Santa Ana-based solid-state storage drive maker STEC Inc. and its top executive could soon be hit with a civil injunction from the Securities and Exchange Commission involving the trading of its securities two years ago.
STEC recently disclosed that the commission is considering a civil injunction action “against the company, its CEO and president, charging them with violations of the antifraud and reporting provisions of the federal securities laws,” according to a filing the company made with the regulatory agency.
Separately, STEC’s board last week authorized a stock repurchase of up to $15 million.
That would be enough to buy about 1.6 million shares, or approximately 3% of the total outstanding, at recent prices.
Chief Executive Manouch Moshayedi said management and the board believes in the “long-term value of STEC” and the planned stock repurchase “reflects our confidence in STEC’s long-term strategy and demonstrates our commitment to delivering shareholder value.”
STEC expects to complete the stock repurchase this month.
Regulators began looking at the company in 2009 to determine if it violated federal securities laws by making false and misleading statements regarding a secondary offering earlier that year.
“Fully Cooperating”
STEC and Moshayedi have received subpoenas in the investigation and are “fully cooperating” with the SEC, according to the filing.
The company and Moshayedi will have an opportunity to respond to the SEC before a formal decision is made on further action in the case.
The company did not respond for comment for this story.
The SEC filing was one in a string of negative reports to hit STEC in the last month. The company also posted disappointing earnings for the second quarter, and industry analysts have raised questions about its standing in the market.
STEC’s share price has dropped some 40% in recent weeks. It’s down nearly 50% for the year to a market value of about $527 million.
The recent dip has been fueled in part by the disappointing second quarter as well as an outlook well below consensus estimates for the current quarter. STEC projected an adjusted third-quarter profit of $4.1 million to $5.1 million, which is about 66% down from a year ago.
The forecast falls well short of the $15.9 million analysts had been expecting on average.
STEC said it foresees revenue of $70 million to $72 million for the current quarter, which would be down about 17% from a year earlier.
That fell short of Wall Street expectations of nearly $96 million in revenue.
Report Draws Ire
THE NEWS:
Securities and Exchange Commission reviewing secondary offering by drive maker STEC in 2009
BACKGROUND:
Company’s shares have plummeted on word of the probe and disappointing results
WHAT’S AHEAD:
STEC lowered outlook for current quarter, one analyst suggests going private
The earnings report and outlook drew the ire of analysts as Needham & Co., The Benchmark Co., JP Morgan Chase & Co., ThinkEquity, Northland Securities and FBN Securities all downgraded STEC.
An analyst at Gleacher & Co. even suggested that it might be time for STEC to weigh a move back to being a private company.
“Despite being consistently profitable over the years, STEC’s revenue growth has been consistently inconsistent,” Brian Marshall wrote in an investor note.
The company has been facing increasing criticism in investment circles for its customer concentration.
Three customers make up 70% of STEC’s revenue, according to analysts. “This puts the company in a precarious position whereby a problem with just one customer would have a large effect on STEC’s operations, and it is dealing with customers who can exert significant pressure given the company’s reliance,” according to a recent blog on investor website Seeking Alpha.
Consolidation could also hit the flash memory market, putting STEC among a handful of possible acquisition targets for larger competitors, according to industry watchers.
Growing Market
Smaller solid-state drive makers are gaining corporate business as information technology spending returns. Solid state drives are seen replacing disk drives for high-end corporate data storage since they’re more reliable and cost less to run.
Companies are projected to spend $4.5 billion on the technology in 2015, up from nearly $1 billion in 2010, according to Stamford, Conn.-based market researcher Gartner Inc.
STEC lowered its third-quarter quarter guidance amid increasing competition from lower-priced solid state storage drive makers and weakening demand.
“As a result of several market challenges, our third-quarter results are expected to decline significantly from the second-quarter levels,” Chief Executive Moshayedi said.
Smaller competitors include Salt Lake City-based Fusion-io Inc. and OCZ Technology Group Inc. in San Jose. Bigger companies include Irvine-based Western Digital Corp. and SanDisk Corp. in Northern California.
