Violin Memory IPO Way Out Of Tune

| About: Violin Memory, (VMEM)

Violin Memory (NYSE:VMEM), a Mountain View, California,-based manufacturer of flash memory arrays, plans to raise $162 million in its upcoming IPO through the sale of 18,000,000 shares at an expected price range of $8-$10. At the midpoint of that range, VMEM would command a market value of $877 million.

VMEM filed on September 18, 2012.
Joint Managers: JPMorgan, BofA Merrill Lynch, Deutsche Bank, Barclays
Co-Managers: Baird, Pacific Crest

Violin Memory has designed and manufactured a new class of persistent memory-based storage solutions for use in applications requiring sustained high performance, including virtual environments and Big Data applications. The firm's recently developed Velocity PCIe Flash Memory Cards are optimized for applications that require continuous access to large quantities of low latency memory. VMEM's technologies allow customers to gain significant savings by simplifying and minimizing costs in their data center environments.

VMEM's close relationship with Toshiba, one of its principal stockholders and a leading provider of flash memory, allows it to stay ahead of the curve in developing its own products around other emerging flash memory technology. The firm's key vendors and tech partners include Dell (NASDAQ:DELL), Fujitu, IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), Symantec (SYMC) and many others - though many of these firms are also competitors, as described below.

VMEM estimates that over 250 enterprises have implemented its solutions, including governments, financial services firms, media and entertainment firms and telecommunications firms.

VMEM offers the following figures in its S-1 balance sheet for the six months ending July 31, 2013:
Total Revenues: $51,303,000
Net Loss: $59,172,000
Total Assets: $112,886,000
Total Liabilities: $95,539,000
Stockholders' Equity: $17,347,000

VMEM has seen extensive revenue growth in the past three years, reporting total revenue of $11.4 million in fiscal 2011, $53.9 million in fiscal 2012 and $73.8 million in fiscal 2013. It has not yet become profitable, however, with growing net losses of $16.7 million, $44.8 million and $109.1 million over the same time period.

VMEM's increasing losses and CEO compensation are very troubling. The huge losses likely reflect the significant investments put into developing the Velocity PCIe Card, which has only recently been introduced and has yet to make a significant impact upon revenue or income. Purchasers of this IPO will essentially be betting on the success of the Velocity card, and they do have reason to be optimistic - VMEM's relationship with Toshiba gives the firm a genuine edge in the development of immediately marketable flash memory devices, especially since VMEM has seen previous success in seeing its solutions implemented by large customers. Without more data on the market performance of the Velocity card, we remain neutral to negative on this IPO although it should be noted that technology IPOs are on fire this week.

Though VMEM's memory solutions are cutting edge and, at this point, essentially unique, it does face serious competition in primary storage vendors that sell both centralized storage products and high performance storage that utilized Solid State Drives. These vendors include Dell, IBM, EMC Corporation (EMC), Hewlett-Packard (HPQ) and many others. Several of these competitors are far better capitalized and have stronger resources than VMEM, and have significantly better name recognition among consumers.

VMEM is extremely reliant upon a handful of customers to account for most of its revenue, placing it in a rather vulnerable position and at a weak point for future contract negotiations. In fiscal 2012 Hewlett-Packard accounted for 65% of total revenue, a figure which plunged to less than 10% a year later. In fiscal 2013, VMEM's top five customers accounted for 37% of its total income. While VMEM's revenues have continued to grow, it's clear that the firm will have to continue to pursue new customers in order to maintain that growth.

President and CEO Donald G. Basile has served the company as CEO since 2009. He previously served as CEO for Fusion-io Inc, and as Vice President of UnitedHealth Group, Incorporated. Basile's impressive educational background includes and M.S. and Ph.D. in Electrical Engineering from Stanford University.

Donald's compensation for fiscal year 2013 was $18,910,938 which even by California standards is very high. This troubles us given the loss of $109,000,000 in the recent fiscal year. Losses could have been kept under 100M if the CEO's compensation had been in the six figures instead of seven figures.

CFO Cory J. Sindelar has been with the firm since 2011 and has previously served as CFO for tech firms including Kilopass Technology, Inc. and Ikanos Communications, Inc. Cory's compensation for fiscal year 2013 was $1,800,200 which seems reasonable to us for his role.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors should consult with their financial adviser before making any investment decisions. This article was written for informational purposes and is partly based on the company's S-1.

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