Sometimes being tiny helps. In a quarter where much larger storage players such as IBM (NYSE:IBM) and EMC (NYSE:EMC) struggled to grow, Fusion-io (NYSE:FIO) kept the growth momentum going. While being small and having a limited customer base is usually cited as a bad thing, it probably worked in Fusion-io's favor, as those customers continue to see demanding storage needs. Although there's a risk that this more expensive approach to storage will smack into an even tougher macro environment for 2013, the growth potential here remains considerable.
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Strong Fiscal Q1 Results...Sort of
Fusion-io reported revenue growth of 59% (or 11% on a sequential basis) for its fiscal first quarter. That was about 7% better than sell-side analysts expected, and a rare sign of strength in a tech earnings season that has thus far been dominated by weak reported growth, sobering guidance and more than a few "miss and lower" releases.
Fusion-io also saw strong growth at its largest customers; Facebook (NYSE:FB) and Apple (Nasdaq:AAPL) made up 56% of revenue, with that revenue growing 60% and 18% from the prior year and quarter, respectively. On the other hand, the company also saw a $10 million order advanced from the December quarter into September, and the company would have missed estimates without that order (though year-on-year growth would have still been in the mid-40s).
The company's profitability also continues to come along. While gross margin did fall about three points from last year, it improved almost two points on a sequential basis. Likewise, operating income continues to grow quite well (up 79%) as the company leverages its fixed costs better.
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Is Guidance Conservative or Problematic?
Although Fusion-io had an objectively strong quarter, investors definitely had some concerns about the company's guidance. Management pointed to flat revenue for the December quarter (which still implies a year-on-year growth rate around 40%) and lower operating margins.
As mentioned above, that $10 million order is the primary culprit, but it doesn't exactly let the company off the hook. Either way, there was going to be a quarterly miss, and I'm not sure it matters whether it was this quarter or the next. Likewise, this issue highlights just how dependent this company still is on a small cadre of customers - customer wins with Salesforce.com (NYSE:CRM), Pandora (NYSE:P) and China Mobile (NYSE:CHL) are nice, but this is a small company selling an expensive solution in a difficult IT market.
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Will Partners Make a Difference, and What of the Competition?
Fusion-io also announced relatively recently that it had added Cisco (Nasdaq:CSCO) and NetApp (Nasdaq:NTAP) as strategic partners. Although I think investors sometimes make too much of strategic partnerships (there's often little or no consequence to the larger partner if they can't deliver), I have to wonder whether the much-discussed fraying of the EMC-Cisco relationship is going to incentivize Cisco work a little harder on Fusion-io's behalf.
It will be interesting to see what the end of 2012 and 2013 hold for solid state enterprise storage. Companies such as EMC and LSI Logic (NYSE:LSI) have done more than just pay lip service to the opportunity, and LSI's lower-priced enterprise products to seem to be catching on. What I wonder, though, is whether Fusion-io can win the price/performance battle as more entrants step into the market.
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The Bottom Line
Fusion-io looks like it should be at that point in its life cycle where revenue, profits and cash flow ramp up aggressively as the company achieves critical mass in the market and strong operating leverage. It's also well worth noting that the stock market tends to get pretty ambivalent about valuation throughout this process, so Fusion-io's high multiples to revenue probably won't bother many growth/momentum investors.
There's always an element of "known unknowns" when it comes to modeling any company's cash flow, but that margin of error gets much larger in cases like Fusion-io where both the company and the market it serves are still quite young. At this point, I'm comfortable with analyst estimates that the addressable market can be $5 billion in 2015, and I think Fusion-io can get get about 20% of that. Assuming that Fusion-io follows the trajectory of many other growth hardware companies such as EMC, NetApp and F5 (Nasdaq:FFIV), the stock could actually be undervalued today, but investors considering these shares need to be fully aware of the volatility and risk that will go with the name.
At the time of writing, Stephen D. Simpson owned shares of EMC since September 2012.