Stec: Fiscal 2Q11 Financial Results

(in US$ millions)	2Q10	2Q11	6 mo. 10	6 mo. 11
Revenues	61.3	82.5	100.2	177.4
*Growth*		35%		*77%*
Net income (loss)

STEC, Inc. announced the company’s financial results for the second quarter ended June 30, 2011.

Revenue for the second quarter of 2011 was $82.5 million, an increase of 34.6% from $61.3 million for the second quarter of 2010 and a decrease of 13.1% from $94.9 million for the first quarter of 2011.

GAAP gross profit margin was 44.7% for the second quarter of 2011, compared to 42.6% for the second quarter of 2010 and 42.4% for the first quarter of 2011. GAAP diluted earnings per share from continuing operations was $0.18 for the second quarter of 2011, compared to $0.06 for the second quarter of 2010 and $0.27 for the first quarter of 2011.

Non-GAAP gross profit margin was 44.9% for the second quarter of 2011, compared to 42.7% for the second quarter of 2010 and 42.5% for the first quarter of 2011. Non-GAAP diluted earnings per share from continuing operations was $0.23 for the second quarter of 2011, compared to $0.09 for the second quarter of 2010 and $0.32 for the first quarter of 2011.

The favorable financial results comparisons between the second quarter of 2011 and the second quarter of 2010 were impacted by the inventory carryover from 2009 into 2010 by one of our largest customers.

Business Outlook – Near-term challenges
Roadmap to 2012 being led
by three major product line initiatives
"Our operating results for the second quarter of 2011 were in line with our guidance," said Manouch Moshayedi, STEC’s Chairman and CEO. "As a result of several market challenges, our third quarter results are expected to decline significantly from the second-quarter levels. We believe that these challenges are the result of two factors. First, we believe lower-cost SSD solutions have been qualified at some of our customers. These alternative solutions usually involve coupling lower-cost, lower performance SATA-based drives with a connectivity bridge to a SAS or FC interface. We believe that some of our OEM customers are selling their systems incorporating these alternative products to end-users at prices lower than the OEMs are currently able to offer the same systems that incorporate our ZeusIOPS SSD solutions. Despite the performance and latency advantages of ZeusIOPS, our OEM customers may be using the alternative solutions to reduce the overall cost of end-user SSD implementations in order to stimulate overall demand. Second, we believe that competitive SAS SSDs may have been qualified at some of our major customers, which has led to fewer orders for our SAS SSD solutions for the third quarter.

"Although we face these near-term challenges, we continue to make significant progress with key product initiatives. We believe that these initiatives will drive renewed momentum in our business and that these challenges should subside once these products are in production. First, we continue the transition of our ZeusIOPS SSD to its next generation (Gen 4) using lower-cost MLC Flash media and based on our ASIC design replacing more costly FPGAs. With qualification efforts underway, we expect to have this version of the product qualified at several of our major OEM customers by the second quarter of 2012.

"In addition, we have set the stage for the launch of our PCIe accelerator card and plan to deliver samples to customers in the third quarter of this year. This product leverages the same ASIC design as our ZeusIOPS SSD and will be delivered using MLC Flash media enhanced by our CellCare technology. This product initiative should enable us to penetrate the Enterprise-Server market with a more cost-effective alternative to current PCIe products. We expect to have this product in production in the second quarter of 2012.

"Furthermore, we are in the process of qualifying MLC versions of our MACH16 SATA drives. Based on our proprietary ASIC design and enhanced by our CellCare technology, these drives are ideally suited for the Enterprise-Server market and will allow us to compete in this large and growing sector with a favorable price-to-performance value proposition. We believe that our MACH16 drives will be qualified at some of our customers by the end of this year and be in production by the first quarter of 2012.

"Lastly, we have significantly advanced the development of our data caching software. Our caching solution is being designed to optimize hardware utilization by improving server IO performance through dynamic placement of data within a system. As this enhances the value of SSDs to end-users, we expect this software to accelerate adoption of our SSDs into the Enterprise-Server market."

Guidance
STEC’s current expectation for the third quarter of 2011 is as follows: