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Violin heads in positive financial direction, stems bleeding

The financial horizon looks brighter for Violin Memory than it did a year ago.

The Santa Clara, California-based all-flash array (AFA) vendor reported last week that revenue grew for the second straight quarter, up 17% to $21.7 million, and bookings ramped up at more than twice the rate of revenue on a sequential basis. CEO Kevin DeNucci said the company hopes to break even by the end of next year.

Violin faces heated competition in the increasingly crowded AFA market, but the company appears to have finally stemmed the bleeding. At the end of last year, Violin’s board of directors terminated former CEO Donald Basile after the company lost more than $90 million through the first three quarters of 2013, including $34.1 million in its initial quarterly earnings report since going public in September 2013.

DeNuccio replaced interim CEO Howard Bain in February 2014. Other new additions included Eric Herzog from EMC to head marketing and business development and Tom Mitchell from Avaya to shore up global field operations.

This year, Violin’s quarterly net loss fell from $30.1 million in its first fiscal quarter to $8.4 million for the quarter ending July 31, when the dramatic drop took into account a $17.4 million gain on the sale of the company’s PCIe product line. With the windfall removed, the fiscal Q2 net loss would have been higher than the $23.5 million loss for the most recent quarter ending on Oct. 31.

Jim Handy, chief analyst at Objective Analysis, said expenses are down, assets are up, and Violin’s new management team has a good shot of making the financials match the strength of the company’s technology.

“The management focus right now is a whole lot better than what they had under Basile,” said Handy. “Basile was trying to grow revenues at pretty much all cost and doing it by taking unnecessary risk. These guys are doing things that are a whole lot better thought out. They said they’re trying both to grow revenue and to increase profitability at the same time, which is a tricky mix, but that says that they’ve got their heads screwed on right.”

DeNuccio said the market for Violin’s arrays is expanding from its niche as a “performance-centric solution” to general purpose workloads supporting a mix of applications. He said the company is making “tangible progress” as large enterprises and cloud data centers transition from disk-based storage to all-flash systems. More than a third of the revenue from Violin’s top 10 customers in the last quarter resulted from disk to flash migrations for primary storage, according to DeNuccio.

“As we increase our presence in the primary storage tier, the composition of revenue should become more predictable and consistent as large customers tend to expand primary storage capacity on a regular basis given the size of their ongoing needs,” said DeNuccio.

DeNuccio said Violin’s top five customers in fiscal Q3 revenue represented 48% of total revenue, but he explained away the risk by noting that customers have varied from quarter to quarter. He said only three customers have appeared more than once among the top five quarterly transactions over the last five quarters. Violin’s customer base includes more than 400 enterprise, cloud and global Fortune 500 companies, according to DeNuccio.

In the fiscal third quarter, Violin closed two deals above $1 million each for the company’s new Concerto enterprise data services, and software revenue rose to about 13% of product revenue. CFO Cory Sindelar said the company’s $2.2 million in software sales was more than double the prior quarter’s $1 million.

Henry Baltazar, a senior analyst at Forrester Research, said Violin still has some work to do to get closer to profitability, but he expects the company to increase revenue as flash systems become more acceptable in midrange and enterprise environments. He said Violin will need to continue to expand its market through partnerships such as its work with Microsoft to produce a Windows Flash Array.

Arun Taneja, founder and consulting analyst at Taneja Group, thinks the next two quarters will be particularly telling for Violin. “Their new products are all shipping now, and their new strategy has had some time to play out. If they show good growth for the next two quarters, they would, in my opinion, have climbed out of the morass,” Taneja said.

In a report issued last week, Sterne, Agee & Leach, an investment firm based in Birmingham, Alabama, advised that Violin will need to hit a quarterly run rate of $35 million in the second half of its fiscal 2016 year for the company’s stock to be considered for a longer term investment horizon. Violin provided guidance of $23 million to $25 million for the next quarter.

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