Isilon Systems, Inc. (ISLN)

Isilon Systems, Inc (Isilon) is a provider of storage solution for digital content. The company has designed and developed its clustered storage systems specifically to address the needs of storing and managing digital content. Isilon’s family of IQ clustered storage systems combines Isilon’s OneFS operating system software with industry standard hardware to deliver modular, pay-as-you-grow, enterprise-class storage systems.


The company’s financial results do indicate strong momentum. Its revenues, in fiscal 2006, grew by 200%. It also managed to perform well in terms of other qualitative metrics such as client acquisition and repeat orders etc. However at the net level the picture was not as rosy. Its net loss actually widened from $19 to $25 million on back of higher SG&A expenses and $8 million hit on account of warrant valuation.


The operating environment of the vertical that company operates in looks robust. This is due to change in storage paradigm across industries where information is increasingly captured in images rather than in text and words. Media & Entertainment, Internet, Life sciences research are some of the sectors that indicate shift in storage model. Isilon’s solutions provide a modular architecture which is scalable and enables its clients to calibrate their capital expenditure better and thus Isilon seems to be in a good position to


capitalize on this structural change.


The company competes with big boys such as HP, HDS, IBM, SUN among others. Thus beyond a point company’s ability to scale up would depend if it is able to create superior value proposition. The other issue the company may face would be slower acceptance of the new paradigm


The company seems to be very richly valued. At the end of the day its losing cash at operating level and has accumulated deficit of $75 million. The macro environment is such that investors are finding succor in stocks which are defensive in nature, generates stable free cash flows and doles of dividend. Thus investors whose risk appetite has moderated in recent past are likely to be away from this stock.