Today, Coughlin Stoia Geller Rudman & Robbins LLP announced that it is filing a class action suit against Isilon Systems. The suit is filed on behalf of an investor who bought Isilon stock at hyped-up IPO prices, and then lost money when Isilon subsequently missed quarter expectations.
As we'll see below, while some of the complaints may have merit, some of the claims are BS (in my humble opinion).
The complaint is that Isilon's management omitted or made misleading statements to artificially inflate the ISLN stock price. First, they claim that the target date of end of 2007 to reach profitability was bogus. From the press release:
According to the complaint, the true facts, which were omitted from the Registration Statement or were known by certain of the defendants but concealed from the investing public during the Class Period, were as follows: (a) the Company was not on track, nor would it be able, to reach profitability by the second half of 2007;
(b) the Company’s clustered storage solutions did not provide a competitively differentiated business model which would enable the Company to effectively compete against the dominant players in the traditional storage market;
There is where I have to call bullshit. Sadly, most people who consider investing in Isilon don't really understand what is different about the storage system. The fact is, nobody else ships such an easy to manage, fully distributed and clustered (all machines are equal--there is no "head") storage system. The closest thing I can compare to it is NetApp's OnTap GX. I recently saw a large installation of an OnTap GX cluster. I'm sorry, folks, but it is not easy to manage. Simply adding more nodes/drives to the cluster requires that you speak a different language (aggregates, vifs, m-sids, d-sids, and junctions, oh my) and know how to apply it. With Isilon's system, you just plug in a new node, and select "join cluster" on the front panel.
(c) the Company’s past results were not indicative of its future operations, including the amount of revenue it derived from its large customers, such as the Eastman Kodak Company (“Kodak”), the Company’s ability to continue to sustain quarter over quarter revenue growth, and its ability to manage its cost structure; and
Don't all press releases and financial statements for public companies include the "may contain forward looking statements..." disclaimer? I always take such statements with a grain of salt, especially when investing in a very hyped tech stock.
(d) despite being able to grow and significantly diversify its overall customer base, the Company would remain highly dependent upon Kodak. Given that the clustered network attached storage market in which the Company operates is a highly competitive, high-growth emerging market, the Company had no reasonable basis to make projections about its 2007 results.
It should be plain from the conference calls that Kodak still represented a non-trivial percentage of Isilon's revenue (I seem to recall around 10%?). Of course there is a risk they could quit buying, especially when NetApp has stated that it is going to try and price Isilon out of the market.
How I See Isilon
Don't get me wrong, I'm less than happy with the bit of ISLN stock that I hold (it should be worth more, and I should have more shares, of course). To me, the risks that have been realized by ISLN (missing aggressive targets), are healthy checks on a very quickly growing business which is breaking into an entrenched marketplace. None of this noise distracts me from the fact that Isilon's product (which I helped design and build) is still very differentiated in the market.
Success, for Isilon, will come with connecting customers to a technology that they are hurting for. Managing disparate pools of storage is painful (requires lots of staff) and wasteful (internal fragmentation reduces utilization). It only makes sense to have a distributed operating system handle this for you. Isilon is the only company that I know of with a true clustered storage system that is dead simple to manage. The barrier to entry is not that Isilon's technology isn't differentiated, but that there are large players which continue to resist incursion on their playing field.
How I See NetApp and EMC
Based on the economics of each system, I feel that Isilon, EMC, and NetApp can coexist in segments of the storage market where their respective strengths lie. Isilon's niche is large amounts of "unstructured data", basically, anything except huge databases or zillions of tiny files. Video, images, audio, oil and gas data sets, etc. are all sweet spots for Isilon's technology.
Investors, Be Wise
No matter how cool the technology, one should always invest with caution. Instead of just buying a big chunk of a hyped company at its IPO, one should buy multiple lots over time (cost averaging), and then buy and hold over the long term. Given recent history, one should know that expecting short-term gains on a new technology stock is a risky proposition.
Disclosure: I am not a legal expert. I worked at Isilon from 2001 to 2005 and still own a small amount of stock.