STEC Still Disappoints, Loss Widens
STEC Inc.’s (STEC) fourth-quarter 2012 adjusted loss per share of 42 cents was wider than the Zacks Consensus Estimate of 39 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 significantly wider than a loss of 7 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 fourth quarter was $35.1 million, down 39.6% on a year-over-year basis. The quarter’s result missed the Zacks Consensus Estimate of $38.0 million and the company’s guided range. The sales decline was due to market share loss.
Operating Results
Reported gross margin in the quarter was 32.2%, down from 41.1% in the year-ago quarter. Higher percentage of fixed production overhead 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 (68.3%) versus (9.3%) in the year-ago quarter. The company’s total operating expenses increased 20.5% on a year-over-year basis. Higher operating expenses were mainly due to 49.2%, 17.8% and 6.5% year-over-year increases in general and administrative, selling and marketing, and research and development expenses, respectively.
Net loss on a GAAP basis was $23.2 million or 50 cents per share compared with a net loss of $3.6 million or 8 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 fourth quarter was $19.8 million or 42 cents per share versus $3.4 million or 7 cents loss per share in the year-ago quarter.
Balance Sheet & Cash Flow
Cash and cash equivalents were $158.2 million versus $186.2 million in the previous quarter. Inventories were at $41.8 million compared with $44.5 million in the prior quarter. Receivables were $13.5 million versus $13.2 million in the prior quarter. Cash from operating activities was $21.3 million, up from $18.1 million in the prior quarter. Capital expenditure was $1.8 million compared with $2.5 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 first quarter 2013, management expects revenues in the range of $21.0–$23.0 million. Non-GAAP loss per share is expected between 40 cents and 41 cents.
Management also stated that the company has hired some experienced personnel from the storage industry to boost its sales and marketing efforts. This will provide support to revenue growth, going forward.
Our Take
STEC’s fourth-quarter results were disappointing as both the top and bottom lines missed the Zacks Consensus Estimates. Moreover, it marked five straight quarters of loss for the company. The first-quarter guidance announced by the company is disappointing as management believes that the diversified marketing strategy will take some time to pay off.
Also, intense competitive pressures from SanDisk Corporation (SNDK), Micron Technology Inc. (MU) and OCZ Technology Group (OCZ) are concerns.
Currently, STEC has a Zacks Rank #4 (Sell).
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