February 23, 2010 / 10:11 PM / 10 years ago

UPDATE 3-Stec continues to see inventory impact, shares sink

* Q4 adj EPS $0.51 in line with estimates

* Q4 rev $106 mln vs est $101.8 mln

* Sees Q1 results below estimates

* Says inventory issue to continue to hurt in H1 2010

* Shares down 30 pct after market (Adds analyst comments, updates share movement)

By Deepti Govind

BANGALORE, Feb 23 (Reuters) - Stec Inc STEC.O, which makes flash memory storage products, posted quarterly earnings in line with estimates, but an inventory overhang at its top customer EMC Corp EMC.N dampened first-quarter forecast and sent the company’s shares down 30 percent in extended trade.

Stec, which makes the new solid-state drive optical media format, said it expects a tough first half of 2010 as the inventory carryover at EMC is expected to continue to hurt sales to that company during the period.

“We have been working diligently to increase solid-state drive (SSD) sales to other major customers by introducing new marketing incentive programs for 2010,” Chief Executive Manouch Moshayedi said, adding that he expects to see benefits of these efforts during the second half of this year.

Industry watchers were anticipating an update on how customers apart from EMC, like IBM Corp (IBM.N), were ramping in terms of using Stec’s products. [ID:nSGE60P0BW]

“All of the other customers are picking up slowly. It’s a matter of educating their sales people and their customers,” Moshayedi said on a conference call with analysts.

To add to the company’s woes, speculation about new competitors making their entry into the space this year and posing a threat to Stec’s near monopoly in the core enterprise storage business had also been dragging its shares down.

Stec said on the call it has not started seeing competitive pressure from anywhere at this point, and does not expect to see a product that could compete with its SSD drive in the market before the fourth quarter of this year.

However, Stifel Nicolaus analyst Aaron Rakers, who rates the stock a “hold,” said competition still remains a worry.

“That commentary doesn’t change our thought with regard to those competitive dynamics increasingly materializing as we move forward.”

Q1 VIEW DISAPPOINTS

For the first quarter, Stec forecast a loss, while analysts were anticipating a profit. Its revenue expectation was also significantly below Street estimates. [ID:nWNAB0798]

“We were previewing pretty weak... it’s fair to say that it is even weaker than what we anticipated,” Stifel analyst Aaron Rakers said.

Stifel had expected a profit of 5 cents a share for Stec in the first quarter, a fourth of what analysts on average were looking for, according to Thomson Reuters I/B/E/S.

The analyst added that Stec has not modeled any revenue from EMC for the first quarter.

Excluding items, Stec earned 51 cents a share from continuing operations for the fourth quarter, in line with analysts’ estimates.

Revenue rose over 86 percent to $106.0 million and gross profit margin increased to 50.9 percent from 27.8 percent.

Analysts were expecting revenue of $101.8 million, according to Thomson Reuters I/B/E/S.

Stec shares were down nearly $3.7, or 28 percent at $9.71 in trading after the bell. The shares, which have shed over 60 percent of their value over the past six months, closed at $13.42 Tuesday on Nasdaq. (Reporting by Deepti Govind in Bangalore; Editing by Unnikrishnan Nair)

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