Why Violin Memory, Inc. Shares Plummeted

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Violin Memory, (NYSE: VMEM  ) plunged 48% Friday after the high-speed data storage specialist came up well short of analysts' estimates with its first quarterly report as a public company.

So what: Quarterly revenue rose 37% year over year to $28.3 million, which translated to an adjusted net loss of $25.4 million, or $0.63 per share. By way of comparison, in the same quarter last year, the company recorded a net loss of $21.3 million, or $1.50 per share.

By contrast, analysts were looking for an adjusted net loss of just $0.44 per share on sales of $31.7 million.

Worse yet, Violin Memory also forecast fourth-quarter revenue in the range of $30, to $32 million, with non-GAAP gross margin of 53% to 55%, and non-GAAP operating expenses in the range of $39 million to $40 million. Meanwhile, analysts were modeling sales of $43.62 million. 

Now what: Remember, on a GAAP basis, the company lost $34.1 million last quarter, and had roughly $134.2 million remaining in cash, equivalents, and short-term investments as of October 31. As a result, while next quarter's projected operating expenses should reflect a solid sequential improvement over Q3's $48.4 million, Violin Memory needs to show investors it can grow sales quickly enough to close the gap before its cash runs out.

Until that happens, and even with shares trading 65% below the company's $9 IPO price and 55% lower than its first-day close, I think investors would be wise to steer clear.

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