Drama at Violin Memory

Violin has had a rather tumultuous time in market. Post IPO, they’ve not had a great time selling. They have an interesting product, but with SanDisk coming out with their kit, and many others in the competitive flash array space, this can’t be a fun time for them. They don’t have a large installed base to protect, and their competitors are numerous and fairly well funded. Add to the mix that, as a post-IPO public company, they no longer have the luxury of not hitting targets … they will get slaughtered in the market.

They’ve underwhelmed a number of investors as of late with rumors/speculation around what they need to do to shake out the doldrums of revenue. So much so, that an activist investor is looking to make changes.

Activist investors are looking to get better returns in a number of higher profile scenarios, and will usually want the companies to cut costs, sell off or shutter underperforming units.

What’s interesting in the letter is that the investor notes the stock is down far more than the market as a whole and has dropped significantly since the new CEO took over.

The confidence reflected in your letter does not seem to be shared by the market – as the stock price is down 24% since the last quarterly earnings report. Furthermore, the stock price today is down 48% since the beginning of the year and down 33% since Mr. Denuccio was named CEO.

As someone who used to work at a company battered by Wall Street, I can tell you that stock underperforming and not seeming to reflect what you believe to be the companies fundamental value is demoralizing. There was a time when I was at SGI, where our value was lower than the cash we had on hand. This has interesting and negative impacts in customer discussions, as customers note this, and ask you about it.

In 1999 I had a conversation with a large university about Origin systems. What it came down to was when they asked us “will you be in business next year”, and I could not, in all honesty, answer that in the affirmative. Think about what that does to sales.

This said, these investors sometimes get it right, and SGI was … well … the management was … quite clueless at the time.

Violin has a very competitive environment, fighting to take heavily defended hills, coupled with many other armies, often better equipped, trying to take the same hills, while the entire landscape they are all fighting for is being eaten away by hyperconverged systems. Like what the day job makes.

Their best bet would be to stop fighting this, and do something hyperconverged … or buy someone hyperconverged. The former may be hard. The latter, somewhat less hard.

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