Santa Ana’s STEC Inc. is showing signs of recovery, but it isn’t out of the woods yet, according to analysts.
The company, whose soaring shares crashed late last year amid a drop in orders from a key customer, makes flash memory drives used by banks, retailers and other large corporations.
Earlier this month, STEC offered a better-than-expected outlook for the current quarter as key customer EMC Corp. started ordering again.
That solves a near-term problem. But a longer-term need to cut STEC’s reliance on EMC remains, analysts said.
“We are cautiously optimistic on the recovering revenue profile at STEC, but we need to see a string of upside surprises and incremental customer wins,” said Mark Moskowitz, an analyst at J.P. Morgan Securities Inc. in San Francisco.
STEC’s been joined at the hip with Hopkinton, Mass.-based EMC, one of the top makers of data storage computers. EMC accounts for more than 60% of STEC’s yearly sales, which are projected at about $215 million this year.
Late last year, STEC’s stock tanked after it disclosed that EMC had built up too many of its drives and was pausing orders.
Analyst downgrades and a flurry of shareholder lawsuits followed.
The news sent shares freefalling. STEC, a star performer for most of last year, lost two-thirds of its value by the end of 2009.
It has struggled to regain lost ground since then. The company’s shares are down about 30% so far this year with a recent market value of about $620 million.
STEC’s products are known as solid state drives and have made inroads replacing traditional disk drives in corporate storage networks. Solid state drives have no moving parts and are touted for their reliability and energy savings.
EMC, Other Customers
The company has been pushing to expand beyond EMC.
Earlier this year, STEC rolled out marketing and incentive plans to help sell more drives to its other customers, which include Hitachi Data Systems Corp., Oracle Corp.’s Sun Microsys-tems, IBM Corp. and Fujitsu Ltd.
It’s unclear if those efforts are paying off.
A few weeks ago, Chief Executive Manouch Moshayedi said EMC’s orders are getting back to normal, hinting that it’s set to resume shipments to its biggest customer.
“While we don’t have full visibility into customer inventory levels, we have now received indications that the inventory situation has been substantially resolved,” Moshayedi said in a statement.
In a call with analysts, STEC said EMC placed an order for drives during the current quarter, which is expected to add some $10 million to the top line.
The move boosted STEC’s outlook beyond what analysts had been expecting.
STEC said it’s looking for second-quarter sales of $48 million to $50 million, surpassing analysts’ average revenue estimate of $37 million.
For profits, the company is expecting to break even or lose $1.5 million, less than the $5 million loss analysts had been expecting.
Some analysts were unimpressed.
“While we view the return of EMC as a positive, our model had already baked in a return of this revenue,” said Sherri Scribner, an analyst at Deutsche Bank Securities Inc. in New York.
She has a “hold” rating on the stock, suggesting clients shouldn’t sell or buy more of the stock.
That’s a pretty big reversal for Scribner, who in January named STEC a “top pick for 2010” and pegged a $36 per share price tag on the stock. Shares were trading at about $12 per share at recent check.
Analysts want to see STEC move toward a more stable customer base.
They took note of STEC’s inventory turn, which tallies the number of days it takes to sell its products.
STEC’s first-quarter inventory turn swelled to 266 days, up from 75 days in the fourth quarter.
Company watchers like to see a fairly snappy turnover so products aren’t sitting around losing value.
“While we are certainly encouraged by the new orders from EMC and better-than-expected guidance, we are very concerned by the significant jump in inventory,” said Betsy Van Hees, an analyst at Wedbush Securities LLC in San Francisco.
Van Hees downgraded STEC’s stock to “un-derperform” from “neutral” and lowered her price target to $9 per share, down from $10 per share.
Over-reliance on one big customer isn’t an uncommon problem for technology companies, especially those hawking cutting-edge products.
M-Flex
The same thing happened a few years ago at Anaheim’s Multi-Fineline Electronix Inc., a maker of flexible printed circuit boards for cell phones.
Motorola Inc. once made up more than 85% of sales at Multi-Fineline, known as M-Flex. That was great when Motorola’s Razr flip phone was hot. But when it lost its luster, Motorola slashed prices and forced its suppliers to do the same.
Investors were down on M-Flex for more than a year until it weaned itself from Motorola. These days, it counts Research in Motion Inc., maker of the BlackBerry, Sony Ericsson Mobile Communications AB and Apple Inc. as major customers, among others.
STEC needs to reshuffle its own customers for a balance that sits better with investors, analysts said.
“We believe STEC needs both customer diversification and increased solid state drive penetration beyond solely high-end storage applications,” J.P. Morgan’s Moskowitz said.
There’s also some concern about the pace of adoption of solid state drives, which still is in the early stages.
“We were somewhat disappointed other enterprise customers were not discussed, leaving us uncertain whether adoption is accelerating in the market,” said Thomas Weisel Partners LLC analyst Kevin Cassidy. “There is still uncertainty around the stock.”
