Fusion-io IPO : Bringing High-Performance Computing To The Cloud

I. Introduction

Fusion-io (Public, NYSE: FIO) , the hot startup known for making high performance enterprise class solid state hard drives (SSDs), is set to go public this week in a $172M offering. Based out of Salt Lake City, Fusion-io provides high performance SSDs that are up to 10x faster than traditional SATA drives.

As an alternative to traditional hard drives and memory, NAND is becoming more popular because it retrieves data faster and uses much less power. Fusion-io’s solutions are targeted towards data centers, where storage bottlenecks cause the most problems.

Right now, most servers are setup to process data requests from users, and access data stored in a hard drive nearby (usually SATA). Fusion-io speeds up the process by putting data on NAND flash inside the server using a PCI-E interface, where it’s much more efficient and easier to retrieve. Another benefit of Fusion-io drives is that IT administrators can use them both for storage or for memory.

Fusion-io has plenty of star power too: Apple (Public, NASDAQ: AAPL)  and Facebook are major customers, cult figure and Apple co-founder Steve Wozniak is their Chief Scientist, and they are bankrolled by legendary tech investors Michael Dell and Marc Andreessen.

Although the story has captivated investors, Fusion-io didn’t get to where they are at by being popular or being associated with prestigious companies in the technology world. Behind the glitz and glamor is a nuts-and-bolts technology story.

II. Best-in-Class Enterprise SSDs

Fusion-io brings best-in-class SSD solutions to enterprise customers and allows them to push through the performance boundaries of traditional hardware. As more companies shift to the cloud, the boundaries of SATA and legacy hardware are constantly being tested and pushed to their limits. High performance drives from Fusion-io allows cloud shops to break through these bottlenecks and achieve maximum performance. What Fusion IO has achieved up until this point is nothing short of impressive.

When I was working at Intel, I was the lead Financial Analyst in charge of supporting an SSD-focused research group. All of the top SSD companies were focused on hitting paydirt in enterprise because it was a much more lucrative market than the traditional consumer/enthusiast market. If you operated a SSD shop, would you rather sell your SSDs for $250 (like OCZ) or sell them for $8,000 (like Fusion-io)? The answer is pretty simple.

I conducted extensive research on the Enterprise SSD leaders and all of my research consistently pointed to Fusion-io. This innovative upstart approached the enterprise SSD market from a completely different angle and their big gamble was paying off.

Fusion-io’s first major flagship product, the ioDrive, single-handedly revolutionized the storage market by harnessing the power of the PCI-E interface. The typical SSD is comprised of NAND chips, a controller, and a SATA interface. Although SATA-based SSDs can achieve speeds as high as 300MB/S, the ceiling on these drives are still constrained by SATA’s bandwidth cap of about ~500MB/S. Enter the Fusion-IO ioDrive.

Instead of using a SATA-based interface, the ioDrive used a PCI-E (PCI Express) connector as the interface, which can plug right into the motherboard of any modern system. These drives not only broke through the 500MB/S glass ceiling of the SATA interface, they demolished it completely and left it in the dust.

The performance numbers for these hot PCI-E SSDs were off the charts and resulted in major design wins at the top enterprise shops. Since then, Fusion-io has made a name for themselves as the go-to solution for high performance enterprise SSDs. The company currently has active relationships with almost all of the key names in enterprise including: IBM (Public, NYSE: IBM), HP (Public, NYSE: HPQ) , EMC (Public, NYSE: EMC) , and Dell (Public, NASDAQ: DELL).

III. Competitive Landscape

As far as competition, Fusion-io definitely faces competitive threats from all fronts, but they do have a key competitive advantage. Enterprise customers have a very different set of requirements than your typical NewEgg customer. In order to gain acceptance at a company like EMC, the drive must meet a long list of stringent requirements, which weeds out low-end assemblers like OCZ (Public, NASDAQ: OCZ) and Super Talent. Fusion-io has a treasure trove of valuable intellectual property in the areas of wear-leveling that gives them a huge advantage in the enterprise area.

Fusion-io’s products are geared towards high-end cloud computing customers and enterprise shops. Since they hold the performance crown in SSDs, Fusion-io can command large premiums and ultimately huge margins for their technology. The typical mainstream SSD costs roughly $250, but Fusion-io’s drives sell for as high as $8,000. The margins on these products can be quite substantial.

Recently, Fusion-io has earned some major design wins at prestigious technology companies like Facebook and Apple. These huge design wins create some major buzz in the storage world and the “halo effect” should position the company for even wins in the future. Although tech companies spend millions on marketing budgets, the best “free” marketing is gaining design-wins at sophisticated firms like Apple and Facebook.

Outside of the tech world, Fusion-io’s products are starting to gain momentum among some of the top Wall Street firms. Credit Suisse recently installed Fusion-io drives and they were able to accelerate stock trading services by as much as 5x. Raw performance is always important and these drives could definitely provide a huge boost in productivity to a host of different industries.

IV. Risk Factors

Increased competition remains the single biggest risk factor to Fusion-io’s success. Micron recently announced their first PCI-E drive which is set to compete directly against Fusion-io’s offerings. SimpleTech (Public, NASDAQ: STEC)  is another competitor who has a sole focus on the enterprise space. The company will need to continue to innovate because every major player in the SSD market wants to gain inroads into the lucrative enterprise SSD space.

Another risk factor is that Fusion-io has a relatively small customer-base right now, which leads to a large amount of variability in their financial performance from quarter-to-quarter. Facebook recently outfitted their data-center with Fusion-io parts, but there is no guarantee this will be a recurring revenue stream for Fusion-io. Companies who rely on a limited customer base, like STEC, typically display large amounts of volatility from quarter-to-quarter and I expect Fusion IO to fall victim to these trends.

V. Recommendation

Fusion-io is definitely the bonafide leader when it comes to high performance enterprise class SSDs. The company has clearly innovated by bringing an entirely new product category (PCI-E SSD) to the market and so far their products have been a huge success. Although they face constant competitive threats, I expect the company to well execute in the coming years and deliver more growth. Big data and cloud computing software is advancing rapidly, but in order for these solutions reach peak performance there needs to be innovation on the storage end as well.

Cloud companies are willing to pay for high-end hardware solutions that will reduce bottlenecks and enable high performance computing. Fusion-io’s products are right in this wheelhouse and should continue to be an attractive solution for cloud providers.

Another important consideration is the possibility of a takeover from a legacy storage player like Seagate (Public, NASDAQ: STX) . The old guard of storage is actively looking to expand into the hot SSD market, which makes Fusion-io a hot target for a potential buyout. Fusion-io’s treasure trove of valuable intellectual property and their dominance in enterprise makes them even more attractive to potential suitors.

With their deep understanding of the enterprise market and NAND, Fusion-io is well positioned for growth in the years ahead. The market for high-performance storage products is poised to grow and Fusion-io currently occupies the dominant position in this hot market.

Robert Irr is a Financial Analyst who previously worked at Intel Corporation. He now writes a tech investing blog at http://www.techinsidr.com.