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Fusion-io (NYSE:FIO)

Q3 2013 Earnings Call

April 24, 2013 5:00 pm ET

Executives

Nancy Fazioli

David A. Flynn - Co-Founder, Chairman, Chief Executive Officer, President and Director

Dennis P. Wolf - Chief Financial Officer, Executive Vice President and Principal Accounting Officer

Analysts

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Kathryn L. Huberty - Morgan Stanley, Research Division

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Benjamin A. Reitzes - Barclays Capital, Research Division

Steven Milunovich - UBS Investment Bank, Research Division

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Mitch Steves - RBC Capital Markets, LLC, Research Division

Rajesh Ghai - Craig-Hallum Capital Group LLC, Research Division

Srini Nandury

Vlad Rom - Crédit Suisse AG, Research Division

Edward Parker - Lazard Capital Markets LLC, Research Division

Nehal Sushil Chokshi - Technology Insights Research LLC

Kulbinder Garcha - Crédit Suisse AG, Research Division

Roxane Googin

Operator

Welcome to the Fusion-io Third Quarter 2013 Earnings Call. My name is Leslie, and I'll be your operator for today. [Operator Instructions] Please note that this conference is being recorded. I'd now like to turn the call over to Ms. Nancy Fazioli. Ms. Fazioli, you may begin.

Nancy Fazioli

Thank you, operator. Good afternoon, everyone, and welcome to Fusion-io's Fiscal Third Quarter 2013 Earnings Conference Call. On the call today are Fusion-io's CEO, David Flynn; and CFO, Dennis Wolf.

Please note that a replay of this call will be available on the Investor Relations page of our website at fusionio.com within a few hours and will be available for at least a week from the time of this call. Unauthorized recording of this call is not permitted.

During today's call, we will be referencing both GAAP and non-GAAP financial measures and we wish to note that a copy of the press release and financial tables, which include a GAAP to non-GAAP reconciliation and other supplemental financial information, is available on the Investor Relations page of our website.

Some of the statements we will make during this call constitute forward-looking statements within the meaning of Federal Securities laws. Accordingly, we wish to caution you that such statements are just predictions based on current expectations and assumptions regarding future events and business performance, and involve risks and uncertainties that could cause actual results to differ materially.

We refer you to the registration statements and reports that we filed with the U.S. Securities and Exchange Commission, which are available on our website, and identify important factors that could cause actual results to differ materially from those contained in our projections and other forward-looking statements. Fusion-io undertakes no obligation to update any forward-looking statements to actual results or changes in the company's expectations.

With that, I'll turn the call over to David.

David A. Flynn

Thank you, Nancy. Good afternoon, and thank you, all, for joining us today. In a few minutes, I'll share more about today's exciting news, our acquisition of NexGen Storage. But first, I'd like to highlight our performance this quarter. We are pleased with the strong growth that we have seen in our core enterprise business over the past 3 years, leading to a well-balanced business. In the most recent quarter, core revenue grew 61% year-over-year, 12 customers exceeded $1 million in orders. Our go-to-market strategy continues to deliver and diversify our business. Our systems vendor partners, HP, IBM and Dell, each exceeded 10% of revenue in the quarter. We are pleased by the balanced performance across all of them. And we are excited about the prospects of Cisco ramping to that level.

Our rapidly growing channel business as a whole also contributed approximately 20% of revenue in this quarter. Our international business represented a full 50% of our revenue. Orders from Asia Pac grew 120% and from EMEA grew 90% year-over-year. These points highlight the success we are seeing with our multipronged go-to-market approach and point to the strength of our partnerships, our brand and our products.

Our relationship with Facebook and Apple is strong. Their orders this quarter were in line with our expectations. They are a key -- we are a key part of their infrastructure and expect to grow as they grow.

In addition to these 2 leaders, the broader hyperscale market represents an even larger upside opportunity for Fusion-io. As we expand our base of hyperscale customers, our revenue stream will naturally become less lumpy. The introduction of the ioScale product line has been successful. Of the 12 customers who exceeded $1 million in orders, 8 were orders for ioScale product. Four of those exceeded $5 million. Web services continues to be an important vertical for ioScale. Public sector is also an important vertical. One of our largest customers this quarter is a government organization.

Speaking of larger customers, we are pleased to share that Spotify is now a Fusion-io customer. Spotify is the most successful global mobile music streaming service of its kind, with more than 24 million active users and over 6 million paying subscribers. We're also pleased to highlight another new ioScale customer, Box, a leader in cloud collaboration, which offers a rich set of features and engaging mobile experience enterprise reliability and security. Their customer base is increasing rapidly. This is another example of Fusion-io working with leading SaaS, or Software as a Service providers, to deploy solution at scale. Box is a great example of successfully working with our OEM partners to deliver integrated ioScale solutions. Our SDK, further differentiates ioScale. We are leading the innovation in the hyperscale community with a library of programming interfaces that allow for native access to ioMemory. These interfaces gives us unique differentiation and are being adopted because of their compelling value proposition. For example, MariaDB, and Percona, 2 of the primary maintainers of MySQL, have integrated SDK interfaces into their distributions of MySQL, the world's most popular open source database. The SDK is nearing general availability and will herald a new era of converged memory and storage.

Because of the value that ioScale brings to hyperscale customers, it commands a premium by delivering a new level of [indiscernible] performance, as exemplified by the fact that this quarter, we had a healthy 60% gross margin. The opportunity in both the enterprise and hyperscale market is huge. Fusion-io is uniquely positioned as the leader in both of these rapidly growing markets. We will continue to invest for growth to capitalize on this opportunity for shareholders.

Today, we announced the acquisition of NexGen Storage. Their solution complements our software-defined storage portfolio of ION and ioTurbine. While those offering address the high-end enterprise market, with NexGen, we address a new market for Fusion-io, the small to medium-sized enterprise or SME. This nearly $16-billion market is ripe for disruption. NexGen bridges medium-sized enterprises to the all-flash data center, with an optimized architecture that can offer the performance of an all-flash array at the price of a hybrid system with the industry's best price performance and price capacity.

Because medium-sized enterprises need to support multiple applications with differing performance requirements, it is essential to provision performance and capacity on a per application basis to avoid sprawling storage costs. The NexGen ioControl software makes it possible to run multiple workloads with different performance requirements on the same shared storage infrastructure. This is often referred to as horizontal application acceleration. In contrast, vertical application acceleration is used when applications are large enough in scale to have dedicated infrastructure. This is where an all-flash system, such as ION is called for.

Between NexGen and ION, we address both horizontal and vertical application acceleration in the midrange and high-end enterprise markets, respectively. NexGen uses a combination of ioMemory and disk drives to transform industry-standard servers into hybrid storage systems. NexGen is the first to offer a hybrid platform leveraging memory-attached flash. It was built from the beginning to make the maximum use of ioMemory. In fact, they have been working with us through our technology alliances program from their founding.

NexGen was a clear acquisition choice for us. It is complementary to our high-end enterprise solutions, and it is interesting to note that both ION and NexGen leverage the SCST or SCSI target subsystem that was built by id7, which we acquired in March. As part of Fusion-io, NexGen Storage will be taken to market as an open platform, as opposed to a closed system. To be clear, we are not getting in to the Box business. As always, we focus on adding value in software and allow our partners the flexibility to add value in the integration for end-users. We are, in essence, stepping out of the [indiscernible] path of the disk drive and the chassis, positioning ourselves for the future of open software-defined platforms.

We believe the future of enterprise and hyperscale storage is in open software-defined platforms. Customers will decide whether they want to continue their dependence on closed systems or move towards an open platform that gives them choice. The open platform approach offers more flexibility, lower end-user price and higher channel incentives. We believe open platforms will win over closed and it's small wins over large.

The ION Data Accelerator and ioTurbine caching software are already seen as the gold standard by which legacy storage vendors must measure themselves. We are raising the bar yet again by introducing a hybrid storage system that, for the first time, it takes the true disruptive potential of flash into the midmarket. We are focused on driving strong growth by addressing multiple markets with a common platform of ioMemory and our growing software portfolio. Our technology differentiation, brand awareness, marquis customers and partners, global reach, world-class supply chain, and most importantly, the highly-motivated and talented individuals that make up the Fusion-io team, position us well to continue to create shareholder value.

I'd now like to turn the time over to Dennis, for a review for our results.

Dennis P. Wolf

Okay. Thank you, David, good afternoon. Thank you all for joining us today.

First, to reiterate, we are pleased to welcome the NexGen team. This acquisition is a strategic investment in an important segment of the market that meets the following criteria: It expands our addressable market include small to medium enterprise. The team has shown storage software technology leadership in developing a solution that offers the performance of an all-flash array at a price of a hybrid system, integrating flash as a memory. And it saves us time to market as we build upon progress made to date by a proven management team with an infrastructure that's already in place. Our 2 companies combined, create leverage that is expected to drive greater opportunity for growth.

The revenue contribution from NexGen in the fourth quarter will be de minimis, and we expect acquisition to be approximately $0.01 to $0.02 dilutive to earnings. We will provide fiscal 2014 guidance on the call next quarter, and we will include, of course, NexGen.

Now turning to our third quarter results, as David summarized, our core business continued to grow and we were especially pleased with the strength and rapid ramp of the ioScale product line. I'd like to remind you that all financial results discussed are on a non-GAAP basis, unless otherwise indicated.

Turn now to revenue. Our revenue was $87.7 million in the quarter and it represented 7% decline in year-over-year growth. Core revenue, which excludes contribution from Facebook and Apple, stood at $68 million, growing 61% year-over-year. Of our 10% customers in the quarter, Facebook represented 16%, HP represented 19%, Dell represented 17% and IBM represented 11%. Our key industry vertical this quarter were web services, public sector and once again, telecommunications. In the coming quarters, we will provide additional color on verticals as we continue to outgrow customer concentration. We will still provide visibility into customers that represent 10% or more of revenue.

International represented 50% of revenue, an all-time high for us, which demonstrates our expanding footprint. And support and maintenance revenue in the third quarter was $9 million.

Let's now turn to gross margin. In the third quarter, our gross margin was 59.9%, at the high-end of our expectations. And this compares to gross margin of 52.1% in the same quarter a year ago.

I'm going to now move to operating expenses. Our expenses totaled $59.7 million for the quarter, up 12% or $6.6 million from the prior quarter. Our operating loss was 8.2%. Sales and marketing expenses were $30.1 million or 34% of revenue in fiscal Q3, an increase of $3.9 million from the prior quarter. We now have 211 revenue-generating personnel, and we added 17 employees to sales in the quarter.

R&D expenses were $19.5 million or 22% of revenue, an increase of $2.3 million from the prior quarter, primarily due to continued buildout of the engineering team. We added 13 employees to R&D in the quarter.

G&A expenses were $10.1 million or 12% of revenue, an increase of $414,000 over the prior quarter due to personnel costs.

Turning to net income and EPS. Our net loss in Q3 was $3.2 million, that's a $0.03 loss per share. This compared to net income of $6.9 million or $0.06 per share in the same quarter a year ago.

We'll now move to the cash flow statement. Our operating cash flow in the third quarter was $6.9 million, and $45.8 million year-to-date. Purchases of property and equipment and leasehold improvements, PPE, in the fiscal third quarter were $2.2 million and $10.9 million year-to-date. Our previous expectations were for $20 million to $25 million in capital expenditures for the year, but we now expect it to be approximately $15 million for the fiscal year.

And now I'll turn into the balance sheet. Our cash and equivalents were $354.6 million, that's down $13.9 million sequentially and up approximately $60 million from the same quarter last year. The sequential decrease is related to the acquisition of id7, a legal settlement and working capital needs. Our cash and cash equivalents will be reduced by approximately $110 million in the fourth quarter due to the acquisition of NexGen Storage. Deferred revenue in the third quarter was $35.3 million, down $2.9 million sequentially. It's really due primarily to the specific timing of a support and maintenance contract renewal.

Turning to accounts receivable. Our ARs stood at $50.5 million this quarter. That's a $5.5 million decrease from the prior quarter. And net DSOs were 51 days, which was up from 44 days last quarter. Our total inventory as of the end of the third quarter was $71.1 million, and that's down $3.1 million sequentially.

And finally, our headcount. Our quarter-ending headcount was 839 personnel, that's up 36 employees from the prior quarter.

And announced during the guidance and with regard to that guidance, it is inclusive of NexGen Storage. So for the fiscal fourth quarter of 2013, we expect revenue of approximately $110 million. Gross margin is expected to be at the high end of our target range of 56% to 58% given anticipated customer mix. We expect a loss in the quarter of approximately $5 million, and we expect diluted shares outstanding to be approximately 98 million shares.

For the full fiscal year 2013, we expect revenue of approximately $435 million. We expect gross margin to be in the range of 59% to 60%. Operating margin is expected to be in the range of 7% to 8%, and we expect diluted shares outstanding to be approximately 109 million shares.

Our results speak to the strong demand for our hyperscale and enterprise solutions, and we will continue to aggressively drive market adoption, as well as make disciplined investments in innovation and market expansion.

Thank you for your time, your interest, and we're now going to ask for your questions. Leslie?

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from Aaron Rakers with Stifel, Nicolaus.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Yes, I guess I'll take my one question here. When you look at the ramp in the ioScale product, going back to last quarter and reporting that you had 5 orders in excess of $1 million and then now, 8, can you talk a little bit about that ramp? How many of those orders from last quarter actually were revenue recognized? And as such, how do we think about that trend given the disclosure of 8 orders coming out of this quarter?

Dennis P. Wolf

So when we give you the 5 or 8 orders, it really is related to what the orders were, not necessarily what the revenue was. Although in each of those quarters, it was almost -- it was equivalent to the 5 and 8.

David A. Flynn

It turns very quickly, I guess, into revenue. So there's not a big delay between the two.

Operator

Our next question comes from Andrew Nowinski with Piper Jaffray.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Congrats on the acquisition of NexGen. We've heard good things about the product. So just wanted to ask on NexGen, regarding your OEM partners. Are they going to OEM the product as well? Or do they have something that's already similar to it? And then just with regard to Dell and IBM, what drove that increase this quarter?

David A. Flynn

So nobody has a product that's a true hybrid that uses the flash to accelerate writes and reads even among the batch of other startups. We are selling NexGen or providing it as a platform in the market so it is viable to be integrated by those OEM partners. But that remains to be seen. The question you had, what was the second half? Sorry. I apologize.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Just wondering what drove Dell and IBM, your other OEM partners, this quarter...

David A. Flynn

The results of the investments that we have been making over the past several quarters in training of their sales team and setting up collaboration in the field.

Operator

Our next question is from Brent Bracelin with Pacific Crest Securities.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

A couple of questions here for me, if I could. First, really wanted to talk a little about the core business. So it looks like in the quarter, that's actually where it looked like a little bit stronger than what we had modeled. What drove that? Could you talk a little bit about the drivers there? And then obviously on the guidance, $110 million, clearly above kind of where we're at and where the Street was at, do you expect growth to come from the core customers? Or do think it would be balanced across both core and strategic?

Dennis P. Wolf

We're really excited about our core business actually, Brent. And you're right, it did do a bit better than we had expected, 60% growth. We have been calling out that it would be a consistent 50% growth. The strain to that core really comes from the work that we've done over the last couple of years, of getting the sales organization primed and targeted. We have continued to hire sales personnel and they're hitting the street and we're finding all kinds of demand. You look at what's happened in international business for instance, it's been extremely robust and it's a testament to that effort that we do. In addition, our channel business, which we haven't given a number for, is quite significant. Taken all that, it's approximately 20%, actually. Taken all together, what -- it enables us to continue to believe strongly that our core business is one of our core competencies now, no pun intended, and that $110 million is an appropriate reflection of Q4.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

And does that also assume a rebound in the strategics, i.e. Apple, Facebook? Or are there new design wins that you're kind of baking into the sequential increase in Q4?

Dennis P. Wolf

So last quarter when we talked about Facebook and Apple. We had said that we wanted to -- we assumed, rather, that it would be about $10 million to $20 million each of these 2 quarters, Q3 and Q4. We found that to be at the high end of last quarter and we expect a little more than that this quarter. So taking the math together and solving for it, you can anticipate that our core business continues to grow in excess of 50%.

Operator

Our next question is from Katy Huberty with Morgan Stanley.

Kathryn L. Huberty - Morgan Stanley, Research Division

Of the 4 customers that spent over $5 million in the quarter, is that the normalized run rate for those customers? Or how many of them could be significantly larger in short order, meaning over the next couple of quarters? And just on the back of that, you also talked last quarter about Facebook and Apple ramping perhaps more significantly as we go into September and December. Do you still have visibility into a more aggressive ramp? Or might those 2 customers remain at the levels from June?

David A. Flynn

So there is definitely annuity value in those customers that the amount of their purchases to date is indicative of future potential with them. But of course, those things, as with other large accounts, can be done in bulk. And the specific quarters that they land in can be hard to predict. The second half of the question around Apple and Facebook last quarter, we said that over these 2 quarters, they would be like, as Dennis mentioned, between $10 million and $20 million. It was in the higher end of the range and it's going to be a little above that range this next quarter. And we also indicated that in the second half of the year, we saw a return to some larger purchases because of potential buildout. I think people are probably aware of that potential buildout at this point.

Kathryn L. Huberty - Morgan Stanley, Research Division

And you're still expecting both of those customers to build out more in the back half of the calendar year?

David A. Flynn

We are still strategic in our infrastructure.

Operator

Our next question comes from Bill Shope with Goldman Sachs.

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Can you comment on what you're seeing in terms of your NAND procurement cost and how your thinking about managing those costs as we progress to the end of the fiscal year and into the calendar year?

Dennis P. Wolf

So the way -- Bill, what we've said on our calls previously is that we're -- our environment for NAND price -- for NAND cost, despite the fact that we haven't seen that it's gone up, has been -- it's -- because we're currently under contract, our products cost has been relatively constant. And we will continue to build those contracts out with an eye towards as much consistency as possible in price. So we think that we have an excellent supply chain team and they've sent -- they've made really good progress on this.

David A. Flynn

That has actually been one of the key things in our discussion with some of these strategic customers, is the ability for our supply chain to supply from multiple flash vendors, something that those who are coupled to specific fabs, cannot do. So yes, we have shown, as particular in these past couple of quarters, when NAND supply has been tight for others, that our supply chain really shines.

Operator

And our next question comes from Ben Reitzes of Barclays.

Benjamin A. Reitzes - Barclays Capital, Research Division

Yes, can we just talk about your guidance a little more? What is the expectations for NexGen of the $110 million? Did you say that already?

Dennis P. Wolf

So the cash was $110 million -- I see. You're talking about Q4 guidance, I apologize. It's de minimis. We're not giving that number out at this point.

Benjamin A. Reitzes - Barclays Capital, Research Division

De minimis, meaning that you bought a company with no revenue?

Dennis P. Wolf

De minimis, meaning that we bought a company that has a revenue stream that's coming. We only have 1.5 month of work with them this current quarter. That would define it as being de minimis.

Benjamin A. Reitzes - Barclays Capital, Research Division

Okay. So then what does the ramp look like in FY '14? Does it become material in the first half of the year? Or the second half of the year?

Dennis P. Wolf

So I'm not really being cagy here, Ben. We're trying to be careful on our fiscal '14 guidance. What I could tell you is that it ramps well. We would expect that it will be meaningful in 2014.

Benjamin A. Reitzes - Barclays Capital, Research Division

Okay. But it doesn't have any real revenue contribution in the $110 million. That's a clean number for core and for strategic customers?

Dennis P. Wolf

Yes.

Operator

And the next question comes from Steve Milunovich with UBS.

Steven Milunovich - UBS Investment Bank, Research Division

Could you talk a bit about competition? EMC is making a lot noise about entering the space. It's probably a bit early to see them, but you also got other players. Are you seeing anything changing?

David A. Flynn

Really, the competitive environment has not changed much. The volume of the noise may have been elevated, but when it comes to in the field, the people who we bumped into -- bump into most is actually Oracle with the Exadata, us providing an open alternative at a very small fraction of the cost of that system. So that really is the most material competition, is with Oracle and the Exadata. And that hasn't changed much.

Steven Milunovich - UBS Investment Bank, Research Division

And our next question comes from Alex Kurtz with Sterne Agee.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

With the ramp of the ioScale product, David, and just sort of the price competitiveness it offers in the market, how should we think about ioScale versus ioDrive over the next year or 2? I'm not trying to talk about fiscal '14 guidance, but just some context around that, because obviously, there is a price per gig difference between the products?

David A. Flynn

Yes, the ioDrive will remain a very important part of our portfolio because it's represents the route-to-market through the OEMs, with full OEM certification. We'll see the price gap back between the 2 lower as the cost improvements that we made to the platform for ioScale, which could be brought to market more rapidly, get incorporated into the ioDrive. It has a little bit of a delay because of how OEMs qualify. So you should see some converging the price point to some extent to where those work well in the market. The one, the ioDrive being through OEMs, and therefore, to some extent more valuable because of their participation and support and sales.

Operator

Next question is from Amit Daryanani with RBC Capital Markets.

Mitch Steves - RBC Capital Markets, LLC, Research Division

This is Mitch Steves filling in for Amit here. My question's kind of about the gross margin decline in June. If I kind of look at it, it looks you guys are doing $110 million in revenues, so there's no deleverage. So is this more of a strategic versus core issue? Or if you could provide any color on that.

Dennis P. Wolf

So it's actually -- in fact, when you look at the full year, because that's the guidance we had given, we tightened the range from 58% to 60% for the full year to 59% to 60%. And that's because of the power of Q3 and Q2 at 62% and 60%. Our ioScale product has actually aided our overall gross margin. But we think that the sweet spot for gross margin expansion continues to be 56% to 58%. What we're saying is that we think that we are on the higher end of that right now because of the value that we've gotten from our supply chain, as well as ioScale margins themselves holding in there really well. The areas that we'll have to continue to watch would be market expansion, as well as where NAND goes. So taking all of those variables into play, we think that roughly a high-end of the 56%, 58% is accurate.

Operator

[Operator Instructions] The next question is from Rajesh Ghai with Craig-Hallum.

Rajesh Ghai - Craig-Hallum Capital Group LLC, Research Division

One thing that I keep hearing from investors in terms of concern is that all your key OEMs are talking of the all-service side flash solutions. I just wanted to understand what your thoughts were and what you thought in terms of that being a risk to your business going forward?

David A. Flynn

So our OEMs already have many flash products within their stable of products. And that really has not impacted our business because we are the ones creating the demand at the customer, generally speaking. So we don't see that as a major risk because, ultimately, the customers are the ones who are requesting Fusion-io. And basically saying, I'd like to get it from whoever my server vendor is. So it's important, we believe, to maintain that brand awareness and the interface to the customer, and we've done a very good job with that. The majority of the business that you see in our core is generated by Fusion-io interaction with those customers. We're also seeing an increase in the amount that is generated from our channel in terms of lead flow that gives us the interest to those accounts. We're seeing the tides shift towards the channel flow there.

Operator

The next question is from Srini Nandury with Summit Researches.

Srini Nandury

This is Srini calling for Srini Nandury. And my question today is, essentially, I want to discuss how much visibility do you have into the hyperscale pipelines as you had already said that you had 6 months visibility into strategic customer pipelines?

David A. Flynn

So we have very good -- sorry, we have very good visibility into the deal flow and the opportunity size. The thing becomes the specific timing because these deployments are orchestrated with lots of moving parts as it were, and when you're building whole data centers, putting in equipment of all different types. So while we have very good accuracy, we don't have precision on the time tables, in many cases. So that's the tricky part.

Srini Nandury

And can -- and a quick follow-up. IBM has committed to spending $1 billion on flash products. How do you think that this will impact your business with IBM?

David A. Flynn

We're very excited about it. And not just because it validates the market, but we consider IBM to be a very important partner.

Operator

The next question comes from Vlad Rom with Crédit Suisse.

Vlad Rom - Crédit Suisse AG, Research Division

David, Dennis, I was wondering, can you talk to where Cisco and NetApp relationships stand right now in terms of contributions to the revenue line and how you see them progressing through the course of the year?

David A. Flynn

You cut out just in the middle. I assume you said Cisco and NetApp?

Vlad Rom - Crédit Suisse AG, Research Division

Yes, exactly.

David A. Flynn

Yes. Cisco -- both of them are still early. Obviously, Cisco, not having their own storage products, is potentially more aligned than NetApp With NetApp, we are collaborating in the field with sharing lead flow, et cetera. But business flowing through may not be as substantial since most of the time, that will come from the server vendor. So Cisco, we do see the opportunity to have them be very strategic because they don't have a storage business to be concerned of. But they are still quite early in the ramp having only recently got the mezzanine form factor cards in their portfolio and not yet with the standard form factor that offer higher density and can sometimes be preferred. So we have -- we're seeing great potential with those. The ramp is progressing very nicely. In terms of the engagement in the field, we are seeing very, very strong alignment with their field team that's hungry. So we're very excited about it.

Operator

The next question is from Edward Parker with Lazard.

Edward Parker - Lazard Capital Markets LLC, Research Division

I think at the end of last year, you commented that the macro-environment is really decreasing your visibility. And I guess, with all we're seeing out there in the IT spending spaces, has that changed or has your visibility improved at all in some your larger customers? And then also, I just wanted to touch on the NexGen acquisition. Could you maybe give us a flavor for what the margins look like there and the impact to your model over time?

Dennis P. Wolf

Sure. So speaking of visibility first. Again, the strength of hyperscale has actually enabled us to do a couple things. One is get into customers sites that we wouldn't have been in before. And the other is to expand in the customers -- in other application-to-use cases that we were not competitive or potentially couldn't be competitive before. It opened up new avenues. So we believe that, that's kind of dispelled any of the issues that IT is currently having regarding the macro-environment. We're not immune to a macro-environment, but we believe that we're at the beginning of what we believe to be pretty strong capabilities for hyperscale.

David A. Flynn

Something about the ioScale product, because of its more direct route to market, this gives us more ability to be the ones holding the discussion with the purchasing teams and doing the planning. So as far as ioScale's concerned, it's going to inherently have more visibility to it than the OEM ioDrive products. To the NexGen, we expect that to be quite additive to gross margin because it is going to be sold as a software platform to the product. So it will be a very good margin.

Operator

[Operator Instructions] Next question comes from Nehal Chokshi with Technology Insights.

Nehal Sushil Chokshi - Technology Insights Research LLC

And thanks for giving that 20% of revenue that's about the channel program. What you’re saying is that your channel sales are driven by ioTurbine or ION software plus the associate hardware. So is that pretty much where the software driven part of the hardware is, as a percent revenue around 20%? Or is there also quite a bit of direct sales of those 2 product launch as well?

David A. Flynn

Well, you shouldn't equate too closely the channel business with the ION and ioTurbine. Traditional I/O memory products also flow through the channel itself. And yes, there's also direct business. We do endeavor to help partner these systems to be more successful, so our main tendency here is to help the channel partners get tooled up and effective in selling. So that means that much of our time with our direct sales team is spent enabling the partners in the field to learn and be successful. Teach them to fish themselves.

Nehal Sushil Chokshi - Technology Insights Research LLC

Okay. And then as a follow-up, where do you expect your channel program to be as a percent of core revenue over time? Should we expect this to get up to 60%, 70%? Or are we going to be limited to the 30% or 40% level here?

David A. Flynn

So I think with NexGen and the fact that it addresses the SME, the midrange market, that helps to balance more towards the channel since it's largely channel that services that customer base and the smaller accounts. So we are -- we instituted the channel about 1.5 year or 2 years ago, and are seeing it grow nicely. And from our perspective, it's also enabling our OEMs because many of these VARs are VARs for those same OEM partners. The products that they can't get through their OEMs, they are incented to do so in that manner. Other products that our OEMs may not have picked up, software or whatnot, they are able to source from us directly. This, by the way, helps get some incentive for OEMs to explore our products more upstream.

Operator

Our next question is from Kulbinder Garcha with Crédit Suisse.

Kulbinder Garcha - Crédit Suisse AG, Research Division

Maybe for David. My question is on the -- over the last year, David, there's been a number of potentially large customers in the web scale size. You've named them over the calls, whether it's players like Pandora, China Mobile, Chinese government, a Chinese Internet player, and all of these was supposed to ramp up. And I have had lost track a little bit in terms of given all the ones that you've won, can you just try and help us understand how many that you have -- you don't have to name them. I just want to understand what the potential for your revenue base is over 1 or 2 years. How many of them maybe are in your pipeline that you think have the potential to be the same sizes, one of your strategic customers today? We know where Facebook and Apple were. But even a $20-million run rate, let's say, a quarter, does that potentially exists, or is that something that's many years off? How would you ...

David A. Flynn

Absolutely. The potential, absolutely, is there for many of them. Remember, they have a very diverse set of applications that they run. And Fusion-io product is extremely potent. So for example, we've talked about Alipay, doing $3 billion worth of transactions on 1 day. That was 3x all of Cyber Monday in the entire U.S. on any Internet company done by just them. And that was done on Fusion-io infrastructure. They have a lot more infrastructure under different applications and a lot of opportunity there. But these things are disseminated within the organizations over time as they become familiar with that technology, how to leverage it and as you reach the cost points where it makes sense to use them in place of traditional mechanical storage. So really, it's exciting to see the opportunity at so many of these accounts as flash becomes more cost effective like we saw when we introduced the ioDrive2 and now, subsequently with the ioScale.

Kulbinder Garcha - Crédit Suisse AG, Research Division

Great. I guess is the -- so the barrier that you're just saying, the cost point, and the dissemination of these organizations. But I guess, what I'm getting at, and I'm sure they were testing it for a while before you even won them as customers. And so many of them, the announcements were over 12 months ago. Is this, what I'm getting at is any of this possible, do you think, over the next 12 months, or is it hard to define right now?

David A. Flynn

Absolutely. You have to remember, even Facebook just stated for several years before they started deploying in large scale. So that is a common thing that -- to go from $1 million to tens of millions per quarter has taken a while with different accounts. On the other hand, Apple ramped rather quickly when they got turned on to the product. So there is a wide spectrum of how these things go. But what we're seeing now is quite exciting because there is now a more accepted understanding that it's a good idea to be looking at going, not just to flash, but to all flash architectures. And part of that came from just the awareness of what Facebook is doing through their Open Compute Project where we launched the ioScale and where they were on stage also talking about their Dragon Stone server that has no mechanical storage infrastructure baggage in at all. And that was great to see.

Operator

We will take our last question from Roxane Googin with Global Investor Research.

Roxane Googin

Two questions. One is a follow-on as far as if you divide your market into hyperscale, SaaS and enterprise, it's stems like the hyperscale you're designed in, its outset, enterprise, you're project-oriented and SaaS, is it more like the enterprise? Or the hyperscale? And what's happening there as OCP gets more popular? Would you tend to be designed in more as opposed to OEM?

David A. Flynn

Well, you're right to recognize that there's kind of a spectrum and its SaaS is somewhat squarely in the middle, not quite being hyperscale as it were because their workloads are more mission-critical and they aren't necessarily quite as large in their infrastructure. But they, too, have a large enough infrastructure to be looking at architectures -- scale out architectures and the use of open source to get the lower cost. So hopefully, that gives a little bit of color about where they sit in. Let me ask you to repeat the second half of your question to make sure I can answer...

Roxane Googin

Yes, the broadening use of OCP. People like Rackspace just making their own servers now. Are you seeing that expand into the SaaS segment and with that, drag your product along with it?

David A. Flynn

Yes, the -- as the OCP becomes more successful with standardizing an open designed for a server where it takes less do-it-yourself work, then you will see it grow into SaaS infrastructures and other smaller hyperscale where they can't quite invest as much time on their own because their infrastructure is not large enough to cost justify it. But as OCP matures, it's going to definitely eat back into the market through those Software-as-a-Service folks. But in many cases, the SaaS sides are best served investing their resources, not in cranking every last penny out of the infrastructure, but in offering richer and more valuable services. And that's one of the key reasons why Fusion-io is very successful in SaaS, is because they are trying to do impossible things and make services that would not have been cost-effective on existing infrastructure. And so the SaaS is a very fertile territory because they are so close to the creation of value in being able to process data in new and innovative ways that weren't possible prior to flash.

Roxane Googin

Okay. But to this time, they're still kind of OEM-based as oppose to OCP?

David A. Flynn

Yes, yes. They're still OEM-based, and even many of the web properties, the OCP is still fairly new. I was recently in China visiting many of the top web properties there and there's an extreme amount of interest about this and everybody's excited about it maturing to the point to where it doesn't -- it's not quite as do-it-yourself sort of thing. But it still has quite a ways to go. So you're going to see a first in the largest of the hyperscale, where they can cost justify the additional investment in effort to make sure it works.

Roxane Googin

Okay. And then just as a quick follow-on, on your SDK, you're saying maybe a summer GA. How would you expect that to, I don't know, impact revenues as modified MySQL variants start getting used? Where would you start to see that, do you think?

David A. Flynn

Well we expect it to drive differentiation and acceleration in the adoption -- in the hyperscale, especially -- or primarily where its application have been enhanced to use it. So MySQL being one of the largest in footprint across the hyperscale. And with the SDK, we expect to offer something that requires half the hardware to do the same workload. And when I say half the hardware, I'm not just talking half as many servers, I mean half as much flash, too. You might say, first of all, that's kind of bad, but in reality, that means that the flash we offer is twice as valuable. And that's through techniques to fit more on it because base is a premium. So cut the hardware in half, double the response time, double how responsive the thing, and actually have the flash last 3x as long because the application is writing that much less to it. So these are all very important value propositions. Reduced hardware, increased responsiveness of the app, have the hardware last longer, especially the flash, it does have finite lifetime. So we're excited about how -- when applications interact with their data differently. It can impact in a major way, the viability of flash and the value of flash.

Roxane Googin

And that would be a calendar '14, '15 sort of impact, probably?

David A. Flynn

Yes, I would expect it to be in that time frame where we could see the fruits of that.

Operator

Thank you. I'll now turn the call back over to Nancy Fazioli for final comments.

Nancy Fazioli

Thank you, Leslie. Regarding events for the quarter, please note that Technology Insights will host a Tech Talk Webcast with David Flynn on May 9. In addition, Dennis Wolf and Lance Smith will present at the Bank of America Merrill Lynch Technology Conference in San Francisco on June 4 and David Flynn will present at the William Blair Growth Stock Conference in Chicago on June 12. Each of these presentations will be webcast and available in the Investor Relations page of Fusion-io's website. Please contact the Investor Relations Department with any follow-up questions from this call. You can reach us at ir@fusionio.com. This concludes our call. Thank you for your participation and support and good evening.

Operator

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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