Violin Memory, a developer of flash memory storage systems, has filed for an IPO, but while the company is in a fast-growing market and has strong technology, the deal might not be a slam dunk.
Flash memory allows for reliable storage with high-speed applications, servers and networks. In other words, it is a great solution for fast-growing categories like social networking, Big Data, the cloud and mobile.
As one would expect, though, Violin thinks its approach beats the competition. According to the S-1:
“Our solutions enable customers to realize significant capital expenditure and operational cost savings by simplifying their data center environments.”
Violin has more than 250 enterprise customers, spanning industries like financial services, Internet, government, media and telecommunications. And for the most part, Violin has seen a nice ramp up in its top line; from fiscal 2011 to 2013, revenues jumped from $11.4 million to $73.8 million.
Unfortunately, Violin Memory has many issues that could easily derail the offering.
Consider that of its 250 customers, just five account for 37% of its total revenues. And during the past year, Hewlett-Packard’s (HPQ) share plunged from 65% to less than 10% as the company decided to end its reseller deal for storage computers.
As for the competition, Violin must fight against many heavyweights, such as EMC (EMC), Dell (DELL), Oracle (ORCL), Fusion-io (FIO), IBM (IBM) and, yes, HP … not to mention a spate of privately held startups.
Then there is this from Violin Memory’s S-1:
“The report of our independent registered public accounting firm for the year ended January 31, 2013 included herein contains an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern as a result of recurring losses from operations and negative cash flows.”
That’s all just a nice way of saying that the company could potentially go bust if there is no IPO or other outside financing! Case in point: During the first six months of 2013, Violin posted a net loss of $59.2 million, despite revenues of $51.3 million.
Investors still might be stinging after the poor performance of the Fusion-IO offering, which dropped from $22.5 to $10.75 in the past couple years. But even if they aren’t, Violin’s numbers aren’t exactly the kind of thing investors want to see.
And looking broadly at the market, given the number of successful IPOs this year, Violin’s filing could be a sign that the quality of offerings is starting to decline.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.