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STEC Inc. Reports Operating Results (10-Q)

May 06, 2010 | About:
10qk

10qk

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STEC Inc. (STEC) filed Quarterly Report for the period ended 2010-03-31.

Stec Inc. has a market cap of $695.8 million; its shares were traded at around $13.83 with a P/E ratio of 9.1 and P/S ratio of 2. STEC is in the portfolios of Richard Perry of Perry Capital, Steven Cohen of SAC Capital Advisors, Jeremy Grantham of GMO LLC, George Soros of Soros Fund Management LLC, Chuck Royce of Royce& Associates.

Highlight of Business Operations:

Over the past several years, we have expanded our custom design capabilities of Flash products for OEM applications. We have invested significantly in the design and development of customized Flash controllers, firmware and hardware and made strategic acquisitions that have expanded our Flash controller design capabilities and enhanced our capabilities to use third-party controllers. We expect to continue to make investments in Flash custom design capabilities and controller development. Flash product revenue decreased 58% from $56.1 million in the first quarter of 2009 to $23.8 million in the first quarter of 2010. Sales of Flash products represented 61% and 88% of our total revenues in the three months ended March 31, 2010 and March 31, 2009, respectively. An inventory carryover related to sales made to our largest customer during the second half of 2009 negatively impacted our Flash revenues in the first quarter of 2010. While we do not have full visibility into customer inventory levels, we have received recent indications that the inventory situation at this customer has been substantially resolved, including the receipt of new purchase orders for scheduled deliveries in the second quarter of 2010. Despite these recent indications, we have limited visibility and assurance as to the level of future sales to this customer.

We also offer both monolithic DRAM modules and DRAM modules based on our proprietary stacking technology. DRAM product revenue increased 126% from $6.6 million in the first quarter of 2009 to $14.9 million in the first quarter of 2010. Sales of DRAM products represented 38% and 10% of our total revenues in the three months ended March 31, 2010 and March 31, 2009, respectively. The increase in sales of DRAM products in absolute dollars and as a percentage of our total revenues was due primarily to an increase in product sales to a single customer.

With certain exceptions, sales of our products are generally made through individual purchase orders and, in certain cases, are made under master agreements governing the terms and conditions of the relationships. We market our products to OEMs and OEM distributors, leveraging our custom design capabilities to offer custom memory solutions to address their specific needs. Historically, a limited number of customers have accounted for a significant percentage of our revenues. Our ten largest customers accounted for an aggregate of 79.4% of our revenues during the first three months of 2010, compared to 79.3% of our revenues during the first three months of 2009. We had two customers account for more than 10% of our revenues, at 34.7% and 15.2%, for the three months ended March 31, 2010, compared to four customers, which accounted for more than 10% of our revenues, at 20.2%, 13.4%, 12.2% and 12.0%, for the same period in 2009.

International sales, which are derived from billings to foreign customers, accounted for 71.5% of our revenues in the first three months of 2010, compared to 49.2% of our revenues in the first three months of 2009. During the three months ended March 31, 2010, 27.6% and 23.0% of revenues were derived from billings to customers in Malaysia and Singapore, respectively. During the three months ended March 31, 2009, 20.3% and 15.6% of our revenues were derived from billings to customers in Malaysia and Taiwan, respectively. Substantially all of our foreign sales are shipped internationally through our facility in Malaysia. For additional information regarding our international sales, see Item 1A, 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 $38.8 million in the first quarter of 2010, compared to $63.5 million in the same period in 2009. Revenues decreased 39% in the first quarter of 2010 due primarily to an 18% decrease in unit shipments. The decrease in revenues was due primarily to a 58% decrease in Flash memory sales, partially offset by a 126% increase in sales of DRAM products. Within Flash memory sales, shipments of our Zeus IOPS SSDs into the enterprise-storage market decreased 60% from $25.7 million in the first quarter of 2009 to $10.4 million in the first quarter of 2010. In addition, an inventory carryover related to sales made to our largest customer during the second half of 2009 negatively impacted our Flash revenues in the first quarter of 2010. While we do not have full visibility into customer inventory levels, based on recent indications, including the receipt of new purchase orders for scheduled deliveries in the second quarter of 2010, we believe the inventory situation at this customer has been substantially resolved. Despite these recent indications, we have limited visibility and assurance as to the level of future sales to this customer.

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 guaranteed 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 three months ended March 31, 2010, and a minimum liquidity ratio of 1.0 to 5.0 through March 31, 2010. The Credit Facility expires on July 30, 2010. As of March 31, 2010, there were no borrowings outstanding under our Credit Facility with Wachovia, and we were in compliance with all required covenants. Our leverage and minimum liquidity ratios for the three months ended March 31, 2010 were 0.0 and 5.5, respectively. The Credit Facility will be used to maintain liquidity and fund working capital requirements, on an as needed basis.

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