STEC shares sank like a stone after it predicted a depressed outlook in its quarterly report. It never really recovered from last year's EMC over-purchase fiasco, and has suffered from over-priced product and missing PCIe flash.
The Wall Street Journal had STEC stock down 36 per cent in after-hours trading, touching $10.68. Ouch!
STEC, which makes solid state drive (SSD) replacements for storage array hard disk drives (HDD), reported second quarter revenues of $82.5m, a satisfyingly big leap of 34.4 per cent up from the year-ago quarter's $61.3m – but that quarter was affected by EMC going on an SSD purchase freeze, having bought too many STEC Zeus IOPS Fibre Channel SSDs.
EMC has since brought in a second SSD source and is moving to lower-cost multi-level cell (MLC) flash, instead of relying completely on the faster and costlier single level cell (SLC) flash Zeus drives.
Meanwhile STEC competitors have romped away with cheaper SAS and SATA interface SSDs, with only one, Hitachi GST using Intel help, developing a FC SSD to compete directly with STEC's FC line. Fusion-io has developed the PCIe flash drive space into a significant flash market sector, and everybody and their brother, but not STEC, are piling into that market.
The problem is that STEC has relied for too long on its higher-priced product and lost control of a market it once dominated to an almost embarrassing degree. It now has lower-priced MLC and PCIe product coming, saying they will have its enterprise class features as well as being low-priced, but they are not here yet, and so STEC's management sees a depressed third quarter.
Has STEC become a lumbering oil tanker of a supplier?
The bad news
CEO and chairman Manouche Moshayedi laid out the bad news:
As a result of several market challenges, our third quarter results are expected to decline significantly from the second-quarter levels. We believe that these challenges are the result of two factors. First, we believe lower-cost SSD solutions have been qualified at some of our customers. These alternative solutions usually involve coupling lower-cost, lower performance SATA-based drives with a connectivity bridge to a SAS or FC interface.
We believe that some of our OEM customers are selling their systems incorporating these alternative products to end-users at prices lower than the OEMs are currently able to offer the same systems that incorporate our ZeusIOPS SSD solutions... Our OEM customers may be using the alternative solutions to reduce the overall cost of end-user SSD implementations in order to stimulate overall demand.
Second, we believe that competitive SAS SSDs may have been qualified at some of our major customers, which has led to fewer orders for our SAS SSD solutions for the third quarter.
The third quarter outlook is for a significant decline to revenues of $70-72m. As an additional encouragement to investors fleeing the stock, the second quarter revenues were 13.1 per cent lower than the first quarter's, indicating an accelerating trend of lower quarterly earnings.
Okay, two snow showers don't make a winter but investors are febrile and other flash vendors, such as Fusion-io, are doing better. Where would you put your money?
Regaining lost ground
What is STEC doing to claw back its lost ground?
Moshayedi outlined four initiatives:
- Make Zeus MLC: A "transition of our ZeusIOPS SSD to its next generation (Gen 4) using lower-cost MLC Flash media and based on our ASIC design replacing more costly FPGAs. With qualification efforts underway, we expect to have this version of the product qualified at several of our major OEM customers by the second quarter of 2012." That's nine months away.
- Launch a PCIe flash product: "[We] plan to deliver samples to customers in the third quarter of this year. This product leverages the same ASIC design as our ZeusIOPS SSD and will be delivered using MLC Flash media enhanced by our CellCare technology. This product initiative should enable us to penetrate the Enterprise-Server market with a more cost-effective alternative to current PCIe products. We expect to have this product in production in the second quarter of 2012." That's nine months away again.
- Develop MLC SSD product: "We are in the process of qualifying MLC versions of our MACH16 SATA drives. Based on our proprietary ASIC design and enhanced by our CellCare technology, these drives are ideally suited for the Enterprise-Server market and will allow us to compete in this large and growing sector with a favorable price-to-performance value proposition. We believe that our MACH16 drives will be qualified at some of our customers by the end of this year and be in production by the first quarter of 2012." Better: that's only six months away.
- Enhanced data caching: "Our caching solution is being designed to optimise hardware utilisation by improving server I/O performance through dynamic placement of data within a system." This should improve the prospects for the PCIe product, but array manufacturers including EMC, Dell and NetApp are developing their own PCIe flash caching software: witness EMC's Project Lightning.
STEC like lumbering oil tanker
The net of this is that it could be nine to 12 months before we see evidence of significantly better revenues at STEC. Instead of acting like a nimble start-up, the company has taken on the attributes of a heavily laden oil tanker, which takes ages to change course while nimbler craft scoot off to new waters leaving it far behind.
STEC's product development efforts have lagged the field while it has milked its Zeus IOPS revenues for far too long. Management took its eye off the ball and is now having to run fast to catch up. Competitors know what they have to do and STEC is in a flash dog fight. ®