Up and Down for Stec

More than two years ago, Stec, Inc. was the king of the enterprise SSDs.

All the biggest storage companies were integrating its products being
added or replacing HDDs to speed enterprise applications, EMC being its
largest client. Look at the list of Stec’s other OEMs or customers: big
ones like Dell/Compellent, HP, EMC, Fujitsu, HDS/3par, HP, IBM, NetApp,
Oracle/Sun/Pillar, SGI and smaller ones including Area Data
Systems, Dot Hill, Huawei, IceWEB, Infortrend, LSI, NEC, Pure
Storage and Xyratex.

But Stec rests on its laurels being beaten by new rivals and late to move to new flash technologies..

On September 2009, company’s share was as high as $42,59. It was $6.96
on September 25, 2012 and the value of the firm is now evaluated at only
$131 million by Yahoo! Finance.

                                Stec’s Share From August 2009 to Now

History

Family’s Business
At the beginning it’s a family’s affair between three Moshayedi
brothers. In March 1990, Manouch and Mike started Simple Technology, in
computer memory upgrades. Three years later, the third one, Mark, joined
the company. They have owned a substantial amount of shares since its
inception. At a point Mike resigned leaving Mark as president and COO
and Manouch as CEO who just recently resigned and was replaced by Mark
as interim CEO. As of June 30, 2012, Manouch and Mark owned
approximately 17% of the outstanding common stock.

Firms acquired and sold
The company bought Cirrus Logic’s flash controller operation for CE
products in 1994 and SiliconTech in 1998. On September 26, 2000, it
completed IPO under the ticker symbol of STEC. It purchased in 2005
Memtech SSD, developer of solid-state flash drives, and in 2006 Gnutek,
developer of flash-based SSDs. The firm sold its consumer flash business
to Fabrik in 2007 for $48 million. Last acquisition in 2011 were assets
of KQ Infotech for R&D software in Pune, India.

Pioneer
In 1999 Stec was pioneering 1GB IDE SSDs and SDRAM modules and also
320MB Type II CF cards. But the real success began in 2007 with the
MACH8-MLC, a 1.8- and 2.5-inch MLC PATA and SATA SSD from 64GB to 512GB,
followed the same year with the 3.5-inch ZeusIOPS (256GB and 512GB)
with SAS, SATA and FC interfaces, this latter adopted in 2008 by EMC and
Hitachi.

But Then …

Market cap divided by three
In 2009, after announcing EMC as the sole customer of its ZeusIOPS
enterprise SSDs, Stec’s sales reached the $1 billion dollar market cap
milestone. Market cap is now down to $326 million.

Sales dramatically falling, huge losses
The drop began at beginning of year 2010 because of EMC, It’s last
financial results are ugly. Revenue for the second fiscal quarter of
2012 ended June 30, 2012 (2Q12) was $40.7 million, a decrease of 50.7%
from $82.5 million compared to 2Q11 and 19.2% from $50.4 million for
1Q12. And with huge losses: $49.6 million its most recent three-month
period and $60.3 million for the last six months.

Within flash-based product sales, representing 97% of total revenues in
2Q12, shipments of ZeusIOPS SSDs into the enterprise market decreased
48% from $62.1 million in 2Q11 to $32.2 million in 2Q12.

Class actions
Above these ugly financial results, the firm was and is engaged in
several class action complaints. Wall Street hates that. At a time, from
November 6, 2009 through March 2, 2010, seven of them were filed
against the company and several of its senior officers and directors in
the United States District Court for the Central District of California.

Here are some of them:

• Seagate files suit against Stec (April 2008) but finally dropped (February 2009)
• There were at least twelve class actions against Stec in 2009 and 2010 on behalf of purchasers of Stec’s common stock in 2009
• Solid State Storage Solutions filed a complaint against the company
  and several other defendants in the U.S. District Court for the Eastern
  District of Texas (September 2011)
• SEC charges Stec’s sales director Farzin Bazshushtari with insider trading and agreed to pay $153,353 (January 2012)
• SEC charges Stec’s chairman and CEO Manouch Moshayedi with insider
  trading (July 2012) and he was obliged to resigned from his executive
  positions in the company (September 2012)
• PricewaterhouseCoopers resigned as Stec’s auditor (September 2012)
  probably in relation with insider trading charge vs. Manouch Moshayedi

What are the reasons of this plunge since 2010?
The bulk of revenues come from its old ZeusIOPS technology and there is
no more monopoly as aggressive newcomers entered in the enterprise
market like Fusion-io, Intel, OCZ, Hitachi GST,  Samsung, SanDisk (with
Pliant), Seagate, SMART Storage Systems, Toshiba, WD and others.

Some of its customers have integrated and may continue to integrate
lower cost, lower performance SATA SSDs with a SAS or FC connectivity
bridge instead of Stec’s native SAS and FC ZeusIOPS products, thereby
offering a lower cost alternative.

The Santa Ana, CA company relied on only few big OEMs, particularly EMC
(28.3% of total sales in 2011), that progressively went to other
manufacturers. Remember that in 2009 Stec’s shares fall more than $8.29
to $14.86 after the company said EMC would carry over its 2009 inventory
into 2010.

Ten largest customers accounted for an aggregate of 85.3% of revenues
during 2Q12, the top three being EMC, IBM and Hitachi accounting for
around 70%. This percentage is decreasing, being 89.3% during the same
period one year ago and new revenue has not been added with new
customers.

Stec always focused solely on the OEM market but it is switching to sell
directly to end-users suggesting a tough time and becoming a competitor
of all its OEMs.

IC devices represent more than 80% of the component costs of its
products. Hynix, Samsung, and Toshiba supplied substantially all of them
and two of them are competitors in the SSD market.

It was too slow to transition to next generation products: cheaper
MLC-based enterprise SSDs, SSD cache software, PCIe accelerators (SSDs with PCIe interface faster than SAS and FC, are now a must for high-end applications),
devices for the embedded market.

To be acquired?
The current price to acquire Stec is so low that some companies involved
in storage could be interested to buy it, either to enter in a market
where there are not participating (Dell, EMC, HP, NetApp, Oracle/Sun for
example), or not strong enough and needing a better expertise in the
field (Micron, Seagate, WD?). There was already in the past rumors of
acquisition by Dell and Seagate.