Fusion-io, Inc. Flies on Strong Earnings, but the Bounce May Be Short-Lived

SSD maker Fusion-io (FIO) beat low expectations last night but has yet to show signs of consistent growth. Does it really deserve its pop today?

Jan 23, 2014 at 1:30PM

Investors in solid-state memory maker Fusion-io (NYSE:FIO) are enjoying a rare good day today. The market's digested its fiscal second-quarter earnings and has apparently found them delicious -- shares are up 14% as of this writing. But does that mean that Fusion-io, which has now clawed its way back to a 50% loss on the past year, is starting to become a good investment again? That's not quite so clear.

Fusion-io beat expectations on both top and bottom lines: Wall Street's $0.10-loss-per-share consensus was trounced by a comparatively "strong" $0.06 loss per share, thanks to stronger-than-expected revenue of $94.5 million (against an $89.1 million consensus). However, the company expects revenue to be flat to "slightly up" in the third quarter, and anticipates a rather ugly non-GAAP operating loss of 15% to 20% of revenues. Based on available information (we'll give Fusion-io the benefit of the doubt and tack on $3 million in additional revenue for the upcoming quarter), that works out to an 11% year-over-year improvement in revenue, but net losses may wind up coming in worse than the year-ago quarter's GAAP loss of $20 million after non-operating expenses are taken into account.

Here's what Fusion-io's recent results look like on both a quarterly and a trailing-12-month basis. As you can see, the company's "transformation" -- as CEO Shane Robinson called it in the after-hours earnings call yesterday -- has not produced the desired results just yet:

Source: Morningstar and Fusion-io earnings release.

Source: Morningstar and Fusion-io earnings release.

On a narrower timeline, Fusion-io's recent bottom-line uptick is heartening, but the trailing-12-month chart continues to show ugly progress in the wrong direction. The company's top and bottom lines have both been sliding for the past four quarters, and a recent move by free cash flow into negative trailing-12-month territory is worrisome as well.

While the company's earnings release and subsequent conference call were light on details, CFO Ted Hull did mention that Fusion-io now boasts 12 end-user customers that have placed more than $1 million each in orders. Robinson also noted that the company is "successfully partnering with ISVs, including SAP, Microsoft (NASDAQ:MSFT), Oracle, and VMware (NYSE:VMW) on industry-leading application acceleration solutions and we continue to be designed into next-generation data centers around the world." He also noted a new partnership with Lenovo, which will include ioScale memory products in Lenovo's ThinkServers sold in China.

Diversification is nice, but when you consider that the quarterly capital expenditures of the smallest of the companies mentioned (VMWare) was roughly equal to Fusion-io's quarterly revenue, it seems like there's a lot further for Fusion-io to go in terms of large-scale partnerships. All told, those four companies spent a combined $1.6 billion on capital expenditures in their most recent quarters -- Microsoft alone pledged some $700 million to build a Des Moines data center last summer just to support Xbox Live. Memory costs are only a small part of the data center, but Fusion-io hasn't proven that it's earned an important place in the cloud just yet.

This isn't the first time Fusion-io shares have surged -- but in each previous occasion, the pop has been relatively short-lived. This could turn out like those previous pops if Fusion-io doesn't have a game changer on the way soon.

Editor's Note: The original version misstated Fusion-io's interest payments. This version has been corrected

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