Isilon Systems 8-K Isilon Systems Announces Financial Results for Fourth Quarter and Full Year 2006

EXHIBIT 99.1
FOR IMMEDIATE RELEASE
4:01 p.m. EST
02.07.2007

ISILON SYSTEMS ANNOUNCES FINANCIAL RESULTS
FOR FOURTH QUARTER AND FULL YEAR 2006

Q4 Revenue Increases 137% Year-over-Year to $20.7 Million;
Full Year 2006 Revenue Increases 195% to $62.3 Million

Seattle, WA — February 7, 2007— Isilon^® Systems, Inc. (Nasdaq: ISLN), the leader in clustered storage, today reported financial results for the fourth quarter and year ended December 31, 2006. Revenue for the fourth quarter was $20.7 million, an increase of 137 percent from $8.7 million in the fourth quarter of 2005, and an increase of 16 percent sequentially compared with $17.8 million in the prior quarter. Revenue for the year ended December 31, 2006 was $62.3 million, up 195 percent from $21.1 million in 2005.

     “Our strong fourth quarter performance caps another year of rapid top-line revenue growth, driven by record new customer acquisition and a high rate of repeat business from our existing customers,” said Steve Goldman, president and chief executive officer. “This year we broadened our portfolio of clustered storage systems and software products, and our results demonstrate how our value proposition resonates with customers across a broad range of industries. In 2006, Isilon established itself and clustered storage as a compelling new alternative in the storage industry, providing solutions that address the unique challenges created by the exponential growth of digital content and that leverage the broad paradigm shift to clustered computing.”

Fourth Quarter and 2006 Highlights

     Isilon’s focus on delivering clustered storage solutions that provide “pay-as-you-grow” scalability, ease-of-use and simplicity, and high levels of performance and reliability, resulted in a number of business highlights:

• Isilon acquired 88 new customers in the fourth quarter of 2006, nearly doubling the number acquired in the same quarter the prior year, resulting in a total customer base of 371. Year-over-year, Isilon increased the size of its customer base by 152 percent.

• Isilon generated more than half of its fourth quarter and full year revenue through reorders from existing customers.

• Isilon expanded gross margins to 54.2 percent in the fourth quarter of 2006, up from 51.7 percent in the same period of 2005, marking the fifth consecutive quarter of margin growth.

• Isilon continued to grow its reseller channel with 45 percent of sales in 2006 coming through the channel compared with 27 percent in 2005.

• Isilon further expanded geographically with international sales accounting for 24 percent of revenue in 2006 compared with 17 percent in 2005.

• Isilon introduced OneFS^® 4.5, the latest version of its clustered operating system software, creating an innovative clustered storage system that delivers one Petabyte of capacity and 10 gigabytes per second of performance in a single file system and single volume. Additionally, Isilon was awarded a patent for core technology of its OneFS operating system.

• Isilon released SnapshotIQ™ and SmartConnect™, which, in addition to SyncIQ™, deliver a next-generation suite of clustered storage software applications for the enterprise. More than one in three new customers in the fourth quarter purchased one or more of Isilon’s new software applications.

• Isilon began shipping the new Isilon IQ 200 clustered storage system, which combines the benefits of high-end enterprise clustered storage in an affordable and compact solution.

• Isilon successfully completed its initial public offering on December 20, 2006, raising $105.7 million net of underwriting discounts, commissions and offering expenses.

Financial Summary

     In addition to disclosing financial measures prepared in accordance with Generally Accepted Accounting Principles (GAAP), this press release and the accompanying tables contain non-GAAP financial measures. For a description of these non-GAAP financial measures, including the reasons why management uses each measure, the inherent limitations of non-GAAP measures and reconciliations to the most directly comparable GAAP financial measures, please see the section of the accompanying tables titled “Use of Non-GAAP Financial Measures” as well as the related table that follows it.

• Net loss for the fourth quarter of 2006 was $10.4 million, or $0.72 per share, compared with net loss of $4.1 million, or $0.78 per share, in the same period of 2005. On a non-GAAP basis, net loss for the fourth quarter of 2006 was $3.3

	million, or $0.06 per share, compared with net loss of $4.1 million, or $0.09 per share, in the same period of 2005.
•	Net loss for 2006 was $25.4 million, or $3.02 per share, compared with net loss of $19.2 million, or $3.95 per share, in 2005. On a non-GAAP basis, net loss for 2006 was $16.4 million, or $0.33 per share, compared with net loss of $19.1 million, or $0.44 per share, in 2005.
•	Loss from operations for the fourth quarter of 2006 was $2.9 million compared with $4.0 million in the same period of 2005. On a non-GAAP basis, loss from operations for the fourth quarter of 2006 was $2.6 million compared with $4.0 million in the same period of 2005.
•	Loss from operations for 2006 was $15.4 million compared with $19.0 million in 2005. On a non-GAAP basis, loss from operations for 2006 was $14.7 million compared with $19.0 million in 2005.
•	At December 31, 2006, deferred revenue was $10.9 million, compared with $3.1 million at the end of 2005; in the fourth quarter of 2006 inventory turns were 11, compared with 8 in the third quarter of 2006; in the fourth quarter of 2006 days sales outstanding (DSOs) were 106, compared with 97 in the third quarter of 2006.
•	At December 31, 2006, cash and cash equivalents were $99.9 million, including proceeds from the December initial public offering, and the company had no outstanding debt.

Outlook

     Isilon expects total revenue for the first quarter of 2007 to be in the range of $21.0 million to $23.0 million. For the full year 2007, the company expects total revenue to be

in the range of $115 million to $125 million. In 2007, the company expects operating expenses to continue to grow in absolute dollars as the company invests in its business, but to decrease as a percentage of total revenue. If revenue and operating expense expectations are met, Isilon expects to reach breakeven and profitability on a non-GAAP basis in the second half of 2007.

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 financial results for the fourth quarter and year ended December 31, 2006 and its business outlook. A live webcast of the conference call will be accessible on the Investor Relations section of Isilon’s Web site at www.isilon.com/company/, where it will be archived for approximately 60 days.

     A recording of the conference call will be available from approximately 5:00 p.m. PT (8:00 p.m. ET), February 7, 2007 to 9:00 p.m. PT (12:00 midnight ET), February 21, 2007. To listen to the recording, please dial 888-286-8010 (domestic) and 617-801-6888 (international); the passcode is 95791384.

About Isilon Systems

Isilon Systems is the worldwide leader in clustered storage systems and software for digital content, 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^® 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 athttp://www.isilon.com.

Safe Harbor Statement

Statements contained in this press release that are not historical fact may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may relate, among other things, to Isilon’s position in the digital content storage market, our expected financial and operating results, our ability to build and grow Isilon, the benefits of our products and our ability to achieve our goals, plans and objectives. Such forward-looking statements do not constitute guarantees of future performance and are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from those anticipated. These include, but are not limited to: our dependence on continued growth in the market for storage of digital content, increased competition, difficulties providing solutions that meet the needs of customers, poor product sales, difficulties in establishing and maintaining successful relationships with our distribution partners, long sales cycles, shortages or price fluctuations in our supply chain, our ability to protect our intellectual property rights, difficulty managing rapid growth and general political, economic and market conditions and events. Additional factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in our recent filings with the Securities and Exchange Commission, including those factors discussed under the caption “Risk Factors” in such filings.

###

(Financial Tables Follow)

     Contacts:

Investors Only:
Rosemary Moothart, Director of Investor Relations, Isilon Systems, +1-206-315-7509,
rosemary.moothart@isilon.com

Press Only:
Lucas Welch, Public Relations Specialist, Isilon Systems, +1-206-315-7621,
lucas.welch@isilon.com

Isilon Systems, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

	Three Months Ended						Year Ended
	December 31,			January 1,			December 31,			January 1,
	2006			2006			2006			2006
Revenue:
Product	$	17,967		$	7,736		$	54,181		$	18,709
Services		2,689			968			8,098			2,374
Total revenue		20,656			8,704			62,279			21,083
Cost of revenue:
Product		8,160			3,794			25,709			10,388
Services (1)		1,308			407			3,622			1,187
Total cost of revenue		9,468			4,201			29,331			11,575
Gross profit		11,188			4,503			32,948			9,508
Operating expenses:
Research and development (1)		4,666			3,535			16,524			12,478
Sales and marketing (1)		7,185			3,893			24,390			12,377
General and administrative (1)		2,225			1,110			7,411			3,681
Total operating expenses		14,076			8,538			48,325			28,536
Loss from operations		(2,888	)		(4,035	)		(15,377	)		(19,028	)
Other income (expense), net
Interest income and other		178			76			306			314
Interest expense		(857	)		(98	)		(1,751	)		(330	)
Warrant revaluation expense		(6,797	)		(26	)		(8,431	)		(52	)
Gain (loss) on disposal of property and equipment		4			—			(76	)		—
Total other income (expense), net		(7,472	)		(48	)		(9,952	)		(68	)
Loss before income tax expense and cumulative effect of change in accounting principle		(10,360	)		(4,083	)		(25,329	)		(19,096	)
Income tax expense		(49	)		—			(109	)		—
Loss before cumulative effect of change in accounting principle		(10,409	)		(4,083	)		(25,438	)		(19,096	)
Cumulative effect of change in accounting principle		—			—			—			(89	)
Net loss	$	(10,409	)	$	(4,083	)	$	(25,438	)	$	(19,185	)
Net loss per common share, basic and diluted	$	(0.72	)	$	(0.78	)	$	(3.02	)	$	(3.95	)
Shares used in computing basic and diluted net loss per common share		14,550			5,251			8,423			4,852
(1) Includes stock-based compensation as follows:
Cost of revenue	$	13		$	—		$	24		$	—
Research and development		64			—			160			—
Sales and marketing		82			—			198			—
General and administrative		176			1			258			5
Total stock-based compensation	$	335		$	1		$	640		$	5

Isilon Systems, Inc.
Consolidated Balance Sheets
(in thousands)
(unaudited)

	As of
	December 31,			January 1,
	2006			2006
ASSETS
Current assets:
Cash and cash equivalents	$	99,899		$	10,853
Marketable securities		—			1,803
Trade receivables, net of allowances of $501 and $239, respectively		24,388			7,862
Inventories		3,587			2,958
Other current assets		1,939			495
Total current assets		129,813			23,971
Property and equipment, net		7,158			4,164
Deferred financing costs, net		—			106
Total assets	$	136,971		$	28,241
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	6,777		$	3,805
Accrued liabilities		2,869			1,261
Accrued compensation and related benefits		3,463			2,007
Deferred revenue and customer deposits		7,611			2,762
Preferred stock warrant liability		—			367
Notes payable and capital lease obligations		—			6,437
Total current liabilities		20,720			16,639
Deferred revenue, net of current portion		3,308			322
Deferred rent, net of current portion		2,186			—
Notes payable and capital lease obligations, net of current portion		—			1,106
Total liabilities		26,214			18,067
Mandatorily redeemable convertible preferred stock		—			59,549
Stockholders’ equity (deficit):
Common stock		1			—
Additional paid-in capital		185,947			324
Accumulated other comprehensive loss		(83	)		(29	)
Accumulated deficit		(75,108	)		(49,670	)
Total stockholders’ equity (deficit)		110,757			(49,375	)
Total liabilities, mandatorily redeemable convertible preferred stock and stockholders’ equity (deficit)	$	136,971		$	28,241

Isilon Systems, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

	Year Ended
	December 31,			January 1,
	2006			2006
Cash flows from operating activities
Net loss	$	(25,438	)	$	(19,185	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4,169			2,596
Realized gain on sale of marketable securities		(14	)		—
Non-cash interest expense		646			69
Excess and obsolete inventory expense		393			1,019
Stock-based compensation expense		640			5
Loss on disposal of property and equipment		76			—
Revaluation of warrants to fair value		8,431			141
Changes in operating assets and liabilities:
Accounts receivable, net		(16,526	)		(4,515	)
Inventories		(1,022	)		(1,826	)
Other current assets		(1,444	)		(172	)
Accounts payable		3,200			1,113
Accrued liabilities, compensation payable and deferred rent		1,754			1,280
Deferred revenue and customer deposits		7,835			1,064
Net cash used in operating activities		(17,300	)		(18,411	)
Cash flows from investing activities
Purchases of property and equipment		(5,340	)		(3,733	)
Purchases of marketable securities		(691	)		(3,253	)
Sales of marketable securities		2,508			1,450
Proceeds from sale of property and equipment		32			—
Net cash used in investing activities		(3,491	)		(5,536	)
Cash flows from financing activities
Proceeds from issuance of preferred stock, net		9,945			19,927
Proceeds from issuance of common stock		108,801			183
Proceeds from notes payable		54,524			13,467
Payments of initial public offering costs		(1,376	)		—
Payments of notes payable and capital lease obligations		(62,061	)		(7,398	)
Net cash provided by financing activities		109,833			26,179
Effect of exchange rate changes on cash and cash equivalents		4			3
Net increase in cash and cash equivalents		89,046			2,235
Cash and cash equivalents at beginning of period		10,853			8,618
Cash and cash equivalents at end of period	$	99,899		$	10,853

Use of Non-GAAP Financial Measures

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.

This press release includes non-GAAP loss from operations, non-GAAP net loss, and non-GAAP loss per share. Non-GAAP loss from operations excludes 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. Isilon excludes warrant revaluation expenses from its non-GAAP measures because they are non-recurring, non-cash expenses that Isilon does not believe are reflective of core operating results. Upon the closing of Isilon’s initial public offering, outstanding warrants were no longer subject to revaluation and their fair value was permanently reclassified to stockholders’ equity. Isilon includes the effect of the conversion of convertible preferred shares into common shares as of the later of the beginning of the period or the date of issuance in non-GAAP basic and diluted weighted average shares outstanding used to calculate non-GAAP net loss per share. Isilon believes giving effect to the preferred stock conversion assists investors and management in assessing period over period results. The company’s preferred shares were converted into common shares as of December 20, 2006, the closing day of its initial public offering.

These non-GAAP measures are not in accordance with, or an alternative 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.

The table that follows provides a reconciliation of the most directly comparable GAAP measures to the non-GAAP measures used by management.

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

																						Shares used in
																						computing
				Operating Expenses																		basic and diluted		Net loss per
																Loss from						net loss per		common share,
	Gross			Research and			Sales and			General and			Total			operations			Net loss			common share		basic and diluted
	margin %			development			marketing			administrative
Quarter Ended
December 31, 2006
GAAP		54.2	%	$	4,666		$	7,185		$	2,225		$	14,076		$	(2,888	)	$	(10,409	)		14,550	$	(0.72	)
Adjustments:
Stock-based compensation		—			(64	)		(82	)		(176	)		(322	)		335			335
Warrant revaluation expense		—			—			—			—			—			—			6,797
Incremented weighted-average shares(1)																							37,760
Non-GAAP		54.2	%	$	4,602		$	7,103		$	2,049		$	13,754		$	(2,553	)	$	(3,277	)		52,310	$	(0.06	)
January 1, 2006
GAAP		51.7	%	$	3,535		$	3,893		$	1,110		$	8,538		$	(4,035	)	$	(4,083	)		5,251	$	(0.78	)
Adjustments:
Stock-based compensation		—			—			—			(1	)		(1	)		1			1
Warrant revaluation expense		—			—			—			—			—			—			26
Incremented weighted-average shares(1)																							41,789
Non-GAAP		51.7	%	$	3,535		$	3,893		$	1,109		$	8,537		$	(4,034	)	$	(4,056	)		47,040	$	(0.09	)
Year Ended
December 31, 2006
GAAP		52.9	%	$	16,524		$	24,390		$	7,411		$	48,325		$	(15,377	)	$	(25,438	)		8,423	$	(3.02	)
Adjustments:
Stock-based compensation		—			(160	)		(198	)		(258	)		(616	)		640			640
Warrant revaluation expense		—			—			—			—			—			—			8,431
Incremented weighted-average shares(1)																							41,134
Non-GAAP		52.9	%	$	16,364		$	24,192		$	7,153		$	47,709		$	(14,737	)	$	(16,367	)		49,557	$	(0.33	)
January 1, 2006
GAAP		45.1	%	$	12,478		$	12,377		$	3,681		$	28,536		$	(19,028	)	$	(19,185	)		4,852	$	(3.95	)
Adjustments:
Stock-based compensation		—			—			—			(5	)		(5	)		5			5
Warrant revaluation expense		—			—			—			—			—			—			52
Incremented weighted-average shares(1)																							38,723
Non-GAAP		45.1	%	$	12,478		$	12,377		$	3,676		$	28,531		$	(19,023	)	$	(19,128	)		43,575	$	(0.44	)

(1) Equals the effect of the conversion of convertible preferred shares to common shares as of the later of their issuance or the beginning of the applicable period. The Company’s preferred shares were converted into common shares as of December 20, 2006.