Things went sour for flash storage drive maker Fusion-io (FIO.DL) (famous for being an employer of Apple co-founder, Steve Wozniak) after the company reported its first-quarter results for fiscal year 2014. Bears showed up after the company announced revenue fell 27% to $86.3 million in the first quarter. The result was catastrophic. Fusion-io has lost more than 26% of its market capitalization since then.
Despite having developed game-changing technology, Fusion-io has not been able to compete against huge tech corporations like EMC (EMC) and challengers like Violin Memory (NYSE: VMEM), which have been aggressively marketing their flash storage products in past quarters. How did Fusion-io lose the war for the flash storage market?
Source: YCharts
Failure in the making?
According to the latest earnings call, Fusion-io reported a loss of $0.28 per share. What's surprising here is that just a year ago, the company was reporting profits of $0.04 per share. What went wrong?
Technology isn't the problem. Simply put, Fusion-io's technology is among the best in the industry. From hybrid storage systems that combine flash with disk, to all-flash storage solutions, the company's innovative memory architecture excels at delivering the best performance. The company also has a comprehensible product portfolio, covering every type of customer, from corporations to single users.
Fusion-io's problems are related to the company's business model and management. First, the company relies heavily on just two customers, Facebook and Apple, both of which already have plenty of flash storage available. These two companies accounted for 50% of Fusion-io's revenue in early 2013.
Despite being an early mover in the flash memory sector, Fusion-io has not been able to create a strong brand and economic moat. As a result, increasing competition from EMC in the server flash card segment hurts the company's top-line performance and profitability, as EMC is aggressively discounting its server memory cards.
With more than $11 billion in cash and cash equivalents, and a stable $5 billion revenue cash flow, EMC has plenty of resources to wage a price war for market share in the flash memory market. In theory, EMC could buy Fusion-io and still enjoy a robust balance sheet.
On the other hand, Fusion-io can't afford burning more cash. Instead of dedicating money to improve its brand strength, Fusion-io has been very active in acquisitions. The company acquired hybrid storage developer NexGen Storage this year for approximately $114 million in cash and $5 million in stock. It also acquired a software-defined storage company, ID7. While these deals clearly served to strengthen and expand Fusion-io's product portfolio, the company's balance sheet got hurt.
Finally, the appearance of new players, like Violin Memory, show that the price war in the flash memory industry has barely started. Aware of the importance of strategic partnerships to fight against Goliaths, Violin partnered with Toshiba. Under this agreement, Toshiba is set to give Violin insider access to unpublished R&D regarding NAND technology, which is Toshiba's specialty. Violin has been well-received by the security sector, with governments and financial institutions as the company's main clients.
What a Fool believes
Fusion-io's early focus on acquisitions, tight budget constraint, and poor revenue diversification have offset the positive effects that developing and offering a complete product portfolio had on the company's revenue. In this bearish context, the company's management kept a high, unrealistic guidance for a couple of quarters. This contributed to significant market disappointment after Fusion-io failed to deliver top-line growth and consistent profits.
