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Fusion-IO, Inc. (NYSE:FIO)

F3Q2014 Earnings Conference Call

April 23, 2014 05:00 p.m. ET

Executives

Nancy Fazioli – IR

Ted Hull – EVP and CFO

Lance Smith – President and COO

Shane Robison – Chairman and CEO

Analysts

Andrew Nowinski – Piper Jaffray

Richard Kugele – Needham & Company

John Roy – UBS

Lou Miscioscia – CLSA

Brent Bracelin – Pacific Crest

Nehal Chokshi – Technology Insights Research

Kulbinder Garcha – Credit Suisse

Rajesh Ghai – Macquarie Capital

Ben Reitzes – Barclays

Srini Nandury – Summit Research

Operator

Welcome to the Fusion-IO Quarter Three 2014 Earnings Call. My name is Adrianne, and I'll be your operator for today. (Operator Instructions) Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Nancy Fazioli with Investor Relations. Nancy Fazioli, you may begin.

Nancy Fazioli

Thank you operator. Good afternoon everyone and thank you for joining Fusion-IO's fiscal third quarter 2014 earnings conference call. On the call today are Fusion CEO, Shane Robison; COO, Lance Smith; and CFO, Ted Hull.

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 filed 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 Ted to review our financial results.

Ted Hull

Thank you, Nancy. Good afternoon everyone and thank you for participating today.

Our third quarter top line results were solid with revenue of $100.5 million which equates to 6% sequential increase and an increase of 15% over the same quarter last year. We delivered a non-GAAP gross margin of 52.4% within the range we expected and a net loss of $0.10 per diluted share as we invest in the longer term growth of our company.

Our balance sheet is healthy, which is $225 million in cash and cash equivalence giving us the ability to execute on our sales strategy, continue to develop leading edge technology and products and expand our market footprint.

Turning now to provide further detail on our results. Of $100.5 million in revenue for the quarter, services, support and maintenance contributed approximately $6.8 million, providing additional customer context one OEM partner and two end-user customers exceeded 10% of revenue in the quarter.

We had notable customer deployments during the period including a win with Yelp, deployments with a large domestic internet provider as well as with a Chinese e-Commerce company, JD.com. These wins as well as large deployments with large long-time customers highlight our continued strength with online service providers as we and our partners demonstrate the Fusion-IO equates the higher performance at a lower overall cost for their data centers.

Turning now to gross margin, and as a reminder, the financial results I will discuss are on a non-GAAP basis, unless otherwise indicated. In the third quarter, our gross margin was 52.4% in line with our guidance and driven by certain large deals in the transition to a partner-focused strategy.

Moving now to operating expense, our expenses totalled 69.5 million for the quarter, up 7% or $4.3 million from the prior quarter driven primarily by calendar year employee benefit changes as well as sales commission expense on higher revenue. Our operating loss for the quarter was $16.8 million or 16.7% of revenue which was consistent with our guidance. Net loss in Q3 was $10.5 million or $0.10 net loss per share.

Moving to the cash flow statement and balance sheet. We use cash from operations of $18.8 million in the quarter and ended the quarter with cash and cash equivalents of $225.1 million. Capital expenditures were $2.9 million in the quarter. Accounts receivable stood at approximately $74.2 million this quarter, an increase of $23.8 million from the prior quarter due to revenue linearity following certain large deployments. Net DSOs were 67 days. Total inventory at the end of the third quarter was $72.7 million, down from the $80.3 million in the prior quarter.

Now, turning to the outlook for the fiscal fourth quarter of 2014. We expect revenue to be in line to slightly up sequentially as we continue to operationalize our partner-first strategy and key product initiatives. Gross margin is expected to be approximately 52% to 54%.

We expect an operating margin loss of approximately 13% to 17% given product launch investments in the quarter. We expect diluted shares outstanding to be approximately 108 million shares and approximately 105 million shares per fiscal 2014.

I'd like to now turn it over to Lance for an update on technology developments and operations.

Lance Smith

Thanks Ted, and good afternoon everyone.

Fusion-IO continues to be extremely well positioned competitively. With our strong hardware and broadening software product portfolio, we are at the forefront of making the data center Flash Aware because of its performance and efficiency advantages over legacy technologies. Flash is an important underpinning in our increasingly real-time world.

The enduring relationships Fusion-IO has with the companies that today defines real-time user experience are a proof point of this. The market for continued strong adoption of Flash looks healthy. Global x-86 server units are up 3% quarter over quarter and Tier One server OEM shipment are up 7% quarter over quarter. Average density per drive continues to increase quarter over quarter.

Our NAND market pricing is stable given our expanding strategic NAND engagements and inventory strategy, and we do not expect NAND availability to impact margins or fulfilment in the near term. With a third generation products on track, we expect to maintain a strong market leadership and expand our reach.

For the IO memory in-server acceleration business, needed shipments and revenue favour the scale up product line in the Q3 as a result of certain large deployment although we continue to see strong demand for enterprise application acceleration solutions.

The industry is now going through the phase of software becoming more Flash Aware. Recent announcements highlighted are a collaboration with Microsoft on their SQL Server 2014 In-Memory OLTP software. We began a tour of 35 Microsoft technology centers globally to highlight for customers the 4x improvement in transaction per second at significant reduced data latency that can be achieved with Fusion-IO and SQL Server 2014.

We also recently announced collaboration with Oracle, MariaDB and Percona on the development of Flash Aware Interfaces for MySQL including database release of Flash Aware features, NVM Compression and Atomic Writes. NVM Compression is unique breakthrough software feature powered by Fusion-IO that significant increases transaction rate, provides four times more endurance, up to six times better performance predictability and doubles usable capacity along with applications like databases to leverage the native capability of Flash as a memory.

NVM Compression coupled with Atomic Writes, which streamlines the software stock, the replacement needs to write twice is a potent differentiator for Fusion-IO.

We continue to work with VMware to improve data center efficiency and virtualize environments. This quarter, we announced the general availability of Fusion ioVDI software for VMware Horizon View. We've also partnered to deliver IO memory solutions integrated into VMware's recently announced VSAN product. VSAN highlights the benefits of having a converts, computers and storage infrastructure and is yet another technology developed from ISVs that help us deliver native Flash performance on a broader scale.

Recent announcement with our ISV partners features the opportunity in the enterprise where there are significant number of workloads where Fusion-IO is positioned to achieve optimal performance reliability, endurance and manageability for our customers.

As we announced in February, we are taking our knowledge in understanding the application acceleration and vertically package in it to make it easier for an even wider audience consumed, through either appliances or certified solutions.

The market dynamics of vertical integration are attractive. We are the market leader in PCIe Flash which IEC indicates IDC indicates is growing at 25% per year. The hybrid Appliance market is sized by IDC as an approximately $9 billion market with a growth rate of 25%, and they size the all-Flash Appliance market as an approximately billion dollar market growing of 60% per year.

Our core market continues to show healthy growth with our hybrid and all-Flash Appliance solutions. Fusion-IO has the opportunity to expand into larger and faster-growing market respectively. In addition, to the localized growth characteristics and the fact that opportunity is an extension of our DNA as a company, expanding into appliances recognize demands of the enterprise customer enables us to offer both customers and partners and end-to-end Flash solution.

To highlight these offerings, our all-Flash ION appliance is best positioned for extreme acceleration applications that require shared storage. Our hybrid appliance ioControl accelerated all of our customers key applications seamlessly offering the power of Flash when they need it most, combining with the cost benefit of disks. The solution also combines well with in-server accelerators or VDI for end-to-end support. And last week, we announced that we are verified for a Citrix XenDesktop to support ioControl.

In addition to our appliances, our virtual desktop solution, ioVDI is one of the fastest virtual desktop solutions in the market, and we are excited about its potential. In a growing but increasingly competitive environment, our customers continue to see us as the market leader. Given our current and next generation product roadmaps, we are deepening our engagements with our key customers and partners who appreciates that Fusion-IO delivers performance, efficiency and reliability.

Now, I will turn it over to Shane for some closing comments before we move to Q&A.

Shane Robison

Thank you Lance, and good afternoon everyone.

I'm pleased with the company's momentum. We are solidifying our partnerships, building channel awareness for our broaden portfolio solutions and advancing the technology with software features like NVM Compression that make business applications more Flash aware.

We are clear on our mission, which is to accelerate the world's data driven solutions. We are resolute in our strategy which is creating industry leading Flash memory products that enable enterprises to better serve their customers, and we are dedicated to attracting and retaining top talent.

It's the conviction around the strength of our people, technology, and partnerships that energies the team as we grow. There's still much work ahead of us and much to achieve, however I'm confident that this team will deliver. So thank you for your time today and thank you for joining the call. And we'll now turn it back for Q&A.

Question-and-Answer Session

Operator

Thank you.

We'll now begin the question-and-answer session. (Operator Instructions). And we have Andrew Nowinski from Piper Jaffray in line with a question. Please go ahead.

Andrew Nowinski – Piper Jaffray

Okay. Good afternoon, and thanks for taking the questions.

So your guidance for fiscal Q4 was lowered and we are expecting Yelp, considering it's your fiscal yearend and Lance treated behind 6 million. We have been hearing that some of the hyperscale customers may have delayed purchasing of HDDs until the back half of 2014. Are you seeing that as well on the Flash side? And if not, can you just go over the puts and takes of your fiscal Q4 guidance?

Shane Robison

This is Shane. Hi Andrew.

In Q3, we talked about the fact that the mix of our business was more in hyperscale. And we see that going into Q4 as well. So I'm not sure where you're getting your data, but in the segment that we're in, which is very much at the high-end hyperscale segment with our big customers. We don't see a major change there.

Andrew Nowinski – Piper Jaffray

Okay. Then I guess why would you expect less, like is it a year-over-year declining in fiscal Q4 year considering the environment certainly got a little bit better than last year?

Shane Robison

It's based on the visibility that we have into the current hails.

Andrew Nowinski – Piper Jaffray

Okay, very good. And then I know you're still working through the 12-month transition. It looks like you've gone ahead on this quarter. But can you give us any color in terms of the revenue level you need to generate positive operating income and when you think you can get there?

Ted Hull

Yes. Well, hi Andrew, this is Ted.

We still have ways to go in terms of assessing that because there are several variables that will play into that in terms of probably see the whole part of the PNL playing through. What I would say to you, obviously we're very focused on how we get there and when we get there. And a lot of it has to do with the new products that we're bringing out, as we just talked about. And also, we work through some of our partner-friendly strategy and those types of things.

So we're very mindful of getting there. I think it's going to have a couple of variables that will play there and we'll see how it plays out as we go into the next fiscal year.

Andrew Nowinski – Piper Jaffray

Okay.

Operator

And we have (indiscernible) in line with a question. Please go ahead.

Unidentified Analyst

Yes, thanks for taking the questions guys.

Lance, you've talked about the market growth rate of mid-20%, and I think we're all looking at our models here trying to understand why. Given your technology advantage, why the company shouldn't be growing at the kind of a clip even if you were to isolate for those two large customers and look at the core business.

So when you need to step back and look out maybe into fiscal '15 and think about the longer term growth rates of the company, shouldn't you be in that kind of range of growth given how long the brand has been in the market and how large the sales organization is?

Shane Robison

Well, we think they're deployed to take up those opportunities. Those growth that I talked about is one of those markets speaks to the reason why we're investing or the type of focus that we're investing in the new product development. So I think we are setting ourselves up so that we can actually take opportunities in those spaces as it speaks very well to why we're investing into ION ioControl and our continued investment into our ioDrive and ioScale product lines in developing IO technology as we go forward.

Unidentified Analyst

Okay. And just a follow up here, you talked about competitive products coming to market. I mean there's a lot of different Flash technologies for enterprises to look at. So at any level, do you feel like your sales force is seeing sort of a freeze or a slowdown or elongation of sales cycles? Because they're evaluating other hybrids or evaluating all Flash arrays and another PCI-E cards. So is that a new dynamic than maybe two years ago?

Shane Robison

Well, what we've seen with the competition is showing great validation. There's a number of announcements that have occurred by our competitors to talk about some technologies and that's what they are. In this last quarter, we haven't really seen the competition take any business from us. But what we have seen is a better understanding of how to make use of Flash in these spaces.

So I'd say over the past couple of years, it's still our challenge to show our customers how to make the best use of Flash and pay our partnership with our ISV is really helping to drive that. Good example for this is with Microsoft and MySQL.

We've talked over the years on that and shown technology administration which are now just hitting the ground and making that advantage for the application when we start talking about four x increase in transactions or ten x improvements in application level software. Customers that haven't seen that, it's still a decision point for them and Flash. Flash has been so cheap that it's – it sees decision to drop in the data center. Flash is in the middle of the tier. It actually delivers on the performance of a memory well above hard disk drives. But they still have to find a way to make best use of it in their data centers.

With the advancements in applications, it's getting easier rather than harder.

Operator

And we have Rajesh Ghai from Macquarie. Your line is open for question. Please go ahead.

Nancy Fazioli

Rajesh?

Operator

(Operator Instructions)

Rajesh Ghai – Macquarie Capital

Nancy Fazioli

We should go to the next question.

Operator

We have Richard Kugele from Needham & Company in line with a question. Please go ahead.

Richard Kugele – Needham & Company

Thank you. Good afternoon.

Just two quick questions. One, can you just elaborate a little on the drivers for the margin improvement in the fourth quarter in the guidance given the comment that the hyperscale would also be a major component? Secondly, just to guide a little deeper on the ioControl side, are there any metrics you can point to on the progress in the quarter, a number of channel partners or any notable wins or anything you can point to? And what would you point to in 2015 as being the success points for that business?

Shane Robison

So let me take the first one. This is Shane.

As you know, the margin is really driven by a mix of our business. As we continue to drive into the enterprise with our application acceleration solutions in partnership with our ISVs and IONs, we'll see that mix shift overtime, and that will be the primary driver for any changes in margin.

Lance, you may want to talk the ioControl question.

Lance Smith

As for ioControl, late last year in December, we brought to market our 3.0 version of our software, which added a tremendous amount of functionality to ioControl. I mean some of the things that we added were additional performance QS functionality, and real intelligence on how to determine what is the best data to keep in Flash and what should be pushed back in the hard disk as we get the best utilization of your Flash.

When we did that customer uptake, the existing customers were quite strong and the customer did their upgrades. We've been certified with Citrix XenDesktop which I've talked about in our opening notes. This is where we've been driving hard to get the acceptance with the ISVs because that's the easiest way for our customers to see the solutions and make use of it in the marketplace.

Right now, we're building up the channel for ioControl and we're sending ourselves employees to grow that business, but we're not talking about the details of our wins in ioControl yet.

Richard Kugele – Needham & Company

Okay. Thank you very much.

Operator

And we have John Roy from UBS in line with a question. Please go ahead.

John Roy – UBS

Yeah, hey. Hey, guys, this is John Roy for Steve Milunovich. Hey, real quick. One of the things you've been talking to quite a bit has been telling us that a lot of the customers has been disappointed with Flash once it gets installed. It solves their problem for a little while, but then doesn't really last. Are you finding a learning curve? I know someone else kind of hinted at that, but it certainly seize me something that's out there. Are there a lot of people that are improperly putting in Flash today?

Lance Smith

Hi John, this is Lance again. I'll take that question.

It's funny we've heard the same thing about our competitive SSD offerings by our competition. What we have found is that our customers are attempting to take some of the off-the-shelf SSDs and place them into the data centers with the expectation of trying to achieve the kind of reliability and performance that they have seen from Fusion-IO.

Looking for that alternative, I think I had mentioned before, but I can tell you that a lot of my customer visits, a lot of the large deployment will have customers that will surprisingly show with an offer of, let's say, a purchase order for more Fusion-IO drive and I'll have to inquire and ask where do they come from. Here's what they'll tell me. Many times they'll deploy these SSDs into their data center in the failure way that they have seen from these drives and their early weeks or months from deployment was much higher than anticipated. And because of that, the deployment of these products in this mission curve and applications, they literally made a decision to meet and pull these SSDs out.

And so, what our industry has actually seen this is the fact Flash is a great technology. But its implementation into enterprise is very important. It has to be reliable. It has to be as reliable as the service being put in, the memory that's operating around it. And if it's not, then the customers may have to take a decision as to whether that particular SSD solution is good enough. Many have experienced it the hard way and have seen the kind of technology that the Fusion-IO has developed and rely on our reliability.

Operator

And we have Scott Smith from Morgan Stanley in line with a question. Please go ahead.

Scott Smith – Morgan Stanley

Hi guys. Thanks for taking the question. I just wanted to see if you can update us a little bit on your partner strategy progress. Are there any metrics you can provide in terms of growth rate or number of partners or mix that you're getting from your new partner initiatives?

Shane Robison

So the partner initiatives are going very well. I think the best metric for you guys to watch is you'll start to see more announcements between us and our partners. You saw a big one with Microsoft in the last two or three weeks, some announcements that they work on some of the open source players. These are a long-term relationships that a big part of our partner-first strategy was to rebuild those relationships over the course of the year, and I think we're doing very well.

So stay tuned for those announcements.

Scott Smith – Morgan Stanley

Okay. Great. And then I just wanted to follow up on some of the earlier questions. I think last quarter you talked about an improvement in hyperscale accounts in your fiscal second half. So it seems like that largely played out in the quarter given the gross margin profile.

But again, going back to the guidance of a more flat in line or flat up slightly, it doesn’t seem like there's – can you just talk about the makeshift, I guess, for what's expected in your fiscal fourth quarter in terms of hyperscale versus some of the enterprise mix?

Shane Robison

Well, you can see from the margin projections that we put up for Q4 that we're expecting a solid hyperscale performance and our focuses on growing both hyperscale and the enterprise Fusion business. And overtime, what we want to do is continue to get better at managing the mix of the business while delivering a tough line.

Scott Smith – Morgan Stanley

Okay. Thank you.

Operator

And our next question comes from (indiscernible). Please go ahead.

Unidentified Participant

Yeah, thanks for taking the question. The first question I just want to ask, I don't know if I caught it or just on the conference call, but did you just close how many customers you had had that were over a million dollars in order this last quarter?

Shane Robison

We do not include data in the script, but it was more than ten.

Unidentified Participant

Okay. And then when I look at some of the large customers of the past, I mean one in particular Facebook has had reported tonight has a 60% plus growth in their CapEx spend for 2014 implying actually somewhere around 70% plus over the last couple of quarters. Can you just remind us of what you view as your footprint or positioning within Facebook relative to what we've seen in the past?

Shane Robison

So we don't break that out, and that's part of our agreement with our customers. I can tell you, we have a very good relationship with our biggest customers and we're continuing to work hard to increase that.

Unidentified Participant

Okay. And then the final quick question from me would be, competitively, as we look at the landscape, maybe just give us some comments and how we should think about competition versus SanDisk and their alternative product because I know that they've launched a competitive win within IBM.

Lance Smith

Yeah, we've been closely watching all these types of technologies. This is Lance speaking.

When it comes to NVM, I think I mentioned before in our last earnings, this is a great validation of the use of Flash within the server itself. But what we have seen is that it's very limited in this application. It does require the servers to have a very specific support for it. IBM was the first to go to market to actually leverage this type of technology. It'll leverage in a number of technologies giving a customer a choice.

What we have seen so far with NVM, the type of technologies that was a bit of a niche in terms of its application, and so far it's been targeting financial trading platforms with some very small amount of data, small amount of messages that you can handle.

What I can do is that going forward, we'll have competing technologies even, I guess, making use of NVMs. We don't believe that DDR3 and the memory interfaces is actually the bottleneck. It's actually still advantaging the NAND and getting the best performance out of NAND. And we're the best in the market when it comes to delivering very symmetrical performance both (indiscernible) and rights.

So we think it's a good validation but not necessarily the best solution.

Unidentified Participant

Thank you.

Operator

And we have Lou Miscioscia from CLSA in line with question. Please go ahead.

Lou Miscioscia – CLSA

Okay. Thanks.

Let's go back to the big picture, a question that was sort of asked earlier. So if IDC said the market is growing 25% a year, and obviously you go back, gosh, I guess over six quarters now, you all have been either declining or obviously growing a little bit off of a very low number.

What's happening from a big picture standpoint? Is the market not growing anywhere near what they expect than its growing a lot slower or are others just gaining a material share in comparison? And then I know you're doing a tremendous number of things in the technology front and with partners and everything else, but is this going to get us there quickly or is it elongated turnaround?

Lance Smith

Well, I'll probably split the answer to this question between Shane and myself. To the first order, when we look at our segment of application acceleration and the development of PCI-Express based, software storage solutions, we are the market leader. It's been measured in many ways showing that we lead the space. And we continue to grow this business to be a market leader. And what I can say is that when we talked about a couple of quarters ago, how we're transforming the company to take advantage of our partners and our channel. And this is where we think that we can grab a hold of the opportunity exist and the scale of this business software than having to do it directly.

Shane Robison

Yeah. I think the one thing I'd add is that when you look at the IDC numbers, and they are exciting. We're excited about it too. But you have to do a little more fine grain segmentation in the market than what they're doing in where we are in the application acceleration space and mission critical application level with our big enterprise customers and then with the biggest scale with our customers in the world.

I think we're doing well with growing in that space and we'll continue to do that and find ways to give you a better feel for what the overall market that we're in looks like.

Lou Miscioscia – CLSA

Okay. To follow up on ioControl, John Spears at the Analyst Meeting did a very good job of presenting, and I think he actually said that they were over 300 channel partners that existed for ioControl and you all were getting – your sales force ramped up and get back in February, if that was immediately or going to be layered in.

Just any more color on that? It seems like a very interesting great product or – you're starting to see material or decent revenue in that or do you expect that it's not really going to come to the back half of the calendar year?

Shane Robison

So one of the things we change this quarter was we have the entire Fusion-IO sales force now selling ioControl, whereas before that, it was a small dedicated sales force that was more specific to the product before we got the new features in.

So as we continue to have a bigger sales force and more reach, we're also building out a very specific channel for ioControl. And we've got a new channel head leading that for the company and we expect to see some return on that over the next few quarters.

Operator

And we have Brent Bracelin from Pacific Crest in line with a question. Please go ahead.

Brent Bracelin – Pacific Crest

Thank you. I guess first question for Lance and I have a couple more. Lance, I wanted to apologize, I got in the call late here. But I wanted to talk about third gen if you discuss the feedback from customers that are sampling the product yet? Do you expect hyperscale customers be the early adopters of third gen? And then obviously, relative to OEM, we have been kind of the OEM feedback. And should we expect a kind of coordinated launch of those things, third gen products next month?

Lance Smith

Hi Brent. This is Lance. Yes, we haven't said a whole lot of details about our gen three product line, and I can tell you that it's on track. Last quarter we started sampling. This quarter, we're going through the validation and qualification with the customer base.

Their reaction has been pretty strong. It's very consistent on what we've done as we've gone from generation to generation. I think this is now our third platform and our fifth change in NAND geometries. There's a number of challenges there for the industry. We think that we still have the technology including in all the VSL, in our virtual storage layer software. ioControl has continued to advance to take on these challenges. The product is looking pretty strong and, you know, there'll be good acceptance as we've seen historically.

Brent Bracelin – Pacific Crest

Any yield issues that you're worried about this point or are you beyond those yield risk?

Shane Robison

No, I'll tell you. I'll give you a reminder of how we've always approach developing our products. We take a look at NAND. We look at its innate challenges to make it reliable and we continue to invest heavily on technologies that will deal with the problems of going to a smaller geometry NAND or any of the next generation NAND as offered. We look forward one or two years out on the various types of technologies and begin to develop core components that will help us try to live on those products. But we don't anticipate it any kind of yield issues because we transition from one product generation to the next.

Brent Bracelin – Pacific Crest

Okay. Great. And then Ted, I want to know relative to kind of your outlook, obviously you've suggested. The fundamentals here continue to kind of stable and/or improving. How much have you baked in a benefit from the gen three product launch relative to your guide in the June quarter?

Ted Hull

Well, we really don't see much of an impact at all in Q4. So that will probably play out as a result through the rest of the fiscal or into the next fiscal year, I should say. So really, not affecting this quarter at all.

Operator

And we have Srini Nandury in line with a question from Summit Research. Please go ahead.

Operator

Srini, your line is open.

Nancy Fazioli

It sounds like next question.

Operator

Okay. We have Nehal Chokshi from Technology Insights in line with a question. Please go ahead.

Nehal Chokshi – Technology Insights Research

Thanks. Can you guys hear me?

Lance Smith

We sure can.

Nehal Chokshi – Technology Insights Research

All right. Great.

So I'd like for you guys to talk a little bit about the differentiation for ioControl product relative to the number of storages. Typically in the advantages, that a number of storage (indiscernible) and how you guys adjust this. They're able to make hard drives (indiscernible) price. And then the second part is that they use variable block size as for their operations and they took advantage in line compression.

So can you talk about these two items? And then in the context (indiscernible) ioControl. I know it's really based on that, but if you could update on that, that would be great.

Lance Smith

Hi, Nehal. This is Lance. I'm happy to address these questions. When it comes to ioControl, there are some very specific differences and advantages that it has over its complication. What's interesting about ioControl is that, one, we're more vertically integrated in product line than our competition. Having the knowledge of the solid state storage and actually integrated into these appliances is a big advantage because then you can start to actually taking better user or advantage of the technology directly.

One of the big differences between the two, the fact that we actually absorb rights and reads on our Flash, which is unique in the marketplace. Most of our competitors make use of SSDs. And they only deal with reads from their SSD RA. The reason why they do that and why they don't push rights is because typically it's unreliable.

And as we mentioned earlier with some of the questions, our customers see sort of our competitor in building these types of hybrid appliances. They don't trust the SSD to actually retain the information so they only put data there that says only the read.

Now, with respect to writing the data, this is one of the reasons why they write the data to hard drive itself and not turnover it to the Flash. So it's really just recap in tier that our competitors have done. In ioControl, much, much different. They do treat it like a true storage tier. We do both reads and rights. What's most important is that we have a quality of service for performance. So if someone wants to guarantee performance for a given application, they no longer have to substantiate a couple of different storage solutions, one for their highest performance and one for their best effort in terms of file sharing or file storage.

We'll actually combine those into one solution. And we can guarantee that using this QS software that we came out with ioControl. As for its acceptance in the marketplace, it's been pretty strong up against our competition when competing head to head with – and some of the big competitors out there. Our customers is seeing that they don't have to do a special trade-off in the software as the intelligence built into it.

But we're just beginning to bring ioControl in the marketplace. And as I mentioned earlier, we just brought out a 3.0 software. As Shane mentioned, we're building out that channel. We're leveraging the 300 bars that was mentioned at our Analyst Day and starting to build momentum in that product line.

Nehal Chokshi – Technology Insights Research

Okay. Can you also address the other differentiation point out there that is variable block sizes?

Lance Smith

For us, we have an upgrade built into our architecture and we're able to leverage Flash so that we can actually handle various different block sizes from different types of applications with different needs. When it comes to compression, those are feature sets that can be built in and extended into the product line. It's actually not a direct benefit for us today because we actually leverage to Flash as its best.

If you have to actually wait for information to be committed over to the hard drive, you better figure out how to write less to it. In our case is we connect, we absorb it and they accepted it into our flashing tier and actually respond quickly back to the application. So today it's actually probably needed for those who can't rely on their flash memory or their SSDs to store data. But for us, it's not needed today.

Operator

And we have Kulbinder Garcha from Credit Suisse in line with a question. Please go ahead.

Kulbinder Garcha – Credit Suisse

Thanks guys. This is Lance for Kulbinder. I just wanted to see, I'm not sure – have you provided the strategic content of the revenue line for the quarter for Apple and Facebook?

Shane Robison

We don't break those out and we haven't for a long time.

Kulbinder Garcha – Credit Suisse

Okay. The reason I'm trying to untangle this is Shane's commentary and also the commentary on Yelp in the Chinese e-commerce customer because you've announced large e-commerce customers before and a lot of times it doesn't seem to come through in terms of those – you've penetrated initially and then perhaps it doesn't manifest itself into being 10% for larger customer. So kind of Shane's point, it seems like if you say your market's potential re-fragmenting. I know you mentioned that they're not necessarily competitive but you could potentially be refragmenting, and that's another first of the competition.

So is that what's happening? So when you penetrated on it, you penetrate a certain tier and then you fulfil it quickly on the high end and then other people and the low end. And that's how the market is shaping and perhaps that's kind of how it's affected that 25% growth number. And I have a follow up.

Thank you.

Shane Robison

I'm not sure exactly what you mean by fragmenting. I think there's differently tiers in the market. And we're playing in the middle and the higher tiers. We've talked about a number of new hyperscale customers. A lot of times, our hyperscale customers because they're very sensitive to how they're build-outs are going and they consider that to be proprietary information. They don't give us the ability to identify them specifically. So that's part of why there's less broken out than you might like.

Lance Smith

Yeah. I think I would add just one other point is maybe there's a little bit of a refresher. Some of these hyperscale accounts or these e-commerce accounts and internet web 2.0 based customers, they have a number of functions and applications within their data center. And many of them will try Flash in the areas that are most critical. And once you see the value, they now have a choice. They can decide to take the benefits that Flash brings in them. Maybe it's ten times their application level performance.

They can either increase the number of compensation cycle available to an application and apply it in other areas with their data center or maybe take advantage of doing consolidation. It depends on the customer. It depends on what their data center or their data center requirements look like.

Sometimes they're limited in space and power, sometimes they do build-outs some of their data centers, and we don't know the timing of that. But what we do know is that once we get a foot hole into these accounts, the customer then sees the benefits and the liability of our products. I mean overtime, consistently starts coming back in doing purchases for new applications within their business.

Kulbinder Garcha – Credit Suisse

Okay. Great. Thank you.

And then just one more follow up. I understand that the differentiation that the application affinity affords during working with ISVs. Do you think that kind of sales cycle is potentially getting increasingly complicated? Because you're working with the Microsoft, you're working within Oracle and then you have to move that back to perhaps to Dell or HP or an IBM to close the loop. Do you think that potentially extends the sale cycles?

Shane Robison

I don't think it extends the sale cycle. It speaks to our investment in making sure that we have those partnerships in good shape. Right now our ability to deliver a solution which is the leading ISP software deployed on the leading OEM hardware platform along with Fusion-IO technology and our ability to integrate that and deliver it as a solution is kind of one of our key differentiators. And you have the sale cycles for these big enterprise customers can be a little bit longer. But I don't think this extends it any more than otherwise.

Operator

And we have Rajesh Ghai from Macquarie in line with a question. Please go ahead.

Rajesh Ghai – Macquarie Capital

Can you hear me now?

Shane Robison

Yeah.

Nancy Fazioli

Yes.

Rajesh Ghai – Macquarie Capital

I'm sorry about that technical glitch earlier. Lance, I have a question for you about VSAN. Obviously, a lot of buzz around that. My question is, does VSAN help submit a solution, help, hinder or unusual to Fusion-IO. The reason I asked you that is talking through some a large contact. It's telling me that VSAN has been productive with their tier two, tier three kind of storage and that kind of storage doesn't really need the low latency that Fusion-IO brings to the table. I'm just kind of curious what your thoughts are.

Lance Smith

We actually like VSAN quite a bit. One of the things that it does do, even if it was considered a tier two, it helps their manageability. If we're talking about a deployment where there's like 10,000 or 15,000 or 100,000 servers, then you want to aggregate all of the availability to that flash. VSAN inputs that layer there so that it's manageable and it's shareable.

So when you take and you put flash on a server side, you have a number of ways that you can configure to get the most performance out of it. But when you have to share data technology, like VSAN, helps to make a very easily shareable in a common environment. So we see, again, as another route or another method to actually make Flash transparency in the data center so customers will have their different applications, they'll have their different environments. And each one of these become more Flash aware and becomes easier for it to get adopted into those data centers. And I just think VSAN is one of those that actually makes it easier for a customer to deploy it and manage it and use it.

Rajesh Ghai – Macquarie Capital

That's helpful. And Shane, one of the key elements of your strategy was to take ioScale to the enterprise make it more generally available through OEM channels. So I'm just curious what are the issues and challenges that OEMs have come back to you in terms of making or getting it qualified and seeing more broader option of that solution in enterprise?

Shane Robison

Well, I don't think there are any additional challenges. I think it's really just a matter of convening call cycle. And that's actually gone pretty well. And then as we mentioned earlier on the call, as we transition to gen three, OEMs and partners they're already in that call cycle.

Operator

And we have Ben Reitzes from Barclays in line with a question. Please go ahead.

Ben Reitzes – Barclays

Yeah, hi. Thanks. This is Eric Sterling for Ben. In the past, you've talked about as many as three OEMs including 10% in the given quarter. I'm just wondering if you are seeing any disruption out of one of your OEM partners who's currently in the process of selling their server business and also if you could just speak to how the progress is overall at some of our earlier OEMs? Thanks.

Shane Robison

So I think we've talked about this for the last couple of quarters as a big, big opportunity for us to make sure that we've got very strong relationships with the OEMs and I think we've made excellent progress there. We announced the deal with Lenovo in China that was specific to China, which we're very excited about. We continue to have a strong relationship with IBM, Dell, with HP, with Cisco.

I think this is a very strong part of our story. And their business is fluctuating a little bit, but we're not seeing anything that I would consider to be disruptive in there.

Ben Reitzes – Barclays

Okay. Thank you.

Operator

And we have (indiscernible) in line with a question. Please go ahead.

Unidentified Analyst

Thanks. Earnings have picked over pretty well. But first off within ioControl, I think you said at the analyst day that you're lacking some – at that time in storage functionality features like snapshots, were those included in the software, like you mentioned earlier. I think you called it 3.0.

Lance Smith

Yeah, some of the functions were that we called out were Snaps in replication. These things are important and cloning are important for the customer-based. We also had an intelligence on how we determine what data belongs in the flashing tier over the hard disk drive tier in full production today.

Ben Reitzes – Barclays

Okay. Great.

And (indiscernible) as far as visibility in the business, relative sizes or relative growth opportunities between hyperslcae enterprise and SMB. And if you're not today and I guess it won't be a shock, but when you think you might get to the point where you're able to give investors kind of underlying visibility into the chunks of the business. Thanks.

Shane Robison

So we're increasingly improving our visibility. I can't give you a timeline as to when and how that's going to play out. But I can tell you it's more than just hyperscale and enterprise because as you had the appliances, now we're in this small medium enterprise. With ION, we're into an all-flash solution that's different than the segments that was currently in with our service side acceleration. So it's a little more complicated than what has traditionally been enterprise versus strategic – and we'll continue to improve our visibility and give you the best guidance we can as we go forward.

Operator

And our next question comes from Srini Nandury from Summit Research. Please go ahead.

Srini Nandury – Summit Research

All right. Thank you for taking my call. Sorry I had the glitches earlier in the day.

Okay. The majority of your sales are going through your OEM and channel partners. Why would you – do you have an opportunity (indiscernible)?

Shane Robison

We are very focused on expense. And part of that is re-allocating the expenses to support the new strategy. And remember, we're very focused on a partner-first strategy which does imply we'll have more leverage. We're also expanding into new markets. We've brought a new leader in for China in the Asian market and we've expanded the staffing in the Asia team to take advantage of the opportunity there.

So we're focused on OpEx. We're focused on leverage and we're focused on operationalizing the strategy that we've been telling you about over the course of the year.

Srini Nandury – Summit Research

Okay. Earlier you have a question from John at UBS. I have a quick question on that. Basically, what we heard is that our market drives and lasting so long and (indiscernible). So the idea is that the recycling some of your drives because the (indiscernible) every year or so. So have you seen that? Have you seen this problem before?

Lance Smith

We have and we've talked about it in the past, maybe it was like a year ago. I don't remember precisely the date, but we've had customers that have taken drives that were in service for many years and redeployed them with a number of successes in doing so.

Is that more atypical than it is typical? Customers want to have a new platform with the new sort of technologies. And I would say it's more of an unusual event for someone who redeploy. Most customers are becoming very savvy now on choosing the right kind of products. Remember, we have our performance line and our cost-optimize line. Customers are now choosing between those in deploying in the environments for the best use of those products in sort of their typical three-year life expectancy. So they push the cards and less amount of money out of them with a biggest amount of return on investment.

Srini Nandury – Summit Research

Thank you.

Operator

And we have Brent Bracelin from Pacific Crest in line with a question. Please go ahead.

Brent Bracelin – Pacific Crest

Thanks for this follow up here. Shane, I wanted to ask you a question. You're approaching your first anniversary, I think, in May. I'd love to get as we just take a step back here your first year in the job. Walk through maybe one or two areas that you see have made the best progress in and you've been surprised by the progress? And then also look back at maybe one or two areas where you think you need to do more work.

Shane Robison

Thanks, Brent.

It's been an interesting year and we have a lot of work to do. And we've been pretty transparent with you guys about some of the issues we have. And I think the thing that's most encouraging to me is our ability to attract truly world-class talent. We've put together a team that will be able to take the company to a total different level than we are today, and they're just getting started. That's the key thing that has changed over the course of the year. I think our new strategy which is deciding in terms of what we can do with application acceleration and mission critical applications and our ability to do that with a different mix of products.

Again, in the early days with being deployed, I think the one thing that we need to do a better job on and that we will be very focused on is controlling expenses.

Brent Bracelin – Pacific Crest

Okay. Fair enough. Helpful. Thank you.

Operator

Next question comes from Richard Kugele from Needham & Company. Please go ahead.

Richard Kugele – Needham & Company

Thank you. Just two last ones. Can you breakdown international versus domestic revenues? Any notable pickups yet now that you've got some fairly high profile Asian customers? And then secondly, as we get into an early fiscal 15, should we look at Q1, Q2 fiscal '15 as the time when the company has been completely transformed into the way you wanted to look, Shane, in the production transition happened? And that's where we can start doing the growth industry wise or – at what point are we done fixing and start moving on?

Shane Robison

So we still have a lot of hard work to do. First of all, let me answer your question on the international stuff, we're not breaking out geographically the revenue right now. And we're excited about the opportunities in both Asia and Europe. And so we'll hopefully seeing some good growth there.

The changes that we've gone through, we made a lot of fairly significant changes in the first half of the fiscal year and we've been operationalizing those over the second half of the fiscal year. I think that's moving along well. We're continuing to do that and we'll continue to do that.

We're excited about going into FY '15 with a lot of that behind us and really positioning us to focus on the customers in the market.

Richard Kugele – Needham & Company

Okay. Thank you.

Operator

I will now turn the call back over to Nancy Fazioli for closing comments.

Nancy Fazioli

Thank you operator.

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.

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