Analysis

posted on 20 May 2008 10:49

The Q1fy08 earnings call transcript provided a lot of interesting color on Isilon's Isilon's Q1fy08 results. Specifically it is winning deals against EMC's new InfiniFlex and repeat customer business saved the quarter.

CEO and president Sujal Patel said: "I am encouraged by our first quarter results. Despite the challenges of the last few quarters, we saw some real underlying strength in our business, marked in particular by strong repeat purchases from existing customers and good management of operating expenses."

Some 75 percent of business came from the existing customer base in the quarter. Without their faith in the product the Q1 results would have been much, much bleaker.

Interim CFO Bill Richter admitted that the results restatement, temporary Nasdaq ejection and audit committee review work put off customers, saying  "... this (was) reflected in the number of new customers, which at 51 declined sequentially as well as year-over-year." However: "sales from our existing customer base were particularly strong in Q1, and in fact we posted record re-orders."

Another encouraging sign was that: "Excluding the cost of the audit committee review, our operating expenses declined sequentially from Q4."

Patel was also encouraged by a number of higher value deals in the quarter: "Several deals in excess of $1 million came from Fortune 500 Companies, demonstrating Isilon's deepening penetration into enterprise accounts and larger, mission critical applications. Given both the increase in large deals, and the strength of our repeat purchases from existing customers, I am encouraged by Isilon's long-term growth prospects."

NetApp and EMC competition

Concerning competing suppliers, Patel said: "When we are competing in field engagements we predominantly face Network Appliance and EMC as the two competitors that we compete against, and our win rates are vey high. It is interesting, whenever we compete against Network Appliance more often than not we are competing against their traditional, non-clustered, 7 G filers, but we are seeing instances of competition against their GX product which is (the) early release of their clustered offering."

"To give you an example, in Q4, we competed head-to-head against Network Appliance with a Fortune 100 company, and we won a deal that was over $1 million. It was a deal that was head-to-head against ONTAP GX. The thing that was interesting about that is it was not only an initial sale of over $1 million, but in Q1 we had another order which was roughly $.5 million from that same customer, so it shows the repeat business model as well."

"The same sort of thing happens with EMC but for different reasons. With EMC we had an engagement in Q1 for example which was a large enterprise account, (a) multi-million dollar win for us, and the real keys against EMC are the ability of our products to seamlessly integrate into the customer's data center, and the fact that we provide a complete solution, end-to-end, from the hardware, to the network, to the operating system's file system, as well as all the software as a single offering."

Commenting further on EMC competition he said: "When we compete against EMC we compete against a much wider range of products than when we compete against Network Appliance. And that’s because NetApp sells a complete solution."

"With EMC sometimes we see the EMC NAS product with their Clarion behind it. Sometimes we see Clarion with a server attached to it that might be running something like Linux. We have seen the InfiniFlex from EMC both (after) it got the fancy brand name and before that, and with all of those we have a very strong (win rate) especially with InfiniFlex - due to the complexity of the offering we are able to deliver very high win rates against it."

Ten percent customers

In previous quarters Isilon had customer deals that represented ten percent or more of the quarter's revenue. Commenting on this Patel said: "If you look back four or five quarters, we had three 10 percent customers in various reporting periods: Kodak, Comcast, and XM Radio."

"One of the things we are very proud of is the fact that as Bill mentioned, we have grown our business and diversified our business significantly and over the course of the last three quarters we have not reported any 10 percent customers. All three of those customers continue to be good customers, in the last five or six months we have seen repeat orders from all of them, it is just that we have grown our business to the point where they don’t graduate to the 10 percent mark."

Product roadmap

Patel indicated that the low-end IQ 200 model had a possibly limited future, saying: "... going forward, the IQ 200 is going to be a less and less important part of our business, as we continue to penetrate larger enterprise accounts and continue to see larger and larger deals being the more predominant type of deal that we go after."

Richter said: "You are going to see that for us 2008 is going to be a year of really helping to push our platforms that are way beyond what they were at in 2007 and you saw the first part of that at the beginning of the year with the X Series launch and you will continue to see us make platform announcements."

"With respect to software, we have spent a significant amount of time and money for 2007 and 2007 expanding our software portfolio. We feel that we have a tremendous opportunity to leverage the software applications as well as drive deeper to implement new features and functions within those software apps and you will see us focus on that over the course of the next three to four quarters as opposed to introducing a lot of new software apps."

So expect more hardware products and both extended and new software applications.

Isilon doesn't feel it can give any guidance for future revenue and earnings yet, although Richter did say Q2 was seasonally traditionally stronger than Q1.

Summary

Isilon could rebound strongly in Q2 and resume fast track growth, particularly if EMC's InfiniFlex is less impressive than hoped and also the longer NetApp takes to get its ONTAP GX product functioning well.

^{[Chris Mellor.]}