Gross margins to expand to 56% long term Fusion-io reported gross margins of 52.1% for F3Q12, up 100 bps from the prior quarter. The upside relative to management guidance (expectations of ~50%) was due to improvements in the supply chain for ioDrive2 and better product mix during the quarter. Looking ahead, management expects GMs in the range of 53%-55% in F4Q12 with fullyear guidance of 54%-56%, unchanged from the prior quarter. Long term margin guidance of 56%-58% was unchanged as well. We highlight two key points on Fusion-io gross margins: ■ Qualifying additional NAND suppliers to alleviate pricing issues. As the ramp of ioDrive2 continues, the company is qualifying additional NAND vendors to alleviate pricing pressures within the supply chain. Fusion-io now has three qualified vendors, up from two in the prior quarter. In addition to securing more favorable NAND supply, ioDrive2 growing within the mix should provide an upward pressure on gross margins as the product structurally has higher margins than the prior iteration. ■ IO Turbine ramp to be accretive to gross margins. IO Turbine, Fusion-io’s software based solution that lowers virtualization cost 70-80%, should begin to generate meaningful revenues toward the back half of calendar year 2012. As the ramp progresses, the product’s favorable margin profile (GMs in excess of 90%) will provide an uplift to overall gross margins in FY13 and beyond. ■ Improving revenue mix toward core customers supportive of margins. Over time, we expect Fusion-io’s broader core enterprise business to grow within the revenue mix. This shift will be supportive of gross margins, as the margins tend to be higher in the core business when compared to the profitability of strategic customers.