Violin Memory Inc. (NYSE:VMEM)
Q4 2016 Earnings Conference Call
March 10, 2016 05:00 PM ET
Cory Sindelar - CFO
Kevin DeNuccio - President and CEO
Ladies and gentlemen, thank you for standing by. Welcome to the Violin Memory Fourth Quarter Fiscal Year 2016 Financial Results Conference Call. As a reminder, this call is being recorded. [Operator Instructions].
I would now like to turn the call over to Cory Sindelar, Violin Memory Chief Financial Officer. Mr. Sindelar, please go ahead.
Good afternoon, and thank you for attending. Joining me today is Kevin DeNuccio, President and Chief Executive Officer. Kevin will begin with opening remarks and highlights from the quarter, and I will subsequently cover our financial results and provide forward guidance.
During this call, we will reference both GAAP and non-GAAP financial measures. Our earnings release issued earlier today, includes a reconciliation of GAAP to non-GAAP measures. A copy of this release is available on our web site at www.violin-memory.com\investors. We will also make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections and estimates and other forward-looking statements, regarding our future business and financial performance. We caution you that all forward-looking statements are based on management's current expectations or beliefs, and that our actual results may differ materially.
In addition to the risks and uncertainties that may be discussed during today's call, there are a number of for other risks and uncertainties that may affect our financial business and financial performance that are included in our quarterly report on Form 10-Q for the third quarter of fiscal year 16, which was filed with the Securities and Exchange Commission, and also is available on our Investor Relations page of our web site, and on the SEC's web site at www.SEC.gov. All forward-looking statements are based upon information available to the Company as of today, March 10, 2016, and we do not assume any obligation to update the forward-looking statements to reflect events that may occur or circumstances that exist after today. Please keep this in mind when listening to a replay of this call.
I'll now turn the call over to Kevin for his opening remarks.
Thanks Cory and good afternoon everyone. I want to thank you all for attending. We have a broad set of topics to share today, that are critical to understanding both the Violin challenges and opportunities.
We will cover three things today; first the Q4 results and year end recap, as well as the indication of the financial picture and strategy into FY 2017. Second, an update on the engagement and results of our strategic alternative process, and most importantly, our strategy to capitalize on the opportunity going forward, particularly as it relates to the year ahead.
In Q4, the strategic evaluation process and related media coverage impacted sales, as it created a wait and see what happens mindset with some customers. In Q4, revenues were approximately $11 million, down $1.6 million from Q3 and down $6.1 million from Q4 a year earlier. Bookings however in the quarter were in fact flat quarter-on-quarter from Q3 to Q4. For the full year, FY 2016 revenues totaled $51 million, down from $79.9 million in the last fiscal year.
FSP revenues is the most critical measure of our success in the future, were flat quarter-on-quarter, with 6000 revenues now negligible. For the year, FSP revenue increased year-on-year from just $1 million in FY 2015 to $17 million in FY 2016 or in 2017, [ph] full growth in first year in production.
In the technology startup world, this would have been a rocketship take-off. However for Violin, any way you look at it, we have just completed a very challenging year. It has been a year of navigating through a completely overhauled product line transition, coupled with a launch of high value producing software, and an industry leading management suite.
Despite the challenges of the quarter and fiscal year, we have put in place a new basic technology in customers for which to build the Violin business. We now completed our sale of two revenue curves, with a decline of 6000 sales at an end and 7000 FSP revenues now driving our product revenues.
In fiscal year 2016, we have accomplished a year of hardening this new flagship product line, with the highest performing all flash arrays in the industry, along with a native Concerto OS 7 operating system, offering the full suite of data services to deliver a zero downtime, zero data loss architecture. This delivers, for the first time, an all flash offering in the industry, that can allow enterprises to migrate from the most expensive legacy to storage architectures of the EMC VMAX, Hitachi VSP or IBM DSA-1000 series to all flash storage.
Anything in this market segment can take time, as large enterprises exercise caution in your core business applications. But it is very large, and it is the most profitable segment of the storage market. We believe the dividends of our value proposition and customer base will prove out in the years ahead, of both our customers and Violin.
Despite the slow ramp, we continue to have a significant advantage and need in technology, versus the traditional vendors, where enterprises wanting to mainstream to flash for all its inherent cost and competitive advantages. We maintain this technology leadership conviction, in spite of the volume of announcements we made recently, related to new products.
All flash array revenues, despite being projected to be greater than $1.6 billion is still in its infancy in a $40 billion storage market. Most of that volume today is still expanded primarily around next-gen virtualized workload.
Violin's targeted segment for high performance storage in moving down the pyramid from tier-0 into tier-1 and tier-2 workloads is just beginning, and we still today have the only differentiated architecture in the industry, and the Violin FSP delivers the full suite of capabilities needed to successfully transform the data center from legacy disk storage.
During the quarter, we continued to win on a global basis, new large scale strategic accounts, that believe in Violin's differentiated value proposition. These customers include, Migros, the largest retailer in Turkey; as well as Halkbank, the state owned people's bank in Turkey. Both of these wins follow-up our Turkish airlines win in the prior quarter.
The Woori Financial Group, our second win in the top five financial institutions in Korea, in addition to our win at Shinhan Bank last quarter, and our longer term running of the Korean Stock Exchange. And in the U.S., one of the largest charitable foundations in the world, with over $40 billion in assets.
During the quarter, we also launched two case studies of IT leaders, who displayed our Be Instrumental messaging, that the FSP is [indiscernible] technology. We launched the San Francisco 49ers implementation of Violin's FSP in the world's most technologically advanced sporting facility, as Levi's stadium hosted the 50th Super Bowl in February. We also announced our study of Ferrellgas, the diversified energy company serving all 50 states in the U.S. You have probably noticed their retail brand of a blue line of propane tanks nearly everywhere you go. We highlighted Bill Evans, their VP of IT and his team, who were instrumental in saving over $1 million, with Violin's FSP technology, by being able to gracefully absorbing new acquisitions, who have previously been outsourcing their IT. Bill and his team recognized the advantages of Violin's differentiated performance and disaster avoidance software architecture, that allowed this seamless migration from their legacy to storage to Violin flash.
Now I'd like to cover a recap on our strategic alternative process. During the last four or five months, along with Jefferies, our bankers, we crafted a robust process to explore relationship, with a broad set of industry players to get a full understanding of the best way to create value for our shareholders. This included both inbound and outbound inquiries of over 40 companies that we felt could benefit from the technology and value proposition that Violin offers in the marketplace.
The results of the process have more than 15 companies engaged at various levels of evaluation and exploration. The process resulted with no companies making a formal offer to fully acquire the company at this time. The process has been successful however, and that it has revealed multiple strategic relationships that will be an essential part of our strategy going forward.
A combination of the current industry disruptions in unknown, the fact that our FSP technology, while comprehensive, is still new and maturing in many new accounts around the world, and therefore not yet producing its revenue potential. And lastly, that our financial cost structure and losses were significantly out of balance with our current revenues, we think all contributed to the challenges of the process.
The overall storage market, as expected, has been fundamentally disrupted by multiple factors, all hitting at the same time. That has become more acute over the last several quarters. We have seen the storage industry leader for decades sell out to a PC company. All of the traditional legacy disk players, shrinking from multiple years now and startups now being starved for cash.
We have flash mainstreaming from disk more rapidly than legacy disk players had anticipated, a shift to cloud for next-gen app, that is a dramatic wave of change in and of itself. And efficiency technology is a virtualization and de-duplication, complicating capacity planning and architectures. This has created some deeper evaluation and even confusion for customers, as they select through priorities, realities, and how to capitalize on all of the change, resulting in vendor turmoil across the board from legacy leaders to startups. However, a strategic has produced for Violin, several significant potential strategic relationships, that we believe could be fundamental in the company's return to growth in industry leadership. These relationships are with some of the biggest technology companies in the world, and now see the strategic advantage of Violin's technology, will combine with their strategies and products, even though they do not take the step of offering an all-out acquisition of the company at this time.
One of these relationships has reached the MOU stage, with one of the largest technology bellwethers. We think this will be a broad and important strategic relationship, that we hope will include financial tie-ins, R&D collaboration and an OEM relationship. We hope to announce this first relationship during the quarter.
Secondly, there are three more relationships in various stages of development, that will give us a fundamentally different footprint and go-to-market capability around the globe, to resell OEM and support our FSP technology.
Therefore, we are concluding the formal review of our strategic alternative process, and will focus on these new relationships to accelerate our focus, return to growth, profitability, and value creation for our shareholders.
In addition to these new strategic relationships, we have taken significant steps to align our expense structure with current revenues and projections. This was a difficult but needed step, designed to give the company a pathway to profitability over the next 18 to 24 months, based on our current cash on hand, with only modest revenue growth. We believe the value of our technology is substantial, and that giving it time to mature and prove out its value in customer deployments and these new strategic relationships, is the best path forward for creating value for our shareholders.
Additionally, we believe, giving customers a financially stronger foundation to count on Violin versus our burn rates over the last couple of years, will bring confidence to invest in FSP technology, and that Violin is a safe a prudent choice, that is also career enhancing for IT leaders.
Properly sizing the company is possible at this time, as we can now book-in Violin with both the technology relationship on the back-end, to accelerate our R&D efforts, and substantial go-to market capability and reach on the front end, that allows us to take these reductions internally, without inhibiting our ability to fully mature the technology, achieve our future vision and a return to revenue growth. The actions we have implemented will take the company from approximately 350 people at the end of Q3, to approximately 250 people at the end of Q1. The headcount reduction of over 28% and an overall cut in quarterly expenses by 33%.
We minimized these cuts within engineering to about 20% versus the 28% total reduction. Within our engineering ranks, we were also able to preserve nearly all of our software development resources, which are critical to our long term strategy.
Reductions within engineering, were primarily centered on supporting physicians and hardware resources, not as critical to our roadmap at this time. Along with the reductions, we put new engineering leadership in place under Ebrahim Abbasi, who was previously managing several other functions within the company, and are streamlining the organization for better efficiency, to line up with our new partnerships. These expense actions should cut our cash burn and losses by more than 50% in our Q2-Q3 timeframe, with only modest revenue growth. In terms of cash burn, this will translate to under $10 million per quarter.
And we will continue to take a cautious outlook on revenue growth at this point, until we are able to close and develop these new strategic relationships, which we believe can then give us substantial revenue lift in the market, hopefully in the back half of this year, but certainly into our next fiscal year.
Going forward, let me summarize our vision and outlook; we've sized the company to achieve cash flow breakeven, with the current cash balance we have on hand. We believe this is an important foundation principle for our customer confidence. We are negotiating both technology and go-to market relationships, that we believe make our restructuring prudent, with the company still having the capability to be a disruptor in an already very disrupted storage industry, in which we pioneered the all-flash storage array market.
The important market position and capability of these strategic relationships, we believe, will give our technology and value proposition for the validation of what our ground-up flash architecture in both hardware and software can do to both transforming cost and competitiveness of our customers.
We also believe, that our average new quarterly acquisition rate we achieved in FY 2016 can continue and expand in FY 2017, and the maturation of the technology in our new FSP install base, can set the foundation for new growth in the year ahead.
We now have over 40 live implementations in large scale enterprise customers, and with the biggest in the world, operating their largest most critical applications that are fundamental to the operations of their business. These applications include inventory in the biggest retailers, building assistance in the largest telcos and cable, or medical applications and records in healthcare, financial transactions in financial institutions and finally, product development in leading technology companies.
This is a maturing base of large customers with our technology, with a profile that most of them can create annual revenues over $1 million annually per franchise, as they gain comfort and confidence in flash technology in Violin.
Most of this space believes in our new unique value proposition, that has its roots in Violin's ability to deliver sustained high performance storage of five to 10 times our other flash competitors, along with all the data services necessary, for zero downtime, zero data loss architecture. These capabilities, combined with a price point and platform for next gen multiple workloads, replace traditional tier-1 and tier-2 disk architectures at dramatically lower cost and higher performance, that is instrumental to a company's competitiveness.
While we have not yet been able to translate this proposition to global success yet, we have seen several countries that are reaching very broad success, such as Russia, Turkey and Korea, giving us confidence that it has the potential to spread globally.
Our value proposition today, allows enterprises to build an on-premise cloud-like solution, that runs next-gen multiple workloads of both traditional legacy applications, that can take advantage of non-dedup type performance storage, significantly above any of our flash competitors, as well as virtualized next-gen applications to take advantage of heavily dedup ratios, that dramatically lower the price of flash.
Additionally, with Concerto on top of that simplified architecture, we offer the only native set of comprehensive data protection services and capabilities, that are traditionally sold as very expensive separate add-on products, and to the traditional legacy storage vendors.
Our future vision is to incorporate this leading FSP technology, with networking and compute partnerships, delivering a simple, seamless, transformation in large enterprises, that provides a simplified enterprise cloud experience on-premise in your datacenters.
As we look to the quarter and year ahead, we believe that our revenues have now bottomed from our difficult product transition, and believe we can increasingly grow quarterly revenues to a view at yearend that can produce 25% to 35% annual growth in FY 2017.
Additionally, as we form these new strategic relationships with industry players, the Violin has the opportunity to see a substantially higher growth in the quarters ahead, as they begin to produce reach and combined capability.
Cory will now provide his remarks on our financial results.
Thank you, Kevin. Today I will cover our fourth quarter financial results, as well as changes to our financial model, due to our restructuring and expense saving activities. Revenue for the fourth quarter was $10.9 million, a decrease of 13% sequentially from revenue of $12.5 million for the third quarter. Revenue from the flash storage platform represented $3.8 million of the $4.3 million product revenue, and relatively flat to last quarter.
Of the total revenue, 58% came from the Americas, which is down slightly from 60% last quarter. EMEA was 30%, up from 25% last quarter, and Asia was down from 15% to 12%. We had seven new customers versus 10 last quarter. New customers accounted for approximately 10% of our revenue versus 15% last quarter, and transactions direct with end user customers, were about 25% of total revenue, which is down about 10% from last quarter.
Our GAAP gross margin for the fourth quarter dropped to 38%, that's compared to 51% last quarter, generally reflecting lower product gross margin, as we sold less previously written off inventory this quarter, and an increase in stock based compensation. Our non-GAAP gross margin for the fourth quarter was also down to 48%, which compares to 56% last quarter, and was below our guidance of 53% to 55%. The decrease in gross margin was due to a decrease in product gross margin, partially offset by an increase in service gross margin. Non-GAAP product gross margin decreased from 50% in Q3 to 24% in Q4.
During the fourth quarter, we sold approximately $0.5 million of 6 Series products, as compared to $2.3 million the quarter before, which is at 100% gross margin since it was previously written off. We continue to approach pricing and margin decisions, based on a blend of FSP and 6000 products to approach certain markets strategically.
Our strategy to win new accounts in key new markets and verticals is starting to work. We have seen repeat purchases from a couple of these recently new customers, and the addition of new customers in the same markets. As such, we will continue to support these markets with appropriate pricing strategies.
We expect that gross margins will improve over time, as we expand our presence in these markets. Also, we reduced our manufacturing overhead as part of the restructuring, which translates to improved product gross margins as well.
Our non-GAAP service margin for the fourth quarter was 63% compared to 61% in the third quarter. The improvement reflects an increase in revenue from maintenance contracts as compared to the prior quarter, at the same time, our support costs were flat.
We expect our overall gross margin to be in the range of 50% to 55% for the first quarter, which reflects our lower cost structure, and a similar level of 6000 series product sale was in the fourth quarter.
Operating expenses on a GAAP basis were $27.8 million for the fourth quarter, which is consistent with the third quarter. However, our non-GAAP operating expenses for the fourth quarter were lower by approximately $1.4 million to $22.8 million as compared to the third quarter, and were below our guidance of $25 million to $26 million. The decrease in expenses was the result of the actions taken during the fourth quarter, to start lowering our expense structure, in light of lower revenue expectations.
Total headcount at the end of the fourth quarter was 318 as compared to 349 at the end of the third quarter. The decrease primarily relates to a reduction in our sales organization at the end of the quarter, partially offset by an increase in our customer support personnel.
Last week, we completed a reduction in force, as part of our restructuring plan, to allowing spending with revenue. As a result of this and other previous actions, our current headcount is 263, representing a cumulative reduction of 25% as compared to our headcount at the end of the third quarter. These reductions were across the company.
For the first quarter, we expect non-GAAP operating expenses to be between $18.5 million and $19.5 million, and we expect to record a restructuring charge between $2 million and $2.5 million. Beginning in the second quarter, we believe our operating expenses will be between $16 million and $17 million.
Turning to our balance sheet, cash, restricted cash and investments totaled $76 million at the end of January. We used approximately $19 million of cash in our operating activities during the fourth quarter, which is $3 million less than the prior quarter, but above our forecast of $12 million to $14 million. During the fourth quarter, we used more cash, because revenue was lower than anticipated, and our liabilities were lower than previously forecasted. Accounts payable was down $2.6 million from the prior quarter.
Our DSO improved to 45 days as our revenue was more linear in the quarter. Our inventory totaled $12 million, consistent with prior quarter, and with a quick ratio of 1.9, our balance sheet remained strong.
For the first quarter, we expect our quarterly cash burn will be between $16 million and $18 million, as our liabilities will come down, as we make an interest payment on our convertible notes, as well as pay out a severance and approved vacation during the quarter. After Q1, we expect that our quarterly cash burn rates will be less than $10 million a quarter.
The last 90 days proved to be challenging in managing the strategic process and growing revenue. The opportunities coming out of this strategic review process, shall produce validation, leverage and reach, even without an outright acquisition, we believe our restructuring efforts allow the company to continue without the need to raise additional capital, and give our customers, vendors and employees, the confidence that we are managing our business for the long term.
I will now turn the call back over to Kevin for his closing.
Thanks Cory. FSP is now installed in more than 40 customer environments, including multiple Fortune 100 Enterprises and more than a dozen Forbes Global 2000 Enterprises. We also believe, we can more than sustain and begin to grow our new account acquisition for FSP technology in the fiscal year ahead.
Going forward, we believe that these franchises already won, are maturing, are maturing and have the potential to generate more than $40 million in revenue on an annual basis, as we head into this fiscal year. In fact, we believe only a handful of them could nearly produce half that revenue by themselves.
We are focused on gaining customer confidence in our FSP technology. Confidence in Violin with a new balanced financial picture and new strategic relationships, to deliver a multi-faceted validation and capability weaved into our vision. With all of this, we believe strongly in our ability to return to growth, make it to profitability on our current cash on hand and return to leadership in a very disrupted storage industry.
I want to thank you all for attending today, and we look forward to answering questions on your upcoming schedules one-on-one.
Have a good evening.
Thank you for your participation. That concludes today's conference. You may now disconnect.
[No question-and-answer session for this conference.]
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