January 24, 2012

Fusion-io reported its second fiscal quarter, ending December 31, with a GAAP net loss of $5.7 million on much lower gross margins. In after-hours trading, the stock was off 13.41% or $4.07 per share. This compares to the prior quarter’s GAAP earnings of $7.2 million. So dismal were the GAAP results that the company only reported non-GAAP numbers during the conference call, which were positive, but open to questions that only a team of accountants could answer.

During the conference call lasting until 6:00PM Eastern, the company lost about $340 million of its total market capitalization. Despite assurances from CEO David Flynn and CFO Dennis Wolf that it was a truly great quarter, the street was not buying it. The greatest concern from the financial analysts asking questions was that gross margins had eroded something like 12 percentage points from fiscal Q1. While guidance given after Q1 had predicted a drop in gross margins due to transition to a new generation of products, it was clear by the tone of the questions and the big sell-off that no one was expecting this kind of margin erosion, let alone driving red ink into the GAAP numbers. Of more concern was Q3 guidance, which predicted more red ink in the GAAP numbers, and a return to higher gross margins waiting until Q4.

Our take: Wall Street punishes those who can’t product sequential quarter winnings, and for the first time since going public, Fusion-io felt the cruel belt of a disappointed equity market. Between the lines, and looking at inventory growth, it is pretty clear that the company suffered from a certain amount of overhang in Q2, that is, customers buying new products at lower gross margins than the mature products with higher margins. Another factor had to be that a number of large end-user deals went through the OEM channel rather than on a direct basis, and margins had to be shared with the OEMs. In the roller-coaster of relatively small-cap public companies, FIO will need to have more than one good quarter in a row to gain back the high-flying confidence held since its IPO. – James E. Bagley