the Apple/Facebook dominance. These two are classed as strategic customers. Fusion has just signed up Salesforce.com, with a server OEM actually supplying the ioDrives. Salesforce is expected to become a strategic customer eventually but sales volumes are not high enough for that yet.
There were six customers in the quarter who ordered more than a million dollars worth of kit, two of them being new customers.
Fusion has qualified a second source for its 2x nm flash and that should help drive down its flash buying prices.
All in all, we're left thinking that the loss in the quarter was unexpected and unplanned, and that it would have been even larger had not Apple and Facebook orders surged.
Wall Street punished the company for its loss and gross margin fall; the shares plummeting 18 per cent to $24.96 when the markets opened this morning. ®