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Executives

Nancy Fazioli

Shane V. Robison - Chairman, Chief Executive Officer, Member of Audit Committee and Member of Nominating & Corporate Governance Committee

Lance L. Smith - Chief Operating Officer and Executive Vice President

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

Analysts

Kathryn L. Huberty - Morgan Stanley, Research Division

Kulbinder Garcha - Crédit Suisse AG, Research Division

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

Edward Parker - Lazard Capital Markets LLC, Research Division

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

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Mark A. Moskowitz - JP Morgan Chase & Co, Research Division

Abhey Lamba - Mizuho Securities USA Inc., Research Division

Nehal Sushil Chokshi - Technology Insights Research LLC

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

Richard Kugele - Needham & Company, LLC, Research Division

Fusion-io (FIO) Q4 2013 Earnings Call August 7, 2013 5:00 PM ET

Operator

Hello, and welcome to the Fusion-io Fourth Quarter 2013 Earnings Call. My name is Maisha. I will be your operator for today's call. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Nancy Fazioli. Please go ahead.

Nancy Fazioli

Thank you, operator. Good afternoon, everyone, and thank you for joining Fusion-io's Fourth Quarter and Fiscal 2013 Earnings Conference Call. On the call today are Fusion-io's CEO, Shane Robison; CFO, Dennis Wolf; and COO, Lance Smith. 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 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 the 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 file with the U.S. Securities and Exchange Commission, which are available on our website, and identify important factors that could cause the 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 Shane.

Shane V. Robison

Thank you, Nancy. Good afternoon, and thank you, all, for joining us today. Let me start out by apologizing for my voice. I've managed to catch a very bad summer cold, but I'm told I'm on the road to recovery.

So let's start out, first, by turning to the Q4 financial highlights. In Q4, we delivered $106 million in revenue, with a 59% non-GAAP gross margin and a $0.03 non-GAAP EPS loss. Fusion-io finished fiscal year with $432 million of revenue, a 60% non-GAAP gross margin and $0.21 of non-GAAP EPS. We generated $25 million in free cash flow for the year. The team has done a solid job of managing our supply chain and ended the year with $238 million in cash or cash equivalents while accounting for the NexGen Storage acquisition during the quarter. The company is well positioned financially and technologically as the world moves to a new generation of data centers.

The all-flash data center is no longer just a concept. Fusion-io pioneered the flash memory-based data center architecture that the industry is now embracing. And as the market transforms to delivering IT as a service, the workload demands on data centers are growing exponentially. We believe we are well positioned to continue to lead this broad industry transition. We are the leader in where the market is headed rather than where it's been, and our solutions continue to be the gold standard.

Fusion-io effectively created a market, which according to IDC's December 2012 report is a $25 billion opportunity. So given the attractiveness of the opportunity, it's not surprising to see the competition enter the market. We know from experience that it takes a number of years and a significant technology base to create true enterprise quality solutions to meet this market demand. And we are vigilant about watching our competition as they enter the market.

While I'm confident and excited about the opportunity ahead, there are several areas where we are not making the kind of progress that we need to make, and we are aggressively addressing them: first, we're improving our go-to-market strategy; second, we're streamlining our product road maps and our product launch process; and third, we're continuing to invest in technology to maintain our leadership position.

So our first area of focus is our go-to-market strategy. We have 3 distinct segments: we have the enterprise segment; hyperscale; and small and medium business segment. Strong collaboration with our OEMs and ISVs is critical to reaching these markets. Our market -- mid-market product, NexGen's ioControl, is a hybrid storage system and is now sold purely through the value-added reseller channel to avoid conflict with our enterprise channel. We will be more collaborative with our partners to solve customers' business problems through comprehensive solutions that demonstrate the power of our technology.

As an example, Fusion-io technology is key to the SAP HANA platform globally. It's integrated into appliances made by HP, Cisco and Dell to help customers improve performance of their applications by orders of magnitude.

Just yesterday we announced that Fusion ioDrive2 is being featured at the Microsoft Technology Centers worldwide to help our customers evaluate Microsoft SQL Server performance with our I/O memory products. Many of our Microsoft SQL Server customers are already reporting significant performance improvements with Fusion-io products.

By providing customers with the ability to test our solutions with their data, Fusion-io demonstrates business value, not simply speeds and feeds. And we intend to replicate this kind of integration across all of our partnerships.

Our second area of focus is streamlining our product road maps and the launch process. For example, we will accelerate our ioScale qualification with our OEM partners. Given our speed of innovation, it is important that we carefully coordinate with our partners when we bring new products to market.

Our third area of focus is investing in technology to maintain our leadership position. We're achieving this through initiatives that accelerate the adoption of flash-aware applications, such as the use of our Atomic Writes API by leading MySQL databases, as well as investing in the growth of our caching and shared acceleration products, ioTurbine, ION and NexGen's ioControl hybrid storage system. We have made good progress on our technology road map since the IPO 2 years ago, and we see further opportunities ahead for even greater differentiation of our technology.

Now, I believe that these course changes, improving our go-to-market, streamlining our product road map and launch process, and focusing our investments in technology, will improve our growth over the coming years.

Let me now quickly cover the trends that we saw in fourth quarter. We had a number of significant hyperscale wins with strong future potential. 11 customers exceeded $1 million in orders, of which approximately half purchased ioScale. These include wins at LinkedIn and a large U.K.-based financial services institution. We see that customers primarily buy from us for 2 reasons: because of our leading price performance, reliability and product availability; and the fact that we are NAND agnostic and can turn product quickly. Our installed base is continuing to grow.

The average orders per quarter by customers ordering greater than $1 million were up approximately 30% year-over-year, which we believe demonstrates increased customer satisfaction and a broader market acceptance. International orders from APAC were up more than 100% year-over-year. EMEA was up approximately 80%. We have expanded our international footprint significantly over the past year. And while this is good progress, we have more work to do to penetrate the international markets.

We made progress with important partners like Cisco with the availability of our solutions in Cisco's C-Series Rack Servers. Stay tuned for more partner product announcements over the coming year.

The market growth in technology is being fueled through services-based business models, supported by reliable, low-latency data centers that can scale to millions of users. Fusion-io is at the heart of delivering real-time information access with market-leading technology, a comprehensive suite of solutions, a robust product road map and strong sales leverage through key industry partners. We acknowledge that others see the same opportunity as we do. It is forcing us to become better by being more focused and more disciplined. We could not be more excited about the opportunity. It's been a real privilege to work more closely with this talented team that is driving industry-changing innovation.

I would now like to turn the time over to Lance Smith to briefly review operations and supply chain for you. But before I do, I'm pleased to announce that Lance has been promoted to President in addition to his role as Chief Operating Officer. Lance has played an instrumental role in the growth and development of Fusion-io since the very beginning. I am extremely excited about his continued leadership as we move the company forward. Congratulations, Lance, and I'll now turn it over to you.

Lance L. Smith

Thank you, Shane. Let me first touch on factors that impact our planning as we move into the fiscal 2014. These include indications on the improving health of the server market and the expectation that our service-side attached flash will capture the larger share of the market going forward. We also anticipate that NAND market economics will hold firm, with supply and demand remaining balanced. To expand further on the NAND market, 2X or 25-nanometer NAND continues to show supply constraints, with upper pricing pressure being offset by 2Y or 20-nanometer NAND cost declines. Do not anticipate short-term conditions over the next 6 months to change significantly, as additional supply is not expected to exceed the growing demand in the marketplace.

From a cost perspective, we continue to leverage our strategic engagement in inventory management to ensure 2X nanometer-based product availability while aggressively pursuing conversion to 2Y nanometer-based product lines over the next several quarters.

Turning to Q4, I believe what we saw on the operations side demonstrates healthy business fundamentals and validates our product strategy. Our unit shipments were up 35% sequentially, driven by a healthy increase in our ioScale products. Our highest-density 3.2 terabyte product saw a 3x increase in volume, and we continue to see stability in ASPs, driven by higher capacity even as dollars per gigabyte pricing is coming down across the market. We believe qualification of ioScale by calendar year end will further accelerate adoption of this product line across price-sensitive segments.

The hyperscale market remains a significant opportunity for us, as customers value Fusion-io-based solutions that offer industry-leading price performance, reliability and availability over commodity SSDs.

In order to accelerate adoption of flash-aware applications in the space, we transformed our software development kit into an industry open NVM initiative and have taken the first steps with key contributions to the Open Compute Project, the Linux community and the T10 Technical Committee. Our decision to open-source these APIs is a strategic move to enhance the benefits of flash memory for value-added software and, ultimately, end customers while extending our industry leadership and expertise.

In addition to strong traction in the hyperscale segment, adoption continues to be healthy in our enterprise-focused ioDrive product line. We expect growth as we extend our solution offerings based on our ION, NexGen's ioControl and unified caching technologies. These solutions simplify end customers' deployment, support and manageability of flash within their infrastructure while achieving the incredible application acceleration Fusion-io delivers.

As it relates to our overall market, there is competition, but it's segmented across market opportunities and it is certainly not all equal. At the high end is the enterprise space, where we primarily compete against network storage companies. These customers have application-specific, mission-critical servers addressed by direct attach PCI Express or rated enterprise SSDs, as well as general-purpose servers that support virtualization, small-scale and private cloud applications.

The SMB segment values total solutions that transparently add flash to their infrastructure. These businesses consider standalone storage boxes with server-integrated PCI Express or enterprise SSDs as central to meeting their needs.

The hyperscale segment is composed of Software-As-a-Service, Platform-as-a-Service and Infrastructure-as-a-Service customers. It is mainly addressed by scale and architectures that suit distributed, direct attach flash and all-flash arrays. The more infrastructure-oriented the customer, the more cost sensitive they become, and thus, more likely to consider the use of low-grade SSDs.

We are approaching our market and its segmentation with specific offerings and strategies to address direct attach storage, all-flash arrays, hybrid arrays and value-added software for virtualized or single-use applications. Taking a solution approach to resolving real customer needs and providing true return on investment will continue Fusion-io's competitive lead and growth.

I'll now turn it over to Dennis.

Dennis P. Wolf

Thank you, Lance. As a reminder, the financial results I discuss will be on a non-GAAP basis, unless otherwise indicated.

Fiscal year revenue of $432.4 million represented 20% growth over the prior year, as we saw reduced revenue concentration from 2 of our large customers. Our fiscal 2013 gross margin was 60%, up 4 points over fiscal 2012, driven by a reduction in our component product costs. Operating margin was 7% with EPS of $0.21, as we continued to invest heavily in the growth of our business and began integrating our NexGen acquisition.

R&D expense was 17% of revenue this past year, up from 14% in the prior year, as we accelerated our software investments and broadened our product portfolio. Sales and marketing increased to 27% of revenue from 23% in the prior year, as we invested in expanding our go-to-market strategy globally. We believe this investment has laid a solid foundation for our future growth.

Our year-end headcount stood nearly 940 people, up approximately 270 employees from the prior year, primarily in sales and R&D, including the addition of nearly 60 employees from the recent acquisition of NexGen Storage Systems.

We delivered $39.4 million in operating cash flow for the year, ending the year with $238 million in cash and cash equivalents.

Let me now turn to our fiscal fourth quarter results, and I will then elaborate on our outlook for our first quarter, as well as our fiscal year 2014.

Turning to revenue. Revenue in the fourth quarter was $106.1 million, representing 21% sequential growth. Customers who represented more than 10% of revenue included Facebook at 36% and HP at 15% of revenue, respectively. Apple contributed less than 10% to revenue in Q4. Facebook demand was higher in Q4 than we had anticipated at the beginning of the quarter. And one new large customer shifted an anticipated order from Q4 to the first half of fiscal 2014. In addition, revenue generated from our OEM partners came in softer than expected. International revenue was approximately 28% for the quarter and is sensitive to customer concentration. Support and maintenance revenue in the fourth quarter was $9.3 million and approximately $35 million for the full year. This is essentially flat from the prior quarter.

I'm turning now to gross margin. In the fourth quarter, our gross margin was 59.1%, down 80 basis points sequentially due to product mix and related pricing.

Moving now to operating expense. Our expenses totaled $69.1 million for the quarter, up 16% or $9.4 million from the prior quarter. The key contributors were approximately $5 million driven by year-end sales acceleration and $3 million due to the acquisition of NexGen. Sales and marketing expenses were $37.6 million or 36% of revenue in fiscal Q4, an increase of $7.6 million from the prior quarter. We now have approximately 240 revenue-generating personnel, 35 of which were added in the quarter. R&D expenses were $20.8 million or 20% of revenue, an increase of $1.3 million from the prior quarter due to investments in next-generation products. G&A expenses were $10.7 million or 10% of revenue, an increase of $0.5 million over the prior quarter, primarily due to management transition costs. Our operating loss for the quarter was $6.4 million or 6% of revenue.

Turning to net income. Net loss in Q4 was $3 million or a $0.03 net loss per share.

Moving to the cash flow statement. We used cash from operations of $6.4 million in the quarter, due to our operating loss and an increase in accounts receivable in the quarter. Purchases of property and equipment and leasehold improvements in the fiscal fourth quarter were $3.5 million.

Turning now to the balance sheet. Our cash and equivalents were $238 million, down $83 million over the same quarter last year. We spent $114 million on our 2 acquisitions during the year, which was offset by $39 million from operating cash flow. Deferred revenue in the fourth quarter was $39 million, up $3.8 million sequentially, due to support and maintenance renewals during the quarter. Accounts receivable stood at $69.1 million this quarter, an increase of $18.6 million from the prior quarter. Net DSOs were 62 days, up from 50 days last quarter due to higher-than-usual support billings. As a point of reference, 80% of our AR is current, which is consistent with the prior quarter. Total inventory as of the end of the fourth quarter was $71.2 million, essentially flat sequentially.

Turning now to guidance. For the fiscal first quarter of 2014, we expect revenue of approximately $80 million to $90 million. This anticipated quarter-over-quarter decline is primarily driven by lower-than-expected Facebook revenue this quarter. As Shane mentioned earlier, while we are making changes to our go-to-market strategy and we have a series of new product introduction, we do not expect to see benefits from these changes until later in the year. Gross margin is expected to be approximately 56% to 58%, as we aggressively drive market adoption of ioScale and next-generation products.

Taking into account all of the above and the impact of NexGen, we expect an operating margin loss of approximately 15% to 25%. Note that NexGen equates to approximately 3% of that operating margin loss. We expect diluted shares outstanding to be approximately $100 million, equal to basic shares outstanding due to the expected net loss.

Now turning to the full fiscal year. We expect revenue growth of approximately 20%, which reflects the continued diversification of our customer base through the focused segment strategies for enterprise, hyperscale and mid-market that Shane and Lance discussed. We are expecting many new product and feature releases during the year, as well as a product transition from 2X to 2Y. We expect gross margin to be in the range of approximately 52% to 54%, as we drive larger volume transactions across a broader base of customers and migrate to our next-generation platform in the second half of the year. We expect our operating expense growth rate will be significantly lower in fiscal 2014, as we look to leverage the investments we made in fiscal 2013. That being said, we will continue to invest in R&D and sales. Operating margin is expected to be in the range of 2% to 5%. This is after taking into account dilution of approximately $10 million from NexGen. We expect diluted shares outstanding to be approximately 113 million shares. We expect a 35% tax rate for the year. And capital expenditures are expected to be approximately $20 million for the year.

Now let me just turn it back over to Shane for some closing remarks.

Shane V. Robison

Thanks, Dennis. This has been a transitional year for Fusion-io, and it has not been without challenges. We've learned that we need to better leverage our strong partnerships and focus on minimizing channel conflict through our new go-to-market strategy. We plan to improve our product development and market introduction process. At the same time, we need to continue to invest in our technology leadership that garnered us our market-leading position to this point. We are gaining traction in larger deals, which we expect to result in an increased number of 10%-plus customers in the coming year. And importantly, we are extremely focused on growing our revenue faster than our expenses. Our conviction around the market opportunity is as strong as it's ever been, and we believe Fusion-io is well positioned to capture a significant share of that opportunity in fiscal '14 and beyond.

So thank you, all, for joining us today. And I'll turn it back over to you for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is Katy Huberty with Morgan Stanley.

Kathryn L. Huberty - Morgan Stanley, Research Division

Your guidance calls for a pretty significant ramp in revenue as you move through the year. That is similar to what you had expected in fiscal '13, which did not materialize. So can you talk about what processes you've put in place to improve your forecasting accuracy and visibility? And maybe talk about some of those new 10% customers that you expect to layer in this year, whether you have formal commitments from them or just verbal communication for the revenue that you're expecting in your guidance from those new customers.

Dennis P. Wolf

Yes, Katy, thank you very much. Dennis here. Shane covered some of this. I'll review that, and then I'll get into specifics. What we have found in our learning over the last year is that we needed to improve our go-to-market strategy. We have 3 distinct segments now. We were kind of playing in all of them, but they were not focused segments. Those focused segments are enterprise, hyperscale and now small to medium business. We needed also to have stronger collaboration with our OEMs, as well as our ISVs. We find that what we -- what we have found during the year is that segmenting our -- market segmentation and geographic expansion and now understanding of who our next -- who our larger customers are has given us visibility into the second half of the year, as well as Q2. If you look at the actual ramp, we're at $80 million to $90 million this quarter, we expect to be able to return to historical levels in Q2 -- our high historical levels in Q2. With 2 key customer deployments expected, we think our major OEMs will be qualified with ioScale by that time. And we'll begin to see the initial impact of our go-to-market strategy. Taking those all together will enable us to get on the ramp that we're talking about.

Operator

Next question is from Kulbinder Garcha with Crédit Suisse.

Kulbinder Garcha - Crédit Suisse AG, Research Division

Just a couple of questions. The first one is, Dennis, just picking up on the last question, so just if I summarize your point, the revenue visibility you've got is by putting this new go-to-market in place and new -- these 2 new customers coming onboard already by December, that gives you a good base to build on for the second half of the fiscal year. Is that the right way of thinking of it?

Dennis P. Wolf

Yes, we -- it's -- we think that by that time, our go-to-market strategy will -- we'll feel the initial impacts, and some of what we're expecting for a couple of larger customers will start taking form.

Operator

Next question is from Aaron Rakers with Stifel, Nicolaus.

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

Just again to kind of build on that and maybe to kind of tie in the gross margin discussion with it, these 2 key customers, as you bring them on, I'm assuming that you're alluding to the ioScale product getting qualified at some of your OEMs. That product was initially not positioned to be an OEM-driven product, so is that ramp really the delta that we're expected to see in the gross margin implied to be the 52% to 54% for the full year relative to the guide for the first quarter? And if not, or maybe included in that discussion, how do we think about your supply of NAND flash and whether or not you're assuming that, that is an impact on gross margin at all as well in that number?

Shane V. Robison

So, Aaron, it's Shane here. Thanks for the question. I'm going to answer the first part, and then I'm going to have Lance talk to you about NAND flash supply. So to add to what Dennis has already said, there's sort of 3 parts to our go-to-market strategy. Obviously, the enterprise piece, which we think is the biggest opportunity over the next several years. If you look at IDC's data, they, in 2012, predicted that by 2016, the enterprise segment, which is really the density-optimized server segment, will be $78 billion. The best way for us to go after that is through tight partnerships with our OEMs and our ISVs and Fusion-io, focused on accelerating their enterprise applications, such as HANA and RAC and MySQL. So we're making very good progress on that. What we'll have over the course of this year is a whole set of demonstrators, where customers will be able to see real end-market value in our combined solution with our OEM partners and our ISV partners. And this is where and we think it's really important for us to focus on that segment, which gives us the biggest growth opportunity and probably the best margin profile. At the same time, we are going to aggressively go after share in the scale space. So IDC says by 2013 -- or in 2013, this year, they said that by 2017, the scale market would be about $43 billion, so it's big. It's not quite as big as the enterprise is predicted to be. And we know that we have not been as aggressive as we need to be on pricing. Our product performs extremely well. We're clearly the market leader. And if we make a few fine tunes on our pricing structure, I think we can really go after some share in that space. And then our ioControl product, which is the new name for NexGen, is now mature enough that it's really starting to get traction in the mid-market, and it will be exclusively sold through the value-added reseller channel. There's been a lot of question about channel conflict with our enterprise customers, and we're determined to eliminate that. So as we go into the second half of this year, we'll rebuild our OEM relationships, which will give us more visibility into their pipeline. We'll have more visibility into our own pipeline because we're reorganizing our sales force around named accounts, and we'll have named account managers on every one of those, and we will be able to have a much better view of our forward-looking pipeline. And we'll focus on our mid-market with a very strong push in our value-added reseller partners. So we think that, along with geography expansion and some of the partnerships with our big customers, are going to give us the kind of growth that we're planning for the second half. The opportunity's there, we're the leaders, and if we can just get a few of our execution things lined up well here, well, I think we'll be in good shape. So let me turn it over to Lance to talk about NAND flash supply.

Lance L. Smith

Aaron, this is Lance. So with respect to the supply of NAND, with our contracts and our relationships with our suppliers, we believe that we can supply the demand for 25-nanometer-based products easily through our transition to our next generation and the 20-nanometer, the 2Y nanometer-based NAND solutions. As far as impacts on gross margins, 25-nanometer is doing very well for us. Our contracts give us consistency in our costs. And as we move to our next generation platform, just as we've done historically, we've designed it for improved cost of goods. And we should be able to continue to support going after these volume opportunities that Shane discussed.

Nancy Fazioli

Thank you. Next question.

Operator

Next question is Bill Shope with Goldman Sachs.

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

Okay. You mentioned your efforts to [indiscernible] channel conflicts [indiscernible] prepared remarks and also [indiscernible] answer to that question. How much -- could you give us a little more color on how much is channel conflict impacting [indiscernible] right now? Is that primarily just a statement on the early [indiscernible] around NexGen or is it broader than that? And what gives you confidence that you can correct any damage that may [indiscernible] some of your chips today?

Shane V. Robison

Bill, it's Shane. Thank you. So let me give you a couple of examples of what I mean by channel conflict, and it really doesn't have a lot to do with NexGen. NexGen is a potential problem if we don't manage it well. But we are out in front of it, and we know what we have to do, and I'm personally talking to the OEMs about it. The kinds of channel conflict challenges that we've been having have to do with first, pricing. We've been inconsistent in how we priced our direct products relative to our OEM products. And we have to have very clear discipline about how we price our direct sales products and how we price relative to what we're doing with the OEMs. So obviously, that's an easy thing for us to fix, and we will fix it. The second piece is on the product rollouts. And this is a little more subtle. But when we talk to our OEMs about qualifying products, and you know this because you study the OEMs, their qualification cycles sometimes take several months. And we'll go have a good discussion with the OEMs, get them to agree to qualify our products, they're working away on qualifying the products. And then all of a sudden, we pop up with an announcement in the market and preannounce that product, which is very disruptive for them. And it's the kind of channel conflict that destroys relationships. We will fix that. So those are just 2 examples of things that are pretty easy to fix but very impactful in terms of the relationship with big OEMs.

Operator

Next question is Ben Reitzes with Barclays.

Benjamin A. Reitzes - Barclays Capital, Research Division

Yes. I'm sorry to ask another revenue question here. But if we take you at your word at negative 20% for the next quarter and then try to get to 20%, we got to grow you close to 30% each quarter sequentially. That's growth that I've -- I don't know if I've seen from really any company I've covered in these days. That's really impressive if you can pull that off. And you talked us through the second quarter. You kind of went through a few things of 2 new customers and the go-to-market. Well, how do you grow 30% in the back half each quarter after that December quarter -- after that second quarter, I'm sorry?

Dennis P. Wolf

Right. And I think it's a focus of a few things, Ben. One, of course, is the -- is what Shane was just referring to pretty assertively, and that is that we needed a change in our go-to-market strategy, and we're working on that. We're all -- we're currently all over that. The segment strategy gives us other opportunities in markets in which we haven't yet played as aggressively as we can. One, of course, is enterprise, which, as we were saying, is a very large market. Our solutions selling in enterprise is going to help, and the content that we have in our product road map enables us to envision that, to see that. We are now 240 -- 200-or-so sales reps, AEs indirects, and they're all entering their maturity. We covered during our conference script, we added 35 salespeople just last quarter. We added about 75 this year. It takes a while for them to mature. They now are in the midst of ramping. We have more new -- we have more mature sales reps now than -- I think about double what we had about a year ago. And they have their own pipelines that they're working on. So it's not just a, "Let's grow by 20% to make everyone happy." It's really more of a fundamental analysis of what we see with our segments, with alleviation of our go-to-market strategy issues, with our product road map, with our key customers that are forming, and these are -- these have the potential of being larger customers. Taken all together, that gives us -- that informs us as to what we are expecting for fiscal '14.

Shane V. Robison

Yes, Ben, this is Shane. If you look in the hyperscale space, everybody is familiar with the 2 or 3 big customers we always talk about. But I think the thing we need to focus on is there's a list of customers behind them: Pandora, Spotify, Alibaba, Alipay, China Mobile, LinkedIn, salesforce.com, U.K. National Health. And there's a real opportunity, and we fundamentally believe that over the next 24 to 36 months, a lot of these big scale out opportunities are going to get deployed. They're building the data center infrastructures now and we'll have an opportunity to deploy there. In the enterprise side, what we're seeing -- if you just look at the results we're getting for solutions like the SAP HANA solution or some of the things that we can do with Microsoft on the database side. There's a real opportunity to go in and change the total cost of ownership equation for our end customers in the enterprise space. And I think -- I'm not trying to say this is going to be easy. Believe me, this is going to be really hard, and we have stretched this as far as we believe we can. But the opportunity's there -- and I think if we fix some of the simple things in our go-to-market operation, and we're aggressive on pricing, we have an opportunity to grow the business.

Operator

Our next question is Steve Milunovich with UBS.

Steven Milunovich - UBS Investment Bank, Research Division

Yes. Are you still talking about the business in terms of core and strategic? And if so, could you give that breakout? And it sounds like if Facebook came in at that high a percentage, then I guess the core or kind of enterprise business must have been weak. Is that the OEM weakness that you were referring to?

Dennis P. Wolf

Yes, that's right, Steve. We're not breaking it out in fiscal '14 because we think that there are others who are taking form instead of just Facebook and Apple. So the deal we made for fiscal '14 is we will give as much color as possible for our larger customers, and we're going to do that. We'll talk about them to the extent that they enable us to talk about it. But you're right. In Q4, Facebook contributed 36%, a [indiscernible] piece of the business. I also want to remind you that the core in the quarter was light. It was light because of the channel conflict that we certainly had, the product rollout strategy for -- particularly for ioScale that we had. And also, well, I talked a bit about larger customers that are coming in towards the second, third, fourth quarter of the year. They are starting a little later than we had expected when we originally expected our core business to be larger for Q4.

Operator

Our next question is Edward Parker with Lazard Capital Markets.

Edward Parker - Lazard Capital Markets LLC, Research Division

Great. Maybe for either Lance or for Dennis, on the gross margin guidance, you talked about a couple different factors including your lithography transition versus some NAND cost headwinds as well as I think you said fine-tuning pricing for hyperscale customers. And then I'm assuming that mix is obviously a big component of that given the fact that you're expecting a couple big hyperscale customers. So maybe if you could just walk us through a little bit in terms of how each of those affects your gross margin in terms of how you get to your 52% to 54% guidance, that'd be great.

Dennis P. Wolf

So I'll take the first part as to how we get to 52% to 54% margin. Again, we are going after market share. That is full stop what this is all about. Shane's talked about the fact that pricing has become -- the fact that we're moving into a new segment and we're moving very aggressively into a new segment, that segment, which is hyperscale, it drives volume. It's price-optimized and drives volume, and we're in it. Enterprise -- the enterprise segment of the business drives up actual gross margin, and as you've seen over the course of fiscal 2014, our enterprise business -- and balancing it out with our hyperscale, which came later, enabled us to show 60% margins. We are trying to build this market fast. And so when you look at the gross margin, the characteristics of gross margin, it's -- again, it's about mix, and it's -- we balance that mix with as healthy a blended business model as we can for gross margin. And that's why we're guiding right now the focus this year is on volume and revenue and growth. Therefore, our gross margin for this year is 52% to 54%. Now as it goes forward, we've talked for the last couple of years about our target gross margin range at scale to be 56% to 58%. We want to take it 1 year at a time. We know that enterprise is a larger opportunity. It's going to depend on how quickly that enterprise business that Shane talked about is going to grow. And it probably would give us a better business model expectation going forward, but we're not calling that now. It's 1 year at a time.

Lance L. Smith

So with respect to lithography transition, as I mentioned before, we have been historically been able to move to a new lithography and take advantage of it by improving its price performance. But when we take a look at ioScale, it truly was designed to be cost optimized. So when we speak of our segment strategies, one of them is trying to not only to the solutions that we create that better benefits the end customer but the kinds of products that we are creating for those segments. ioScale has been designed for those cost-conscious consumers. And when we've done so, we've designed it for our target margins. Now when we take a look at ioScale, one of its benefits is the fact that it actually increases our ASPs. I think I mentioned that our unit shipments were up 35% sequentially, but we also saw stability in our ASPs. And this was really driven by the fact that customers are buying more flash for each one of their servers. And when we go from 25 nanometers to 20 nanometers, this will improve for us so that we can actually address a broader range of products. We can still address the high-end needs, the performance requirements of enterprise, but able to change the design and tune it so that we can also hit these low cost points without dramatically hitting our gross margins.

Operator

Next question is Alex Kurtz with Sterne Agee.

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

Yes. Shane, it sounds like there is some concern or just a little bit of caution on the NexGen acquisition from your prepared remarks. I'm interested. I mean, you obviously were involved in looking at this when you were on the board. And I'm wondering what changed between then and now as far as implementing that acquisition into your business model?

Shane V. Robison

So I don't -- I'm sorry if I led you to believe there is concern. The only concern that we have is our discipline around how we deliver that product to the market. So that strategy around it, as we talked about at the time of the acquisition, was market expansion. In the mid-market, small, medium business segment, these are businesses that want to try and take advantage of the performance of flash, but they can't afford an all-flash solution. And what they really need is a product that is -- and most of them can't afford to have their own IT departments and IT infrastructure. So they need a product that's going to be delivered by an ISV partner or that is so simple to integrate that it's plug-and-play. And the only thing that we need to worry about with the ioControl/NexGen product is our own internal discipline about ensuring that, that goes through the correct channel at the correct pricing. And by the way, I've been out and, as you might expect, talked to every big OEM, and we're going to offer it to them if they want to take advantage of that product for their own solutions. So no concern at all about the team, and by the way, the team is executing well. They're ahead of their internal plan, and numbers aren't huge relative to everything else we're doing, but they should be growing very nicely over the next year. And so this is much more -- the only hesitation was just around making sure that we are disciplined around channel clarity and how we're going to take that product to market.

Operator

Our next question is Andrew Nowinski with Piper Jaffray.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Okay. Just a question. I'd like to go back to sort of the 2 customers that essentially built this business and get more color as to why it's taking longer for them to resume spending. Back in December and even last quarter, I think the expectation was still the strategics would -- they were simply deferring spending for about 6 months, meaning it would come back to normal levels in the September quarter. That no longer appears to be the case. And LSI is now claiming that they've made inroads at a large social networking company and imply that they're just starting to deploy their PCI cards there. So I guess are you aware of any changes at Facebook or Apple from a competitive dynamic that may impact your long-term opportunities there?

Lance L. Smith

Well, what I can talk to with respect to Facebook, what we did mention in our notes, Dennis mentioned that Facebook revenue was higher in Q4. This was -- didn't expect it. This was because the applications, the new tier that we've been able to apply our products to. This is the Graph Search that was a new business for us that actually was being fulfilled in Q4. That impacted on the lightness in Q1 of this year. And when we look at Facebook, we have a very strong work relationship with them based on years of experience in working together. We believe there is a terrific opportunity going forward with Facebook, especially with their build-out. Now we've said in the past, as they grow, we grow. When we turn to Apple and we take a look at their expectations, we have less visibility at Apple. We've mentioned this in the past. And when -- and I've talked about this before. When we look at Apple, there is opportunity at Apple, at Facebook and at these hyperscale accounts as we had an established footprint because when their databases are growing, when their data footprints are growing, we actually are able to sell product sort of a maintenance on a quarterly basis. But what I can tell you is the opportunities of both of these accounts and with hyperscale accounts that we've mentioned before, the big driver here is price. When we hit the right price points, the opportunities turn up. And this is where we think that -- and we believe with these types of accounts that we can actually see a potential. A little conservative at this moment, especially with some of that -- with Apple because they're -- we don't have as much visibility, but we have significant potential with our product lines and the price points that we're going after tends to capture more business.

Shane V. Robison

Andrew, this is Shane. The only thing I would add is -- and I know we've already told you guys this, but because of the way people build out their big data centers, this is by definition a lumpy business. And that's just a fact. The best way for us to sort of dampen the lumpiness is to have a dozen of these customers instead of just 2 or 3. And that's why I gave you the list I did earlier. And that's what we're focused on, is building out enough of these customers so that it doesn't have as much impact when we do get these transitions from one data center to the next one.

Nancy Fazioli

Thank you. Next question.

Operator

Next question is Mark -- I'm sorry, next question is Mark Moskowitz with JP Morgan.

Mark A. Moskowitz - JP Morgan Chase & Co, Research Division

Yes. First question is just around gross margin. Usually, once you give up part of the farm, it's hard to get it back. It sounds there is a structural shift here afoot with your new gross margin guidance. And you also mentioned a few times, Shane, competition. You didn't really get too specific, but I presume it can only get worse. So I'm just trying to get a sense here in terms of how we can understand the gross margin trajectory going forward.

Shane V. Robison

So, Mark, that's a really good question. And I think, first of all -- I have to repeat myself a little bit here -- this market opportunity is huge. And we're not the only ones that are seeing it. So you're going to see intense competition. And as Lance said earlier, not everybody is targeting the same part of the market. There is the server attached stuff, which we specialize in, real high performance, distributed memory systems. There's the array replacement technology, which was where most people are playing. There is the very low-end part of the market. And all of those are opportunities, but just the opportunity in our space, it's massive, and we're going to see competition coming in. And that's why 1 of our 3 tenets is to invest -- continue to invest to stay ahead on the technology side. And we do have a leadership position there in it today. The -- back to the margin question, if you look at our 3 segments: enterprise, hyperscale and SMB, each have very different margin profiles. For this coming year, especially in the first 2 quarters, we're going to see probably more in the scale part where we're going after share there with pricing. And as we get these big solutions really starting to move in the marketplace through partnerships with our OEMs and ISVs, that segment, the enterprise segment, which should be bigger, has a better margin profile. And the SMB is actually in between the 2. So a lot of this is going to depend on how we -- how fast we can get all 3 of these sort of moving together and sort of blend that margin to give you the overall margin for the company.

Dennis P. Wolf

And, Mark, like Shane was saying, our hyperscale -- our scale business right now is the one that we're really aggressively focused at as we build out our enterprise business, that's why the expectation is 52% to 54%.

Operator

Our next question is from Abhey Lamba with Mizuho Securities.

Abhey Lamba - Mizuho Securities USA Inc., Research Division

Yes. Can you talk a little bit about the switching costs and ROI involved in moving away from Fusion-io to some of the cheaper alternatives, especially in some of these large accounts where they are already using your technology in the infrastructure?

Lance L. Smith

Sure, I can take that question. This is Lance. The switching costs -- if I were to at least reiterate your question and make sure I'm clear on it, going from Fusion-io to a lower-cost solution or going from hard disk drives to Fusion-io? If it's the first question, there's a fair amount of cost that's involved. First of all, if you can imagine the data center itself, we are a server side-attached flash, which means that we have flash products in each one of the servers. So physically, it would be a fair amount of work to remove these devices. Architecturally, it's even more painful. You have to go from a very fast, low-latency, highly reliable solution to one that is less reliable, and maybe having to utilize a rated [ph] controller bringing these low-cost SSDs together and then trying to scale out. So you'll have an impact on the number of servers you now have to deploy, the number of software licenses you have to deploy. You'll impact your environmentals and your overall management costs. So I think going backwards can be very troublesome considering most of our customers when they're able to take advantage of Fusion-io's benefit at the application side, you're able to reduce the number of overall costs in your infrastructure more than 10x. So I think it could be troublesome for someone to actually replace it.

Operator

Next question is from Nehal Chokshi with Technology Insights.

Nehal Sushil Chokshi - Technology Insights Research LLC

Yes. So hate to beat the dead horse here, but sounds like the GM profile -- is that going to actually bottom throughout FY '14? Or is it just going to continue to go down throughout the fiscal year as the hyperscale business get larger and larger as a percent of revenue throughout fiscal year '14?

Shane V. Robison

Well, we don't know -- I'm sorry, Nehal. Go ahead.

Nehal Sushil Chokshi - Technology Insights Research LLC

And then to follow up on that, you've mentioned that the enterprise opportunity hasn't developed as fast as you would like it to and probably not as much as you had expected. Why wouldn't resolving the channel conflict issues that have been mentioned get this going again sooner than what seems like you guys are projecting here?

Shane V. Robison

Well, we're hoping it does. The -- as you know, these enterprise sales cycles are a little bit long because you're going in and typically putting a new system in place to run a very mission-critical application for a large enterprise. And usually, the CIOs are going to take their time and they are very careful about how they do that. But you're absolutely right. I mean, the nice thing about this solutions approach that we're taking right now is we don't actually have to invent new stuff. We've got great Fusion-io products. We've got great enterprise apps from the ISVs, and all of the OEMs have great platforms for us to deploy this on. So now it's a matter of us getting in front of the customers and describing to them the orders of magnitude that we can improve the performance of their mission-critical applications. So you're absolutely right. This could take off faster than we expect, but we're not building that into the model right now.

Unknown Executive

[indiscernible]

Shane V. Robison

Now, one of the things -- for any of you who are going to VMworld or to Oracle World, we'll have a showroom there -- it's across the street from the Moscone Center -- where you can see these applications demonstrators that we're using as sales tools to go into the big enterprise. So you'll be able to come in and see what we're doing, see what we're telling the customers, see the kinds of performance improvements that they're seeing in their mission-critical business applications and get a feel for how compelling this value proposition is as we try and get the real growth moving in the enterprise segment.

Dennis P. Wolf

So, Nehal, as far as the gross margin profile, it's really dependent on mix. We would expect that we'll have more hyperscale going into the year, particularly the second half of the year, which instills -- which creates the 52% to 54% gross margin target for the year.

Operator

Our next question is Rajesh Ghai with Craig-Hallum.

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

Yes. I had a question on the OpEx guidance, Dennis, if I kind of look at your Q1 OpEx guidance and kind of build a ramp for the operating margin through the year to -- for the full year guide, the OpEx appears to be flat Q-on-Q from the Q1 level in order to get to your full year operating margin guidance. Kind of curious what the assumption is over there. Is it just the fact that you're going to have more ioScale in the future and that's going to not have the same need for sales and marketing expense? Or are you going to be very frugal with your expenses going forward in this year? And how do you keep your envisioned agenda in that case?

Dennis P. Wolf

Sure. So, Rajesh, it's really more a matter of the investments that we've already made as well as the -- and I'll go through it, as well as the investments we anticipate making. You should start your year with an assumption of OpEx being at about $65 million. So it will be down from Q4 because of the -- in the scripted conversation, we talked about how it had gone up by $8 million or $9 million. So it will be going down some, but the investments that we've made in sales are starting to pay now. They're -- again, as we discussed earlier, they're entering their maturity phase. So we expect that we've got the sales organization tuned and ready to go. Our investments are really going to be primarily about R&D, and there will be investments continuing along the whole -- the entire year. So you'll -- there'll be adequate room for OpEx and decision-making around new investments.

Shane V. Robison

And we're doing some reallocations. You heard us do an organization announcement in June where we talked about the new product planning and product marketing with part of the organization. And we're moving things around from other parts of the company to build that function up, and we'll continue to do that across the board. We will be very disciplined on the expense side.

Operator

Our last question will be from Rich Kugele with Needham & Company.

Richard Kugele - Needham & Company, LLC, Research Division

Just in terms of the price competition that you were discussing with ioScale, my recollection was that, that product was intended to -- among other players, to go after like the Intel Solution and other similarly priced products. Are you finding that that's actually not who you're ultimately competing against? And instead you're competing against, like, graded SSDs? And that's who you're trying to price now? Like how far off is the pricing? And then as a follow-up, since you're one step removed on the SMB solution box, the IO central [ph], can you over time move that from beyond just being an SMB solution to be more of a even a high-end product over time?

Shane V. Robison

So on the question about ioScale, there's a -- there are multiple different competitive things we have to deal with in that space. We do not have to get down and [indiscernible] the low-end guys because we have so much richer functionality and more reliability. What we have to do is just close the gap a little bit. So this is not about us not having a lot of value to sell as part of our product. It's just the gap right now is big enough that there are opportunities that we would otherwise have available to us that are not there because we're too expensive. And so we're looking at bringing that down to expand our footprint. On the question about ioControl, we will basically drive that for the next year or 2 through the channel. If that opportunity that you described to move that into the high end comes about, that will go through the OEMs. We hope we have that problem to deal with.

Operator

I'd like to hand the call back to Nancy Fazioli for closing remarks.

Nancy Fazioli

Thank you, Maisha. Regarding events for the quarter, please note that Dennis will present at the Pacific Crest 2013 Global Technology Conference Forum on August 12. And we will also present at the Oppenheimer 16th Annual Technology, Internet & Communications Conference on August 14. These presentations will be webcast and available on the Investor Relations page of Fusion-io's website. Please contact the Investor Relations Department for any follow-up questions from this call. This concludes our call. Thank you for your participation and support, and good evening.

Operator

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

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