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Fusion-io Inc. (FIO - Snapshot Report) reported fourth-quarter 2013 non-GAAP loss per share of 3 cents, which deteriorated from the year-ago earnings per share of 9 cents. The year-over-year loss was primarily attributed to lower revenues and higher expenses.

Including stock based compensation of 16 cents, loss per share came in at 19 cents, wider than the Zacks Consensus Estimate of 15 cents per share.

Revenues

Revenues decreased a marginal 0.5% from the year-ago quarter to $106.1 million. Reported revenues not only lagged management’s guidance of $110.0 million but also fell short of the Zacks Consensus Estimate of $113.0 million.

Despite having a number of hyper-scale customers such as Facebook (FB - Analyst Report), Apple Inc. (AAPL - Analyst Report) and Hewlett-Packard Co. (HPQ - Analyst Report), the company missed revenues mainly due to fluctuations in large orders. Moreover, weaker-than-expected revenues from Fusion-io’s OEM partners were also responsible.

Operating Results

Non-GAAP gross profit (excluding stock-based compensation and amortization of intangible assets and other one-time items) increased 2.2% from the year-ago quarter to $62.7 million. Gross margin expanded 150 basis points (bps) from the year-ago quarter to 59.1%, primarily attributed to the product mix and manufacturing efficiency.

Including stock-based compensation of $0.12 million, gross profit came in at $62.6 million with margins of 59.0%.

Total operating expenses surged 37.0% from the year-ago quarter, primarily due to higher investments in product development and increasing headcount. As a percentage of revenues, operating expenses expanded from 58.4% in the year-ago quarter to 80.5%, which resulted in operating loss of $6.3 million. The non-GAAP operating loss worsened from the year-ago profit of $11.9 million.

Including stock-based compensation of $15.5 million, operating loss came in at $21.9 million.  

Fusion-io reported non-GAAP (excluding stock-based compensation and amortization of intangible assets and other one-time items) net loss of $3.0 million or 3 cents per share, compared with a net profit of $9.8 million or 9 cents in the year-ago quarter. Including stock-based compensation of $15.5 million or 16 cents per share, net loss came in at $18.5 million or 19 cents per share.

Balance Sheet and Cash Flow

Fusion-io exited the fourth quarter with cash and cash equivalents of $238.4 million, down from $354.6 million in the previous quarter. Accounts receivable totaled $69.1 million. Inventories remained flat sequentially at $71.1 million. Fusion-io did not have any long-term debt.

Fusion-io used cash of $6.4 million in operations compared to $30.5 million being cash generated from operations in the year-ago period. The company spent $3.5 million as capital expenditure.

Guidance

For the first quarter of 2014, Fusion-io expects revenues to range between $80.0 million and $90.0 million. Non-GAAP gross margin is expected in the range of 56.0%–58.0%. The company also expects non-GAAP operating margins to range between 15.0% and 25.0%. Diluted share count is likely to be approximately 100 million.

For fiscal 2014, the data storage device manufacturer expects revenues to grow by 20.0% from the year-ago period while non-GAAP gross margin is expected in the 52.0%–54.0% range. The company also expected non-GAAP operating margin in the range of 2.0%–5.0% and diluted share count of 113 million. Capital expenditures are expected to be approximately $20.0 million for the fiscal.

Conclusion

Fusion-io’s fourth-quarter results were disappointing with the top line and bottom line coming well below the Zacks Consensus Estimate. Moreover, the company provided tepid first-quarter guidance.

Though, Fusion-io is confident about increasing demand from its hyper-scale customers margins are expected to remain under pressure due to the continuing investments for innovation and market expansion.

Despite long-term growth opportunities, given expected synergies from the acquisition of NexGen and advanced storage software solutions provider ID7 (acquired in Mar 2013), high-value customers and increasing product demand, we prefer to stay on the sidelines due to continuous operating loss.

Currently, Fusion-io has a Zacks Rank #3 (Hold).

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