Executives at Santa Ana-based STEC Inc. are waiting for sales to their main customer to rebound as they pursue other business after dropping a bomb last week.
The maker of flash drives for corporations gave a sales and profit outlook for the current quarter that was about half of what Wall Street had been expecting.
The reaction was swift and brutal: Shares of STEC, a highflier for much of 2009, fell more than 20% after the news. The company had a market value of about $515 million last week.
STEC got burned by a drastic drop in orders from its biggest customer, Hopkinton, Mass.-based EMC Corp.
EMC made up 62% of STEC’s $106 million in sales during the fourth quarter. It isn’t expected to buy anything during the first quarter, killing the company’s sales and profit outlook.
STEC’s now expecting sales of $33 million to $35 million, well short of the $70 million analysts had been expecting.
Profits are seen coming in at $5.5 million to $6.5 million, versus the $10 million Wall Street had been looking for.
Analysts have worried about STEC’s reliance on EMC.
“STEC’s trials and tribulations at EMC have come full circle,” said Gary Hsueh of Oppenheimer & Co. in New York. “The warning signs were all there. The result was EMC completely turned of the spigot with STEC.”
Now the company is pursuing a strategy of trying to beef up sales to others while waiting for EMC to start buying again.
STEC is waiting for EMC to run down its stockpiles of drives and for its other customers to ramp up their ordering.
A pickup isn’t seen until the second half of the year.
“We are estimating that our customers are going to deplete their inventory by the end of the second quarter,” Chief Executive Manouch Moshayedi said in a call with analysts last week. “We should be able to get to a normal run rate as of that point.”
STEC has rolled out marketing and incentive plans to help sell more drives to its other customers, which include Hitachi Data Systems Corp., Sun Microsystems Inc., IBM Corp. and Fujitsu Ltd.
“We expect to start experiencing the benefits of these efforts during the second half of this year,” Moshayedi said.
The company’s drives are known as solid state since they have no moving parts. Instead of the spinning disks of traditional drives, STEC’s products store data using flash memory chips.
Solid-state drives help companies cut costs in storing and serving up data. The drives are more durable and use less power than disk drives.
STEC sells its drives to server makers, industrial users and the military. Sales to computer makers made up about two-thirds of the company’s fourth-quarter sales.
Drives for the military and industrial users made up a little less than 10% of its sales in the fourth quarter. The rest of STEC’s sales comes from circuit boards topped with memory chips that go into computers.
Concerns about competition and reliance on EMC appear to have ended Wall Street’s love affair with STEC.
The company was one of the best performing stocks of 2009, with shares running up nearly 800% at one point.
During the past six months, STEC’s stock has slipped on investor fears about competition and slowing sales of its drives to EMC.
Now it appears those fears were justified.
“STEC’s guidance was even worse than feared,” said Richard Kugele, an analyst at Needham & Co. in Boston. “With excess inventory weighing in and the remaining customers far behind in their own ramps, STEC is now poised to lose money through June.”
STEC’s shares are down some 70% in the past six months.
There’s one bright spot.
The company still enjoys a monopoly on what are called enterprise-grade solid-state drives, or flash drives used in corporate data rooms.
It’s a lead that might stick around until the end of 2010, when others are expected to begin shipping competing drives.
“We believe STEC saw significant benefits during 2009,” said Jeff Schreiner, an analyst at Capstone Investments LLC in San Francisco. “However, we believe that competitive offerings will likely be qualified for enterprise deployments prior to the next leg-up in solid- state drive growth. We don’t believe a similar market share, pricing power or first-to-market advantage will likely exist for STEC during future periods.”
Schreiner, who dropped his coverage of the stock last month, said in a research note that deployments of solid-state drives “have more than likely plateaued during the near term.”
For now, STEC is set to stay the course.
“We are ahead of everyone in this market and we are going to keep that lead going,” Moshayedi said. “We are not going to change tack because we had one down quarter.”
