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Isilon reveals turnaround plan

Clustered storage vendor vows to continue to spend on product development, sales and marketing, despite losing nearly $27 million in the first year as public company.

Isilon Systems Inc. CEO Sujal Patel said he's looking to bolster the company's products and restore customer confidence in the clustered storage vendor after a troubled 2007.

Isilon Thursday night held its first conference call with analysts since last October when founder Patel took over as CEO in the wake of poor financial results following an initial public offering (IPO) in late 2006. Isilon also had to restate earnings from the fourth quarter of 2006 through the first half of 2007 because of improper revenue recognition, and it made those results public Wednesday along with findings of an internal audit review.

Patel said he's determined to drive Isilon to profitability for the first time, although it remains a long way from there. The revised earnings showed a loss of $26.9 million on $89 million in revenue for 2007. Patel hopes that the completed audit review and restatements will make organizations more willing to take a chance on Isilon's systems.

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"We believe that review process and the uncertainty it placed around our business had an impact on our ability to close sales in [the fourth quarter of 2007]," Patel said. "In particular, that impact was most profound with new customers. With the conclusion of the audit committee's review, we expect that will subside."

Despite its losses, Isilon executives said they will resist cutting the workforce. They pledged to increase spending on research and development, and to a lesser degree sales and marketing, to better compete against EMC and NetApp.

On the product front, Patel said Isilon would continue to upgrade the X-Series systems it rolled out in January, while adding new software functionality to make it better suited to the enterprise. He wouldn't give details and was even more elusive when asked about profitability plans. Isilon executives refused to give guidance for this quarter, but said they expect revenue to decrease from last quarter. Still, they predicted the company would show a "double-digit" increase in revenue for 2008.

A reluctance to reduce headcount has analysts questioning Isilon's business plan, though. Shebly Seyrafi of Caris & Co. mentioned that to Patel during the call, saying Isilon could only make minimal progress toward profitability without layoffs. "It seems to me the only way to get there is through meaningful headcount reduction," Seyrafi said.

Patel responded that Isilon would need to continue to develop products and keep its sales force at its current level to compete with EMC, NetApp and other vendors expanding into clustered storage.

"We view a path to profitability as an absolutely critical milestone, and we intend to get there in the long term," he said.

Patel refused to say when Isilon might be profitable, but it's unlikely to happen this year. He did say Isilon nearly doubled its number of customers to 657, despite its 2007 troubles.

The company has instituted new revenue recognition policies to address previous poor policiesdisclosed by the audit review in an SEC filing Wednesday. When selling through resellers, Isilon will no longer recognize revenue until there is "documented evidence of sell-through" to an end user. Isilon had to defer $2.7 million in revenue from past quarters from sales through resellers.

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