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Fusion-io: A Lesson in IPO Research

The warning signs have been there from the start


Nothing seems to be going right for Fusion-io (FIO).

The company, a developer of next-generation storage technologies, has seen its stock plunge 50% this year. The company pulled off a hot IPO back in June 2011 — jumping about 30% midweek — but now the company seems more like the walking dead.

Investors shouldn’t be surprised, though. Just look at the company’s Q4 earnings report, which came out last week. Revenues came in at $106.1 million and the company posted a loss of $23.8 million, or 24 cents. Both are significantly down from Wall Street’s expectations of $110.1 million in revenue and a loss of only 3 cents per share.

The outlook wasn’t much better. For the current fiscal year, revenues are forecast to hit $519 million, down from the consensus estimate of $561.7 million.

Again, there were lots of warning signs for the meltdown. In early May, FIO’s CEO and co-founder David Flynn suddenly bolted. As I noted for

“(This is) certainly worrisome since it is relatively soon after the company’s IPO … And the reason for the move is that he is looking for ‘entrepreneurial investment opportunities.’

The message is clear: Fusion-io just doesn’t seem like a good place for him to spend his time!”

But there were other big-time issues. Actually, all you had to do was read FIO’s “Risk Factors” from its filings. It’s true that these are often generic and legal boilerplate, but when looking at hot tech companies, it is worth looking at some key areas — especially when the Risk Factors section has lots of specific details.

As for FIO, there were some doozies (from its latest 10-Q, which was filed in May):

  • Customer Concentration: “Revenue from our 10 largest customers, including the applicable OEMs, accounted for 93% and 83% of revenue during the three months ended March 31, 2012 and 2013, respectively, and 93% and 85% of revenue during the nine months ended March 31, 2012 and 2013, respectively. As a result of our revenue concentrations, our quarterly revenue and operating results are likely to fluctuate in the future and will be difficult to estimate.”
  • Competition: “[Rivals] may include the traditional data storage providers, including storage array vendors such as EMC and Hitachi Data Systems, who typically sell centralized storage products and high-performance storage approaches utilizing solid state disks, as well as vertically integrated appliance vendors such as Oracle. In addition, we may also compete with enterprise solid state disk vendors such as Huawei Technologies, Intel, LSI, Marvell Semiconductor, Micron Technology, OCZ Technology, Samsung Electronics, SanDisk, Seagate Technology, STEC, Toshiba, and Western Digital. Our ION Data Accelerator software competes with proprietary integrated flash appliances from EMC, HP, IBM, and a number of privately held companies.”
  • Growth Issues: “You should not consider our revenue growth in recent periods as indicative of our future performance. In fact, our revenue declined 7% from the three months ended March 31, 2012 compared to the three months ended March 31, 2013 and could decline in future periods. In future periods, we do not expect to achieve similar percentage revenue growth rates as have achieved in some past periods…If we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability.”

Scary stuff, but these factors were nothing new. You would have found them in the S-1 as well.

The lesson: When looking at a hot IPO, check out the risk factors and look for competition, customer concentration and growth deceleration — all of which are a toxic combination.

Again, if there are a lot of available details on these items, it’s a good chance that the threats are serious — and that investors should consider avoiding the deal.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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