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STEC Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 3, 2009 04:18PM

STEC Inc. (STEC) filed Quarterly Report for the period ended 2009-09-30. Simple Technology is a technology solutions provider offering products based on dynamic random access memory or DRAM static randomaccess memory or SRAM and Flash memory technologies. The company designs manufactures and markets a comprehensive line of custom and standard memory and storage products as well as connectivity products that connect memory cards and hard drive upgrade kits to PCs. These products are used in high performance computing networking and communications consumer electronics and industrial applications. Stec Inc. has a market cap of $1.07 billion; its shares were traded at around $21.56 with a P/E ratio of 31.7 and P/S ratio of 4.7.

Highlight of Business Operations:

A limited number of customers account for a significant percentage of our revenue and our level of customer concentration has increased. Our ten largest customers accounted for an aggregate of 83.9% of our revenues in the first nine months of 2009, compared to 78.4% of our total revenues in the first nine months of 2008, and 86.1% of our revenues in the third quarter of 2009, compared to 82.2% of our total revenues in the third quarter of 2008. We had one customer account for more than 10% of our revenues, at 37.9%, for the nine months ended September 30, 2009, compared to two customers, which accounted for more than 10% of our revenues, at 40.9% and 13.7%, for the same period in 2008. We had one customer account for more than 10% of our revenues, at 53.7% in the third quarter of 2009, compared to three customers, which accounted for more than 10% of our revenues, at 36.5%, 12.3%, and 10.7%, for the same period in 2008.

International sales, which are derived from billings to foreign customers, accounted for 49.4% of our revenues in the first nine months of 2009, compared to 21.8% of our revenues in the first nine months of 2008 and 50.9% in the third quarter of 2009, compared to 29.3% of our revenues in the third quarter of 2008. During the nine months ended September 30, 2009, 9.8%, 10.0% and 10.7% of our revenues were derived from billings to customers in the Czech Republic, Singapore and Taiwan, respectively. During the third quarter of 2009, 25.0% of our revenues were derived from billings to customers in the Czech Republic. The increase in international sales as a percentage of our revenues in the third quarter of 2009, compared to the same period in 2008, and the first nine months of 2009, compared to the same period in 2008, is due to the increase in sales of our ZeusIOPS products to new customers in 2009. No foreign geographic area or single foreign country accounted for more than 10% of revenues during the nine months ended September 30, 2008. For the nine months ended September 30, 2009 and 2008, more than 95% of our international sales were denominated in U.S. dollars. In addition, our purchases of DRAM and Flash components are currently denominated in U.S. dollars. However, we do face risks associated with doing business in foreign countries.

Net Revenues. Our revenues were $98.3 million in the third quarter of 2009, compared to $63.7 million in the same period in 2008. Revenues increased 54% in the third quarter of 2009 due primarily to a 211% increase in average sales price (“ASP”) of our products from $36 in the third quarter of 2008 to $112 in the third quarter of 2009, partially offset by a 53% decrease in unit shipments. The increase in revenues and ASP was due primarily to a 102% increase in Flash memory sales and a 324% increase in ASP for Flash products, partially offset by a 50% decrease in sales of DRAM products. Within Flash memory sales, shipments of our Zeus IOPS SSDs into the enterprise-storage market grew to $60.7 million for the third quarter of 2009, an increase of 343% from $13.7 million for the third quarter of 2008. The increase in our Flash ASP resulted from increased sales of higher ASP Zeus IOPS and MACH8 IOPS products in the third quarter of 2009, compared to the same period in 2008. Unit shipments decreased due primarily to declines in sales of our DRAM modules, ultra-mobile SSDs and CompactFlash products. We expect sales of our ultra-mobile SSD products to decline as we continue to focus on growing our higher ASP Zeus IOPS and MACH8 IOPS products.

Research and Development. Research and development expenses are comprised primarily of personnel costs for our engineering and design staff and the cost of prototype supplies. Research and development expenses were $6.6 million in the third quarter of 2009, compared to $5.7 million in the third quarter of 2008. Research and development expenses as a percentage of revenues were 6.6% in the third quarter of 2009 compared to 9.0% in the third quarter of 2008. Research and development expenses increased due primarily to an increase in payroll and payroll-related costs from our expanding global research and development efforts from our facilities in the United States, United Kingdom, Taiwan and Malaysia predominantly related to our Flash product line which includes the advancement of high-performance SSDs.

Net Revenues. Our revenues were $248.2 million in the first nine months of 2009, compared to $170.5 million in the same period in 2008. Revenues increased 46% in the first nine months of 2009 due primarily to a 110% increase in Flash memory sales and a 222% increase in ASP for Flash products, partially offset by a 57% decrease in sales of DRAM products and a 14% decline in our DRAM ASP. Within Flash memory sales, shipments of our Zeus IOPS SSDs into the enterprise-storage market grew to $144.0 million for the first nine months of 2009, an increase of 339% from $32.8 million for the first nine months of 2008. The increase in our Flash ASP resulted from increased sales of higher ASP Zeus IOPS and MACH8 IOPS products in the first nine months of 2009, compared to the same period in 2008. The decrease in our DRAM ASP resulted primarily from a decrease in selling prices for DRAM modules. Unit shipments decreased due primarily to declines in sales of our DRAM modules and CompactFlash products, partially offset by sales of our ultra-mobile SSDs. However, going forward, we expect sales of our ultra-mobile SSD products to decline as we continue to focus on growing our higher ASP Zeus IOPS and MACH8 IOPS products.

On July 30, 2008, we entered into an agreement for a $35 million two-year senior unsecured revolving credit facility (the “Credit Facility”) with Wachovia Bank, National Association (“Wachovia”). Borrowings under the Credit Facility will bear interest at a floating rate equivalent to, at our option, either (i) LIBOR plus 0.70%–1.20% depending on our leverage ratio at each quarter end or (ii) Wachovia’s prime rate, announced from time to time, less 1.00%–1.50% depending on our leverage ratio at each quarter end. The Credit Facility is guarantied by certain of our domestic subsidiaries. In addition, if we make a loan to any of our foreign subsidiaries, we have agreed to pledge to Wachovia our intercompany note from such foreign subsidiary. The Credit Facility agreement contains customary affirmative and negative covenants, some of which require the maintenance of specified leverage and minimum liquidity ratios. We were subject to a maximum leverage ratio of 2.0 to 1.0 for the quarter ended September 30, 2009, and a minimum liquidity ratio of 1.0 to 5.0 through September 30, 2009. The Credit Facility matures on July 30, 2010. As of September 30, 2009, there were no borrowings outstanding under our Credit Facility with Wachovia. As of September 30, 2009, we were in compliance with all required covenants. Our leverage and minimum liquidity ratios for the three months ended September 30, 2009 were 0.0 and 4.02, respectively. The Credit Facility will be used to maintain liquidity and fund working capital requirements, on an as needed basis.

Read the The complete Report

STEC is in the portfolios of Richard Perry of Perry Capital, Arnold Van Den Berg of Century Management.


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