STEC Inc. doesn’t seem at all threatening.
The company is run from a pair of two-story buildings in a vanilla Santa Ana business park. Inside, it looks like any other electronics assembly plant in Orange County.
STEC’s top executives,local technology veterans and brothers Mark and Manouch Moshayedi,are laid-back and quick with a joke.
But STEC’s products have come on the radar of the biggest disk drive makers as a potential threat to a lucrative part of their business.
Analysts and investors have taken notice, with shares of STEC doubling in the past year to a market value of $625 million last week.
Some see STEC as a potential disk drive slayer.
That’s a long shot. But the company’s products,drives for storing data using flash memory instead of spinning disks,are starting to gain sales at the expense of traditional drives.
STEC’s flash memory drives are found in servers from EMC Corp., IBM Corp. and Dell Inc., and possibly Hitachi Data Systems Corp. and Hewlett-Packard Co.
That’s a big concern for disk drive makers such as Scotts Valley-based Seagate Technology LLC and Lake Forest-based Western Digital Corp. Server drives are one of the last bastions of decent profits in the cutthroat drive business.
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STEC drive: no moving parts |
“If STEC is successful in what they do, it’s going to kill Seagate’s profit center,” said Richard Shannon, an analyst from Northland Securities LLC in Minneapolis.
In April, Seagate, the No. 1 maker of disk drives, sued STEC for alleged patent infringement. The suit is seen by many as a shot across the bow of an upstart rival.
“If Seagate is going after this little pipsqueak company, it must mean something,” Shannon said. “It’s a flail.”
STEC buys and assembles flash memory chips onto circuit boards, packages them into compact, boxy drives and ships them off to server makers.
Flash memory drives for laptops, a small part of its business, are sold to Lenovo Group Ltd., Apple Inc. and others.
Flash drives are more reliable, but more expensive, than traditional drives. That makes them a tough sell for consumer PCs.
But they’ve taken off for big makers of computers for storage networks, which are used by retailers, banks, companies and the military.
Taking Over
Mark Moshayedi, president and chief operating officer, is bold: “We see in the next three or four years flash drives from STEC and others wiping out the whole hard drive industry for high-end storage. The biggest guys in the industry are forced to follow in our footsteps instead of us following them.”
STEC has the edge of being among the first to market flash drives. Aliso Viejo-based SiliconSystems Inc. is a smaller competitor.
There’s industry talk that Seagate’s readying a flash drive.
“We still don’t see anyone coming out with something that can compete with our level for at least one or two years,” said Manouch Moshayedi, STEC’s chief executive.
Another big rival could be looming.
Fountain Valley-based Kingston Technology Co., the top maker of memory products for computers and consumer electronics, said earlier this month it’s set to make flash drives. It’s not known yet whether they’ll be geared toward consumers or server makers.
The Moshayedi brothers, who started out in computer memory products in the 1990s, say they aren’t worried about being picked on by bigger players, be it Kingston or Seagate.
Patent suits like Seagate’s “are done in the industry all the time to show power and to possibly reduce somebody’s stock price and put pressure on them,” Mark Moshayedi said.
The suit has done just the opposite, Manouch Moshayedi said.
“From the moment that Seagate sued us our stock price has been going up,” he said. “Most people realize that it’s a frivolous lawsuit.”
Seagate didn’t respond to calls for comment.
Analysts seem to be on STEC’s side.
“The Street has really taken note of it,” analyst Shannon said. “Right now STEC is the only (major company) that has this product out on the market.”
Buzz about flash drives and design wins with EMC in January have helped fuel STEC, the analyst said.
“In the last six months or so they are starting to generate reasonable volumes,” Shannon said. “Expectations have risen,people are interested in STEC’s story.”
The patent suit fuels speculation that Seagate could seek to buy STEC.
“I would suspect that they have already offered, especially since the stock was at $6 only a few months ago,” Shannon said.
STEC shares were trading at about $12 last week.
Other potential buyers could be EMC or IBM, according to Shannon.
The Moshayedis said STEC isn’t for sale and declined to comment if any potential buyers have come their way.
Manouch Moshayedi holds a 12% stake in STEC with a recent market value of about $7.3 million. Mark Moshayedi has a 4% stake worth about $2 million. Both executives have sold shares through the years.
The drives STEC makes are called solid state because they have no moving parts. That means flash drives use less power, are more durable and almost never crash.
STEC History
STEC grew out of the Moshayedis’ SimpleTech Inc., which started as a maker of memory modules for computers and later got into flash memory cards for consumer electronics.
A year ago, SimpleTech sold its consumer flash business to San Mateo’s Fabrik Inc., which has operations in Santa Ana and kept the SimpleTech name for its products.
After the deal, STEC adopted its current name and sole focus on flash drives.
Selling custom, high-end flash drives to the biggest storage networking companies is a “higher margin, more stable business,” Manouch Moshayedi said.
STEC typically sees around 35% profit margins on flash drives. Consumer flash cards netted around 10% at best, he said.
STEC saw sales of $190 million last year. Flash drives made up about $110 million.
The business was started in 1990 by Manouch Moshayedi and brother Mike Moshayedi, who retired after the consumer sale to Fabrik. All three brothers, including Mark, are natives of Iran.
Manouch and Mike Moshayedi had a structural engineering consultancy in Santa Ana before putting their money toward designing and selling computer memory products.
The company, first known as Simple Technology Inc., got off the ground with a bit of luck.
“When we advertised for salespeople only one person showed up,” Manouch Moshayedi said. “He was a used car salesman. We hired him.”
Mark Moshayedi, the youngest brother and an electrical engineer, joined in 1993.
Working together is “fantastic,” Mark Moshayedi said. “We have small arguments at 10 but by noon we are at lunch together and having fun.”
In 1994, the company got into flash with when it bought the flash controller business from Cirrus Logic Inc. A year later, it launched its first line of flash drives.
In 1998, the company got into making flash memory for industrial customers and server makers when it bought SiliconTech Inc.
Simple Technology went public in 2000 and shortened its name to SimpleTech in 2001.
What’s now STEC built up its flash drive business with the 2005 purchase of MemTech SSD Corp., a maker of controller chips and solid state drives based in San Jose. It bought Britain’s Gnutek Ltd. in 2006.
In 2007 STEC opened a site in Malaysia with manufacturing, testing and design that now employs some 250 workers.
