Analysis

posted on 04 April 2008 16:56

Isilon CEO Sujal Patel confirmed in an financial results conference call yesterday that Isilon is going to grow its way out of trouble. He didn't say when he expected Isilon to become profitable.

In the call Patel said he was: "personally frustrated by the difficulties Isilon experienced in 2007." You bet! He said that operating expenses (OPEX) were too high: "The level of operating expense relative to revenue is out of alignment." An analyst suggested that OPEX was about 85 percent of revenue when it should be 40 percent.

Interim CEO Bill Richter said: "At this stage in our business we do not plan giving revenue guideance," indicating the severe difficulties Isilon faces in assessing how many customers in its sales funnel will close orders this quarter, particularly with first time customers. This has been a factor in the first quarter of 2008 and Isilon hopes it will lessen substantially with the results restatement and hopefully regained Nasdaq listing.

Richter expects a decline in Q1 fy08 revenue compared to Q4 fy07 because of this, although there would still be double-digit growth year-on-year.

Patel emphasised that the conditions in the market for Isilon's growth were stronger than ever. He said that the new X-Series clustered file storage products could scale to 1.6PB capacity and 10GB/sec bandwidth from one filesystem which was highly competitive. He said it had 100X the scalability and 20X the performance of traditional network-attached storage (NAS) systems. It will replace the current I-Series product over time.

The clustered file storage market is not mature, in fact it is immature with profoundly strong growth ahead for it. If Patel cut Isilon back all he would do is make room for competitors, like EMC, NetApp, and new entrants, plus the expected EMC Hulk/Maui combo and IBM XIV product, to streak past Isilon and leave it struggling to catch up. At this stage of the market's progress its got to be a growth-led strategy, not a draw-in-the-horns layoffs and expense cuts one.

Headcount will in fact grow, both in R&D and in sales and marketing. He rebutted a suggestion that layoffs were essential to get OPEX back down towards sustainable levels.

So Patel is going to spend on product R&D, spend a little less but still spend on strengthening the sales and marketing side. He is going to have Isilon accelerate its way out of trouble. There was no sense of when profitability might be attained but he hinted that he could maybe give a view about the profitability timeframe towards the end of 2008.

He's looking to recruit a senior VP for operations to drive efficiencies in the manufacturing supply chain and boost gross margin up into the low 60 percent area. A new CFO is expected which would enable Bill Richter to return to his financial controller role.

It looks like the right strategy and Patel said he wanted to galvanise the company around customers. Let's hope he gets the results he wants and then the 2007 blip in Isilon's growth will be just that, a blip, and not something far, far worse.

^{[Chris Mellor.]}