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Violin Memory Inc (VMEM): Nice Opportunity In Flash Storage Space

 October 28, 2013 09:50 AM


Violin Memory, Inc. (NYSE: VMEM) is well positioned to take advantage of the strong secular growth of flash in the enterprise. The combination of its proprietary hardware, a growing software portfolio and resulting industry-leading price/performance should translate into robust growth over a multi-year time frame.

Founded in 2005, Santa Clara, California-based Violin Memory makes high-performance flash-based storage systems that are designed to bring storage performance in-line with high-speed applications, servers and networks.

Violin has developed a technology stack to address the rapidly growing all flash array market. In addition, the company is extending its technology position into the PCIe card market with a cost advantage offering that will add to its growth potential in the coming quarters.

"We expect the combination of strong customer adoption of flash based arrays, the migration to 19nm products, entry to the PCIe card market and the conversion of past deferred revenue bookings (Toshiba) to translate into strong revenue / share gains over the next few quarters," Deutsche Bank analyst Chris Whitmore wrote in a client note.

Over long-term, Violin is well positioned to benefit from the strong secular growth of flash in the enterprise due to its unique IP position.

Flash storage is a disruptive technology that challenges the economics of high performance disk storage and alleviates the performance bottleneck in the datacenter. Flash is more cost effective than traditional disk for certain high performance use cases (e.g., database, analytics, virtual desktop and cloud) with a 30-90 percent lower total cost of ownership (TCO) for these high bandwidth applications.

"We believe Violin's total addressable market ("TAM") is ~$6B in 2014 (flash arrays and PCIe) and is growing at a ~30% CAGR," Whitmore said.

Violin's core customers are enterprise accounts, and its primary value proposition is superior performance (5-10x faster than traditional disk with lower operating costs) and lower TCO for high demand workloads.

Violin has shown explosive revenue growth from $11 million in fiscal 2011 to $74 million in fiscal 2013 despite disengaging from a large reseller agreement with HP.

"Looking forward, we expect robust growth to continue (+77% Y/Y in FY14E and +56% Y/Y in FY15E) driven by ongoing strength in the array business and a solid ramp in PCIe cards (becomes meaningful in F4Q)," Whitmore noted.

Violin also has a good line of sight into revenues over the next 2-3 quarters as $16 million of deferred revenues booked for development work with Toshiba moves from Violin's balance sheet onto the P&L.

In addition, strong revenue gains should be accompanied by potential gross margin expansion from the current 40 percent plus to about 50 percent in fiscal 2014. Margins would be driven by the ramp of the 6264 array and rollout of 19nm across most of Violin's offerings, mix towards a greater portion of software and the ramp of higher margin PCIe cards.

Violin could launch additional software capabilities in upcoming quarters where its software stack will ultimately include a full suite of enterprise-class data management features.

"As Violin's software offering matures and the hardware migrates to 19nm, we expect Violin's margin profile to improve materially," Whitmore said.

Meanwhile, Violin has a strategic relationship with Toshiba, which has invested about $42 million in Violin and owns about 14 percent of Violin's common equity. Toshiba's commitment to Violin speaks to the company's strong IP position.

Furthermore, Toshiba is Violin's primary supplier of NAND flash, which provides an advantageous cost position, visibility on product supply and a close working relationship with Toshiba's development roadmap.

In addition, Toshiba entered into a development deal with Violin to develop PCIe cards. Violin's PCIe cards are experiencing strong initial traction with new customers and would convert into meaningful orders/bookings in future periods.

"Beyond validating Violin's IP, we believe this relationship provides significant strategic and tactical benefits to Violin in the form of cost, time to market and the potential for significantly expanded market reach. Over time, we expect both parties to realize meaningful value from the partnership," Whitmore noted.

On the other hand, Violin is investing heavily to build out its direct sales force which is producing meaningful losses due to significant opex outlays. Violin has a significant cash burn rate given its heavy investment in sales force expansion and R&D.

Violin also competes in a competitive market against large and established data storage providers such as EMC, NetApp, IBM and HP.

"At current investment rates and growth trajectory, we are modeling Violin to be EBIT and Cash flow positive in FY16 / CY15.," Whitmore added.

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