I've said it before and I'll say it again: Fusion-io (NYSE: FIO) is on to something.
That's my takeaway from EMC's (NYSE: EMC) announcement of its new VFCache technology, formerly dubbed "Project Lightning." VFCache is a new server offering that uses PCIe cards and Flash technology on the hardware side and intelligent caching on the software side. The approach pumps up throughput and reduces latency.
Thunder and lightning
By putting flash chips directly in the server on a PCIe card, EMC says it can accelerate performance up to 4,000 times faster than traditional 15K HDDs, making fetching data a snap. In the next year, the company will also add a layer of deduplication technology to VFCache, adding even more efficiencies into the flash chips.
EMC called it an "evolutionary step" of its flash strategy that "delivers revolutionary benefits," since customers' existing storage architectures will see no disruption. Storage rival NetApp (Nasdaq: NTAP) also uses a similar approach with flash caching in its Performance Acceleration Module (PAM) cards.
Fusion-io CEO David Flynn told CNBC, "We've been competing with them since we announced the company five years ago and now they're having to follow our architecture to try and stay competitive. It just shows the migration away from the storage mainframe to a more open model." He also named EMC's legacy offerings as one of the competitive obstacles it will face when competing with his smaller and nimbler company.
Since VFCache follows in Fusion-io's footsteps and thunder comes after lightning, maybe it would have been more aptly named "Project Thunder." After all, EMC is trying to steal Fusion-io's thunder anyway.
Who asked for validation?
Fusion-io hardly needs EMC's vote of confidence or additional validation that its technology cranks up the data storage game. Its 169% top-line jump last quarter speaks for itself, although the margin contraction sparked a bit of a selloff the following day. You also may be familiar with Fusion-io's biggest customer, who happens to be going public soon. It's company I like to call "Facebook."
The VFCache announcement shows that Fusion-io's architectural approach is a value proposition worth mimicking. EMC has also been known to acquire companies, specifically those that have innovative technology that it can integrate into its own offerings, such as data deduplication specialist Data Domain a couple of years back.
Takeover bait? Or bait for takeover talk?
Fusion-io has frequently been named as a potential takeover target, considering its relatively small size and compelling technology. Flynn deflected a head-on question on the topic, as expected, instead talking about the company's growth opportunities in the coming years.
The biggest potential hurdle any would-be competitor, including EMC, would face is that Fusion-io's market cap currently sits north of $2.1 billion, while it reported a GAAP net loss of $5.7 million despite healthy revenue gains to $84.1 million. It still enjoys a gross margin of 51%, albeit a contraction from the prior year's 59%, while any suitor would hope to realize some synergies in operating expenses through integration.
That would be a pretty pricey acquisition -- especially when EMC can just follow the lead.
Defense! Defense!
Fusion-io has a handful of patents, yet they "provide only limited protection." As of Nov. 9, the company had only 11 issued patents and 87 patent applications in the U.S., with the same number in other countries. Flynn didn't mention any IP implications from the announcement, but he did point out that his company has "outsold EMC in terms of total capacity of flash sold into the market."
He downplayed VFCache by calling it a desperate move by EMC to postpone the realization that storage area network (SAN) storage is no longer competitive in terms of performance, especially when considering how quickly data is generated nowadays. EMC CEO Joe Tucci has separately said that the world created 1.2 zettabytes of information in 2010, crossing the zettabyte threshold for the first time. That figure grew to 1.8 zettabytes in 2011, while data growth is expected to explode by fifty-fold from 2010 to 2020.
For the sake of putting the sheer size of a single zettabyte into context, it's 1 billion trillion bytes -- that's 36 million years of HD video.
David and Goliath
That's a lot of data to store, and it shows the importance of the storage industry and EMC's leadership in it. Fusion-io is a small niche play, a veritable David to EMC's Goliath. I like both companies, as both sit on my CAPS scorecard next to green-thumb CAPScalls. Fusion-io has more explosive potential as it ramps up sales at breakneck growth rates, while EMC's mature, dominant position has helped it put up impressive record-breaking digits of its own.
And who knows? Maybe Fusion-io will get acquired one of these days after all.
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