Violin Plans IPO With Losses Mounting as HP Business Dips

Violin Memory Inc. (VMEM), a maker of high-speed storage systems, is seeking to raise as much as $180 million an initial public offering even as its quarterly losses exceed revenue and the company struggles to recover from the departure of its biggest reseller.

Violin plans to sell 18 million shares for $8 to $10 apiece, the Santa Clara, California-based company said in a regulatory filing today. The market debut is scheduled for later this month.

Growth has slowed at Violin since Hewlett-Packard Co. (HPQ) opted to start selling its own storage product last year. Hewlett-Packard, the world’s second-biggest personal-computer maker, accounted for 65 percent of the storage company’s revenue in fiscal 2012 and now represents less than 10 percent, Violin said in the filing. At the same time, EMC Corp. (EMC), International Business Machines Corp. (IBM) and Dell Inc. (DELL) have bolstered their competitive offerings through acquisitions.

“They’re competing in a really cutthroat sector,” said Brenon Daly, an analyst at 451 Research LLC in San Francisco. “They’re bringing an offering that is way out on the risk curve, and it’s being priced accordingly.”

At the top end of its projected price range, Violin would be valued at $818.2 million. That’s just above the company’s $800 million valuation after a private financing in April 2012 and less than half the $2 billion that was being discussed when it confidentially filed for an IPO last year, two people with knowledge of the company said in October.

A representative for Violin declined to comment.

Losing Money

Violin’s net loss for the most recent quarter widened to $30.6 million, compared with the $26.5 million the company generated in revenue. Sales and marketing costs climbed 40 percent from a year earlier to $18.6 million.

Founded in 2005, Violin has been led for the past four years by Don Basile, who was previously chief executive officer at Fusion-io Inc. (FIO) He shifted Violin’s focus to flash arrays, which provide faster and more efficient storage than hard drives. The company has about 250 customers and 450 employees.

Hewlett-Packard ended its deal to resell Violin’s storage, telling Bloomberg in October it favored its own 3Par devices. In 2013, Violin’s largest customers included Computer Security Solutions Inc. and Avnet Inc. (AVT), which both resell the products to other clients.

“We expect that sales of our products to a limited number of customers will continue to account for a majority of our revenue for the foreseeable future,” the filing said.

Cost Savings

While flash storage is more expensive than hard-disk drives, keeping many customers from making the switch, it also uses less energy and is faster to access than traditional data storage. Violin and other flash-storage companies have to more effectively promote the long-term cost savings of the technology to encourage businesses to pay more up front, according to Jim Handy, an analyst at Objective Analysis in Los Gatos, California.

“They need to tout other features of the product that allow total data-center costs to come down,” Handy said. Competing on price with older technologies is “destructive for anyone in the flash business,” he said.

Violin’s gross profit margin, or the revenue left after subtracting the cost of goods sold, narrowed to 42 percent in the quarter ended July, from 46 percent a year earlier. EMC, which sells complete storage-management systems, reported a second-quarter gross margin of 63 percent, three percentage points higher than data-storage provider NetApp Inc. in its most recent quarter. Fusion-io, which sells flash storage to Facebook Inc. and Apple Inc., recorded a 58 percent margin.

Margin Improvements

Violin forecasts that its gross margin will reach 58 percent to 62 percent over the long term by selling new products with greater capacity and more profitable software, according to the company’s online presentation to promote the offering.

JPMorgan Chase & Co., Deutsche Bank AG and Bank of America Corp. are leading Violin Memory’s offering. The company plans to list on the New York Stock Exchange under the symbol VMEM.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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