Violin Memory Reports Disappointing Quarter, Is Exploring 'Strategic Alternatives'

Flash storage array vendor Violin Memory, coming off a disappointing quarter caused in part by technical issues at one of its largest customers, on Wednesday said it's "exploring strategic options."

Violin Memory executives declined to state what those strategic options might be, but the term "exploring strategic options" generally means looking at the possibility of becoming acquired by or merging with another technology company or private equity firm.

Kevin DeNuccio, president and chief executive officer of the Santa Clara, Calif.-based storage vendor, brought up the possibility of an ownership change during the analyst conference call to discuss the company's fiscal third-quarter 2016 financial results.

[Related: Violin Memory Expands All-flash Line As Way To Grow Its Primary Storage Business]

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Despite a quarter that saw revenue fall significantly from a year ago, DeNuccio said he believes Violin Memory's resources are sufficient to continue pursing opportunities. However, he said, the company's leadership team, including its board of directors and executives, have to look at creating core value.

"Our stock price remains at a level that we do not believe reflects the true value of our business and developed technology," he said. "Therefore, it is our responsibility to all stakeholders to consider alternate ways of creating value. Our board has authorized us to explore strategic alternatives, and we've retained the services of an investment banking firm to assist us with this process."

DeNuccio said Violin Memory has not set a timetable for the process, and that there is no certainty the "complexity of this exploration of alternatives will result in any transaction being consummated."

DeNuccio also said the company will not be providing further information during the process.

However, at the end of an unusually short question-and-answer period with analysts, DeNuccio was asked about what kind of companies could be possible suitors.

"I don't really want to provide any more specific color," he said. "We think this is a very attractive asset. Attractive both from a partnership and an acquisition potential by all different segments of the industry because the industry's obviously restructuring pretty dramatically, with server companies buying storage companies, and this company buying flash fabs. So [there's] a lot of moving pieces when you go through these big transitions. We think there's a broad reach of people that are interested in an asset like this."

Violin Memory did not respond to a CRN inquiry for more information about the exploration of strategic alternatives.

One Violin Memory channel partner told CRN on condition of anonymity that he's hopeful the storage vendor will see a turnaround, but that other flash storage array companies like Pure Storage, which just went through its own IPO, are hurting Violin.

The solution provider said it's uncertain what kind of companies might want to acquire Violin Memory.

"I'm not sure how much of their tech, like deduplication or compression, was developed on their own," the solution provider said. "Could someone want to buy Violin for the compression algorithm used with their flash memory if it were developed by the company itself? Maybe. But everyone in this market is using compression. They have to because the cost per terabyte of flash storage is still high."

Despite issues, Violin Memory is still a viable company, the solution provider said. "We have some designs going on now that look pretty realistic," the solution provider said. "Maybe they made the statement about exploring strategic alternatives to make shareholders comfortable."

For the third fiscal quarter, which ended Oct. 31, Violin Memory reported revenue of $12.5 million, down about 42 percent from the $21.7 million the company reported for the third quarter of fiscal 2015.

On a GAAP basis, the company reported a third-quarter loss of $22.7 million, or 23 cents per share, down from a loss of $23.5 million, or 25 cents per share, for the same period last year.

On a non-GAAP basis, the third-quarter loss reached $18.6 million, or 19 cents per share, compared to last year's loss of $17.8 million, also 19 cents per share.

DeNuccio called the third-quarter revenue "frustrating," and blamed much of the fall to an inability to close its largest forecasted opportunity due to some technical challenges with the large installed base of the vendor's FPS 6000 series within the environment of a customer that can account for about 10 percent of Violin Memory's revenue in any given quarter.

"Consequently, this delayed the planned rollout of a second phase in a multi-phase [FPS] 7000 flash storage platform deployment that began in the second quarter," he said.

DeNuccio also said that as the enterprise storage market transitions to a flash storage-based infrastructure, newer companies such as Violin Memory are facing legacy vendors that are taking measures to protect their legacy businesses.

Cory Sindelar, Violin Memory's chief financial officer, said during the conference call that the company's new FSP technology, introduced earlier this year, accounted for about 60 percent of the vendor's total revenue during the third fiscal quarter.

Sindelar also said that North America accounted for about 60 percent of Violin Memory's total revenue. Furthermore, new customers accounted for about 15 percent of revenue, while indirect sales channels accounted for about 65 percent.

Investors did not like what they heard from Violin Memory. During the investment day, share prices fell 19.1 percent to $1.06 by the close of trading Wednesday.