STEC's 1Q Loss Narrower Than Expected
STEC Inc.’s (STEC) first-quarter 2013 adjusted loss per share of 48 cents was narrower than the Zacks Consensus Estimate of 50 cents loss per share. The adjusted or non-GAAP loss per share excludes employee severance fees, litigation costs and deferred tax valuation allowance, but includes stock-based compensation expense. The quarter’s loss per share was however significantly wider than a loss of 22 cents per share incurred in the year-ago period. The disappointing result was due to higher costs, lower pricing and market share loss.
Revenues
Total revenue for the first quarter was $22.0 million, down 56.3% on a year-over-year basis. The quarter’s result missed the Zacks Consensus Estimate of $28.0 million and was within the company’s guided range. The sales decline was due to market share loss.
Operating Results
Reported gross margin in the quarter was 26.8%, down from 35.9% in the year-ago quarter. Higher percentage of fixed production overheads and labor costs on revenues and competitive pricing pulled down the gross margin. This was partially offset by favorable flash-component costs.
Operating margin was (115.4%) versus (27.5%) in the year-ago quarter. The company’s total operating expenses decreased 2.1% on a year-over-year basis. Lower operating expenses were mainly due to a 21.4% and 1.5% year-over-year decline in research & development and selling & marketing expenses, respectively. This was partially offset by a 31.3% increase in general & administrative expenses.
Net loss on a GAAP basis was $25.5 million or 54 cents per share compared with a net loss of $10.7 million or 23 cents in the year-ago quarter.
After excluding non-recurring items associated with cost of sales and operating expenses after taxes but including stock-based compensation expense, adjusted net loss for the first quarter was $22.3 million or 48 cents per share versus $10.3 million or 22 cents loss per share in the year-ago quarter.
Balance Sheet & Cash Flow
Cash and cash equivalents were $132.9 million versus $158.2 million in the previous quarter. Inventories were at $42.1 million compared with $41.8 million in the prior quarter. Receivables were $7.3 million versus $13.5 million in the prior quarter. Cash from operating activities was $8.7 million, down from $21.3 million in the prior quarter. Capital expenditure was $1.5 million compared with $1.8 million in the prior quarter.
Outlook
Earlier, STEC marketed its products through OEMs (original equipment manufacturers). However, since the past few months, it has been marketing its products directly to enterprises and end-users. Management believes that the transition could lead to solid contributions from enterprise verticals. With this diversification strategy, the company believes that customer concentration risks will be mitigated. Moreover, the company expects the diversification procedure to start paying off from 2013.
For the second quarter of 2013, management expects revenues in the range of $23.0–$26.0 million. Non-GAAP loss per share is expected between 41 cents and 43 cents.
Our Take
STEC’s first-quarter results were disappointing as both the top and bottom lines were significantly down from the year-ago quarter. The company suffered the sixth consecutive quarter of loss. However, the reported loss per share was a tad better than the Zacks Consensus Estimate. The second-quarter guidance announced by the company is modest as management believes that the diversified marketing strategy will take some time to pay off.
Also, intense competitive pressure from SanDisk Corporation (SNDK), Micron Technology Inc. (MU) and OCZ Technology Group (OCZ) is a concern.
Currently, STEC has a Zacks Rank #4 (Sell).
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