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Fusion-io Inc. (FIO - Snapshot Report) reported third-quarter 2013 loss per share of 13 cents, slightly better the Zacks Consensus Estimate of 15 cents loss per share. The quarter’s loss was worst than 4 cents loss per share reported in the year-earlier quarter. The year-over-year wider loss could well be attributed to lower revenues and higher expenses.

Revenues

Fusion-io’s third quarter revenues of $87.7 million decreased 7.0% from $94.2 million in the year-ago quarter and were much below the Zacks Consensus Estimate of $96.0 million. Despite having a number of hyper-scale customers such as Facebook (FB - Analyst Report), Apple Inc. (AAPL - Analyst Report), Hewlett-Packard Co (HPQ - Analyst Report) and Dell Inc., the revenue miss was mainly due to fluctuations in large orders.

Operating Results

Gross profit decreased 1.6% from the year-ago quarter to $48.3 million. Gross margin was 55.1%, up from 52.1% in the year-ago quarter, mainly due to manufacturing efficiency.

Total operating expenses surged 42.1% year over year, primarily due to an increase in headcount and addition of employees from the acquired entities. Operating margin was (32.5%) compared with (5.2%) in the year-ago quarter.

Fusion-io reported net loss of $20.0 million or 21 cents per share, compared with a net loss of $4.7 million or 5 cents in the year-ago quarter. Excluding certain pre-tax one-time items, adjusted net loss was 13 cents per share compared with 4 cents loss per share in the year-ago quarter.

Balance Sheet and Cash Flow

Fusion-io exited the third quarter with cash and cash equivalents of $354.6 million, down from $368.5 million in the previous quarter. Accounts receivable was $50.5 million. Inventories decreased $2.9 million sequentially to $71.1 million. Fusion-io carries no long-term debt burden.

Cash used in operations was $12.4 million compared to operating cash flow of $6.9 million in the year-ago quarter. Capital expenditure was $6.3 million compared with $2.2 million in the year-ago quarter.

Guidance

For the fourth quarter of 2013, the data storage device manufacturer expects revenues to be roughly $110.0 million. Non-GAAP gross margin is expected in the range of 56.0%-58.0%. The company also expects non-GAAP operating loss of roughly $5.0 million. Diluted share count is likely to be approximately 98 million shares.

For fiscal 2013, Fusion-io expects revenues of $435.0 million, non-GAAP gross margin within the 59.0%–60.0% range, non-GAAP operating margin in the range of 7.0%–8.0% and diluted share count of 109 million shares.

Acquisition of NexGen Storage

Concurrent with the earnings release, Fusion-io also announced the acquisition of Colorado-based hybrid storage appliances maker NexGen Storage for roughly $119.0 million. NexGen’s solutions complement Fusion-io’s software-defined storage portfolio of ION and ioTurbine. With NexGen, Fusion-io’s exposure into the small and medium enterprise (SME) space will get broadened.

Fusion-io expects revenue contribution from NexGen to be minimal in the coming quarter. Nevertheless, the acquisition is expected to dilute earnings per share by 1-2 cents in the fourth quarter.

Conclusion

Fusion-io’s third quarter results were disappointing with the top line coming well below the Zacks Consensus Estimate. However, the loss per share was narrower than expected. Though revenue guidance was encouraging, continuing operating loss expectation keeps us concerned.

Fusion-io is confident about increasing demand from its hyper-scale customers and hence is optimistic about continuing investments for innovation and market expansion. This shows that expenses are going to grow again.

Despite long-term growth opportunities, given expected synergies from the acquisition of NexGen and advanced storage software solutions providerID7 (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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