IPO Pick of the Week: Fusion-io

| About: Fusion-io, Inc. (FIO)

Based in Salt Lake City, Utah, Fusion-io (proposed FIO) is scheduling a $172 million IPO with a market capitalization of $1.1 billion at a price range mid-point of $14 for tomorrow (June 9). IPO calendar includes two IPOs.

FIO provides data decentralization through memory storage platforms. For the nine months ended March 31, 2011, revenue was up 394% to $125 million from $25 million. Losses dropped to $1 million from a $20 million loss for the nine months ended March 31, 2010.

With a short-term equipment upgrade, Facebook decided to implement FIO’s memory storage platform. Facebook accounted for 47% of FIO’s revenue for the nine months ended March 31. 2011.

For the March 2011 quarter Facebook accounted for 52% of sales and Apple (NASDAQ:AAPL) accounted for 20% of sales. The Facebook implementation is almost complete and FIO expects sales to Facebook will decline significantly in the June 2011 quarter.

Apple may be gearing up purchases. In technology for a hot product often it's one big customer, then two, then many. But what's the encore? For example, it looks like after the Facebook equipment upgrade there is no expectation of follow-on orders or recurring revenue.

FIO’s record March 2011 quarter produced sales of $67 million, with a gross profit of 53% and a net profit of 10%. But that is the first quarterly profit ever for FIO.


At the price range mid-point of $14 FIO is valued at 109 times annualized earnings for the six months ended March 31, 2011 (to even out the the March 2011 spike based on completing Facebook's order), 5.5 times sales and 6.1 times book value.

FIO Valuation Metrics


FIO expects a big revenue drop for the June quarter, as sales to Facebook decline. Unless Apple steps in with large orders, FIO may revert to showing quarterly losses. Other large cloud vendors include Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN).

It is highly likely that FIO will jump to an IPO premium, even above 109 times annualized earnings for the six months ended March 31, 2011.

But unless large orders can be confirmed to replace Facebook, it seems that FIO will be walking a high wire tightrope that could be risky if significant competition emerges (see competition below).

BUSINESS -- FIO provides data decentralization through memory storage platforms

MARKET -- Based on IDC data, FIO estimates that $52 billion will be spent in 2011, on high performance storage and networking and memory-rich servers, excluding related spending on software and services. Page 2, S-1

SHORT TERM PURCHASES -- Many customers make concentrated purchases to complete or upgrade specific large-scale data storage installations. These concentrated purchases are short-term in nature and are typically made on a purchase order basis rather than pursuant to long-term contracts. As a result, FIO’s quarterly revenue and operating results are likely to fluctuate in the future and will be difficult to estimate.

FACEBOOK REVENUE EXPECTED TO DECLINE -- Consistent with the short-term nature of customers’ purchases, FIO expects that revenue from sales to Facebook will decline significantly for the three months ending June 30, 2011, as it completes its planned deployments.

FACEBOOK, APPLE & CUSTOMER CONCENTRATION -- As noted, for the quarter ended March 2011, sales to Facebook and Apple, through a reseller, accounted for 52% and 20% of revenue, respectively, for the three months ended March 31, 2011.

Facebook, Inc. is currently FIO’s largest customer and accounted for 47% of revenue during the nine months ended March 31, 2011, up from 12% of revenue for the nine months ended March 2010.

In addition, two other customers accounted for 14% and 13% of revenue, respectively, for the nine months ended March 31, 2010, and two other customers each accounted for 13% and 11% of revenue for the nine months ended March 31, 2011.

Revenue from customers with a ship-to location in the United States was 70% and 82% of revenue for the nine months ended March 31, 2010, and 2011, respectively.

During fiscal 2010, and the nine months ended March 31, 2011, sales to the 10

largest customers in each period, including the applicable OEMs, accounted for 75% and 91% of revenue, respectively. During fiscal 2010, and the nine months ended March 31, 2011, sales to two OEMs accounted for 23% and 22% of revenue, respectively.

INTELLECTUAL PROPERTY -- FIO has 4 issued patents and 63 patent applications in the United States and 85 corresponding patent applications in foreign countries, as of April 30, 2011, relating to non-volatile solid-state storage, non-volatile solid-state memory, software acceleration, and related technologies. FIO generally controls access to and use of its proprietary software and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers and partners, and FIO software is protected by U.S. and international copyright laws

COMPETITION -- FIO competes with various traditional datacenter architectures, including high performance server and storage approaches.

These may include the traditional data storage providers, including storage array vendors such as EMC Corporation (EMC), Hitachi Data Systems (HIT) and NetApp (NASDAQ:NTAP), which typically sell centralized storage products as well as high performance storage approaches utilizing solid state drives, or SSDs, as well as vertically integrated appliance vendors such as Oracle (NASDAQ:ORCL).

In addition, FIO may also compete with enterprise solid state disk vendors such as Huawei Technologies, Co., Intel (NASDAQ:INTC)., LSI (NASDAQ:LSI-OLD), Marvell Semiconductor (NASDAQ:MRVL), Micron Technology, (NASDAQ:MU), Samsung Electronics, OCZ Technology (NASDAQ:OCZ), Seagate Technology (NASDAQ:STX), STEC (NASDAQ:STEC), Toshiba Corp. and Western Digital (NYSE:WDC).

FIO’s directCache data-tiering software competes with products from suppliers of software-hardware cache solutions, including LSI Corporation and Adaptec (owned by PMC-Sierra, PMCS), as well as several open source software solutions and other software-based hardware cache solutions being developed by privately held companies.

Although FIO’s ioSphere platform management software is specifically designed to manage solid state storage, it competes with products of developers of general-purpose distributed management and monitoring software solutions, including Hewlett Packard Co. (NYSE:HPQ), IBM, CA and Nagios Enterprises, LLC.

A number of new, privately held companies are currently attempting to enter FIO’s market, some of which may become significant competitors in the future.

VENTURE CAPITAL FUNDED -- FIO has been financed by New Enterprise Associates and Lightspeed Venture Partners

USE OF PROCEEDS -- Shareholders intend to sell 1.5mm shares. FIO expects to sell 10.8 million shares for $137 million, allocated to working capital and general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.