Isilon Systems Announces 2008 Second Quarter Financial Results

Solid Revenue Growth and Gross Margin Expansion Drive Bottom Line Improvement

SEATTLE, July 31 /PRNewswire-FirstCall/ -- Isilon(R) Systems
(Nasdaq: ISLN), the leader in clustered storage, today announced its financial
results for the second quarter ended June 30, 2008. Revenue for the second
quarter was $28.2 million, a sequential increase of 17 percent compared with
$24.1 million in the first quarter of 2008. Revenue increased 23 percent
compared with $22.9 million in the second quarter of 2007.
"In the second quarter, Isilon delivered solid results representing
increased traction in our business and progress toward profitability," said
Sujal Patel, President and Chief Executive Officer, Isilon Systems. "We
continue to deepen penetration into mission critical enterprise applications,
demonstrating a broadening recognition of Isilon's strong value proposition."
Financial results for the second quarter of 2008 included the following:
-- Gross margin for the second quarter of 2008 was 56.9 percent, compared
with 53.5 percent in the first quarter of 2008. Gross margin in the second
quarter last year was 50.6 percent. On a non-GAAP basis, gross margin for the
second quarter was 57.0 percent, compared with 53.7 percent in the first
quarter of 2008. Non-GAAP gross margin in the second quarter last year was
50.8 percent.
-- Loss from operations for the second quarter of 2008 was $6.4 million,
compared with $10.8 million in the first quarter of 2008. Loss from
operations in the second quarter last year was $6.2 million. On a non-GAAP
basis, loss from operations for the second quarter of 2008 was $4.9 million,
compared with $9.5 million in the first quarter of 2008. Non-GAAP loss from
operations in the second quarter last year was $5.1 million.
-- Net loss for the second quarter of 2008 was $5.8 million, or $0.09 per
share, compared with net loss of $10.1 million, or $0.16 per share, in the
first quarter of 2008. Net loss in the second quarter last year was
$5.0 million, or $0.08 per share. Non-GAAP net loss for the second quarter
was $4.3 million, or $0.07 per share, compared with non-GAAP net loss of
$8.8 million, or $0.14 per share, in the first quarter of 2008. Non-GAAP net
loss in the second quarter last year was $4.0 million, or $0.07 per share.
-- As of June 30, 2008, cash, cash equivalents and marketable securities
were $75.1 million.
Conference Call
Isilon management will host a conference call today at 2:00 p.m. PT
(5:00 p.m. ET) to discuss Isilon's second quarter financial results. The call
will be accessible via webcast on the Investor Relations section of Isilon's
website at http://www.isilon.com/company/, where it will be archived. In
addition, the live conference call will be accessible by telephone at
866-825-1692 or 617-213-8059; the passcode is 89843996.
A replay of the conference call will be available by telephone
approximately two hours after the call ends until 9:00 p.m. PT (12:00 midnight
ET), August 14, 2008, at 888-286-8010 or 617-801-6888; the passcode for the
replay is 72074835.
About Isilon Systems
Isilon Systems (Nasdaq: ISLN) is the worldwide leader in clustered storage
systems and software for digital content and unstructured data, enabling
enterprises to transform data into information - and information into
breakthroughs. Isilon's award-winning family of IQ clustered storage systems
combines Isilon's OneFS(R) operating system software with the latest advances
in industry-standard hardware to deliver modular, pay-as-you-grow,
enterprise-class storage systems. Isilon's clustered storage solutions speed
access to critical business information while dramatically reducing the cost
and complexity of storing it. Information about Isilon can be found at
http://www.isilon.com.
Use of Non-GAAP Financial Measures
To supplement our consolidated financial statements prepared in accordance
with GAAP, this press release includes non-GAAP gross margin, non-GAAP loss
from operations, non-GAAP net loss, and non-GAAP loss per share. Isilon
provides non-GAAP information to enhance investors' overall understanding of
the company's current financial performance and the company's prospects for
the future and to aid in comparing current operating results with those of
past periods. The company believes the non-GAAP measures provide useful
information to management and investors by excluding certain items that may
not be indicative of Isilon's core operating results and business outlook.
Non-GAAP gross margin, non-GAAP loss from operations, non-GAAP net loss,
and non-GAAP loss per share exclude charges related to stock-based
compensation. Isilon excludes stock-based compensation expenses from its
non-GAAP measures primarily because they are non-cash expenses that Isilon
does not believe reflect core operating results. Stock-based compensation
expense is dependent on a number of factors over which management has limited
control and is not a factor management utilizes in operating the business.
These non-GAAP measures are not calculated in accordance with GAAP and
should be considered supplemental to, and not a substitute for, measures
prepared in accordance with GAAP and may be different from non-GAAP measures
used by other companies. In addition, these non-GAAP measures are not based
on any comprehensive set of accounting rules or principles. Isilon believes
that non-GAAP measures have inherent limitations in that they do not reflect
all of the amounts associated with Isilon's results of operations as
determined in accordance with GAAP and that these measures should only be used
to evaluate Isilon's results of operations in conjunction with the
corresponding GAAP measures. We compensate for these limitations by analyzing
current and future results on a GAAP basis as well as a non-GAAP basis,
prominently disclosing GAAP results and providing reconciliations from GAAP
results to operational measures. We expect to continue to incur expenses
similar to the non-GAAP adjustments described above, and the exclusion or
inclusion of these items from our non-GAAP financial measures should not be
construed as an inference that these costs are unusual or infrequent.
A table following the financial statements provides a reconciliation of
the most directly comparable GAAP measures to the non-GAAP measures used by
management.
Safe Harbor for Forward Looking Statements
This press release contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning our future
financial and operating results, the benefits of our products, technologies
and services, and our ability to achieve our goals, plans and objectives,
including our efforts to further grow into enterprise accounts and broaden the
recognition of our value proposition. These statements are not guarantees of
future performance, but are based on management's expectations as of the date
of this press release and assumptions that are inherently subject to
uncertainties, risks and changes in circumstances that are difficult to
predict. Forward-looking statements involve risks, uncertainties, and
assumptions. If the risks or uncertainties ever materialize, or the
assumptions prove incorrect, our actual results may differ materially from
those expressed or implied by our forward-looking statements. There can be no
assurances that forward-looking statements will be achieved. Important
factors that could cause actual results to differ materially from those
indicated in forward-looking statements include the following: risks
associated with anticipated growth in the storage of unstructured, digital
content; competitive factors, including changes in the competitive
environment, pricing pressures, sales cycle time and increased competition;
our ability to build and expand our direct sales operations and reseller
distribution channels; our ability to build sales backlogs and improve sales
linearity; general economic and industry conditions, including expenditure
trends for storage-related products; new product introductions and our ability
to develop and deliver innovative products; our ability to provide
high-quality service and support offerings; our reliance on a limited number
of suppliers and our ability to forecast demand for our products and potential
shortages or price fluctuations in our supply chain; risks associated with
international operations; and, macroeconomic factors affecting the United
States. These and other important risk factors and assumptions are described
in detail in our 2007 Annual Report on Form 10-K and other periodic reports
filed with the Securities and Exchange Commission. The Company makes no
commitment to revise or update any forward-looking statements in order to
reflect subsequent events or circumstances.

Isilon Systems, Inc.
Condensed Consolidated Statements of Operations
(unaudited)

Three Months Ended Six Months Ended
June 30, July 1, June 30, July 1,
2008 2007 2008 2007
Restated* Restated*
(in thousands, except per share data)
Revenue:
Product $22,657 $19,604 $42,409 $34,570
Services 5,525 3,307 9,897 6,187

Total revenue 28,182 22,911 52,306 40,757

Cost of revenue:
Product 9,155 9,546 17,564 17,306
Services (1) 2,993 1,762 5,813 3,270

Total cost of revenue 12,148 11,308 23,377 20,576

Gross profit 16,034 11,603 28,929 20,181

Operating expenses:
Research and development(1) 5,980 4,730 11,470 9,404
Sales and marketing(1) 12,405 9,820 24,205 18,829
General and administrative(1) 4,064 3,206 10,460 6,082

Total operating expenses 22,449 17,756 46,135 34,315

Loss from operations (6,415) (6,153) (17,206) (14,134)

Interest income and other 660 1,167 1,462 2,331

Loss before income tax expense (5,755) (4,986) (15,744) (11,803)

Income tax expense (64) (36) (173) (75)

Net loss $(5,819) $(5,022) $(15,917) $(11,878)

Net loss per common share, basic
and diluted $(0.09) $(0.08) $(0.25) $(0.19)
Shares used in computing basic
and diluted net loss per
common share 63,147 61,148 62,947 60,940

(1) Includes stock-based
compensation as follows:
Cost of revenue $18 $25 $78 $44
Research and development 231 222 412 321
Sales and marketing 554 398 1,185 550
General and administrative 693 371 1,118 559

* For further reference, please see the company's 2007 Annual Report on
Form 10-K filed April 2, 2008, with the Securities and Exchange
Commission.

Isilon Systems, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands)
As of
June 30, 2008 December 30, 2007
ASSETS
Current assets:
Cash and cash equivalents $43,970 $38,999
Marketable securities 31,097 46,862
Trade receivables, net of
allowances of $243 and $324,
respectively 18,864 20,152
Inventories 11,595 9,430
Other current assets 6,862 5,524
Total current assets 112,388 120,967

Property and equipment, net 10,558 10,571
Total assets $122,946 $131,538

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $10,400 $10,962
Accrued liabilities 4,392 5,182
Accrued compensation and related
benefits 5,814 5,180
Deferred revenue 15,846 12,392
Total current liabilities 36,452 33,716

Deferred revenue, net of current
portion 7,444 5,819
Deferred rent, net of current
portion 3,302 3,414
Total liabilities 47,198 42,949

Commitments and contingencies

Stockholders' equity:
Common stock 1 1
Additional paid-in capital 194,447 191,254
Accumulated other comprehensive loss (193) (76)
Accumulated deficit (118,507) (102,590)
Total stockholders' equity 75,748 88,589
Total liabilities and
stockholders' equity $122,946 $131,538

Isilon Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six Months Ended
June 30, 2008 July 1, 2007
Restated*
Cash flows from operating activities
Net loss $(15,917) $(11,878)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 3,091 2,447
Amortization of discount on
marketable securities (122) (30)
Stock-based compensation expense 2,793 1,474
Changes in operating assets and
liabilities:
Accounts receivable, net 1,288 503
Inventories, net (2,164) (1,653)
Other current assets (1,273) (2,681)
Accounts payable (718) 7,553
Accrued liabilities, compensation
payable and deferred rent (246) 243
Deferred revenue 5,080 2,795

Net cash used in operating activities (8,188) (1,227)

Cash flows from investing activities
Purchases of property and equipment (2,989) (3,183)
Purchases of marketable securities (24,068) (20,832)
Proceeds from maturities of
marketable securities 39,870 -

Net cash provided by (used in)
investing activities 12,813 (24,015)

Cash flows from financing activities
Proceeds from issuance of common stock 362 203
Repurchases of unvested common stock (13) (78)
Payments of offering costs - (1,135)
Net cash provided by (used in)
financing activities 349 (1,010)
Effect of exchange rate changes
on cash and cash equivalents (3) 1
Net increase (decrease) in cash
and cash equivalents 4,971 (26,251)
Cash and cash equivalents at
beginning of period 38,999 99,899
Cash and cash equivalents at end
of period $43,970 $73,648

* For further reference, please see the company's 2007 Annual Report
on Form 10-K filed April 2, 2008, with the Securities and Exchange
Commission.

Isilon Systems, Inc.
Reconciliation of GAAP to non-GAAP results
(in thousands, except percentages and per share data)

Operating Expenses

Research Sales General
Gross and and and
margin % development marketing administrative Total
Three Months
Ended
June 30, 2008
GAAP 56.9% $5,980 $12,405 $4,064 $22,449
Adjustments:
Stock-based
compensation 0.1 (231) (554) (693) (1,478)
Non-GAAP 57.0% $5,749 $11,851 $3,371 $20,971

March 31, 2008
GAAP 53.5% $5,490 $11,800 $6,396 $23,686
Adjustments:
Stock-based
compensation 0.2 (181) (631) (425) (1,237)
Non-GAAP 53.7% $5,309 $11,169 $5,971 $22,449

July 1, 2007
Restated*
GAAP 50.6% $4,730 $9,820 $3,206 $17,756
Adjustments:
Stock-based
compensation 0.2 (222) (398) (371) (991)
Non-GAAP 50.8% $4,508 $9,422 $2,835 $16,765

Six Months
Ended
June 30, 2008
GAAP 55.3% $11,470 $24,205 $10,460 $46,135
Adjustments:
Stock-based
compensation 0.2 (412) (1,185) (1,118) (2,715)
Non-GAAP 55.5% $11,058 $23,020 $9,342 $43,420

July 1, 2007
Restated*
GAAP 49.5% $9,404 $18,829 $6,082 $34,315
Adjustments:
Stock-based
compensation 0.1 (321) (550) (559) (1,430)
Non-GAAP 49.6% $9,083 $18,279 $5,523 $32,885

Net loss per
common share,
Loss from basic and
operations Net loss diluted
Three Months Ended
June 30, 2008
GAAP $(6,415) $(5,819) $(0.09)
Adjustments:
Stock-based compensation 1,496 1,496 0.02
Non-GAAP $(4,919) $(4,323) $(0.07)

March 31, 2008
GAAP $(10,791) $(10,098) $(0.16)
Adjustments:
Stock-based compensation 1,297 1,297 0.02
Non-GAAP $(9,494) $(8,801) $(0.14)

July 1, 2007 Restated*
GAAP $(6,153) $(5,022) $(0.08)
Adjustments:
Stock-based compensation 1,016 1,016 0.01
Non-GAAP $(5,137) $(4,006) $(0.07)

Six Months Ended
June 30, 2008
GAAP $(17,206) $(15,917) $(0.25)
Adjustments:
Stock-based compensation 2,793 2,793 0.04
Non-GAAP $(14,413) $(13,124) $(0.21)

July 1, 2007 Restated*
GAAP $(14,134) $(11,878) $(0.19)
Adjustments:
Stock-based compensation 1,474 1,474 0.02
Non-GAAP $(12,660) $(10,404) $(0.17)

* For further reference, please see the company's 2007 Annual Report on
Form 10-K filed April 2, 2008, with the Securities and Exchange
Commission.

SOURCE Isilon Systems

Press, Jay Wampold, Senior Director of Marketing and Communications,
+1-206-315-7620, jay.wampold@isilon.com, or Investors, Rosemary Moothart,
Director of Investor Relations, +1-206-315-7509, rosemary.moothart@isilon.com
, both of Isilon Systems