Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
FIO > SEC Filings for FIO > Form 10-K on 28-Aug-2013All Recent SEC Filings

Show all filings for FUSION-IO, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for FUSION-IO, INC.


28-Aug-2013

Annual Report

Part II. Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

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-lookingstatements 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 solutions for enterprises, hyperscale datacenters, and small to medium enterprises that accelerate databases, virtualization, cloud computing, big data, information systems, 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 platforms enable the acceleration of data away from legacy architectures and proprietary hardware. This core technology leverages flash memory to significantly increase datacenter and computer-based information system efficiency, with enterprise grade performance, reliability, availability, and manageability.

We were incorporated in December 2005 and we have experienced significant growth with revenue increasing from $197.2 million in fiscal 2011 to $359.3 million in fiscal 2012 and to $432.4 million in fiscal 2013. Our headcount increased from 441 employees as of June 30, 2011 to 669 employees as of June 30, 2012 and to 938 employees as of June 30, 2013.

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 2011, 2012, and 2013, sales to the 10 largest customers in each period, including the applicable OEMs, accounted for approximately 92%, 91%, and 84% of revenue, respectively. Our direct customer Facebook, Apple, through a reseller, and OEM customer HP, each accounted for 30%, 25%, and 17% of our revenue, respectively, in fiscal 2012 and 29%, 15%, and 17% of our revenue, respectively, in fiscal 2013. As a result of our revenue concentrations, our quarterly and annual revenue and operating results are likely to fluctuate in the future and will be difficult to estimate. 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.

-39-


Table of Contents

We believe that extending our platform differentiation through software and hardware innovation will be critical to achieving broader market acceptance and to maintaining or increasing our gross margins. In this regard, our ioTurbine virtualization acceleration software, ION Data Accelerator software, ioControl software, ioSphere management software, and specialized storage memory programming software interface extensions that allow Integrated Software Vendors to develop, integrate, and add significant value to applications using our platforms are important strategic investments that differentiate our products from hardware competitors. We invest in hardware qualification so that we can apply the value of our software to new non-volatile technologies as they become available. We also invest in new hardware controllers to ensure that our products are competitive in performance, reliability, power, and density. If we are unable to successfully develop or acquire hardware or software technology, and then market and sell additional functionality, our ability to increase our revenue and gross margins could be adversely affected.

Our ioMemory technology forms the basis of our hardware offering and is designed as a portfolio of upgradeable design modules, enabling faster time-to-market and increased extensibility, and it provides server-based storage class 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 technology 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 ioScale product is derived from our ioMemory platform and is specifically designed for the unique needs of the high-volume hyperscale market.

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 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 April 2013, we acquired 100% of the stock of NexGen Storage, Inc., or NexGen, a developer of hybrid storage systems based in Louisville, Colorado. The acquisition of NexGen adds to our storage solution portfolio and expands our reach into small to medium enterprises. The consideration for the NexGen acquisition was $110.7 million, consisting of (i) $109.0 million in cash,
(ii) $1.4 million in assumed stock options, and (iii) $0.3 million related to the elimination of intercompany balances. In addition, we agreed to pay $5.0 million in cash to one of the selling stockholders in 12 equal quarterly installments and 339,627 in shares of our common stock to another selling stockholder, which is subject to a repurchase right that lapses in 12 equal quarterly installments. The quarterly installments for both the cash and restricted stock amounts are subject to ongoing employment requirements. As

-40-


Table of Contents

such, the associated compensation expense will be recognized over the service period. We also assumed NexGen's options and restricted stock units that were unvested at the time of the merger that were converted into unvested options to purchase 822,927 shares of our common stock and 84,808 of our restricted stock units. Subsequent to the acquisition, we will recognize over the underlying future service period up to approximately $23.7 million of compensation expense related to the fair value of the cash, restricted stock, and the assumed stock-based awards. The assets, liabilities and operating results of NexGen are reflected in our consolidated financial statements following the date of acquisition.

In March 2013, we acquired 100% of the stock of ID7 Ltd. and SCST Limited, together the ID7 Entities, for total cash consideration of approximately $5.9 million. The ID7 Entities, located in England and Wales, are the primary developers of the SCST storage subsystem enabling enhanced shared storage software functionality for any Linux server or appliance. In connection with the acquisition, we issued 135,131 shares of our common stock to the former shareholders of the ID7 Entities, which is subject to a repurchase right, that lapse 25% after one year and the remaining 75% in 12 equal quarterly installments thereafter. Subsequent to the acquisition, we will recognize over the underlying future service period up to approximately $2.4 million of stock-based compensation expense related to the fair value of the restricted stock awards. The assets, liabilities and operating results of the ID7 Entities are reflected in our consolidated financial statements following the date of acquisition.

Components of Consolidated Statements of Operations

Revenue

We derive revenue primarily from the sale of our storage class memory products and support services. We sell our solutions 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 for a period of one to five years. Revenue from support services for fiscal 2011, 2012, and 2013 represented $4.5 million, $14.6 million, and $34.8 million, respectively. For all periods presented, 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, manufacturing operations, amortization of intangible assets, costs of licensed technology, 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 441 employees as of June 30, 2011 to 669 employees as of June 30, 2012, and to 938 employees as of June 30, 2013. As a result, operating expenses have increased significantly over these periods.

-41-


Table of Contents

Sales and Marketing

Sales and marketing expenses consist primarily of personnel costs, including incentive compensation, product demonstration expenses, travel-related costs, facilities-related costs, depreciation associated with sales and marketing acquired assets, contract labor and consulting expenses associated with sales and marketing activities, and amortization of intangible assets.

Research and Development

Research and development expenses consist primarily of personnel costs, including incentive compensation, depreciation associated with research and development acquired assets, contract labor and consulting services, amortization of intangible assets, facilities-related costs, travel-related costs, and prototype expenses. We expense research and development costs as incurred.

General and Administrative

General and administrative expenses consist primarily of personnel costs, including incentive compensation, legal expenses, depreciation expense, facilities-related expenses for our executive, finance, human resources, information technology, and legal organizations, consulting and professional services, and travel-related costs.

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, and transactional foreign currency gains and losses.

Trends in Our Business

Gross Margin

Our gross margin will vary due to product mix and pricing, customer demand, and cost of materials. We anticipate gross margin to decrease in fiscal 2014 compared to fiscal 2013 as a result of our growth strategy.

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. We expect sales and marketing expenses to increase in absolute dollars 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 research and development expenses to increase in absolute dollars 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.

-42-


Table of Contents

General and Administrative

While we expect personnel costs, including stock-based compensation expense, 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 applicable to public companies. We expect that general and administrative expenses will continue to increase in absolute dollars primarily due to general growth of the business, infrastructure costs to support our growth, and in legal costs related to intellectual property.

Results of Operations for the Fiscal Years Ended June 30, 2011, 2012, and 2013

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        Change              June 30,              Change       Change
            2011          2012          in $          in %          2012          2013          in $         in %

Revenue $ 197,204 $ 359,349 $ 162,145 82 % $ 359,349 $ 432,386 $ 73,037 20 %

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.

2012 Compared to 2013. Revenue increased $73.0 million from fiscal 2012 to fiscal 2013, primarily due to the increase in the overall volume of our products shipped.

Revenue from our 10 largest customers, including the applicable OEMs, for each fiscal year was 92%, 91%, and 84% of revenue for fiscal 2011, 2012, and 2013, respectively. Our direct customer Facebook, Apple, through a reseller, and OEM customer HP, each accounted for 30%, 25%, and 17% of our revenue, respectively, in fiscal 2012 and 29%, 15%, and 17% of our revenue, respectively, in fiscal 2013. No other customer accounted for 10% or greater of revenue in fiscal 2012 and 2013. Revenue from customers with a ship-to location in the United States accounted for 82%, 74%, and 60% of revenue for fiscal 2011, 2012, and 2013, 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       Change               June 30,               Change       Change
                             2011           2012           in $         in %          2012           2013           in $         in %
Cost of revenue            $  84,043      $ 159,045      $ 75,002           89 %    $ 159,045      $ 177,915      $ 18,870           12 %
Gross profit                 113,161        200,304        87,143           77 %      200,304        254,471        54,167           27 %
Gross margin(1)                   57 %           56 %                                      56 %           59 %

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

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.

-43-


Table of Contents

2012 Compared to 2013. Cost of revenue increased $18.9 million from fiscal 2012 to fiscal 2013 primarily due to the increase in the volume of our products shipped and for litigation settlement related expenses of $4.1 million. Our gross profit increased $54.2 million and our gross margin increased from fiscal 2012 to fiscal 2013 primarily due to the increase in the volume of our products shipped, lower raw material costs, and product mix, partially offset by litigation settlement related expenses of $4.1 million.

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       Change              June 30,             Change       Change
                              2011         2012         in $         in %          2012         2013          in $         in %

Sales and marketing $ 55,698 $ 87,171 $ 31,473 57 % $ 87,171 $ 126,508 $ 39,337 45 %

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, 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.

2012 Compared to 2013. Sales and marketing expenses increased $39.3 million from fiscal 2012 to fiscal 2013, primarily due to an increase in sales and marketing personnel, as we hired additional employees to focus on acquiring new customers and expanding our business. This increase in headcount resulted in a $30.2 million increase in personnel-related costs, including a $13.3 million increase in sales commissions and a $3.7 million increase in stock-based compensation. The increase was also due to a $4.8 million increase in product demonstration costs and a $2.9 million increase in travel-related expenses.

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       Change             June 30,             Change       Change
                               2011         2012         in $         in %          2012         2013         in $         in %

Research and development $ 27,238 $ 60,006 $ 32,768 120 % $ 60,006 $ 95,458 $ 35,452 59 %

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, 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.

-44-


Table of Contents

2012 Compared to 2013. Research and development expenses increased $35.5 million from fiscal 2012 to fiscal 2013, primarily due to an increase in research and development personnel, resulting in a $30.5 million increase in personnel-related costs, which includes a $9.8 million increase in stock-based compensation. The increase was also due to a $2.4 million increase in contract labor and consulting expense and a $2.2 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       Change             June 30,             Change       Change
                                2011         2012         in $         in %          2012         2013         in $         in %

General and administrative $ 20,556 $ 58,423 $ 37,867 184 % $ 58,423 $ 69,421 $ 10,998 19 %

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-employeestock 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, an increase in the number of general and administrative personnel contributed to the increased expense. These increases contributed to a $26.8 million increase in personnel-relatedcosts. The majority of the remaining increase was due to a $2.9 million increase in legal and professional accounting 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.

2012 Compared to 2013. General and administrative expenses increased $11.0 million from fiscal 2012 to fiscal 2013, primarily due to an increase of $3.2 million in legal fees principally for the S4 litigation, an increase of $2.8 million in litigation settlement related expenses, an increase of $2.5 million in depreciation expense, and an increase of $0.7 million in software related expenses.

Other Income (Expense), net

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

Year Ended Year Ended June 30, Change Change June 30, Change Change 2011 2012 in $ in % 2012 2013 in $ in % Other income (expense), net $ (3,420 ) $ 328 $ 3,748 110 % $ 328 $ 194 $ (134 ) 41 %

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 repurchase derivative liability.

2012 Compared to 2013. Other income (expense), net changed by $0.1 million from fiscal 2012 to fiscal 2013, primarily due to the net change in the fair value of a common stock repurchase derivative liability during the first six months of fiscal 2012, which liability was paid in full in December 2011.

-45-


Table of Contents

Income Tax Expense

The following table presents our income tax expense 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 2011 2012 $ % 2012 2013 $ % . . .

  Add FIO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for FIO - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.