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Big questions ahead of Violin Memory’s IPO

FORTUNE — Violin Memory this week filed for a $172 million initial public offering, after more than two years of teasing. Unfortunately, I’m not sure the wait was worth it.

For context, my sky-high expectations for Violin were of the company’s own doing. Here is what CEO Don Basile told Fortune in June 2011, in anticipation of an IPO by rival flash storage company Fusion-io (from which he was once fired):

“We’re going to watch the IPO very carefully, particularly to see how Wall Street likes the story. We understand they told Wall Street that they’re soon moving to $50 million quarters, which is something we plan to hit by Q4. If the market gives Fusion-IO the type of multiple it’s expecting, then we’ll probably conclude our own banker selection by late summer.”

Wall Street did like the story, with Fusion-io (FIO) pricing above range and being valued at nearly $2 billion at the start of its first day of trading. But, as Violin’s new registration documents tell us, the company didn’t hit $50 million quarters in late 2011. Or in 2012. Or so far in 2013. In fact, it’s highest revenue quarter was Q2 2013, at just $26.5 million.

So perhaps it’s not surprising that Violin didn’t end up picking bankers until the following spring. Shortly thereafter, the company raised more than $70 million in new VC funding at a valuation north of $800 million, with SAP Ventures and Highland Capital Partners joining existing investors like Toshiba and Juniper Networks .

But still no IPO papers. By last fall, stories began appearing about how the company had filed confidential IPO registration docs with the SEC and was talking about a $2 billion valuation. Even though Basile had been the source of prior valuation disclosures, these leaks seemed to be coming from banking sources.

One year later, Violin finally moved its registration into the public sphere and that $2 billion is a distant pipe-dream. And even $1 billion seems like a stretch.

The big problem is what Basile originally told Fortune: Wall Street is going to view Violin’s story through the prism of Fusion-io. And, unlike in 2011, that’s no longer a good thing.

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Fusion-io stock has fallen back to earth, opening this morning at just $10.66 per share (just barely over $1 billion in market cap). Now there are all sorts of reasons for this — including senior management tumult — but the reality is that Fusion-io still generates much more revenue (and fewer losses) than does Violin.

In its last fiscal year (ending June 30), Fusion-io reports a $38 million net loss on $432 million in revenue. Violin’s last fiscal year (ending Jan. 31) generated a $109 million loss on $74 million in revenue. In other words, Fusion-io has nearly 6 times Violin’s revenue and just one-third the losses.

With much worse top-line numbers than Fusion-io, how does Violin hope to achieve a higher valuation?

The answer, I’d guess, is a growth argument. Violin revenue for the first half of 2013 is up 70% over the same period in 2012, while Fusion-IO is only growing at around a 20% clip. And Violin’s losses — while also increasing — are increasing at a slightly lower rate than are Fusion-IO’s. so what Basile apparently will tell investors on the upcoming IPO roadshow is something like: “Yes, both companies started at the same time. But our best days are ahead of us while theirs are behind it.” And if a long-hold mutual fund manager asks if that apex is only going to last for a year or two, perhaps Basile will move on to the next meeting.

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Basile’s alternate argument could be that Fusion-io isn’t actually the proper comp, even though they both are “flash memory” companies going after similar customers. Fusion-io primarily makes flash storage cards  while Violin makes entire flash arrays (the latter of which are more expensive). Unfortunately, this is a line that is beginning to blur. Fusion-io still doesn’t have full all-flash arrays, but it’s getting closer (it currently offers hybrid arrays for small and mid-sized businesses). Moreover, Violin began selling flash memory cards this past spring. And if a hedge fund manager asks how different the two companies really could be given that Basile had run Fusion-io before being fired — and then secretly joined Violin, prompting a series of since-settled lawsuits — perhaps he’ll move onto the next meeting.

The upside wildcard is a pending strategic agreement with Toshiba, whereby the Japanese company would license Violin’s intellectual property related to its flash memory cards. It’s unclear exactly how large this deal would be, but it was substantive enough that Violin included it in the IPO registration (likely at the SEC’s request during the confidential filing period). And if a corporate pension fund manager asks why they should believe in the Toshiba deal, given that Basile’s original “$50 million quarter” projection was based on a signed resale agreement that Hewlett-Packard bailed on, then he’ll probably say: “Because Toshiba holds 14% of our stock and they wouldn’t do us like that.”

To be clear, none of this is to say that Violin won’t be able to go public. It’s been a very good year for IPOs, and buyers haven’t generally been scared off by growing losses at enterprise tech companies. But I don’t see how Violin gets to 10-figures, let alone much of a premium to where it priced its last private round. Then again, it’s surprised me before…

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