Fusion-io: 1 of the Great Turnarounds of 2014

Fusion-io (NYSE: FIO  ) is in the midst of a turnaround that may be taking hold. In a year where investing may be a game of inches, this company is definitely worth watching. Last night, the company announced a smaller than expected loss of $0.06, $0.04 cents better than the expected loss of $0.10. More importantly, however, revenues of $94.5 million were ahead of expectations of $89.8 million and the upside seems to be carrying through to the coming quarter.  If Fusion-io can execute on each aspect of its business plan, it could be one of the great turnarounds of 2014.  Do you think this turnaround checklist could lead to a 200% to 300% return?

Fusion-io is in the unusual position of possibly being able to see revenue upside while it is cutting costs, which can lead to an earnings upside explosion from 1)  new management, 2) a new selling strategy and 3) a streamlined operating framework. So, lets dive into each of the components.

Like Spinal Tap turning amplifiers up to 11 to get the added boost, Fusion-io does the same for enterprise data warehousing and virtualization servers.  Or, if my editors will let me put my geek hat on for a minute, it adds flash memory into servers that have a business critical function that needs to run as fast as possible.  No, not mining bitcoins, more like deep business analysis and finely tuning datacenters. 

Both revenue and profit upside seems on track for Fusion-io.
Revenue of $94.5 million was driven by a better than expected enterprise mix. Normally this is lower margin business but gross margin of 57.6% were much better than prior guidance of 53%. Enterprise business is usually lower margin because the deal sizes are smaller but the dollar cost of sales is the same.  You still have to fly out to client sites and do the sales pitches but you sell smaller amounts of product.  

Going forward, the company is building out an OEM channel as opposed to relying on direct sales. Since Fusion-io is selling a piece of a larger solution, this strategy seems like a good course of action that will contribute to profitability over time.

Helping with the cost cutting initiative, a new product, IO Scale, will also be instrumental in reaching more cost sensitive projects. The difference in price between IO Drive and IO Scale is 50%, making this cost effective for smaller scale and back office projects. Traditionally, an IO Drive project costs between $6.00 and $8.00 per gigabyte while IO Scale drops the price down to $2.50 to $3.00.

The management team has also been built out substantially in the last 90 days. Fusion-io replaced both its CFO and VP of Sales with Ted Hull, the former VP of Finance from Cisco Systems, and Ian Whiting, the VP of Americas Sales from Riverbed Technology. One of the biggest problems with Fusion-io has been its cost structure. Now that a new CFO has taken the reins a reduction in operating expenses could be in the future for the company in the next 100 days. Since the CFO has only been on board since the beginning of December, few changes have been announced but they are likely around the corner either at the upcoming analyst day or after the March quarter closes.

The key concern here is the threat from solid state drives which can produce similar functionality when combined into an array. This competition is another reason that partnering with OEMs to get implanted into a solution set of products is a good idea if not necessary.

Guidance for the March quarter was light with revenue expected to be in line to slightly up sequentially. Gross margin guidance of 52% at the midpoint is considerably below the 58% in the quarter. Expectations are low and if better cost control guidance is brought up during the analyst day on February 6, it's possible that estimates and ratings will come up at that time.

Fusion-io is one of those tech companies that is reminiscent of the Internet boom when product/engineering companies came public, felt growing pains that required a management change, then realized dramatic earnings growth once the corporate structure was optimized. If the transition is successful and margins improve, this could be one of the great turnaround stories of 2014. If profitability improves the likelihood of being acquired by EMC or Seagate improves as well.  Whether this closes 2014 as a stand-alone business or a division offered by another firm, if the management team can execute on its plan, Fusion-io could offer bragging rights and riches in the coming year.

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