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Recent IPOs in the enterprise flash-storage segment have had very different trading outcomes. The more recent IPO of Nimble Storage (NYSE: NMBL ) performed much better than expected, while Violin Memory (NYSE: VMEM ) pretty much tanked a few months prior.
The companies offer different paths to solve the growing complexity of data-storage requirements of enterprises and data centers. The traditional disk-storage systems aren't adequate enough to meet the storage and performance requirements of the modern data world. The data-storage industry is estimated by IDC and Gartner to reach approximately $63.8 billion for both storage systems and software by 2017. Nimble estimates that the addressable market for its services will reach more than $35 billion by 2017, based on IDC estimates.
Based on a scenario of a large addressable market needing a modern solution to handle enterprise needs, both Nimble Storage and Violin Memory were considered promising IPOs for 2013. The collapse of Fusion-io (UNKNOWN: FIO.DL ) and weak IPO of Violin should have been a bad omen for Nimble. Does this flash-storage provider really offer a better solution for customers and investors?
Violin Memory was a highly anticipated IPO until it filed the prospectus highlighting massive operating losses. The maker of persistent memory-based storage solutions that utilize flash-memory chips was spending money faster than it could grow revenue. Despite a promising future, the stock continued to drop from the initial IPO price at $9 to sit around $6 only two months after going public. Soon after reaching $6, Violin dropped an absolute bomb on the market that eventually led to the firing of the CEO.
In the first earnings report after going public, Violin provided the shocking news that revenue growth had suddenly come to a halt, while expenses continued to soar. In reality, revenue growth still hit 37%, but the number was far short of market expectations. A bigger issue was the minimal growth in the current quarter's revenue projections of up to $32 million. The company just spent $40 million on operating expenses in the last quarter -- and that's only if you exclude more than $8 million in stock-based compensation.
The interim CEO came out with plans last week to reach profitability by 2015, but investors need to be wary of such promises, knowing that a weak business can't be turned around that quickly, if at all.
Different solution, similar results
Nimble Storage offers a different solution -- one based on a flash-optimized hybrid storage platform to leverage the strengths of both flash and disk. The company claims this solution is simpler and reduces the costs. That's important, considering the biggest issue with the transition to a flash-storage solution is the cost. Another difference is the software that underlies the file system and cloud-based service.
While offering a different solution, the earnings results appear to offer a similar picture. For the nine months ended Oct. 31, Nimble generated revenue of $84 million -- growth of 150% over the comparable period in 2012. The operating expenses soared to roughly 99% of revenue.
The good news is that this was an improvement from 124% of revenue during 2012. The part that really sticks out as similar to Violin was the $51 million spent on sales and marketing. That amount alone nearly equals the total gross profit. These numbers were similar to those that caused the disappointment in Violin at the time of the IPO, which raises the question of why any investor would pay up for Nimble.
The Fusion-io experience should further scare off any investor thinking of buying a high-flying flash-storage stock. Fusion-io was the darling flash-storage provider with huge customers in Apple and Facebook, yet the company never could generate much of a profit. Fusion-io reached revenue of $432 million in 2012, but the margins were never impressive, and now those major customers have curtailed spending.
The company once soared above $40, but the stock now sits below $10. The market cap is now below $1 billion -- down from $3.3 billion -- even though the company is vastly larger than Nimble, which commands a market cap nearly three times as large.
The lessons of Violin Memory and Fusion-io should be a warning to anybody jumping into Nimble Storage now. Ultimately, the hybrid solution might be the best alternative in the flash-storage sector. But until Nimble or any other provider is able achieve these growth rates on the back of much lower operating expenses as a percentage of revenue, the sector should be avoided. Investors are understandably excited about the potential, but the past suggests they proceed with extreme caution
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