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How Will Violin Play On Wall Street?

Contact: Brenon Daly Tim Stammers

In what would be the first IPO from the storage sector in two years, Violin Memory's (NYSE:VMEM) prospectus is out for all the world to see. (We indicated last week that the S1 was on its way.) What people are mostly seeing in the paperwork, however, is red ink - and lots of it.

As we wrote in our full report on the all-flash array (AFA) vendor, its filing and what it has to look forward to as a public company, Violin's offering won't appeal to everyone on Wall Street: It's a relatively immature company, spending money at an unsustainable rate in a market that today represents only a tiny fraction of overall storage spending but is getting more competitive every day.

If we wanted to translate that into some actual numbers, we might offer this summary from the prospectus: Each quarter, Violin has been losing anywhere from $20m to as much as $35m to bring in $20-25m in revenue. (Altogether, Violin has run up an accumulated deficit of more than $250m since incorporating in 2005.)

The main reason for the deep losses at Violin is the fact that its product is expensive to make. (Gross margins run only in the low-40% range.) Once those costs are subtracted, there's very little left over for operating costs. Yet that hasn't slowed Violin's spending on R&D or sales/marketing. For the past year, quarterly operational spending at Violin has run three times higher than its gross income.

While certainly staining the P&L sheet a blood red, Violin's lavish spending has nonetheless helped establish it as the leader in the nascent AFA market. Storage professionals at major enterprises have tapped Violin as the most exciting privately held storage vendor, according to recent interviews by TheInfoPro, a service of 451 Research. Further, Violin has succeeded in converting that into sales momentum, with recent growth rates of about 70%. For more on Violin and the offering, see our full report.

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