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Fusion-io (NYSE:FIO)

Q4 2012 Earnings Call

August 09, 2012 5:00 pm ET

Executives

Nancy Fazioli

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

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

Analysts

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Rajesh Ghai - ThinkEquity LLC, Research Division

Kathryn L. Huberty - Morgan Stanley, Research Division

Kulbinder Garcha - Crédit Suisse AG, Research Division

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

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

Jason Ader - William Blair & Company L.L.C., Research Division

Shebly Seyrafi - FBN Securities, Inc., Research Division

Edward Parker - Lazard Capital Markets LLC, Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter Fiscal Year 2012 Fusion-io Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And with that, I would now like to turn the conference over to your host for today, Ms. Nancy Fazioli, Director of Investor Relations. Please go ahead.

Nancy Fazioli

Thank you, Keith. Good afternoon, everyone, and welcome to Fusion-io's Fiscal Fourth Quarter and 2012 Earnings Conference Call. On the call today are Fusion-io's CEO, David Flynn; and CFO, Dennis Wolf. Please note that a replay of this call will be available on the Investor Relations page of our website at fusionio.com within a few hours and will be available for at least a week from the time of this call. Unauthorized recording of this call is not permitted.

During today's call, we will be referencing both GAAP and non-GAAP financial measures and will note that a copy of the press release and financial tables, which include the GAAP to non-GAAP reconciliations and other supplemental financial information is available on the Investor Relations page of our website. Some of the statements we will make during this call constitute forward-looking statements within the meaning of the federal securities laws.

Accordingly, we wish to caution you that such statements are just predictions based on current expectations and assumptions regarding future events and business performance and involve risks and uncertainties that could cause actual results to differ materially. We refer you to the registration statements and reports that we file with the U.S. Securities and Exchange Commission, which are available on our website and identify important factors that could cause the actual results to differ materially from those contained in our projections and other forward-looking statements. Fusion-io undertakes no obligation to update any forward-looking statements to actual results or changes in the company's expectations.

Before taking questions, David and Dennis will begin with some prepared remarks. With that, I'll turn the call over to David.

David A. Flynn

Thank you, Nancy, and thank you, everyone, for joining us today. We're exceptionally pleased with the business execution and financial results that Fusion-io delivered in the fiscal fourth quarter and for the full year 2012, our first year as a public company.

To recap some of our accomplishments. On a fiscal year basis, we delivered 82% revenue growth. This significantly outperformed what was already a robust growth expectation of approximately 40% for the industry in general, indicating that we increased our market share lead substantially. We attribute this to the compelling ROI of our solutions and our differentiation both in technology and our go-to-market strategy.

In fiscal 2012, we delivered our target operating margin of approximately 12% and grew net income by an impressive 130%. We did this while continuing to invest in innovation and talent, growing the team by 50% primarily in R&D and sales. This year, we expanded our product portfolio with the introduction of the ioDrive2 platform, the most significant and game-changing product transition in the company's history; the ioCache, directCache and IO Turbine solutions for interoperability with legacy storage; our software development kit that provides high-performance, native access to virtualized flash; the ioFX workstation product family for the digital content creation market; and lastly and possibly the most disruptive to the market, we just announced the ION Data Accelerator.

The ION software allows ioMemory to be used as a shared resource over traditional networking. This ushers in the era of software-defined storage with an exclamation point. Here you have software that can turn any off-the-shelf server into a super server, capable of outperforming even the most expensive proprietary storage arrays and flash-based appliances.

Our new products and the growth of our sales force and channel have allowed us to expand our customer reach rapidly this past year. We now sell and support products in 59 countries around the globe. Our customer count has more than doubled from the 1,500 we had when we went public a year ago. Now we have approximately 3,500 customers with over 50% of the Fortune 100 as customers.

Another exciting development for the company this year was the addition of Cisco and NetApp as partners. These partnerships showcase the strength of our technology and our brand. We're very pleased for the opportunity to work with these partners to satisfy their customers' data acceleration needs. In addition, our relationship with our long-term partners continues to strengthen, especially as they faced threatened competition from storage vendors attempting to encroach on their market with flash in the server.

We have executed a very strong ramp of our technology alliances program. Our partners in this program, who are integrating ioMemory as a central part of their product offering, are having success in their markets in part because of the differentiation that we offer them. They have generated several million dollars worth of business for us in this quarter and are accelerating. We are very pleased with the success of this program as well as our VAR channel program. We're now working with over 300 alliance reseller and channel partners. This has significantly expanded our geographic reach and is now driving substantial business.

Turning to our customers. We had 8 end-user customers in the fiscal Q4 that placed orders in excess of $1 million. 5 of these were repeat buyers from among 40 customers who've purchased $1 million or more worth of products from us; 3 were new additions, including a data analytics company, a leading cloud service provider and a large media software company that experienced a 10x, not 10%, that's 10x performance improvement in its data center by replacing legacy infrastructure with Fusion-io. This again speaks to the significant ROI our customers can realize with our solutions.

The combination of our go-to-market strengths and our expanding product portfolio is just now beginning to pay off. To highlight a few key developments, we refreshed our technology platform this year with the introduction of the ioDrive2. This is second to none in the industry in reliability and performance. Our systems and our partners HP, IBM and Dell have now all launched products based on this platform, and Cisco is expected to launch in the fall.

This year, we unveiled our software development kit, or SDK, which offers application developers native access to Fusion's ioMemory virtualization subsystem, significantly simplifying application development, speeding time-to-market and allowing developers to design applications that would have been unthinkable before. We now have approximately 150 early access independent software vendors and application developers in our program who are eager to take advantage of these APIs. We like how this expands the ecosystem around the ioMemory platform and create stickiness within the marketplace.

This year, we completed our acquisition of IO Turbine and successfully integrated the team, expanding our portfolio with software to address the virtualization market and to interoperate with legacy storage. We now have more than 200 customers embracing the solution. A good example of our customer traction is a large domestic bank that chose IO Turbine over a competing solution from a legacy storage vendor because of our superior performance and feature set and also because we do not lock them into any specific back-end storage array, offering the choice of both the storage and the server and thus avoiding lock in to a specific vendor of either is a key decision factor for customers. We expect our cashing products to be a growing revenue contributor in 2013 and beyond.

Finally, just last week, we announced our new ION shared storage solution. It's already been deployed successfully with over a dozen customers, the majority of which are Fortune 500 companies, and it's in production. This powerful product stands to revolutionize the cost structure of performance storage by allowing customers the choice to move away from proprietary and closed systems.

For example, one of the world's largest media and entertainment companies deployed ION in place of legacy storage infrastructure at a fraction of the cost and realized a 25x performance improvement in their application. Now the irony is the application they are accelerating is Documentum, owned by the same storage company whose proprietary system they replaced with ION.

This product is just one more testament to our internal R&D team executing and showcasing that the combination of open systems and ioMemory is the optimal architecture for the data center. These ioMemory-enhanced super servers running ION unleash the full power of ioMemory with shared data acceleration and software defined storage.

Let me now turn it over to Dennis to further expand on our great results for the year and provide color on our outlook for 2013.

Dennis P. Wolf

Well, thank you, David, and good afternoon, everyone. As David highlighted, fiscal 2012 was a defining year for us. I'd like to add some additional color on these results, but let me first inform you that all financial results will be discussed on a non-GAAP basis unless otherwise indicated.

With regard to our revenue mix for the fiscal year, revenue from our 2 largest customers combined grew 66% year-over-year and represented 55% of our total business. As it relates to our core customer revenue, we saw it more than doubled this year as we continued to build out our sales team and expand our go-to-market strategy. We expect these trends to continue to be catalysts for robust growth, which will be part of our outlook discussion in a moment.

We ended the year with Q4 gross margin of 57.6% and near the top of our long-term model range. The full year gross margin was 55.8%. This solid margin improvement is the result of continued robust growth of our core business, expansion of sales of our higher end enterprise products as well as product cost improvements. I will speak to this later, but we are confident that for the full year of fiscal 2013, our gross margins will continue to be in our target range as a result of improvements in mix, cost and yield efficiencies.

We are pleased with the full year operating margin of 11.6%, which we achieved while continuing to invest in R&D and sales. R&D expenses were 14% of revenue this year as we held R&D as a percentage of revenue relatively flat over the prior year. We continue to bring new technology and products to market. We drove efficiency and leverage in sales and marketing as it dropped from 27% to 23% as a percentage of revenue as we realized operating leverage from our channel model and improved the overall productivity of our direct sales organization.

We delivered earnings per share of $0.35 compared to $0.20 in fiscal 2011. Our year-end headcount stood at 669 people, up 228 employees from the prior year primarily in sales and R&D. We would expect this pace of hiring to continue this year. And finally, we are please to deliver cash flow of $35 million for the year and that we exited the year with such a healthy balance sheet which provides us with strategic and operational flexibility. On the balance sheet, note that deferred revenue was $29 million at year end, up from $12 million the previous year driven by support and maintenance services.

Let me now turn to our fiscal fourth quarter results, and I will then elaborate on our outlook for our first quarter and fiscal year 2013. Turning to fourth quarter results. Revenue for the quarter was a record $106.6 million, an increase of 13% sequentially, which also represents an increase of 49% year-over-year. We had 3 customers that exceeded 10% of revenue this quarter: Apple, Facebook and HP. In aggregate, the 3 represented 72% of revenue. Revenue from Facebook and Apple represented approximately 53% of total revenue in the fiscal fourth quarter compared to 55% in the prior quarter and 65% in the quarter ended June 2011. Core revenue increased 20% quarter-over-quarter compared to 17% increase in the prior quarter, which is showing continued acceleration in the growth rate of our enterprise business.

And now turning to gross margin. As I already noted in the fourth quarter, our gross margin was 57.6%. That's a 550 basis point increase from the prior quarter. The sequential improvement was a result of product mix that favored enterprise, as well as it also stemming from NAND cost improvement. Our operating expenses were $49.5 million for the quarter, up 18% or $7.6 million from the prior quarter primarily due to investments in sales and R&D. However, due to disciplined execution, our operating margin was 11.2% this quarter.

Sales and marketing expenses were $24.6 million or 23% of revenue in fiscal Q4, an increase of $3.3 million from the prior quarter. The increase was due to variable compensation and headcount additions primarily in sales where we added 28 employees. R&D expenses were $15 million or 14% of revenue, an increase of $1.8 million from the prior quarter as we added 14 employees in fiscal Q4 as well as made additional investments in product development, including hiring an elite group of the world's top operating system design experts.

G&A expenses were $9.8 million or 9% of revenue, an increase of $2.4 million over the prior quarter, and this increase was due to facilities expansion, variable compensation and our new ERP implementation. Net income in Q4 was $9.8 million or $0.09 per share. This compared to third quarter net income of $6.9 million or $0.06 per share.

And moving to the balance sheet, starting with cash. We ended the quarter with $321 million in cash and cash equivalents, an increase of $26.6 million from the prior quarter due to strong sales in the quarter. Our accounts receivable stood at $56.7 million this quarter, an increase of $7.4 million from the prior quarter due to the later quarter timing of shipments of ioDrive2. Net DSOs were 52 days, similar to last quarter and are likely to remain in that target range.

Total inventory as of the end of the fiscal fourth quarter decreased to $59.5 million compared to $72 million at the end of the prior quarter. We have largely reduced our average costs resulting from utilizing older inventory and in its place, adding lower-cost inventory. This, of course, also supported the expansion of our gross margin this past quarter. Our capital expenditures in the fiscal fourth quarter were $7.4 million and $24 million for the full year due to that facilities expansion I talked to you about as well as our ERP implementation.

Okay. Now let me turn to guidance. For the fiscal first quarter of 2013, we expect revenue to modestly increase over a strong fiscal Q4. Gross margin is expected to be in the range of 56% to 58%, operating margin is expected to be approximately 10% and we expect diluted shares outstanding to be approximately 110 million shares.

Turning to the full fiscal year 2013. We expect revenue growth to be in the range of 45% to 50% over fiscal 2012. This revenue outlook factors in the contribution from our new products and partnerships. We expect gross margin to be in our target range of 56% to 58% given continued NAND flash cost improvement and our expectations pertaining to product mix.

Operating margin is expected to be roughly in line with fiscal 2011 or approximately 12% as we continue to invest in R&D and sales. Due to our strong growth, we continue to expect our non-GAAP tax rate for fiscal 2013 to be in the range of 35% to 40% even though we do not expect to be a cash tax payer for at least a few years. Diluted shares outstanding are now expected to be approximately $114 million, and capital expenditures in fiscal 2013 are expected to be in the range of $20 million to $25 million due to continued product development and moderate facilities expansion.

In summary, it has been a great year, and we have a great opportunity, a healthy outlook and a very solid business. Let me now turn it back over to David.

David A. Flynn

Thank you, Dennis. In closing, we made excellent progress this year on our product road map, go-to-market strategy and market share capture and demonstrated this by delivering strong financial results for our shareholders. I'd like to address our views on the strength of our competitive position.

We started Fusion-io with a vision that this new medium, NAND flash, was best integrated with a clean slate approach as a new type of server memory. Everyone else in the industry chose to integrate NAND like a disk drive. We felt that approach would limit this powerful new medium and keep it from achieving its full potential.

Our differentiated approach provided the underpinnings for where Fusion-io is today. It is our software-defined architecture that enables our industry-leading performance, reliability and feature set that uniquely address the demands of big data virtualization and cloud computing. This software-focused approach will further differentiate us over time.

We have an exceptional team in place to carry out this vision, and we're excited about what we believe to be a very compelling opportunity before us. Just as today every server has RAM, in the future, we believe every server will have flash or other non-volatile memory, not attached to the disk, but as a native memory device. And applications will interact with this memory in much more compelling ways than they do at legacy storage. The software that facilitates and defines this new type of interaction is extremely valuable.

Thank you for your time. We'll now turn it over to you, operator. We're ready for taking the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Andrew Nowinski with Piper Jaffray.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

With regard to your annual outlook, your revenue guidance certainly suggests that you are in no way impacted by the competitive landscape. So can you just help us understand some of the assumptions that went into that in terms of the contributions from Cisco and NetApp and your strategic customers? I guess I'm just trying to get an understanding of how conservative that guidance might be and then where the upside might exist.

Dennis P. Wolf

Okay. So Andrew, let me take it by actually talking about how we really build our -- how we have assumed our revenue for next year. We look at a number of tools in forecasting our business. One is pipeline, the other is sales productivity. We look -- we assess the strength of our core versus key customers, top 2 customers, if you will, strategic as we call them, and we assess demand from our channel partners, which is where you're addressing this, as well as new products and expected ramp. I'll focus on a few of them that really have the most benefit for us to understand the business. One is the sales productivity. We now have about 150 or so AEs and SCs, I call them bag-carrying revenue generators. That's up about 40% from a year ago. But what's really more -- most compelling about that number is really that they've entered into their maturity phase, and it's benefiting us in understanding what our sales productivity really looks like. It gives us better predictability. Another area that we've spent a lot of time on is we assess the strength of our core and strategic customers. Our core business, as we've been talking about, has increased at roughly 100% year-over-year. And that's actually a testament to the build out of the sales productivity ramp that we have and the very capable AEs and SCs that we have who are really going after greenfield opportunities. Our key customers, the strategic customers, we've had a couple years of experience with them now. So we have a better understanding of what their predictability will be going through fiscal 2013 now. We do assess the demand from our channel partners, but it is nascent. And so while we have certain estimates and there are calculus in there for what it is, we -- it's based on what we expect it to be. And of course, we have a very robust product ramp that we also use in understanding our revenue.

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Okay. Got it. And then just one quick follow-up question with regard to your partnership with NetApp. I guess, can you explain sort of how you expect to benefit from that relationship? And are you assuming any sort of revenue contribution from it in the -- in this -- not this quarter, but the December quarter?

David A. Flynn

So we're very excited about our partnership with NetApp. As you know, this is our first partnership with a storage vendor. And they have unique capabilities in that they are singularly focused and very much a best-of-breed company, not unlike us in our market with deploying flash. So we view the opportunity to be very complementary both in a technology and in ability to address the market. You have to stay tuned in terms of the specifics of what comes from it. But what I can say is we now have products that allow us to interoperate well with legacy storage environments, and so we see great potential in the relationship.

Operator

Your next question is from the line of Rajesh Ghai with ThinkEquity.

Rajesh Ghai - ThinkEquity LLC, Research Division

My first question is about gross margin assumption for fiscal '13. So you talked about cost mix and yield efficiencies helping you in terms of your gross margin improvement in Q4. Can you delineate how much benefit you got from the decline in NAND flash pricing versus how much you got from the other 2 factors?

Dennis P. Wolf

Sure. So let me -- so what I'd like to do first, let me restate the question which is around gross margin guidance for 2013. Is that correct?

Rajesh Ghai - ThinkEquity LLC, Research Division

Yes, 2013 and also kind of what drove it between the 3 factors in your Q4?

Dennis P. Wolf

Happy to do it. First, we do expect to be in the target range, and we feel confident in that range. And we feel confident in that range because the product transition that we have referred to in the past has gone exceedingly well for us. We're on the other side of the NAND cost curve, which probably gave us roughly half of the benefit. And we -- it actually puts us in a position -- the fact that we have the cost improvements and products and the fact that we have product transition that's behind us, it puts us in a position to manage the dials that we have to get into -- within a 56% to 58% margin.

Rajesh Ghai - ThinkEquity LLC, Research Division

Okay. And my other question is about your ION product announcement. So Dennis, what specific use cases are you positioned this new product for versus what you already do with your ioDrive1, ioDrive2? And the second question is, does this raise the potential for cannibalizing some of your partner's network storage product? And how do you kind of plan to play that dynamic going forward considering a lot of your server OEMs also sell a lot of network storage?

David A. Flynn

Okay. So those are 2 questions, let me take the first one about what applications we are targeting. There are a class of applications that assume shared access. One of those that is very prominent is Oracle RAC. And we find our solution very competent under Oracle, both standalone Oracle and Oracle RAC, but it's challenging with Oracle RAC because of its expectation of a shared storage pool. So with this, we expect to be able to address that as just an example of one. Now in truth, of the dozen-plus deployments we already have today, I've been surprised at the diversity of it. One of those I detailed on the call was Documentum. There's many others. And even in some situations, folks, just for convenience of how they want to manage their storage, would rather have it over a network. And our mantra has been that the closer, the better for data access. And what we've really been able to pull off with ION is quite remarkable in that we're able to provide access rates that are very, very close to actually having the ioMemory directly in the server with million I/Os per second, 6 gigabytes a second of bandwidth and latencies of like 0.06 milliseconds. So it's a -- we took our time to get it right to be able to do the network sharing of the memory resource. There was a second half. So just on that one very quickly, our -- the cat's out of the bag. People are using flash as flash appliances. We provide our server partners a way to leverage their strengths in their diversity of servers to deploy a solution. So if it's going to happen anyway, we represent a way for them to participate as opposed to having it be somebody else.

Operator

Your next question is from the line of Katy Huberty with Morgan Stanley.

Kathryn L. Huberty - Morgan Stanley, Research Division

Just a quick question on mix in the fourth quarter. How did ioDrive versus ioDrive2 shipment mix look versus what you expected? And when do you expect ioDrive2 to be fully ramped? In other words, be close to 100% of what you're shipping? And then I have a follow-up.

Dennis P. Wolf

So let me talk to, first, to mix, the majority of our mix in the quarter with ioDrive2. We expect it to be predominant from this quarter going forward. So we're pleased with the transition to ioDrive2. We did outperform our revenue last quarter. It was mainly in our enterprise products. As you know, we were about $10 million higher than what we first outlooked, and it's a testament really to the strength of the transition of ioDrive2.

Kathryn L. Huberty - Morgan Stanley, Research Division

Okay. And then as a quick follow-up, I assume that software is still single-digit percentage of revenues. Where do you expect that to be in 12 or 24 months given the shipment of IO Turbine and the new ION product?

Dennis P. Wolf

Yes, it's coming up, but it is a system sale as you know. So even when we look at it being a de minimis number in fiscal 2012 and a larger number in 2013, the fact is that our software really enables us to sell an entire system and expand our market.

David A. Flynn

So take for example ION, it could drag along a dozen ioMemory devices or more in the same system.

Kathryn L. Huberty - Morgan Stanley, Research Division

And from a margin standpoint, would you expect to take any mix upside coming from those software sales and to funnel it back into more aggressive pricing of the hardware to expand the installed base? Or would your gross margins float above the 58% range longer term?

Dennis P. Wolf

Yes. So again, it's kind of posed to the comment I was making a little earlier regarding the dials that we use. We have a new suite of software products that ION, IO Turbine, other -- everything that we work on which enables us to really use that dial as part of our gross margin. And the thing that we're most interested in for the key dial is to expand our market share. We're kind of relentless still about growing our revenue growth. But we will use that dial, the software dial for us and making sure that, that gross margin of 56% to 58% holds relatively true. The other dial we have, of course, is channel fulfillment mix. We could always mix it between OEM, VAR and direct.

Operator

Your next question is from the line of Kulbinder Garcha with Credit Suisse.

Kulbinder Garcha - Crédit Suisse AG, Research Division

My questions are I guess just with respect to customer ramps. I think in the last 6 months, you've spoken about salesforce.com, Pandora, a couple of customers in China. Just I know you don't speak about specific customer. But in aggregate, can you just speak about have you had any revenues from them already, I mean, even in the fourth fiscal quarter? And how should that develop as we go forward? And is there any mixed implications from that, that we should be aware of?

David A. Flynn

Any revenue from whom?

Kulbinder Garcha - Crédit Suisse AG, Research Division

Probably it was -- I think you've talked about Pandora, salesforce.com and a couple of customers in China in terms of major potential wins in recent months.

David A. Flynn

Now those represent just a handful of our 40-ish customers that have an aggregate on at least $1 million in business and have shown that potential to do that scale of thing. We do see those grow on a regular basis as they learn the potency and the ability to use flash in their infrastructure. I really can't get in the specifics on a specific customer other than to say you see that pattern that these large scale customers bubble up from the broader base of customers as time progresses. We expect to see that accelerate with the diversity of products to address virtualized environments, which can be rather large, et cetera. So it makes more customers have that potential to go to that kind of scale.

Kulbinder Garcha - Crédit Suisse AG, Research Division

And then I guess the derivative from that, David, is just more that do you think that the Apple and Facebook revenue concentration has peaked from here?

Dennis P. Wolf

No. So I want to take -- actually, I want to expand a little bit on what David also said, which is very exciting. He said about 40 new -- 40 customers greater than $1 million. Actually, in the last 9 months, it's roughly half of those. In other words, 20 of the 40 really occurred in the course of the last 9 months, and it is showing that our core business is not only growing, but the size of the core business potential is growing. That doesn't take away from Facebook or Apple. It just means that as a percentage of total, it might become smaller. In fact, during the year, we went from 65% when we started the year to 53% at the end of the year. Think of it this way. We know where our -- we think we know where our Facebook and Apple revenue will be, and we expect it to be roughly half-half, maybe 4%, 5% in either direction of total revenue.

Kulbinder Garcha - Crédit Suisse AG, Research Division

That's very helpful. And then finally, just on IO Turbine, any update there in terms of -- I think we spoke -- I think last time you'd mentioned maybe revenues by year end, how the rollout for that is going?

Dennis P. Wolf

Going well. I mean, we did have revenue, and we're not going to -- we're not breaking out our software piece. I could just tell you that yes, it's going well and not only that, but it's enabling us to get into different -- it's broadening our ability to get into customer situations.

David A. Flynn

Yes, with traditional storage vendors out there talking about it, some that may be partnering with us and others that may be competing and trying to lock people into a more proprietary solution, both of these things bring us into the conversation. In the script, we talked about having 200 customers. Now many of those are multiple unit kind of stuff and the size of those deployments grows as they get things done. So they're kind of the acorns planted. So we're very excited about the progress in that marketplace and in particular, how fast it's being catalyzed because the traditional storage vendors are now talking about it, which helps us accelerate our lead.

Operator

Your next question is from the line of Alex Kurtz with Stern Agee.

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

David, first to you. I think there's some confusion in the market around how Google sort of constructs its data centers and how they use commodity components to build technology and how Facebook does it, which -- how they use your branded product. Do you have any sense or do you have any directional feel about why these 2 organizations have gone in separate directions? And I think there was a fear that maybe one day Facebook sort of move towards the Google model. So if you could address that, that would be great.

David A. Flynn

So Facebook has a very different culture than Google, especially in the leveraging of outside specialists in different areas. The founding culture within Facebook has been to show that it's somewhat folly for Google to go and reinvent everything that's not part of their core business value. So I think it somewhat goes to that. And as a company, Fusion-io is really the only one who's proven at this kind of large scale and to be able to reliably hold data. There's a fundamental difference too in the type of business that they are both in. Google holds transient data. It doesn't matter if the search result is wrong or lost. You don't notice and it gets refreshed by the next day anyway. With Facebook, it's actually the data matters, storing that stuff. People have their life's interaction with their friends on there, and that -- were it to be lost would kind of really hurt. So it's the difference between having people actually care about their data, in which case they're going to potentially use experts in the field more than where it doesn't matter.

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

That's helpful, David. A question for you, Dennis, then I'll hop off here. I know you can't talk about the out year and as far as OpEx growth. But can you just sort of help us put a framework around future OpEx growth as it relates to revenue growth?

Dennis P. Wolf

That's actually a good question. What I would say is that we would expect that our -- the long-term goal, of course, is to grow our revenue at about 1.5 to 2x our expense growth. That gets you to the 20% plus operating margin target model that we have. It will just take some time. But our goal is to get to that level.

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

Okay. So the goal is 1.5 to 2x to get to the 20%?

Dennis P. Wolf

Right.

Operator

Your next question is from the line of Bill Shope with Goldman Sachs.

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

There's obviously been a lot of debate throughout this year surrounding competition, particularly competition between you guys and the traditional flash vendor so to speak. Your upside this quarter obviously helps eliminate many of those concerns. On that theme, can you also address some of the competitive engagements and success stories you may have had versus flash vendors in the quarter and in the year, particularly those that can further sort of eliminate this debate?

David A. Flynn

So in reality, what we see in the market, who we compete against and bump shoulders with, is really Oracle with the Exadata that is leveraging flash and yet were brought in as an open solution. It actually runs Oracle faster than with the Exadata and allows people to use their off-the-shelf servers. So that's the one, and the other one is with EMC and VFCache. Those are really the only 2 kind of flash solutions that are in the market that we bump shoulder with in the enterprise space, which is our primary market and represents the majority of our business. Now we do business in the web scale space as well. And within that web scale space, those customers where the data is valued with Software-as-a-Service kind of stuff or social networking, we find ourselves as the choice there because of the proven reliability. So it's really -- we don't bump into many of these other players in either market because reliability actually matters. And it turns out that it's really quite a hard problem to take these consumer-grade NAND flash chips and make them into an enterprise product that you can scale into thousands of servers. So it's kind of interesting that in the enterprise market, it's all about having a solution and being in front of the customer, having the support and having partners, HP, IBM and DELL. You have to have that to really compete in that market. So we don't see component vendors really there. And in the other market, it's at a massive scale. And so with the new technology, that reliability matters. So that's why you don't see us talking all that much about the competition there. Moreover, our -- last point is our main focus -- our main competition is the status quo of using disk drives and being more competent at articulating the reasons why customers get value from this means that we're capturing market share faster. If I were focused on want to be competitors, then I would be focusing on the 10% of the market -- of the field that we've already plowed as opposed to the 90-plus percent that remains virgin out front.

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

Okay. That makes sense. And my last question, just a more mechanical question in the quarter and the guidance. Last quarter, I believe you talked about OEM qualifications potentially deferring some revenue into the September quarter. How did that dynamic actually play out? Was it actually a source of some of the upside? And if not, are there still deferrals on the comp for the September quarter?

Dennis P. Wolf

There's -- I think really what it's more a matter of, Bill, is a matter of seasonality. We ended Q4, that's the quarter where the compensation is -- potentiality is greatest for the sales organization. So we're coming off of that kind of year end. So we had some seasonality in the quarter. We -- I'll say that HP, Dell and IBM are all now launched, and we've taken them into consideration in our guidance for Q1.

Operator

Your next question is from the line of Jason Ader with William Blair.

Jason Ader - William Blair & Company L.L.C., Research Division

So first question just in terms of the gross margin, Dennis, and you can answer this. So what is your assumption on NAND pricing going forward in the 56% to 58%? Do you think it stays where it is? Are you forecasting sort of a range? How does it work?

Dennis P. Wolf

We're assuming that NAND flash -- NAND pricing is relatively constant at this point.

Jason Ader - William Blair & Company L.L.C., Research Division

Okay. And then the second question is for you, David, on ION. I was wondering, do you expect to have a clustering capability at some point that will allow the flash capacity to be shared across multiple servers so you can go well beyond the 10 terabytes that you can serve today?

David A. Flynn

So the initial product supports pairing and aggregation there with high availability. Many of the applications that we're targeting, such as Oracle, have the ability to use separate LANs. So we can scale now into the petabytes even when you use Oracle and ASM with Oracle RAC, et cetera. We do see a very rich road map of additional features around the networking sharing capabilities of ION.

Jason Ader - William Blair & Company L.L.C., Research Division

Okay. So it's fair to say that this is sort of Gen 1 and we're going to see a lot more development here, a lot more feature addition to kind of let's say puts you more on par with where some of the network storage platforms are out there.

David A. Flynn

Indeed. And ultimately, since this is software-defined, the opportunity is there, for example, to enable channel partners to add value in ways around the platform because -- not just in terms of supplying the box that it goes in or letting the customer source it and that openness about your choice of server, but also in terms of some openness around the extensibility of the software platform itself. We're uniquely positioned to do this because the ioMemory platform allows us to control the variables that made software-defined storage rather impossible before, the storage subsystem being unpredictable in terms of its performance and reliability. And with the richer capabilities of ioMemory and its SDK, it allows a richer set of possibilities with the software-defined storage there.

Jason Ader - William Blair & Company L.L.C., Research Division

Okay. And then last question just on ION. How long was the development going on for ION, David?

David A. Flynn

This has been going on for multiple years.

Operator

Your next question is from the line of Shebly Seyrafi with FBN Securities.

Shebly Seyrafi - FBN Securities, Inc., Research Division

So it looks like implicit in your guidance is that the OpEx percent is going to increase this year. Maybe you can talk about where you're investing more, and when you can come back to actually approach the long-term target of 33% to 36%. I think you're basically implicitly guiding for around 46% or so of revenue OpEx. Just talk about your expected progression there.

Dennis P. Wolf

Sure. So our investment, Shebly, will continue to be in R&D and in sales, and we have such a greenfield opportunity. We've talked about this over the course of the year that we're going to continue to expand to absolutely accelerate the market and grab more opportunities in areas that we're currently not even -- is currently not productized. So we have a whole product road map of what we anticipate doing over the next year or 2, and we're actually investing to that road map. At that point in time over the course of a couple few years, we are going to -- we expect that we'll be in the target operating margin range in excess of 20%. But right now, the opportunity is immense. The product road map is specific. The fact that there are a lot of geographies that we can enter into and expand is real. We're taking that opportunity.

Shebly Seyrafi - FBN Securities, Inc., Research Division

Okay, because your prior target, I believe, was end of calendar 2013 to hit that 20%, 25%. I guess that's being pushed out a year or 2 for good reasons for growth. I just also want to explore how you may be able to achieve a 60% plus gross margin. You did have that number in September of '11 and before. Just I guess in reply to Jason's question, you suggested that you're assuming flat NAND prices for the -- NAND prices fall more than you expected, that's one way. You have software from IO Turbine and other areas. You might have revenue upside just like you just had. So if you have a confluence of all these factors, maybe you could just talk about the possibility of getting over 60% gross margin and whether you would use that -- if that were to occur, would you invest more in the business and keep within your range, or would you let it go above 60%?

Dennis P. Wolf

Okay. So we referred to it earlier when we talked about dials. We -- first of all, it's accurate. The opportunities are in software. They're in improved NAND costs. But what we really want to do is we want to expand our market and our bias is always going to be on market expansion and to establish our base, if you will. So what we're going to do is we're going to work with the dials to probably keep it within that target range by cascading, looking at the software products that we have, channel fulfillment mix that we can use. Sometimes, the mix between OEM, VAR and direct gives us something to work with, and we'll continue to optimize cost. Can it be above 60%? Of course, it can. I think the oscillation factors that we had a year ago or less than a year ago are gone. We're on the other side of the transition, and so it gives us ability to stay -- we believe to stay within that range and to maximize our opportunity. We will put whatever we can back into the business to expand the market.

Operator

Your next question comes from the line of Edward Parker with Lazard Capital Markets.

Edward Parker - Lazard Capital Markets LLC, Research Division

David, can you maybe give us a sense of what your ambitions for ION are? Do you see it potentially being a significant or maybe even a bigger part of your enterprise business in selling individual ioDrives at some point in the future?

David A. Flynn

Well, there's definitely a lot of opportunity there. Customers are used to and like to consume their storage as a separately managed and scalable resource. And indeed, our sales team comes from that heritage, with Jim Dawson having built 3PAR in the traditional storage world. So there's a very good competency within the sales team already around selling that type of thing. And now with much of the challenge of how do you get performance from across the other end of the network solved, there's definite opportunity there for people to be able to consume it more readily in models that they are used to. So I think there's great possibility or there's great potential for it. And not just in the enterprise market, but you have to realize that what we're doing is making it possible now for the scale out market where they want to use commodity servers and they want to have just a homogenous array of servers. Now they can use that paradigm by software-defining servers to take on the specific personalities that they need of the shared storage. So this is really represents the ability to take the shared storage model into the scale out world of cloud and web scale.

Operator

We will now take our last question. It is from the line of Aaron Rakers with Stifel, Nicolaus.

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

First question, I want to go back to earlier on in the call. I don't know if it was clear or not, but I wanted to understand, again, just distinctly with regard to your guidance looking in the current quarter and for that matter, for the full year. I guess for the current quarter, are you assuming any revenue contributions from Cisco or the NetApp relationship at this point?

Dennis P. Wolf

We're still baking that. So there's some assumptions, but it's not material.

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

Not material. And then also I thought an interesting metric, you mentioned that you have -- you're now seeing the maturity develop with regard to your productive AEs. You cited that, that was at 150 persons currently. Can you talk a little bit about the ramp of that? Where do you expect to end this year as far as productive AEs? And how long does it necessarily take from hire to maturity, if you will, on those hires?

Dennis P. Wolf

Yes. So we try not to put too much out there because it becomes the discussion around sales productivity as opposed to just the other tools that are actually used in forecasting and the things that really motivate the sales. But I will tell you that we expect to continue to grow our sales organization. We really do have a lot of greenfield opportunities. We're still building out Asia. There are a lot of territory within the U.S. that we're still building. So we're going to take as many strong, productive sales personnel as we can. The other, of course, is that sales are not just done through direct salespeople. It's done through our fulfillment partners, and we put a lot of work on our fulfillment partners this year in building out our OEMs and now a different -- now additional distributors. Our VAR program has just now been built out and then of course the direct sales. So you may have 150 bag carriers out there, but when you look at everybody, the ecosystem is significant and we're going to continue to build that out.

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

Okay. So I won't ask the productive number per AE. But final question for me, of the 20 or so customers that have spent over $1 million over the last 9 months, is there a specific vertical dynamic within that customer base that you're notably starting to see here maybe outside of the web scale customer opportunities?

David A. Flynn

So what is most remarkable to me is how very diverse those customers are, covering many different types of applications in many different types of market verticals. There are some trends in terms of what those things tend to be: database, transactional, analytics, search. Those types of things are very common. But then you go to virtualization and virtual desktops, and it's very broad because indeed, solving the problem of getting data into the processor so that you can do data processing is universal. It's because processors have outstripped their supply chain from legacy systems. So this is very, very horizontal in what it addresses. But yes, so it's hard to get down to any specifics other than that.

Operator

I'll now turn the call back to Nancy Fazioli for some final comments.

Nancy Fazioli

Thank you, Keith. Please note that Dennis will be presenting at the Pacific Crest Global Technology Leadership Forum on this coming Monday, August 13. We will host a technology update to coincide with the VMworld Conference on August 28. Finally, management will present at the ThinkEquity G9 Conference in New York City on September 12. Each of 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 calls -- questions from this call. You can reach us at ir@fusionio.com.

This concludes our call. Thank you for your participation and support, and good evening.

Operator

Ladies and gentlemen, that will conclude today's conference. Thank you very much for joining us. You may now disconnect. Everyone, have a great day.

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