“Gross margin guidance provides bear fodder…we think it is temporary. Based on the stock’s reaction post close, management’s guidance for a second quarter of ~50% gross margins, attributable to primarily a product transition and secondarily a lower-end mix, stoked fears over competition. Based on our conversations with management, we believe the lower margins are temporary given: (1) as the new product is qualified at server OEMs, higher margin enterprise business will enter the mix; (2) more NAND suppliers are becoming available; and (3) software like IO Turbine is margin accretive.
Business seeing traction in all facets. Fusion-io’s rapid growth (+13% q/q and +169% y/y) and management’s FY12 guidance increase from 55% growth to 65-70% highlighted significant growth potential as did 3 key points: (1) Strategic accounts: management noted a significant win at Salesforce.com and this could offer not only revenue but also diversification; (2) Core accounts: adoption of IO-Turbine is off to a solid start, with several customers in production. This bodes well for enterprise penetration; and (3) Sales: the company added 50 of the world’s largest resellers, gaining access to 2,500 more sales people. Technology penetration and share. For 2010, Gartner notes that the enterprise PCIe market stood at $596mn and based on addressable market numbers was only 1% penetrated. We conservatively expect penetration to rise to only 4% this year and to 10% by 2014. Based on these Gartner numbers and Fusion-io revenue, the company had approximately 14% share in 2010. Given the company’s momentum, direct sales, solution approach, and technology leadership, market share could double, and this would result in a potential $2bn revenue opportunity in 2014.”