STEC Inc. Reports Operating Results (10-Q)
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 $503.2 million; its shares were traded at around $10.39 with a P/E ratio of 35.8 and P/S ratio of 2.2. Highlight of Business Operations: Historically, a limited number of customers have accounted for a significant percentage of our revenue. Our ten largest customers accounted for an aggregate of 79.3% of our revenues in the first three months of 2009, compared to 76.1% of our total revenues in the first three months of 2008. We had four customers account for more than 10.0% of our revenues, at 20.2%, 13.4%, 12.2% and 12.0%, for the three months ended March 31, 2009, compared to two customers, which accounted for more than 10.0% of our revenues, at 43.5% and 12.6%, for the same period in 2008.
International sales, which are derived from billings to foreign customers, accounted for 49.2% of our revenues in the first three months of 2009, compared to 21.9% of our revenues in the first three months of 2008. During the three months ended March 31, 2009, 20.4% and 15.6% of our revenues were derived from billings to customers in Singapore and Taiwan, respectively. No foreign geographic area or single foreign country accounted for more than 10% of revenues during the three months ended March 31, 2008. In the future, we expect substantially all of our foreign sales to originate internationally as our operations in Malaysia become established. For the three months ended March 31, 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. See Risk FactorsWe face risks associated with doing business in foreign countries, including foreign currency fluctuations and trade barriers, that could lead to a decrease in demand for our products or an increase in the cost of the components used in our products.
Net Revenues. Our revenues were $63.5 million in the first quarter of 2009, compared to $50.7 million in the same period in 2008. Revenues increased 25.4% in the first quarter of 2009 due primarily to a 72% increase in average sales price, or ASP, from $36 in the first quarter of 2008 to $62 in the first quarter of 2009, partially offset by a 26% decrease in unit shipments. The increase in revenues and ASP was due primarily to a 91% increase in Flash memory sales and a 123% increase in ASP for Flash products, partially offset by a 67% decrease in sales of DRAM products and a 22% decline in our DRAM ASP. Within Flash memory sales, shipments of our ZeusIOPS SSDs into the enterprise-storage market grew to $25.7 million for the first quarter of 2009, an increase of 267.1% from $7.0 million for the first quarter of 2008. The increase in our Flash ASP resulted from increased sales of higher ASP ZeusIOPS and Mach8IOPS products in the first quarter of 2009, compared to the same period in 2008. The
Gross Profit. Our gross profit was $23.0 million in the first quarter of 2009, compared to $16.7 million in the same period in 2008. Gross profit as a percentage of revenues was 36.3% in the first quarter of 2009, compared to 32.9% in the first quarter of 2008. The increase in gross profit in absolute dollars was due primarily to increased revenues and ASP for Flash products. Gross profit as a percentage of revenue in the first quarter of 2009 increased due primarily to a shift in product mix toward higher gross profit margin Flash products, partially offset by an increase in production and labor overhead due primarily to a $1.3 million increase in write-downs of our inventory related to obsolescence, excess quantities and declines in market value below our costs.
General and Administrative. General and administrative expenses are primarily comprised of personnel costs for our executive and administrative employees, professional fees and facilities overhead. General and administrative expenses were $7.4 million in the first quarter of 2009, compared to $5.3 million in the first quarter of 2008. General and administrative expenses as a percentage of revenues were 11.6% in the first quarter of 2009, compared to 10.5% in the first quarter of 2008. The increase in general and administrative expenses in absolute dollars and as a percentage of revenues was due primarily to a $1.1 million increase in legal expenses, a $410,000 increase in payroll and payroll-related costs, a $260,000 increase in depreciation expense related to our new facility in Malaysia. Legal expenses increased primarily as the result of an IP-litigation matter which began in the second quarter of 2008 and was settled in the first quarter of 2009. Payroll and payroll-related costs increased due to higher stock-based compensation and an increase in employee headcount.
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). 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) Wachovias 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, in the event 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 March 31, 2009, and a minimum liquidity ratio of 1.0 to 5.0 through March 31, 2009. The Credit Facility matures on July 30, 2010. As of March 31, 2009, there were no borrowings outstanding under our Credit Facility with Wachovia. As of March 31, 2009, we were in compliance with all required covenants. The Credit Facility will be used to maintain liquidity and fund working capital requirements, on an as needed basis
Read the The complete ReportSTEC is in the portfolios of Richard Perry of Perry Capital.