STEC, Inc.: Solid state disk drive maker's risky bet pays off

As memory chips keep increasing in capacity, “solid state” devices with no moving parts relentlessly displace storage devices that depend on spinning disks. Just look what Apple’s iPod has done to portable CD players.

Now STEC, Inc. (Nasdaq:STEC), formerly known as SimpleTech Inc., based in Santa Ana, Calif., has made a bold move into solid state drives (SSDs) made from “flash” memory chips that can similarly replace hard disk drives (HDDs) on computers. Founded in 1990, and public since October 2000, SimpleTech has made a variety of memory products — such as memory boards, plug-in flash drives and plug-in SDDs — for both consumers and corporate systems, including Cisco (Nasdaq:CSCO) routers. But technical issues and costs have largely kept SDDs relegated to a niche of add-on storage devices rather than as full-blown replacements for HDDs.

So in February 2007, SimpleTech got serious. It sold its consumer business to privately held Fabrik Inc. for $43 million and changed its name to STEC, Inc. It also began developing a new line of high-capacity SSDs for EMC Corp. (NYSE:EMC), a leading provider of corporate storage, backup, and security products and services.

Investors didn’t get it, though. Between Jan. 3 and May 21 of 2007, the stock plunged to $5.80 from $12.92. It bottomed at $5.67 in early March 2008, after STEC announced a fourth-quarter profit of $1.4 million, down 85% on revenues that were down 28.7% to $53 million because of the missing consumer business.

But it’s now payoff time. On Jan. 14 of this year, STEC announced that EMC would begin incorporating its 73-gigabyte and 146-gigabyte ZEUS IOPS SSDs in some of its high-end networked storage systems. Corporations that conduct hundreds or even thousands of transactions every minute, such as investment and credit card companies, need ultra-fast storage and retrieval systems no matter what the cost; EMC began providing them.

The EMC deal “gave people in the industry a wakeup call that (SSD technology) is fully baked,” says Richard Kugele at Needham & Co. “EMC would never use something that wasn’t.” Kugele initiated coverage of STEC with a “buy” rating on March 10.

On May 5, STEC announced its first-quarter earnings. It earned $2.1 million, or $0.04 per share, down from a profit of $6.7 million, or $0.13 per share, in the same period a year earlier. But last year’s results were boosted by a gain of nearly $8 million from the sale of the consumer business to Fabrik. Revenues were up 7% to $50.7 . . .

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