(By Balaseshan) FBN Securities analyst Shebly Seyrafi lowered the price target on shares of Fusion-IO Inc. (NYSE: FIO) to $28 from $30 to reflect a more challenging IT spending environment, while retaining a "sector perform" rating.
Seyrafi said FIO beat expectations for Q1 mostly due to the "pull-in" of about $10 million from a deal with one of its key customers, so it is guiding for flattish sequential growth in Q2, and this guidance is causing the stock to exhibit weakness today.
Frankly, the market reaction reminds the analyst of Mellanox Technologies Ltd. (NASDAQ: MLNX). MLNX reported abnormally high revenue in calendar Q3 after the introduction of a new customer (Polywell) in calendar Q3 added to revenue to that quarter, but caused a weaker sequential guidance for calendar Q4. The analyst said he thinks that this reaction was not rational.
So, if anything, Seyrafi is warming up to FIO here at lower levels. He believes that FIO is by far the most investable pure play in SSDs/PCIe SSDs after the recent challenges at OCZ Technology Group Inc. (NASDAQ: OCZ) and STEC Inc. (NASDAQ: STEC).
However, the sudden deterioration in spending on technology that many have noted, particularly since the second half of September, is causing the analyst to still be patient on this equity. For Q1, FIO reported revenue of $118.1 million (up 59% year-over-year, up 11% sequential) and EPS of $0.14 (ahead of his $0.07 estimate).
The analyst said FIO pulled in revenue of about $10 million from one of its key customers -- like Facebook (NASDAQ: FB), Apple Inc. (NASDAQ: AAPL), or Hewlett-Packard Co. (NYSE: HPQ) -- from Q2 last year to Q1 this year. Without that extra boost, revenue would have been about $108 million, which is "modestly up quarter-over-quarter".
For the upcoming Q2, FIO is guiding for revenue being approximately flat quarter-over-quarter, a gross margin of 56-58%, operating income margin of about 10% (which would be a large decline from 19.5% in Q1), and 112 million shares outstanding.
Frankly, Seyrafi believes FIO is being its usual conservative self, and he models an operating income margin of 14.5% (and see upside) in Q2. The company explanation as to why operating income margin will decline is that the company hired 64 employees (10% addition as FIO ended the quarter at 733 employees), and many of these hires occurred late in the quarter.
Another factor which may be putting pressure on the shares today is the fact that the company did not raise its annual guidance (this is the first time that this has occurred, as the analyst can recall). For 2013, FIO is guiding for revenue growth of 45-50% (as before), gross margin of 56-58% (as before), operating income margin of about 12% (as before), and 114 million shares (as before).
The brokerage raised its 2013 EPS estimate for FIO to $0.47 from $0.36 and its 2014 estimate to $0.53 from $0.52. FBN lowered its 2013 revenue forecast to $533.1 million from $539.0 million, while maintaining its 2014 forecast of $718 million.
FIO is trading down 1.00% at $24.81 on Friday.