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Fusion-io (NYSE:FIO)

Q1 2014 Earnings Call

October 23, 2013 5:00 pm ET

Executives

Nancy Fazioli

Shane V. Robison - Chairman, Chief Executive Officer and Member of Operations Committee

Lance L. Smith - President and Chief Operating Officer

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

Analysts

Kulbinder Garcha - Crédit Suisse AG, Research Division

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

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

Kathryn L. Huberty - Morgan Stanley, Research Division

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

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

Steven Milunovich - UBS Investment Bank, Research Division

Srinivasan Sundararajan - Summit Research Partners, LLC

Richard Kugele - Needham & Company, LLC, Research Division

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

Louis R. Miscioscia - CLSA Limited, Research Division

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Nehal Sushil Chokshi - Technology Insights Research LLC

Eric Sterling - Barclays Capital, Research Division

Operator

Hello, and welcome to the Fusion-io First Quarter 2014 Earnings Call. My name is Maisha. I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Nancy Fazioli. Nancy Fazioli, you may begin.

Nancy Fazioli

Thank you, operator. Good afternoon, everyone, and thank you for joining Fusion-io's Fiscal First Quarter 2014 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 be making 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, and good afternoon, everyone, and thank you, all, for joining us today on the call. So I'm going to start out with an overview of actions that we've taken since we last reported, and then Lance will discuss operations, and Dennis will cover our fiscal Q1 financials before I turn to our outlook and then we'll close with your questions. So, first, our results.

In Q1, we delivered $86.3 million in revenue, within the range of guidance provided, with a 59% non-GAAP gross margin and a $0.07 non-GAAP EPS loss. We believe that our solid top and bottom line performance, in the face of organizational transition, speaks to our continued technology leadership. I also believe that it speaks to the effectiveness of our strategy. First, the comprehensive nature of our flash portfolio, which serves the entire spectrum, from server acceleration to flash appliance, to hybrid or tiered storage; second, our data center application expertise and robust product roadmap around the new NAND lithographies; and third, our sales leverage through key industry partnerships with our OEM, VAR and ISV partners. In the past few months, we've rolled up our sleeves and we're refining this strategy and tackling impediments to faster growth. Despite strong success in some of the most innovative forward-looking customers, our go-to-market execution issues hindered faster growth, and we're focused on aligning better with what we see as our upside opportunity. We continue to firmly believe that our application-centric low-latency architecture and our software capabilities make us the leader in where the market is headed.

Over the 2-plus-year time frame since our IPO, Fusion-io has significantly expanded its portfolio flash solutions, which has also required a rethinking of our sales approach. Now we're targeting our market and its segments with specific offerings and strategies that address each opportunity. Direct attach storage, all-flash arrays, hybrid arrays and value-added software for virtualized or single-user applications. And we believe that the following changes will help us better align with customer requirements and become a more predictable business, as we improve the speed at which we execute sales initiatives. First, we are imposing a better segmentation of the market, particularly with regard to the differences between hyperscale customers and enterprise customers; second, we are better leveraging our OEM and software vendor or ISV partnerships; and third, we are working to strengthen our geographic reach, as we have been overly concentrated in the U.S. enterprise sales area and we see missed opportunities in the other geographies.

So I'm pleased to note that we continue to attract and retain high-caliber people, people who are fluent in the trends of the industry and see our potential. We've experienced very little attrition overall and notably few departures on the engineering side. A few recent additions to our team include our new Chief Strategy Officer, Gary Smerdon, who was formerly Senior Vice President and General Manager of the Accelerated Solutions Division at LSI. A new Senior Vice President of Research and Development, Robert Hon, who was formerly Senior Vice President of Engineering at Echelon; and a new Chief Information Officer, Keith Brown, who was the VP of Enterprise Applications and Architecture at Aflac. The expertise and perspective that Gary, Rob and Keith bring to the team are already making a positive impact on our business. I'm also very pleased to welcome Dr. Ed Frank to our Board of Directors. Ed brings decades of experience in the computing and consumer electronics industries, having served most recently as VP of Macintosh Hardware Systems Engineering at Apple, until his retirement last week. His perspective will be invaluable as we execute on strategies to scale our success.

Now, as we welcome some new members to the team, we would also like to take a moment to thank Dennis, our CFO; and Jim, our Head of Sales, for their significant contributions as early and integral members of Fusion-io. We appreciate the commitment they've shown to the company, and we wish Jim well in retirement and we wish Dennis well in his new adventure. We expect to announce Jim's replacement soon, and we've already initiated a search for Dennis' replacement. In the interim, Dave Sampson, who has been our VP of Finance for nearly 4 years, will assume the role of Principal Accounting Officer.

So moving on to advances on the partnership front. I'm pleased to highlight a number of noteworthy developments. HP, IBM and Dell, each exceeded 10% of revenue this quarter, demonstrating very healthy traction from the enterprise side of our OEM business. And the Fusion-io ioDrive2 is now available through Cisco for its rack-mounted servers. And we continue to work with Cisco on other Fusion-io product opportunities. This past quarter, IBM was the first to qualify our ioScale product line and also adopt our ioTurbine software as their branded IBM flash cache storage accelerator. We continue to make the whole breadth and depth of our product portfolio available to all of our OEM partners. This includes all of our shared storage solutions like ION Data Accelerator and ioControl hybrid storage, our ioMemory products across ioDrive, ioScale and ioFX, and our virtualization caching and VDI software products. In particular, we believe that the hyperscale opportunity with our OEMs will continue to build out over the course of this year, as we finalize qualification of ioScale with all of them.

I'm pleased to highlight that in October, 9 out of 10 VMware, VMmark benchmarking commissions by Fusion-io OEM partners, including HP, IBM, Cisco and Fujitsu used ioMemory solutions to place among the top scores. Six of these benchmarks additionally leveraged Fusion's ION Data Accelerator to set new world records for performance. This is noteworthy recognition by OEM partners of the performance advantages and the value that our solutions offer to their end-user customers.

In terms of other new partnerships, we're pleased to now announce an expanding worldwide OEM partnership with Fujitsu. Building on our early success with Fujitsu, we're excited to enable their customers to accelerate their business with industry-leading Fusion ioMemory performance for applications across the enterprise. And I cannot emphasize enough how critical our OEM relationships are to our being able to take an application-centric solutions-based sales approach with our customers. The fact that we support almost all of the world's leading OEMs offers tremendous flexibility to our customers and is an important competitive differentiator.

We're also proud to share that Fusion ioMemory is being integrated into Quanta Computer's Rackgo X servers through the Open Compute Project. This is an important development in addressing the hyperscale market. While traditional storage vendors may be struggling to adapt their business to new IT models, Fusion-io solutions are trusted to accelerate computing from the enterprise to hyperscale.

This week, we also announced tighter integration with SAP, as we became part of the SAP PartnerEdge program. Emphasizing our leadership in architecting flash memory solutions for enterprise application acceleration, Fusion-io is trusted to provide performance in SAP HANA solutions from all of our OEM partners.

And since our announcement in August, ioMemory has been featured at Microsoft technology centers around the world. We've held more than half a dozen technology events at the MTCs, and each presentation has been oversubscribed. So we're pleased about the traction we're starting to see from this opportunity, which highlights the significant performance benefits that we can offer Microsoft SQL Server customers.

So with that, I'd now like to turn the time over to Lance to highlight progress on our product roadmap and operations.

Lance L. Smith

Thank you, Shane. As we've seen historically, the market continues to demand density, capacity and performance from flash memory solutions. Our product lines continue to command premiums over the competition, driven primarily by application performance, the customers' return on investment, and most importantly, quality and reliability. We now have over 5,000 customers worldwide who have selected Fusion-io to leverage flash memory in their mission-critical applications.

Earlier this month, I visited the Asia-Pacific region and met with key customers and prospects. The opportunities for Fusion-io in China remains very significant. This was clear simply by observing the build-out of China's infrastructure, with industry groups reporting that half of the country is now on the web. Thanks largely to cellphones and other mobile devices, China has the most Internet users in the world by far. In speaking with many large hyperscale customers that provide online transactions, social media and gaming in China, they have similar needs for performance, reliability and quality to hyperscale customers in the U.S. and Europe, and are looking for deeper commitments to develop scalable data center architectures and serve their growing customer base. To date, we have had modest penetrations in the region. With increased focus, key markets such as China are poised to become a significant contributor to our growth.

These meetings with customers in China, as well as recent meetings with hyperscale customers in the U.S., reinforces our view that there is a paradigm shift in the storage market fully underway. Fusion-io was founded because we saw the opportunity ahead, as the market increasingly focuses on information acceleration rather than traditional storage, and we believe we will continue to lead the industry in this transition. As a company, we are broadening our reach with a robust product roadmap. We are expanding our solutions and software offerings while transitioning to our next generation platform to leverage smaller and more cost effective NAND geometries.

Let me first speak to the NAND market, and then I will cover advancements in our product portfolio. As we mentioned last quarter, NAND pricing and availability continue to remain stable given our strategic NAND engagements and inventory strategy. We do not expect NAND availability to constrain shipments or impact margins this quarter. At the macro level, the SSD segment is the leading demand driver for the NAND market. Over the next year, we see greater balance in supply and demand with longer life cycles in NAND lithographies than we have seen previously.

Turning to products. Over the past quarter, we have focused on the deployment of enterprise solutions to accelerate the adoption of flash storage in mission-critical applications. We have also continued to advance our product portfolio. A new adjacent flash storage product line, the Fusion ioFX workstation drive, was recently released in partnership with HP. The ioFX is available for the new HP Z Book mobile workstation portfolio, and the award-winning line of HP Z desktop workstations, to accelerate large application data sets, including oil and gas research and digital content creation.

Our all-flash Fusion ION Data Accelerator shared storage software has expanded functionality to include broader connectivity options. Our enhanced end-to-end data transport integrity prevents silent data corruption and supports high-availability configurations for mission-critical applications. As Shane mentioned, these enhancements were the catalysts for record-setting performance by our Tier 1 OEM server and ISV partners.

Recently, we announced a number of updates to our ioControl hybrid storage solutions for SMEs, including product availability in EMEA, ioControl 3.0 software release and ioControl SPX server caching solutions, making it the first hybrid solution to offer server caching for high-performance application clusters. In fact, the performance of ioControl was recently tested by the Tolly Group, a respected third-party lab. On average, we achieved 160% higher virtual machine density, 700% better performance and less latency. This is all covered in a white paper where we are compared to other hybrid storage solutions based on conventional storage architectures. In our virtualization solutions business, we continue to innovate based on the ioTurbine technology, combined with the performance of ioDrive. We announced ioVDI software, a new product for virtual desktop acceleration. Optimized for flash memory ioVDI delivers seamless, reliable and cost-effective virtual desktop performance with consistent low latency response times.

There's a tremendous amount of innovation underway at the company, across multiple segments, and I am pleased with the progress we've been making. Our most important objective over the next several quarters is to focus the team so that we can meet critical time lines while coordinating the rollout of new solutions amongst all of our customers and partner.

I'll now turn it over to Dennis.

Dennis P. Wolf

Thank you, Lance. As a reminder, the financial results I discuss are on a non-GAAP basis unless otherwise indicated. Let me now turn to our fiscal first quarter results before I turn it back to Shane to elaborate on our outlook.

Turning to revenue. Revenue in the first quarter was $86.3 million, in line with our expectations for the quarter. Three enterprise partners each represented more than 10% of revenue. We had 3 end-user customers whose orders were $5 million or greater and 9 total end-user customers whose orders exceeded $1 million each in the quarter. Services Support and Maintenance revenue in the first quarter exceeded $8 million.

Turning now to gross margin. In the first quarter, our gross margin was 59.4%, up 40 basis points sequentially.

We move now to operating expense. Our operating expenses totaled $62.7 million for the quarter, down 9% or $6.2 million from the prior quarter, which included fiscal fourth quarter sales accelerators.

Sales and marketing expenses were $31.8 million or 37% of revenue in fiscal Q1, a decrease of $6.8 million from the prior quarter.

R&D expenses were $23.2 million or 27% of revenue, an increase of $1.3 million from the prior quarter due to investments we are making in our product roadmap.

G&A expenses were $7.7 million or 9% of revenue, a decrease of $700,000 related to executive transition expenses incurred in Q4, as well as lower legal and audit fees in Q1.

Our operating loss for the quarter was $11.5 million or 13.3% of revenue due to prudent expense management.

Net loss in Q1 was $6.7 million or a $0.07 net loss per share.

Moving now to the cash flow statement. We used cash from operations of $17.1 million in the quarter, primarily due to our operating loss. Total capital expenditures for the quarter were $3.3 million.

And I'm going to turn now to the balance sheet. Our cash and cash equivalents were approximately $225 million, down $13 million sequentially.

Deferred revenue in the first quarter, driven primarily by support and maintenance contracts, was $37.2 million, down $1.8 million sequentially.

Accounts receivable stood at $63.9 million this quarter, a decrease of $5.2 million from the prior quarter, due to lower revenue.

Net DSOs were 67 days, up from 62 days last quarter.

Turning to inventory. Our total inventory as of the end of the fiscal quarter was $74.1 million, up $3 million from the prior quarter.

And turning now to headcount. Net of engineering interns, headcount remains essentially flat from the prior quarter.

Now let me turn this back over to Shane for our outlook.

Shane V. Robison

Thanks, Dennis. With regard to guidance, for the fiscal second quarter of 2014, despite the organizational transition, we expect revenue to be slightly up sequentially.

Gross margin is expected to be approximately 52% to 54% as we continue to drive adoption of ioScale and the product becomes more widely qualified with our partners.

We expect an operating margin loss of approximately 15% to 20%, and we expect diluted shares outstanding to be approximately 105 million shares.

It's important to say our conviction about the long-term opportunity for Fusion-io remains unchanged and is intensely bullish. Given the market dynamics, product and organizational transitions, we're not currently in a position to provide guidance for multiple quarters. As the market expands, flash memory in the data center continues to be one of the most disruptive trends in the industry. And given our enterprise application expertise, robust product roadmap and strengthening ecosystem of partners, we continue to be the best-positioned company across the spectrum of delivering flash memory based information acceleration to the data center.

While we still have challenges to work through, we are very encouraged by our progress. We're developing a more focused go-to-market strategy, we're advancing our technology platforms and we're streamlining our product roadmap so that we can position ourselves to capture significant share of the opportunity ahead of us. We have not wavered in our vision or commitment to what we believe is possible given the capabilities that we bring to the market. So thank you very much for being with us today. And I'll now turn it over to you for Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is Kulbinder Garcha with Crédit Suisse.

Kulbinder Garcha - Crédit Suisse AG, Research Division

I have a question which is kind of split into 2 parts, and this aims mainly at Shane I think. The first one is a lot of the organizational changes you're suggesting need to be made. You kind of indicated, even last quarter, that you would need to scale the operations, you need to hire more in Asia, you need to build-out sales. Yet, at that time you were comfortable with talking about a fairly meaningful sales ramp. So what is deteriorated in visibility that you can't do that now? Specifically in the last 3 months. That's my first part. And the second part, that's a wider question that's linked to it. I would like your observations on this. It looks like, for the next year, this next fiscal year, the likelihood of Fusion actually growing revenues is probably quite low, just given where the first half is going to come out, given what Q1 is and what Q2 you're guiding to. The segment, the [indiscernible] post, is clearly growing, you guys may not grow in it for 12 months. What comfort can you give to investors that something more difficult is not happening in the market. Either the customers that you once thought you won are now not actually going to give you business, that the pipeline isn't as strong or something more fundamentally difficult or wrong isn't with Fusion-io? Those are harsh questions but I just though I'd ask them up front.

Shane V. Robison

Good questions, Kulbinder, thank you. I think they're probably the ones that are on everybody's mind. This quarter, one of the things that we have been facing is a difficult time with the build-outs of some of our hyperscale customers' data centers. We obviously supply technology to them as they build out those data centers, and those schedules have been changing. We've obviously had some organizational issues, which have constrained visibility. But the flip-side of that is our enterprise customers, especially through our OEMs, have been gaining momentum. So the hyperscale segment, as we've talked about in the past, is subject to some fluctuation depending on how these big hyperscale customers build out their data centers, and that creates some visibility issues for us this quarter. We are very excited about the opportunity with our product lines, as things are maturing, the ioControl product. They've announced some new features, even just in the last couple of weeks. So our ability to go to market in 3 segments: hyperscale, with our lead that we have there, in the enterprise, through our partnerships with our OEMs and multiple products, including our software products; and then in the small, medium enterprise space as we deliver on the ioControl promise. So we think that with our position in the next few quarters, as we go through the same transition that the industry's going through, with the NAND technologies, is very good. And the difficulty we have is just timing, it's coming up with exactly when these transitions are going to happen and what the impact will be on the business. So we are digging into that and as I've dug into the organization further, the foundation is sound, but we've got some challenges in terms of just making sure we're comfortable with the timing.

Kulbinder Garcha - Crédit Suisse AG, Research Division

And Shane, on that point, a lot of new customers that you won over last year, year and a half, have any of those walked away? Are they still in the pipeline? Because there has been so many wins that Fusion has spoken about, going back prior to you becoming CEO, as well, I accept that. But over the last 12 to 18 months, is that potential still there? Can you convert it this year or you just don't know at this stage?

Shane V. Robison

Well, I think this is where we obviously would like to have better visibility. Our relationship with our customers is very strong, and as they do their initial build-out, obviously we've had some big wins and we will continue to win business as they build out further and scale their services.

Operator

Our next question is Andrew Nowinski with Piper Jaffray.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

So, first off, just want to say good luck to Dennis on your future endeavors.

Dennis P. Wolf

Thank you Andrew.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

And then can you just give us a little bit more color on the hyperscale customers? Particularly the 2 key customers that you mentioned last quarter. Were those deals that the customers just pushed out into the next fiscal quarter or the back half of the year, or where they lost? And then if you could provide any insight on the 2 strategic customers as well, that'd be great.

Shane V. Robison

So our relationship with our big strategic hyperscale customers is very strong and. And as I said earlier, the visibility issue has to do with the timing of their data center build outs. So without going into specifics on each of those customers, that is the issue and it's just the nature of the business. We're working very closely with them and we'll be prepared to support them as they build out their data centers.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

And then what about those 2? Were those the same 2 customers that you had mentioned last quarter, that you thought were going to push fiscal Q2 here back to historic levels, that didn't come through and that's what you're guiding down?

Shane V. Robison

Yes, at this point, we have many more than 2 hyperscale customers and several of them have delayed some of their data center build outs.

Operator

Our next question is Aaron Rakers with Stifel, Nicolaus.

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

I guess I'll just ask some on the metrics that you guys did not offer up this quarter that you had in the past. Yes, I know you mentioned 9 customers over $1 million in orders. Can you give us the update on how many of those our ioScale and any color on that? And I believe also last quarter you had given us a metric on sequential unit growth and then also the order growth within EMEA and Asia Pac.

Dennis P. Wolf

Hey, Aaron, Dennis here. To your point, we had 9 greater-than-$1-million customers, of which roughly half were hyperscale customers. Your second question was on geographic mix. From a geographic perspective, about 40% of our business was outside of the United States.

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

And specific to that, AsiaPac and EMEA order growth, relative to what we had said last couple of quarters?

Dennis P. Wolf

Yes. So, obviously the order growth is dependent upon what has happened sequentially. And the revenue is down this quarter, so the order growth is not going to be as material. What I could tell you though is that the trend, for both Europe and Asia Pac, is very strong and the investments that we are focused on, particularly outside of the U.S., are we think bearing fruit and also were increasing.

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

And then the unit figure?

Dennis P. Wolf

We didn't give you units this quarter. I don't have it in front of me.

Operator

Our next question is Katy Huberty with Morgan Stanley.

Kathryn L. Huberty - Morgan Stanley, Research Division

I first just have a follow-up from some of the prior questions and then something separate. The goal post continues to move out on the ramp of the hyperscale accounts, and I understand you started to answer that in some of the prior questions. But can you, Shane, talk about why you think those accounts are delaying the build-out of their data centers? I understand you don't to talk about any customer in particular, but is there something going on, whether it be macro or a technology issue that's causing everybody to delay at the same time?

Shane V. Robison

So I don't think everybody's delaying at the same time. Some of our hyperscale customers have delayed, and that is really a function of their business growth. They need to grow these data centers to support the growth of the services that they're providing and some services are growing really fast and some have slowed a bit, and you guys have visibility into that as well. So it's really a normal market dynamic and we'll be prepared as these guys need new technologies as their services grow to support them.

Kathryn L. Huberty - Morgan Stanley, Research Division

Okay. And then as a follow-up. You're guiding gross margin down significantly from the first quarter to the second quarter. I understand that has to with mix and wanting to be aggressive on pricing, but there's no corresponding uptick in revenue. There's no price elasticity. Why would getting more aggressive on pricing not drive an uptick in demand through your channels?

Shane V. Robison

So we think it will and what we don't know for sure is how much, and that's why we said up slightly. And we'll define slightly as we go along.

Operator

Our next question is Alex Kurtz with Sterne Agee.

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

So, Shane, what I'm really interested is really how the core team is executing and the reps that are -- the vast majority of your employee base is going after the core storage market and sort of what their yield rates look like, how they've been trending over the last couple of quarters. Because, to me, the hyperscale business is going to continue to be lumpy for some time. Really, for investors, the core business and those yield rates and how they're performing with the new products seems more germane. So any kind of additional metrics or color on that would be helpful.

Shane V. Robison

Yes, I actually think that's one of the highlights that maybe we didn't spend enough time on this quarter. Our enterprise business had nice growth this quarter. And if you look at the performance of our OEM partnerships, which is primarily going into these enterprise customers, as we said, 3 of our big OEM partners were more than 10% revenue each. And our focus, with what we talked about with the Microsoft Technology Centers and some of our SAP wins on real high-end enterprise application acceleration, is paying dividends. So I'm very bullish on that. I think what we are going through in the sales force, and we talked about this last time, is the transition to a named-account model where we'll have more of the enterprise sales force focused on these big accounts who are great opportunities for us to do application acceleration in mission-critical situations with big enterprise customers. And that's actually working well, the question is, how fast can we really ramp that now.

Operator

Our next question is Bill Shope with Goldman Sachs.

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

Given the limited visibility on revenues you talked about. How are you planning your OpEx at this point? And then, related to margins as well, I understand you can't provide guidance for the full year, but can you walk us through at least the qualitative puts and takes for your gross margin trajectory throughout the year?

Shane V. Robison

Yes. Let me touch on expenses and then I'll let Dennis talk a little bit about the margin stuff. I'm very focused on profitable growth. So we're going to be managing our expense to a revenue target that is slightly sequentially up. You've seen, from the performance that we reported this quarter, that we've been managing expenses carefully and we will continue to do that.

Dennis P. Wolf

Again, as far as gross margin is concerned, Bill, we're still on task with what we said last quarter, which is anticipate that our gross margin will be within the range of 52% to 54%. As we progress through the year and as we increase the sheer volume on the hyperscale side, anticipate that, that will start happening in second half of the, but we're not giving any forecast at this time.

Operator

Our next question comes from Steve Milunovich from UBS.

Steven Milunovich - UBS Investment Bank, Research Division

Gentlemen, can you talk a bit about competition? Typically we ask about competition and the answer is nothing has really changed. But this market is changing quite a bit with the acquisition of Virident. I think EMC is now in the space. There's a lot of folks getting into the space. Is that putting pricing pressure on you? And you talk about being able to sell at a premium, but are you able to maintain that? And is your differentiation really noticed sufficiently by customers?

Lance L. Smith

Hi, Steve, this is Lance Smith. This is really a good insightful question. What I can say on competition, a number of things have happed in the marketplace. There has been quite a bit of consolidation. And what we've seen right now, in the consolidation, that it's too soon to tell whether it's going to make a significant impact. But what we've seen over the last couple of quarters, nothing has really changed. We have spoken about competition in the past. In fact, I think last quarter, we began to give you some color on the types of competition. We've seen 2 categories. Those that own their own fab and those that don't. And what we've seen is those competitors that can create their own technology, integrate third-party NAND, is on the same playing field as us. And we think we have an advantage there, given that we're first to market, we have a solid intellectual property, and we bring a lot of value to the customers with a brand and a reputation of reliability. I can tell you that a number of key accounts that I have visited and spoke with over the last couple of quarters. The competition is there. But what we've seen, and we've mentioned in the past, is that second category of just-good-enoughs. The SSDs that are playing down in the lower parts of the data center where cost does matter. And what we've come to the marketplace is a price banding on our product lines. So at the high-end is ioDrive. When customer is looking to support mission-critical applications, ioDrive wins. They're looking for reliability, they're looking for performance. When it's more volume-oriented and it's significant volume, we do price stepping and we address the competition by taking products like ioScale that has been tuned for cost. And the one way we were able to approach that is ioScale significantly adds more capacity for a single controller, for a single card. And you'll note that our density, on a per-drive basis, is significantly higher on ioScale than ioDrive. It affords better economies. And so we actually have now ways to compete and actually manage our gross margin based on the types of business that we go after.

Shane V. Robison

Steve, this is Shane. We also wanted to make sure we were getting really current information from the market. So we had a team go out and do a pretty comprehensive customer survey. We asked them very specific questions about how we stand relative to the competition in the market. And without going into every detail, we were very pleased with the feedback we got, in terms of how our customers are viewing us relative to the competition.

Operator

Our next question is Srini Nandury with Summit Research.

Srinivasan Sundararajan - Summit Research Partners, LLC

Hi, this is Srini Sundararajan calling for Srini Nandury. Question is, one of your competitors presented servers based on UltraDIMM at the Flash Memory Summit. For low latency, it looks like UltraDIMM seems to work on many of the challenges that you already sold. So what are your thoughts on this technology and is that going to be a threat to FIO?

Lance L. Smith

Again, this is Lance. Thanks for the question. There are a couple of competing technologies that are at it's early stages. When we look at the UltraDIMM, what we do note is that it can be low in latency, but it also has a number of limits. For one thing it's limited in power. It's limited in its form factor. Precisely how much NAND flash can you place on to one single DIMM. So we think there's some opportunities there. But as a replacement for something -- or a technology like the ioDrive, where it's a true extension of a memory for very large footprint applications, we believe that, in time, it may have some traction, but it's too early to say now, and it certainly has a number of limits it has to get around.

Operator

Our next question is from Rich Kugele from Needham & Company.

Richard Kugele - Needham & Company, LLC, Research Division

A couple of questions. First, Shane, can you elaborate on your comments where you're talking about your expanded efforts with the ISVs, to enhance that relationship? Any comments on how ioControl is doing so far would be helpful. And then in terms of ioScale, can you just give us a mix on how much was ioScale in the quarter versus other solutions?

Shane V. Robison

So that's kind of a multipart question. On ioControl, I'll hit that one up front because it's pretty easy. They're performing well against the plan that we had for them. Yes, they're still small relative to the rest of our business. But, yes, they're doing well and growing nicely and they've been announcing new features and functionality. And relative to some of the IPOs that we've seen out there, we're feeling really good about our position with ioControl. It will go through the channel. It is really a product that we have focused at the small/medium enterprise, and it'll go through systems integrators and be more of a ISV-driven or systems integrator and channel partner driven go-to-market model. For the enterprise, and what we're focused on there with our solution selling and some of the things that we've talked about with SAP HANA and the results we've been able to get there, and the results we can get with that Microsoft SQL Database, Oracle RAC, on industry standard servers, VMware -- I mean, we're just at the beginning of starting to build this out. And this is a big part of the sales strategy transformation that we're going through. So we're going to continue to have a performance lead, but we won't be just talking about performance in terms of dry ups [ph] and speeds and feeds. We're going to be really demonstrating to our customers how much we can accelerate their mission-critical applications. We've built out a lab in our facility in Salt Lake where we actually have installed servers from all of our OEM partners, integrated Fusion-io acceleration technology, both in ioDrive and ioScale. And then we load applications and real customer data on those architectures, and it gives our customers a real feel for what kind of performance improvements they can have. And in addition to that, we've already pretested the different configurations so they know which version of the software and hardware they need to integrate in order to stand up this solution in their data center and get the results that we've promised. So all of that is work in progress. We're seeing good traction. A lot of this, like the demonstration center that I talked about, has just been built out over the last 2.5 months.

Richard Kugele - Needham & Company, LLC, Research Division

Okay, that's helpful. And then the mix question?

Shane V. Robison

I don't think we've been talking about the mix between ioScale and ioDrive. What I will tell you is it's important to understand that ioScale and ioDrive both go into the hyperscale market and the enterprise market. So what we're seeing is, depending on the application and service that people are accelerating, they'll choose one product or the other so we have a robust sale of both in both markets.

Operator

Our next question is from Rajesh Ghai from Craig-Hallum.

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

My question was related to the server market that's been pretty weak over the past year or so, and I was just wondering how much of that has been impacting you recently and how much does that impact you if it continues to weaken ahead of the grand [indiscernible] flash in 2014?

Shane V. Robison

I think it's a little hard to say because we're really focused on accelerating applications. And a lot of our customers have servers already in installations and we can integrate our cards and solutions into those servers or we can have our cards and solutions integrated into new servers. So I think the focus for us is a little higher up the stack, in terms of how do we accelerate the applications that they're using. And the growth in the server market obviously will affect us at some level, but this is much more about growth in the software application space and how much people are building that out.

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

Any changes in the buyer behavior since the recent consolidation in terms Virident getting bought by Western Digital, and also in terms of other PCI flash vendors coming to the market and including Violin Memory?

Shane V. Robison

Well, as Lance said, I think the competitive landscape is pretty well understood at this point. You guys follow it very closely. As far as the buying behavior, and especially this was reinforced by our customer survey, we're still viewed as the gold standard for server-attached solutions. Remember, Violin is more an array replacement. So it really isn't going up against the sweet spot of our market. Although we do have other competitors. And I think this is a big opportunity, so we're going to continued to see competition come and go. And our focus is on maintaining our competitive edge with a serious investment in R&D and our customer relationships.

Operator

Our next question is Lou Miscioscia with CLSA.

Louis R. Miscioscia - CLSA Limited, Research Division

Maybe two questions for Shane. It sounds like you're obviously not supporting a growth of 20% year-over-year. But, Shane, and maybe you don't have to give this as guidance, but would you expect actually to grow in fiscal '14? And then I do have a quick follow-up question.

Shane V. Robison

I think what we've said on our guidance, which is were going to be sequentially up, is as much visibility as we really have right now. I mean, we're trying to be as transparent as we can with you guys, and as we learn more about the growth and what the trajectory of that growth is going to look like over the course of the next couple of quarters, we're going to tell you that as quickly as we know.

Louis R. Miscioscia - CLSA Limited, Research Division

Okay, so quarter-to-quarter now?

Shane V. Robison

Right.

Louis R. Miscioscia - CLSA Limited, Research Division

Now, with the enterprise companies, and obviously you work for an enterprise company, now over 10% of revenue, at least 3 of them. What's the risk in your confidence level of them eventually either going to another vendor? Just given that anything over 50% gross margin -- I think you know that the vast majority of their own hardware products, except for maybe mainframes and some storage products, don't get 50% gross margin. So, at some point, wouldn't you expect a material amount of pressure coming from them for either to cut your margins or the threat of them switching off, and as they become over 10% of revenue that becomes more of a concern?

Shane V. Robison

So this happens to be an area that I know really well. And I think your concern is a legitimate one, except in a situation where we can maintain our technical advantage. So I think as long as we're investing in R&D it's a significant investment, and we maintain a performance lead that is compelling to the end customer, we'll have a good relationship with the OEMs. Because as we move our product, we will help them move their product and vice versa. So this is always a concern and that's why we're so focused on our R&D investment, on making sure our product portfolio is robust. The other mitigating factor is we'll have multiple partners. So it's a little bit like the hyperscale business where they're not all going to be the same each quarter, and so it is actually an advantage to be supporting multiple OEM partners.

Operator

Our next question is Amit Daryanani with RBC Capital Markets.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

I just have a question. Could you guys talk about maybe what percent of your revenues are enterprise versus hyperscale? And when you talk about these 3 customers as your enterprise customers over 10%, do you have a good sense of where those products eventually end up? I guess my question really is, I mean, do you think they end up selling it to some other hyperscale customers, so really it's not enterprise the way you would think about it?

Dennis P. Wolf

So Amit, the only thing that we really give as a metric is in our greater-than-$1-million customers, to give you kind of advanced knowledge of how hyperscale is building out. And it was roughly 50-50, which is consistent with what it's been in the previous quarters. It's building out.

Shane V. Robison

And in answer to your other question, yes, some of our OEM partners are also selling into the hyperscale business and that's why what we're -- the way we're really talking about our business is in these market segments. Hyperscale, enterprise and small/medium enterprise. The way we think about hyperscale is those are typically customers who have a single service that they've optimized their architecture around and really streamlined it and their challenge is massive scale. On the enterprise side, they're typically trying to accelerate a mission-critical enterprise application, for example, HANA, or some analytics package. And both markets are taking advantage of both our ioScale and ioMemory products.

Nancy Fazioli

Next question please?

Operator

Next question is Nehal Chokshi with Tech Insight Research.

Nehal Sushil Chokshi - Technology Insights Research LLC

Yes, I'd like to get a clarification on the answer to Rich Kugele's question, and then I have an actual question after that. So my understanding is that the mix is what drives the GM fluctuations, and that, that mix is dependent upon customer, not necessarily product. Is that the right way of thinking about that?

Lance L. Smith

This is Lance, I'll take that question. So the mix has a number of components. It certainly starts with a combination of the customer type, also product mix and deal timing. So when you couple that together with this transition in our go-to-market, that will be the effective driver for gross margins.

Nehal Sushil Chokshi - Technology Insights Research LLC

Okay. So what I'm trying to understand here is that, given the slight sequential revenue increase but GM being down by 600 basis points, what does that imply about your mix? Where is your mix shifting to? Can we interpret this as it's shifting towards more hyperscale or is it shifting towards more ioScale or is it shifting more towards the lower capacity products? How should we be thinking about that?

Dennis P. Wolf

So I think -- first of all, we can't cannot give you guidance beyond this current quarter, the quarter that we're currently in, which is shifting a little bit more to hyperscale. That doesn't necessarily mean that that's the way it's going to be. We have to wait to see what the next couple, few quarters are. But we are making a lot of progress with our hyperscale product and our enterprise business.

Operator

We will take our last question from Ben Reitzes with Barclays.

Eric Sterling - Barclays Capital, Research Division

It's actually Eric Sterling for Ben. I know it's typically an application-driven decision, but what would you say is the impact that you're seeing from the evaluation of all-flash arrays?

Shane V. Robison

I'm not sure I understand the question but...

Eric Sterling - Barclays Capital, Research Division

What I'm saying, like, how do you view, if at all, that it's impacting revenue?

Shane V. Robison

You mean the competition with -- for example, with Violin or Pure or one of the all-flash array vendors?

Eric Sterling - Barclays Capital, Research Division

Exactly. How customer evaluations of those technologies might, if at all, impact revenue.

Shane V. Robison

Yes, I think it's really tied to what you said in the beginning, it's very application-specific. And with our direct attach architecture, we think we're uniquely positioned at the high-end of the enterprise and hyperscale market. And that's a very different application than what the array replacement guys are focused on. So, while we're interested in that and we have some products like ION that is growing in that space, that's, at least in my view, not what's impacting our core business.

Operator

I will now turn the call back to Nancy Fazioli for final remarks.

Nancy Fazioli

Thank you, operator. Regarding events for the quarter, please note that our senior executives will present at the Needham HDD Flash Memory Conference on November 6 in Boston, at UBS Global Technology Conference in San Francisco on November 19 and at the Crédit Suisse Annual Technology Conference in Phoenix on December 3. These presentations will be webcast and available on the Investor Relations page of Fusion-io's website. Please contact the Investor Relations Department with 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 Fusion-io first quarter 2014 earnings call. Thank you, all, for participating. You may now disconnect.

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