Isilon Hits Financial Bumps

It has been another tough week for clustering specialist Isilon, which lowered its preliminary third quarter results, citing weaknesses in its European business and tight wallets at key customer Kodak.

Earlier this week, the vendor announced that its third quarter revenues will be between $23.2 million and $23.7 million. Isilon had previously predicted revenues between $25 million and $27.5 million.

This week the vendor also predicted a GAAP net loss per share of 10 cents to 12 cents for the quarter and non-GAAP net loss of between 8 cents and 10 cents.

Analysts had estimated a net loss of 3 cents per share on revenues of $26.8 million.

The vendor, which went public late last year, has had a bumpy ride over subsequent quarters. Isilon was also hit by losses in the second quarter, which it attributed to deal slippage and the need to ramp up its sales training.Speaking on a conference call this week, Isilon CEO Steve Goldman explained that he is far from happy with the vendor's ongoing performance. "We're obviously very disappointed," he said, explaining that weaknesses in Europe and Kodak's decision not to spend more had a big impact on Isilon's third quarter results.

Kodak accounted for 17 percent of Isilon's second quarter revenues, but did not spend any cash with the vendor in the third quarter, according to the CEO. "In the second quarter Kodak spent $4 million on products from Isilon, which they are still absorbing," he said, adding that the photography giant remains "fully committed" to Isilon.

The exec also highlighted weakness in Isilon's business on the other side of the Atlantic. "[Isilon's European business] is still very early in terms of its operating history," he said, adding that this was compounded by a "typically" soft quarter. "Many countries there take off the whole month of August."

Isilon execs had previously discussed reaching profitability and breakeven sometime in 2008, although at least one analyst thinks that this is now unlikely. "Another miss pushes out operating profitability until calendar 2009 and adds to concerns about Isilon's ability to manage growth and handle stiffening competition," wrote Goldman Sachs analyst Laura Conigliaro, in a guidance note this week. "We see no reason to buy Isilon shares, even at currently depressed levels."

At mid-morning today, Isilon's shares were trading at $5.57, down 7 cents (1.24 percent) from last night's close at $5.66.Despite the revenue shortfall from Kodak, Needham and Company analyst Glenn Hanus nonetheless expects Isilon to weather this storm. "Our independent checks confirm that Kodak should remain a significant customer although quarter to quarter order patterns remain lumpy," he wrote in a guidance note. "Although the company is building a recurring revenue stream from services and reorders, quarterly lumpiness in revenues with backend loading could continue to make visibility challenging."

The analyst also warned that Isilon could face stiff challenges from rival vendors in the clustering space, such as NetApp, which has already vowed to go after the newly public company. "Potentially tougher competition from established companies such as NetApp, EMC, HDS, IBM, and various startups, could result in increased pricing pressure, gross margin pressure and loss or failure to increase market share."

Earlier this year NetApp CEO Dan Warmenhoven vowed to go on the offensive against Isilon, which had accused the vendor of failing to make inroads into clustered NAS. On the conference call, the Isilon CEO denied that NetApp was behind Isilon's current problems, although he was careful not to name any names. "We do not believe that our performance in the third quarter was based on changes in the competitive environment," he said. "Our win rates remain high."

The CEO nonetheless admitted that Isilon still has issues to address with regard to training its new sales personnel. "While we made solid progress on this in the third quarter, more work needs to be done, and we're still not firing on all cylinders."

The exec also touched on the issue of a broader spending slowdown on this week's conference call, something which has already been identified by a number of other storage vendors. "We're still addressing whether any cautionary elements had an impact on Isilon's business," he said, explaining that the vendor will have a clearer idea by its third quarter earnings call on October 25.Have a comment on this story? Please click "Discuss" below. If you'd like to contact Byte and Switch's editors directly, send us a message.