Orange County Business Journal

STEC Misses Q2 Expectations, Preps Losses in Class Action Lawsuit

Chris Casacchia Wednesday, August 8, 2012

Santa Ana-based solid-state storage drive maker STEC Inc. on Tuesday reported second quarter financial results that narrowly missed Wall Street expectations and took a sizeable charge related to a class action lawsuit.

The company posted revenue of $40.7 million, down 50.7% from a year earlier.

Analysts on average had forecast sales of $41 million.

STEC recorded a loss of $12.4 million in the June quarter, just below consensus estimates.

The company also said it took a $35 million charge in the recently ended quarter in preparation of a settlement agreement regarding class action lawsuits filed in 2010 for “alleged materially false and misleading statements and omissions regarding the sales, demand and competition for STEC's products.”

A settlement has not been reached and the charge-off represents the company’s “best estimate of the probable loss” and “the mid-point of the estimated settlement range.”

The Securities and Exchange Commission last month charged STEC Chief Executive Manouchehr Moshayedi with violating anti-fraud provisions of U.S. securities laws, and seeks a final judgment ordering him to relinquish any trading profits, pay prejudgment interest and financial penalties, and be permanently barred from serving as an officer and director of any registered public company.

The civil charges, filed July 20 in U.S. District Court in the Central District of California, allege Moshayedi withheld “critical nonpublic information” that was likely to negatively affect the company’s stock price and a secondary offering that was set to coincide with its second quarter financial results and its third-quarter revenue guidance in 2009.

The SEC alleged he did not call off the offering or abstain from selling his shares once he had the information. He instead engaged in a fraudulent scheme to hide the “truth” through a secret side deal, the SEC said, selling 9 million shares.

The class action lawsuits were filed two years before the federal agency took action.

The SEC late last month cleared STEC Inc. and its cofounder and director Mehrdad “Mark” Moshayedi of any wrongdoing related to the insider trading investigation.

The Moshayedis are brothers and each made $134 million from the sale, according to the SEC.

STEC also provided guidance for the current quarter that fell well below Wall Street estimates.

The company projects sales of $40 million to $42 million for the September quarter, down from $72 million a year ago.

Analysts forecast sales of $49 million in the September quarter.

STEC projects a loss between $12.4 million and $14.3 million, compared to an adjusted profit of $9.6 million a year ago.

Wall Street expects a loss of about $8.8 million in the current quarter.

The company is less than a year removed from a strategic shift from targeting original equipment manufacturers to serving a mix of solid state drive vendors, large companies and data centers and end-users, which prompted an expansion in sales and marketing to serve those segments, according to Moshayedi.

“The potential benefits of our marketing diversification strategy could include increasing our total addressable market, reducing dependency on a few customers, and shortening our overall sales cycle,” he said.

STEC shares were down 7.18% in midday trading Wednesday to a market value of about $324 million.