Fusion-io Gets Growing Pains


Sometimes it's not enough to grow quickly, as Fusion-io (NYS: FIO) discovered yesterday. Despite boosting its top line to $84.1 million -- 169% higher than the prior year -- the advanced solid-state memory manufacturer swung to a loss for its latest quarter. That earned it a decisive after-hours thumping, sending a message that growth needs to happen on the bottom line as well. CFO Dennis Wolf believes his company is on the path to steady profit, but time will tell if it reaches the end.

Nothin' but the truth
Fusion-io has made a couple of major technological leaps forward recently, beginning with its November release of a new solid-state drive boasting a mind-boggling 10 terabytes of capacity. That drive might soon be boosted with technology that can maintain a billion transfers per second. By comparison, standard drives from Western Digital (NYS: WDC) and Seagate (NYS: STX) might only manage 160 transfers per second under reasonable conditions. Fusion-io's drives do cost much more, with their more "basic" SSDs costing $7,500.

The big leap forward in capability hasn't yet translated to big profits. Here are a few key numbers from the company's latest report:

  • Fusion-io's net loss was $5.7 million, but the company booked a $5.6 million profit under non-GAAP accounting.

  • Cash on hand was up in a big way, up $105.5 million thanks largely to a secondary offering last November that brought in $94 million.

  • Operating cash flow was solid at $13.5 million for the quarter.

  • Inventories dropped by 10%. Accounts receivable are almost half what they were a year ago.

  • The company estimates that next quarter's revenue will be flat, and projects a slight drop in its non-GAAP net margin, from nearly 7% currently to about 5%.

  • The full 2012 fiscal year should see 65% to 70% revenue growth and a non-GAAP net margin of 8%. The company calculates non-GAAP earnings by excluding stock-based compensation, amortization of intangible assets, and acquisitions.

Will it catch on?
Fusion-io needs to show a positive bottom-line trend going forward to justify its triple-digit P/E, especially in light of Western Digital's impressive post-flood profit. Seagate will report next week, and is expected to net $1.07 per share. Another SSD manufacturer is having similar growing pains -- OCZ Technology (NAS: OCZ) saw its revenue rise 94% in the latest quarter, though it remains (barely) unprofitable for the time being.

STEC (NAS: STEC) is profitable and has a longer history of positive free cash flow than its two main SSD rivals, but with the rapid technological gains made by Fusion-io and others, it's hard to say how well it'll maintain that pace. At the least, STEC has its memory-chip business to fall back on, something Fusion-io can't yet claim. Western Digital and Seagate have also moved into the SSD market, so the situation is very fluid. There may be many winners, but if hard-drive history plays out again, the big players might wind up taking all the marbles again.

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At the time thisarticle was published Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. The Motley Fool owns shares of Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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