The following discussion and analysis should be read together with our consolidated financial statements and the notes to those statements included elsewhere in this annual report on Form 10-K. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about Fusion-io and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described in "Risk Factors" in Item 1A of this Form 10-K, in this Item 7, and elsewhere in this Form 10-K. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

We provide next generation datacenter solutions that accelerate databases, virtualization, cloud computing, big data, and the applications that help drive business from the smallest e-tailers to some of the world's largest data centers, social media leaders, and Fortune Global 500 businesses. Our integrated hardware and software platform enables the decentralization of data from legacy architectures and specialized hardware. This core technology leverages flash memory to significantly increase datacenter efficiency, with enterprise grade performance, reliability, availability, and manageability.

We were incorporated in December 2005, and we initially focused on the engineering and development of our platform. We have experienced significant growth with revenue of $36.2 million, $197.2 million, and $359.3 million in fiscal 2010, 2011, and 2012, respectively. Our headcount increased from 262 employees as of June 30, 2010 to 441 employees as of June 30, 2011 and to 669 employees as of June 30, 2012.

We sell our products through our global direct sales force, OEMs, including Cisco, Dell, HP, and IBM, and other channel partners. Some of our OEMs and channel partners integrate our platform into their own proprietary product offerings. Our primary sales office is located in San Jose, California, and we also have additional sales presence in North America, Europe, and Asia.

Large purchases by a limited number of customers have accounted for a substantial majority of our revenue, and the composition of the group of our largest customers changes from period to period. Some of our customers make concentrated purchases to complete or upgrade specific large-scale data storage installations. These concentrated purchases are short-term in nature and are typically made on a purchase order basis rather than pursuant to long-term contracts. During fiscal 2010, 2011, and 2012, sales to the 10 largest customers in each period, including the applicable OEMs, accounted for approximately 75%, 92%, and 91% of revenue, respectively. Our direct customer Facebook, Apple, through a reseller, and OEM customer HP, each accounted for 36%, 24%, and 14% of our revenue, respectively, in fiscal 2011 and 30%, 25%, and 17% of our revenue, respectively, in fiscal 2012. We expect that sales to a limited number of customers will continue to contribute materially to our revenue for the foreseeable future.

We anticipate that sales through OEMs and other channel partners will continue to constitute a substantial portion of our future revenue. In some cases, our products must be designed or qualified into the OEM's products. If that fails to occur for a given product line of an OEM, we would likely be unable to sell our products to that OEM during the life cycle of that product, which would adversely affect our revenue. We expect that as we continue to expand our global presence and business overseas, we will increasingly depend on our OEM relationships in such markets.

We believe that extending our platform differentiation through software innovation will be critical to achieving broader market acceptance along with maintaining or increasing our gross margins. In this regard, our ioTurbine virtualization software, directCache data-tiering software, ioSphere platform management software, and the software development kit integrates and adds significant value to our platforms and we intend to continue adding software functionality to differentiate our products. The next generation VSL 3.0 virtualization software subsystem, for our next generation hardware platform is in full production. We continue to devote the majority of our research and development resources to software development, and if we are unable to successfully develop or acquire, and then market and sell additional software functionality, our ability to increase our revenue and gross margins could be adversely affected.

Our ioMemory forms the basis of our hardware offering and is designed as a portfolio of upgradeable modules, enabling faster time-to-market and increased extensibility, and it provides server-based storage memory, low access latency, field upgradeability, deep error correction, self-healing protection and native PCI Express connectivity. Our second generation ioMemory technology supports the latest NAND geometries, significantly increases performance and capacity, improves reliability while retaining the ability to build storage systems of varying capacity, performance, and form factors. At the heart of the ioMemory hardware is our proprietary field programmable data-path controller. It connects a large array of non-volatile memory chips natively to the server's PCI-Express 1.0 or 2.0 peripheral bus, and addresses the reliability issues of non-volatile memory with our Adaptive Flashback Protection advanced chip-level fault tolerance technology, which is capable of restoring, correcting, and resurrecting lost data in the Flash-based storage sub-system.

Our portfolio of storage memory products incorporates our ioMemory hardware modules and related VSL and caching software into our family of ioDrive, ioCache, and ioFX enterprise grade products. Our ioDrive, ioDrive2, ioCache, and ioFX products work in conjunction or are integrated with our ioTurbine virtualization caching software and directCache data-tiering software.

We outsource manufacturing of our hardware products using a limited number of contract manufacturers. We procure a majority of the components used in our products directly from third-party vendors and have them delivered to our contract manufacturers for manufacturing and assembly. Once our contract manufacturers perform sub-assembly and assembly quality tests, they are assembled to our specified configurations. We perform final manufacturing assurance tests, labeling, final configuration, including a final firmware installation and shipment to our customers.

As a consequence of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of revenue and other operating results, including gross margin and operating expenses as a percentage of our revenue, are not necessarily meaningful and should not be relied upon as indications of future performance. Although we have experienced significant percentage growth in our revenue, we do not believe that our historical growth rates are likely to be sustainable or indicative of future growth.

Recent Developments

In August 2011, we acquired IO Turbine, Inc., or IO Turbine, a provider of caching solutions for virtual environments, based in San Jose, California. The acquisition of IO Turbine is a key part of our strategy to enable enterprise customers to increase the utilization, performance, and efficiency of their datacenter resources, and extract greater value from their information assets. The aggregate consideration in the acquisition for all of IO Turbine's outstanding securities on a fully diluted basis was approximately $65.6 million, which consisted of (1) cash, (2) shares of our common stock valued at $28.40 per share, the closing sale price of our common stock on the closing date of the acquisition, and (3) the fair value (approximately $0.9 million) of assumed stock options and restricted stock

awards attributable to pre-acquisition service. In addition, subsequent to the acquisition we will recognize up to approximately $26.4 million of stock-based compensation expense related to the fair value of assumed restricted stock awards and stock options, of which approximately $3.8 million was expensed immediately in connection with the acceleration of vesting of certain restricted stock awards and the remainder will be recognized over the underlying future service period of the assumed stock awards and stock options. The assets, liabilities, and operating results of IO Turbine are reflected in our consolidated financial statements from the date of acquisition. Approximately $3.6 million of cash and 278,974 shares were deposited in escrow and held for one year from the date of acquisition as partial security for indemnification obligations of the IO Turbine stockholders pursuant to the merger agreement, before being released in full from escrow in August 2012.

In November 2011, we completed a follow-on public offering of our common stock in which we sold and issued 3,000,000 shares at an issuance price of $33.00 per share. After deducting underwriting discounts and commissions and approximately $1.1 million in offering costs, we received approximately $94.0 million in net proceeds.

Components of Consolidated Statements of Operations

Revenue

We derive revenue primarily from the sale of our storage memory products and support services. We sell our storage memory platform through our global direct sales force, OEMs, and other channel partners. We provide our support services pursuant to support contracts, which involve hardware support, software support, and software upgrades on a when-and-if available basis, and typically have a one-year term. Revenue from support services for fiscal 2010, 2011, and 2012 represented less than $1.0 million, $4.5 million, and $14.6 million, respectively. In fiscal 2012, our software revenue was not significant to our consolidated statement of operations.

Cost of Revenue

Cost of revenue consists primarily of material costs including amounts paid to our suppliers and contract manufacturers for hardware components and assembly of those components into our products. The largest portion of our cost of revenue consists of the cost of non-volatile memory components. Given the commodity nature of memory components, neither we nor our contract manufacturers generally enter into long-term supply contracts for our product components, which can cause our cost of revenue to fluctuate. Cost of revenue is recorded when the related product revenue is recognized. Cost of revenue also includes costs related to allocated personnel expenses related to customer support, warranty costs, costs of shipping, and carrying value adjustments recorded for excess and obsolete inventory.

Operating Expenses

The largest component of our operating expenses is personnel costs, consisting of salaries, benefits, and incentive compensation for our employees, which includes stock-based compensation. Our headcount increased from 262 employees as of June 30, 2010 to 441 employees as of June 30, 2011, and to 669 employees as of June 30, 2012. As a result, operating expenses have increased significantly over these periods.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel costs, incentive compensation, marketing programs, travel-related costs, consulting expenses associated with sales and marketing activities and facilities-related costs.

Research and Development

Research and development expenses consist primarily of personnel costs, prototype expenses, amortization of an intangible asset, consulting services, depreciation associated with research and development equipment and facilities-related costs. We expense research and development costs as incurred.

General and Administrative

General and administrative expenses consist primarily of personnel costs, legal expenses, consulting and professional services, audit costs, and facility-related expenses for our executive, finance, human resources, information technology, and legal organizations.

Other income (expense), net

Other income (expense), net consists of changes in the fair value of a derivative related to a repurchase of our common stock, interest expense, interest income, realized gains and losses from investments, and transactional foreign currency gains and losses.

Trends in Our Business

Gross Margin

For fiscal 2012, gross margin decreased from fiscal 2011 mainly due to higher raw material costs associated with the early stage of the ioDrive2 product lifecycle and also related to product mix. We are now qualified with three NAND flash suppliers, and we believe there is potential for additional gross margin improvement; however, we plan to continue to balance driving market adoption with improving gross margin. While gross margin remains subject to fluctuations as a result of raw material costs and product mix, we currently anticipate our gross margin to improve slightly in fiscal 2013 compared to fiscal 2012 due to lower raw material costs and more normalized product mix.

Sales and Marketing

We plan to continue to invest in sales by increasing our sales headcount. Our sales personnel are typically not immediately productive and therefore the increase in sales and marketing expense when we add new sales representatives is not immediately offset by increased revenue and may not result in increased revenue over the long-term. The timing of our hiring of new sales personnel and the rate at which they generate incremental revenue could therefore affect our future period-to-period financial performance. We expect that sales and marketing expenses will continue to increase in absolute dollars and may fluctuate as a percentage of revenue as we expect to continue hiring new sales representatives. We also expect to expand marketing activities to drive sales opportunities and brand awareness.

Research and Development

We expect to continue to devote substantial resources to the development of our products including the development of new products. We believe that these investments are necessary to maintain and improve our competitive position. We expect that our research and development expenses will continue to increase in absolute dollars and may fluctuate as a percentage of revenue as we expect to continue to invest in additional engineering personnel and infrastructure required to support the development of new products and to enhance existing products.

General and Administrative

While we expect personnel costs, including stock-based compensation expense for employees and non-employees, to be the primary component of general and administrative expenses, we also expect to continue to incur significant legal and accounting costs related to compliance with rules and regulations implemented by the SEC. We expect that general and administrative expenses will continue to increase in absolute dollars and as a percentage of revenue primarily due to general growth of the business, infrastructure costs to support our international growth, and in legal costs related to intellectual property.

Results of Operations for the Fiscal Years Ended June 30, 2010, 2011 and 2012

Revenue

The following table presents our revenue for the periods indicated and related
changes as compared to the prior periods (dollars in thousands):



                Year Ended                                          Year Ended
                 June 30,                 Change in                  June 30,                 Change in
            2010         2011            $           %          2011          2012            $          %

2010 Compared to 2011. Revenue increased $161.0 million from fiscal 2010 to fiscal 2011, primarily due to the increase in the overall volume of our products shipped.

2011 Compared to 2012. Revenue increased $162.1 million from fiscal 2011 to fiscal 2012, primarily due to the increase in the overall volume of our products shipped.

Revenue from the 10 largest customers, including the applicable OEMs, for each fiscal year was 75%, 92%, and 91% of revenue for fiscal 2010, 2011, and 2012, respectively. Three customers accounted for 36%, 24%, and 14% of our revenue in fiscal 2011 and 30%, 25%, and 17% of our revenue in fiscal 2012. No other customer accounted for 10% or greater of revenue in fiscal 2011 and 2012. Revenue from customers with a ship-to location in the United States accounted for 76%, 82%, and 74% of revenue for fiscal 2010, 2011, and 2012, respectively.

Cost of Revenue and Gross Margin

The following table presents our cost of revenue and gross margin for the
periods indicated and related changes as compared to the prior periods (dollars
in thousands):



                               Year Ended                                            Year Ended
                                June 30,                  Change in                   June 30,                  Change in
                           2010          2011            $           %          2011           2012            %          %
Cost of revenue          $ 16,018      $  84,043      $ 68,025       425 %    $  84,043      $ 159,045      $ 75,002       89 %
Gross profit               20,198        113,161        92,963       460 %      113,161        200,304        87,143       77 %
Gross margin(1)                56 %           57 %                                   57 %           56 %

(1) We define gross margin as our gross profit expressed as a percentage of total revenues

2010 Compared to 2011. Cost of revenue increased $68.0 million and gross profit increased $93.0 million from fiscal 2010 to fiscal 2011, primarily due to the increase in volume of product shipped. Gross margin increased due to efficiencies resulting from economies of scale as our revenue has increased. The increase was partially offset by sales of excess raw materials of approximately $4.0 million related to end-of-life products in fiscal 2011, which were sold at their approximate carrying value.

2011 Compared to 2012. Cost of revenue increased $75.0 million and gross profit increased $87.1 million from fiscal 2011 to fiscal 2012, primarily due to the increase in the volume of our products shipped. Our gross margin decreased from fiscal 2011 to fiscal 2012 due to higher raw material costs associated with the early stage of the ioDrive2 product lifecycle and also related to product mix.

Operating Expenses

Sales and Marketing

The following table presents our sales and marketing expenses for the periods
indicated and related changes as compared to the prior periods (dollars in
thousands):



                                Year Ended                                        Year Ended
                                 June 30,                Change in                 June 30,                Change in
                             2010         2011          $           %          2011         2012          $          %

2010 Compared to 2011. Sales and marketing expenses increased $32.3 million from fiscal 2010 to fiscal 2011, primarily due to an increase in the number of sales and marketing employees, from 123 as of June 30, 2010 to 232 as of June 30, 2011. This resulted in a $25.4 million increase in personnel-related costs, including a $9.6 million increase in commission expense. The increase was also due to a $2.4 million increase in marketing program costs, a $2.2 million increase in travel-related costs and a $0.8 million increase in allocated rent and facilities expenses.

2011 Compared to 2012. Sales and marketing expenses increased $31.5 million from fiscal 2011 to fiscal 2012, primarily due to an increase in sales and marketing personnel from 232 employees at the end of fiscal 2011 to 347 at the end of fiscal 2012, as we hired additional employees to focus on acquiring new customers and expanding our business. This increase in headcount resulted in a $23.5 million increase in personnel-related costs, including a $3.0 million increase in sales commissions. The majority of the remaining increase in sales and marketing expenses from fiscal 2011 to fiscal 2012 was due to a $2.9 million increase in product demonstration expenses, a $2.0 million increase in travel-related costs, and a $0.5 million increase in consulting services.

Research and Development

The following table presents our research and development expenses for the
periods indicated and related changes as compared to the prior periods (dollars
in thousands):



                                    Year Ended                                       Year Ended
                                     June 30,                Change in                June 30,                Change in
                                 2010         2011          $          %          2011         2012          $           %

2010 Compared to 2011. Research and development expenses increased $11.3 million from fiscal 2010 to fiscal 2011, primarily due to an increase in the number of research and development employees, from 97 as of June 30, 2010 to 152 as of June 30, 2011. This resulted in a $7.3 million increase in personnel-related costs. The increase was also due to a $1.7 million increase in manufacturing costs for new product prototypes, and a $1.2 million increase in allocated rent and facilities expenses.

2011 Compared to 2012. Research and development expenses increased $32.8 million from fiscal 2011 to fiscal 2012, primarily due to an increase in research and development personnel from 152 employees at the end of fiscal 2011 to 243 at the end of fiscal 2012, resulting in a $22.5 million

increase in personnel-related costs. The increase was also due to a $3.1 million increase in manufacturing costs for new product prototypes, a $2.3 million increase in amortization expense for an intangible asset for developed technology acquired in the IO Turbine acquisition, a $1.7 million increase in engineering outside services, and a $1.0 million increase in depreciation expense.

General and Administrative

The following table presents our general and administrative expenses for the
periods indicated and related changes as compared to the prior periods (dollars
in thousands):



                                  Year Ended                                      Year Ended

                                   June 30,               Change in                June 30,                Change in
                               2010         2011          $         %          2011         2012          $           %

2010 Compared to 2011. General and administrative expenses increased $8.2 million from fiscal 2010 to fiscal 2011, primarily due to an increase in stock-based compensation of $4.6 million, of which $3.2 million specifically related to non-employee stock option awards and the significant increase in the fair value of these awards from period to period. In addition, the increase was due to the number of general and administrative employees, from 42 as of June 30, 2010 to 57 as of June 30, 2011. These increases contributed to a $7.9 million increase in personnel-related costs. The increase was offset by a $3.1 million decrease in legal costs, including a $1.0 million insurance claim reimbursement related to the resolution of litigation that was ongoing in fiscal 2010. The majority of the remaining increase was due to a $2.4 million increase in depreciation expense and a $0.5 million increase in professional accounting services.

2011 Compared to 2012. General and administrative expenses increased $37.9 million from fiscal 2011 to fiscal 2012, primarily due to an increase in stock-based compensation of $22.8 million, of which $5.2 million specifically related to non-employee stock option awards and the significant increase in the fair value of these awards from period to period and $3.8 million related to the acceleration of vesting of certain restricted stock awards assumed in connection with the acquisition of IO Turbine. In addition, the increase was due to the number of general and administrative employees, from 57 employees at the end of fiscal 2011 to 79 employees at the end of fiscal 2012. These increases contributed to a $26.8 million increase in personnel-related costs. The majority of the remaining increase was due to a $2.9 million increase in professional accounting and legal services, a $1.3 million increase in acquisition related costs due to the acquisition of IO Turbine, a $1.1 million increase in rent expense, and a $0.9 million increase in consulting costs.

Other Income (Expense), net

The following table presents our other income (expense), net for the periods
indicated and related changes as compared to the prior periods (dollars in
thousands):



                                   Year Ended                                            Year Ended
                                    June 30,                  Change in                   June 30,               Change in
                               2010         2011           $             %             2011        2012         $          %

2010 Compared to 2011. Other income (expense), net changed by $3.3 million from fiscal 2010 to fiscal 2011, primarily due to $2.1 million increased expense attributable to the change in the fair value of a preferred stock warrant and a $1.0 million increase in other expense due to a change in the fair value of a common stock repurchase derivative liability.

2011 Compared to 2012. Other income (expense), net changed by $3.7 million from fiscal 2011 to fiscal 2012, primarily due to a decrease in interest expense of $2.3 million, which was primarily the result of a change in the fair value of a preferred stock warrant, and a decrease of $1.1 million in other expense, which was primarily the result of a change in the fair value of a common stock . . .