STEC: Fiscal 3Q08 Financial Results

STEC, Inc. announced its financial results for the third quarter ended September 30, 2008. Revenue for the third quarter of 2008 was $63.7 million, an increase of 42.5% from $44.7 million for the third quarter of 2007, and an increase of 13.3% from $56.2 million for the second quarter of 2008.

Non-GAAP gross profit margin was 34.1% for the third quarter of 2008, compared to 31.1% for the third quarter of 2007, and 35.3% for the second quarter of 2008. Non-GAAP diluted earnings per share was $0.10 for the third quarter of 2008, compared to $0.06 for the third quarter of 2007, and $0.09 for the second quarter of 2008.

GAAP gross profit margin was 32.1% for the third quarter of 2008, compared to 29.0% for the third quarter of 2007, and 32.3% for the second quarter of 2008. GAAP diluted earnings per share from continuing operations was $0.02 for the third quarter of 2008, compared to $0.01 for the third quarter of 2007, and $0.03 for the second quarter of 2008. Non-GAAP results in the third quarter of 2008 include start-up costs related to the Company’s Malaysia facility, costs related to its global tax-restructuring and the corresponding short-term impact of this restructuring on the Company’s effective tax rate, IP litigation costs, hiring and recruiting fees for key research and development employees, customer evaluation product costs for new DDR3 technology memory, employee severance and employee stock compensation expense. Non-GAAP results are explained and reconciled to GAAP results in tables included in this release.

Business Outlook
"We are very pleased with our results for the third quarter of 2008 and the momentum our business continues to sustain," said Manouch Moshayedi, STEC’s Chairman and Chief Executive Officer. "Despite challenging macro-economic conditions, we have once again grown our quarterly revenues and non-GAAP diluted earnings per share. The execution of our key SSD market initiatives — Enterprise-Storage and Enterprise-Server — positively impacted third quarter of 2008 results. Our existing OEM customers and their customers are now further along in their testing of our products as they prepare to deploy systems incorporating our SSDs. Furthermore, we continue to find additional opportunities for our ZeusIOPS and Mach8 product families for new customers across a wide array of industries looking to leverage the cost and power saving advantages of SSDs in their high-end storage and server platforms."

"I would like to clearly reiterate that we are on track to execute the strategic plan which we have consistently described to you during the last two years. Our results for the third quarter of 2008, including quarter-over-quarter and sequential quarterly growth of both revenue and non-GAAP diluted earnings per share, affirm our own confidence that we have properly aligned our business to succeed, particularly at a time when others are reeling from difficult market conditions and struggling to execute to a meaningful plan. I am pleased with our execution in the third quarter of 2008 and more so with our longer-term outlook."

Guidance
"We currently expect fourth quarter of 2008 revenue to range from $69 million to $72 million with diluted non-GAAP earnings per share to range from $0.11 to $0.14.’"

Enterprise-Storage and -Server Markets
"During the third quarter of 2008 we again achieved an increase in revenue from our ZeusIOPS line of SSDs to $13.7 million. We are forecasting sales of ZeusIOPS of more than $17 million during the fourth quarter of 2008 and therefore expect to achieve our long-stated goal for ZeusIOPS revenue in 2008 of $50 million, a target we had set for ourselves more than a year ago. We would also like to re-emphasize our belief in the potential of SSD to be a disruptive technology, even with a less than optimal macro-economic backdrop for adoption."

Additional Market Opportunity for SSD
"We began shipping production units of our SSD products to a major Notebook OEM customer for their entrance into the Ultra-Mobile Personal Computer (UMPC) market in the third quarter of 2008. While the Notebook and Ultra-Mobile PC markets are not the primary target markets for our SSD products, we believe that our selection as this customer’s SSD vendor in a key launch for them showcases our ability to design best-of-class solutions across a full range of SSD applications. Our SSD expertise, which has been developed to date through our successes in the Enterprise-Storage and Enterprise-Server markets, has enabled opportunities in these additional markets. We believe that the current environment of falling NAND Flash prices will help to further reduce the price of SSDs to the end-customer and stimulate demand in these markets."

Inventory Management
"We expect to reduce our inventory significantly, with a goal to reduce inventory to approximately $50 million by the end of the fourth quarter of 2008, and return to what we consider a normal run rate for our business. This is ahead of schedule as we had originally announced that we expected the inventory level to return to normalized levels by the end of the first quarter of 2009. We had maintained our inventory levels in the third quarter of 2008 primarily as a result of the procurement of NAND-Flash components based on customer forecasts and orders related to new product launches set for the second half of 2008 and the first quarter of 2009."