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STEC, Inc. (NASDAQ:STEC)

Q4 2008 Earnings Call Transcript

March 12, 2009 4:30 pm ET

Executives

Mitch Gellman – VP, IR

Raymond Cook – CFO

Manouch Moshayedi – Chairman & CEO

Analysts

Shawn Hannon – Needham & Company

Wenge Yang [ph] – Oppenheimer

Harron Rackers [ph] – Stifel Nicolaus

Richard Shannon – Northland Securities

Kevin Cassidy – Thomas Weisel Partners

Mike Crawford – B. Riley & Co.

Jeffrey Schreiner – Capstone Investments

Operator

Good day everyone, and welcome to the STEC Q4 and full-year 2008 earnings conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over the Vice President of Investor Relations, Mr. Mitch Gellman. Please go ahead sir.

Mitch Gellman

Thanks. Good afternoon everyone and thanks for joining us today for our Q4 2008 and full year earnings conference call. With me for today's discussion and question-and-answer session are Manouch Moshayedi, our Chairman and CEO; and Raymond Cook, our Chief Financial Officer.

For those of you planning to attend the B. Riley & Co. Annual Investor Conference in Las Vegas. We hope you will join us for our presentation next Thursday, March 19 at 9:30 AM Pacific time. The conference is being held at the Palm Casino Resort.

By the end of today’s conference call, we hope that you will have gained an up-to-date and a more in-depth understanding of STEC, including the exceptional results we achieved recently as well as our bright outlook discussed in today's earnings release as well as on the call. We hope the positive comments are refreshing particularly in light of the macroeconomic challenges that we are all our working our way through today.

Various comments about the company's future expectations, plans and prospects made during today's earnings conference call, including the question-and-answer session constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Act of 1934 as amended, and are based on management's current expectations. These forward-looking statements entail various significant risks and uncertainties that could cause our actual results to differ materially from those expressed in such forward-looking statements.

The risks and uncertainties are detailed under Risk Factors in filings with the Securities and Exchange Commission made from time to time by us, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, including the 8-K filed earlier today for this news release. The files are available under the category SEC Filings in the Investor Relations section at our website, www.stec-inc.com.

Forward-looking statements in this teleconference are generally identified by words such as believes, anticipates, expects, intend, may, will, and other similar expressions. However, these words are not the only way we identify forward-looking statements. In addition, any statements that refer to expectations, projections or characterizations of future events or circumstances are forward-looking statements.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which represents our views only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if the estimates change, and therefore you should not rely on the se forward-looking statements as representing our views as of any date subsequent to today.

Thanks again everyone for joining us today. And now I would like to turn the call over to Raymond.

Raymond Cook

Okay. Thank you, Mitch. We are very pleased to report or fourth quarter of 2008 net revenues of $56.9 million at the midpoint of our revised December guidance of $55 million to $59 million. Our ZeusIOPS SSD revenues were $19.8 million for the quarter, up 45% over Q3 revenues of $13.7 million. ZeusIOPS for calendar year 2008 were $52.7 million, up 300% over calendar year 2007, exceeding the target we had set for ourselves in 2007 for calendar year 2008 of $50 million of revenue for this product line.

As previously discussed, we have been working with all of our major OEM, enterprise storage OEMs, to qualify our ZeusIOPS and their systems, and we're glad to report that most of the major enterprise storage OEMs including EMC, Sun Microsystems, and Hitachi Data Systems have launched or are launching their storage systems equipped with our ZeusIOPS solid-state drives.

For the fourth quarter of 2008, revenue by product lines were as follows

Flash related products accounted for $48.4 million or 85% of our total revenues, an increase from $40.5 million in the third quarter of 2008; DRAM related products accounted for $7.9 million or 14% of total revenues, a significant decrease from the $21.8 million in the third quarter of 2008; and service revenue was $0.6 million or 1% of total revenues.

International sales comprised 39.7% of our total revenues in the fourth quarter of 2008, representing a significant percentage increase from the prior quarter of 29.3%. Our average sales price for non-service revenue was $38 per unit, up from $36 per unit in the third quarter of 2008. Average shipment density of our memory products increased 130% quarter-over-quarter to 3.4 gigabytes in Q4 versus 1.5 gigabytes in Q3.

We shipped 1.2 million total non-service units in the fourth quarter of 2008, a decrease from the 1.7 million units in the third quarter of 2008 reflecting our continued transition to the enterprise SSD platforms, which are characterized by higher density, lower volume units.

Non-GAAP diluted earnings per share in Q4 were $0.05 as compared to $0.10 in Q3.

Revenue for the full-year 2008 was $227.4 million, up 20.5% over 2007 revenues of $188.7 million. Non-GAAP diluted earnings per share from continuing operations for calendar year 2008 was $0.31, up 38% over calendar year 2007 of $0.22.

From a balance sheet perspective, looking at select accounts of interest our cash position as of December 31, 2008 increased by $4 million quarter-over-quarter to $33.4 million. Accounts receivable declined $5.7 million from the end of September to $44.7 million. Net inventory declined $16 million over Q3 to $64 million as of the end of Q4. Capital expenditures were $3.2 million, offset by $2.7 million of depreciation and amortization, and current liabilities declined $9.3 million quarter-over-quarter to $22.9 million.

This resulted in positive cash flows from operations of $13.7 million for the quarter ended December 31, 2008. Our $35 million unsecured line of credit with Wachovia Bank remains in place with no balance outstanding for the quarter ended December 31, 2008.

Now turning to the P&L, our GAAP results included several expense items that we do not expect to recur in our long-term operating model. These items are detailed in our fourth quarter of 2008 earnings release that was issued today.

The following comparisons are based on non-GAAP operating expenses from continuing operations for the third and the fourth quarters of 2008. Non-GAAP sales and marketing spending decreased from $4.7 million in the third quarter of 2008 to $4.5 million in the fourth quarter of 2008, while non-GAAP general and administrative spending increased slightly from $4.6 million in the third quarter of 2008 to $4.7 million.

Non-GAAP research and development expenses increased from $4.7 million in the third quarter of 2008 to $5 million in the fourth quarter of 2008, due primarily to an increase in payroll cost related to expanding global research and development efforts, pertaining to our flash SSD product lines.

GAAP capital expenditures were $3.2 million during the fourth quarter of 2008 consisting primarily of production, quality and test equipment that was put into place in Malaysia.

Turning now to guidance for the first quarter of calendar year 2009, we expect our revenues to be in the range of $58 million to $60 million, diluted non-GAAP earnings per share of $0.10 to $0.12 calculated using an effective tax rate of 29%.

To add a few final points, I would like to point out that by the end of March 2009 most of our production will come from the new state of the art 210,000 square foot facility in Malaysia. This marks an important milestone in a comprehensive undertaking that our entire global team has worked very hard at accomplishing over the last few years to execute seamlessly. We are now in an excellent position to benefit from the added capacity, lower costs and lower taxes as our business enters its next phase of growth.

Finally, I would like to mention that the dispute with Seagate has been dismissed recently, signifying that we have successfully defended our intellectual property against this lawsuit. Our IP portfolio gives us a strong foothold in the solid-state drive market that is poised for phenomenal growth and creates a defensible position for us in the future.

I like to thank you for joining us on the call today. This concludes our prepared remarks. I will now open up the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) And we will go first to Shawn Hannon with Needham & Company.

Shawn Hannon – Needham & Company

Yes. Good afternoon, thank you.

Manouch Moshayedi

Good afternoon, how are our doing?

Raymond Cook

Hi, Shannon.

Shawn Hannon – Needham & Company

Hi. So you had alluded to this a little bit earlier, as your Zeus product line continues to grow as a piece of our overall mix. Is this enabling you with any level of improved visibility within your business, can you talk a little bit around that?

Manouch Moshayedi

Well, we can only comment on obviously, the current quarter and what we are seeing today, and as you have seen in our press release. We have already said that first half of this year we think that we are going to surpass what we did last year. So we've got visibility 2, 3 months in advance of the product shipping. So it does affect our visibility positively.

Shawn Hannon – Needham & Company

Okay, that is helpful. Looking at another piece of your business, is there a way to get a little bit of color around your non-SSD flashcards, effectively how are you seeing trends at some of your major customers or within the segments that you supply into, how might the current environment be affecting that business there for you today?

Manouch Moshayedi

Okay, we obviously we saw a decrease in our DRAM business last quarter. And we were trying to maintain at the levels that we did business at last quarter on the DRAM side of things. So DRAM was about 14% to 15% of our total sales in the fourth quarter of last year. I think we will try to keep it at around that level going forward. Obviously, it is very competitive out on pricing for DRAM, and we like to stay out of that fight.

On the ZeusIOPS side of things, it is where we are really putting all of our efforts into on the enterprise side. In that business, competition is still not there. This marks our second two years of introduction of this product into the market and there is still no competition out there for this product, and we think that putting most of our R&D and our sales efforts into selling into the enterprise market benefits us most rather than going after smaller business (inaudible).

Shawn Hannon – Needham & Company

That is helpful, and it was actually – that actually got to the follow up part that I was going to have. What I was also looking for color on was for your general flashcard business, if there was any color you can provide on that as well?

Raymond Cook

That is a steady business. It is getting more and more competitive as we go forward, but still we're holding our ground there, and we have got lots of networking customers who rely on us, and we are servicing them with flashcards. So we're still continuing to service that market, even though at that market in terms of – because of the price of flash has come down, that market has shrunk a little bit, and more competitors have come in to it, but yet we still have very good relationships with our customers that we have had for many, many years. And we keep on servicing those customers, which is good because it basically feeds off of the same technology that we work on for ZeusIOPS, and all of the ASICs that we do for controllers for SSD. So, it is not a wasted effort on our part going after those businesses.

Shawn Hannon – Needham & Company

That is very helpful, and then lastly just one more than I will hop back into queue, so HP announced two new storage products the other day, that includes an SSD piece within their solution, are you in a position to confirm other where your presence is there?

Manouch Moshayedi

I can’t confirm – you know, as you saw from our press release two major guys are missing off of that list that we put out there. We have done complete quantification at both of these accounts, and we expect doing a press release along with them within the next few weeks. So, we don't want to pre-empt that press release by talking about it.

Shawn Hannon – Needham & Company

Okay, that is very helpful. Thanks so much. Congratulations on the guidance.

Manouch Moshayedi

Thanks for asking the questions.

Operator

We will go next to Wenge Yang [ph] with Oppenheimer.

Wenge Yang – Oppenheimer

Hi, for answering my questions. The first question is regarding gross margin. So I compare Q2 versus Q4, it is about the same revenue level, but the gross margin is much lower, what is the reason that is causing this gross margin drop in Q4?

Manouch Moshayedi

Q4 to Q2 gross margin, are you talking about the GAAP or non-GAAP?

Wenge Yang – Oppenheimer

GAAP.

Manouch Moshayedi

GAAP numbers. Well that might have had to do – let me see here, I don't know. Maybe I haven't looked at the GAAP numbers. We are looking at non-GAAP numbers. I think that has to do with –

Raymond Cook

We usually look at the, this is Raymond – we usually look at the business on a non-GAAP basis.

Wenge Yang – Oppenheimer

Even on a non-GAAP basis it is lower on the same revenue level, right?

Raymond Cook

Our revenue levels from Q3 to Q4 had declined, but from a gross profit percentage basis, we had some additional items that were – we took some reserves on our inventory for –

Manouch Moshayedi

It seems we did have some cancellations of orders in Q4 as you might know. We did have about $20 million of cancellations of orders. We did take some reserves for inventory, which came at $2.4 million total in Q4, and compared to Q2 was a little bit higher, and in Q3 it was a little bit higher. So that affected our gross margins also. But the gross margin was still 32.3%.

Wenge Yang – Oppenheimer

Okay, I think that is helpful. The cancellation of orders plus the reserve of inventories that is probably something I am looking for. So I guess the ZeusIOPS revenue percentages are going to grow quite large in the first half of ’09. What are you looking at for the gross margin in the next two quarters, in the first half of 2009 in light of higher ZeusIOPS percentage?

Manouch Moshayedi

Our long-term goal of gross margins was always to hit 40% gross margins and 20% EBIT margins. So, we're still working towards that goal and I think we've got to try to achieve that goal one of these quarters coming in, hopefully within the next 4 to 6 quarters we will get there.

Wenge Yang – Oppenheimer

Okay. So the next question is regarding the DRAM business, and it dropped quite a bit, could you give some color on why the DRAM business dropped so much, and is the trend going to continue in the next quarter or it is going to rebound?

Manouch Moshayedi

I don’t maybe you haven’t read our press releases in the past three or four months, but we did get a cancellation from one of our major networking customers, and as a result we guided down for Q4 based on those numbers. So that is why the DRAM numbers came down, and as I just mentioned previously, also to the caller before, we are trying to keep the DRAM business as low as possible because the margins are pretty low.

Wenge Yang – Oppenheimer

Okay, last question. So, on December 15 you provided some color on Q1 revenue at $42 million to $50 million, and now the outlook is much, much better. So during this time I guess that ZeusIOPS has gained much more traction. So what is the main reason for this revenue upside, and is this purely because ZeusIOPS or there are some other product contributions?

Manouch Moshayedi

Obviously it is ZeusIOPS. As we have said it already in our call, we think that we are going to double or we're going to match last year's ZeusIOPS numbers, just in the first half of this year. So, ZeusIOPS has been the biggest winner in this quarter.

Wenge Yang – Oppenheimer

Okay. Should I look at all the other factors be flat or down?

Manouch Moshayedi

Well, we are basically keeping DRAM the same. PCIe probably would be the same as MACH4 [ph], and then as we go forward into Q2, I think PCIe will go away altogether. And DRAM will stay in the 15% to 20% range of our total revenue. So, our highest margin business, which is our ZeusIOPS is where we're putting all of our efforts into and we're trying to grow. And I don't think that there is anyone who is really concerned about our legacy business that is low margin right now.

Wenge Yang – Oppenheimer

Okay. Thank you.

Operator

We will go next to Harron Rackers [ph] with Stifel Nicolaus.

Harron Rackers – Stifel Nicolaus

Hi guys. Thanks a lot for taking the questions. A couple, I guess just to build on some prior questions, first of all can you tell me how much your SSD revenue in total was this last quarter?

Manouch Moshayedi

Last quarter, you mean Q4?

Harron Rackers – Stifel Nicolaus

Exactly.

Manouch Moshayedi

So we have hit, I think $22 million of ZeusIOPS. With $20 million of ZeusIOPS, we did about a couple of million dollars of MACH8 IOPS, we did $13.5 million of PCIe. That was it. So, altogether it was about $33 million or $35 million of SSDs in the fourth quarter.

Harron Rackers – Stifel Nicolaus

Perfect, and I guess I'm still little bit confused on the gross margin question earlier. If by my math your SSD revenue obviously grew as a percent, and within that the ZeusIOPS product grew to 35% of total revenue, but yet your gross margin came down. I'm still trying I'm having a tough time trying to understand the give-and-take's in that. Does that imply that the DRAM margin was even well below 10% or have you started to see some decline in your ZeusIOPS gross margin trend?

Manouch Moshayedi

Harron just so you know, we took about a $650,000 inventory obsolescence and scrap number in Q3 of 08. And then we took about $2.4 million inventory obsolescence. So that $1.8 million difference made a big difference in the gross margins.

Harron Rackers – Stifel Nicolaus

Just to get right to the point, I guess from a ZeusIOPS product, from that gross margin profile, where do you currently see that, and where do you see that trending through 2009?

Manouch Moshayedi

I think it is going to stay above 50%. It has been in the 50% to 60% range, and we expect it to stay in the range.

Harron Rackers – Stifel Nicolaus

Above 50, perfect. And then also if you guys can, I am still – I would like to understand as we get to, first of all how much of your actual production was from Malaysia this last quarter, and then as we see the kind of finalization of that transition, how do I think about that flowing into your non-GAAP operating expenses in terms of what has been backed out in terms of Malaysian start-up costs and so on.

Manouch Moshayedi

I think after the first quarter, this quarter we are in is the last quarter that we are non-GAAP in Malaysia. So after this quarter it will be part of GAAP calculations. We are moving all of our manufacturing from here to Malaysia by the end of this month. Last quarter, I think their contribution was somewhere around $14 million of our total sales came out of Malaysia. It wasn't because the number of units, it was because Malaysia started of with producing lower-priced DRAM and lower-priced flash products first.

So they had about $14 million, which was – I think in terms of number of units they did about 50% of our total output.

Harron Rackers – Stifel Nicolaus

Okay, so I get this right. So once you roll out of – I guess, once you get into the June quarter, what is the cost differential between what is backed out versus what will be eliminated.

Manouch Moshayedi

What is the cost differential if June was backed out, it could be even.

Harron Rackers – Stifel Nicolaus

I'm trying to understand what happens to OpEx as you go to the June quarter and roll the Malaysian cost into the non-GAAP numbers.

Manouch Moshayedi

I think for now we are just calling it even. We think we're going to get a good savings when it comes to it. But we will have to get to the next quarter and see what happens with the cost at that point. But right now we are calling it even.

Harron Rackers – Stifel Nicolaus

And final question from me on the MACH8 IOPS product, and I guess maybe it is more so now that you are supporting SAS in the Zeus product line, where do you stand in terms of getting qualifications and ramp in terms of the enterprise server market?

Manouch Moshayedi

We are qualified already across most of the customers that we are already in with the ZeusIOPS. So, they are all using the market IOPS as well, and we are continuing to make progress on that side of things and it should be a pretty good product going forward.

Harron Rackers – Stifel Nicolaus

Okay, thanks a lot guys.

Manouch Moshayedi

Hi, Harron. Just one more point of clarification, as far as the Malaysia cost, when we on February 4 of 2009. So, we are now that we're entering into a reduction of our workforce of our Santa Ana facility. We will also be taking down our cost in Santa Ana at the same time that the Malaysia is coming up to speed.

Harron Rackers – Stifel Nicolaus

What is your headcount growth through this year?

Manouch Moshayedi

It should be even.

Harron Rackers – Stifel Nicolaus

No net headcount growth.

Manouch Moshayedi

No net headcount growth. I think what happens is that as we go through a reduction in force here in Malaysia, we build up the facility – it was actually force in California. We have already built up a good amount of manpower in Malaysia, and I think it will be quite even from the beginning to the end of the year.

Harron Rackers – Stifel Nicolaus

Thanks guys.

Manouch Moshayedi

All right.

Operator

We will go next to Richard Shannon with Northland Securities.

Richard Shannon – Northland Securities

Hi, guys. Maybe I will follow-up the questions on Malaysia specific to taxes, I think your guidance for the first quarter of 2009 to be below 30%, and I think you are talking about 29% for the first quarter, how much room is left in below 30%, and I guess your tax rate is dependent on that one, and your manufacturing and shipping locations. So, I'm kind of curious how that plays into or where you think that can go this year?

Manouch Moshayedi

So, we have already guided to below 30%, which is about 10% below where we are today. We have to wait and see as we go forward how many customers we can switch from US shipping locations to out of US shipping locations, but it looks pretty promising at this point because most of our major customers build their products either in Europe or in Asia. So, I think we will have still tremendous amount of room in that number going forward. This year there is a drop of almost 10%, hopefully by the end of the year, we can even improve on that and then going forward into 2010, it should even drop another 10%.

Richard Shannon – Northland Securities

Okay, so is the ability for the customer to take shipping into their international customer of manufacturing partners. Is that something that you can help them with or is that entirely dependent on them and their internal processes?

Manouch Moshayedi

It is internally – it is dependent on them.

Richard Shannon – Northland Securities

Okay, second question, following up on an early one DRAM, obviously revenues are down below the $10 million per quarter mark, you mentioned you thought that they would be – going forward those revenues would be kind of 15% to 20% of sales, implying that they could kind of get a above that $10 million level. Is that – do you expect it to be able to grow much above where you are at right now, kind of growing with the overall revenues or is it something you tend to keep down at the below $10 million quarter level that you are at right now.

Manouch Moshayedi

We do tend to bring it down as much as possible. We have said this now since, four or five years ago that we wanted to bring our DRAM component down. And the DRAM component is now down in the 15% range, and we're going to try to keep it at that level, and hopefully as ZeusIOPS business grows that percentage even comes down.

Richard Shannon – Northland Securities

Okay, final question from me regarding your ZeusIOPS revenue goal for the first half of this year, your first and still biggest customer for the product line, do you expect them still to be your biggest customer in the first half?

Manouch Moshayedi

I would say that there are 3 or 4 customers now that are in line with each other. So they are all at about the same rate at this point.

Richard Shannon – Northland Securities

Okay, and also for that guidance number for ZeusIOPS in the first-half, is that predominantly a revenues based on production volumes or is there still fair amount of qualification revenues in there too?

Manouch Moshayedi

It is mostly, but as far as we are concerned they are going to production units and our customers are selling them. So I don't know how they call it, but selling these units or just sending these units out as samples to their customers.

Richard Shannon – Northland Securities

Okay great. Thanks a lot Manouch. I will jump out of line.

Manouch Moshayedi

All right.

Operator

We will go next to Kevin Cassidy with Thomas Weisel Partners.

Kevin Cassidy – Thomas Weisel Partners

Thanks for taking my question. So going back to maybe the tax and the exposure to international, with your International sales going up so much. Is that part of a tax strategy or was that because of the ZeusIOPS sales increasing?

Manouch Moshayedi

It is basically because a lot of our customers are now doing manufacturing outside of the United States. So, for example, all of our PCIe business was done internationally, in China. So that affected us. And I think as we go forward, there is only I think couple of customers in the US, who will continue on building or manufacturing in the US all of their systems. But most of our customers will be transitioned to outside of United States.

Kevin Cassidy – Thomas Weisel Partners

Okay, and that will be true also as you get more calls within the servers?

Manouch Moshayedi

Yes.

Kevin Cassidy – Thomas Weisel Partners

Okay, thank you for clearing that up.

Operator

We will take our next question from Mike Crawford with B. Riley & Co.

Mike Crawford – B. Riley & Co.

Hi thanks, could you disclose what the components of inventory are?

Manouch Moshayedi

Components of inventory, no.

Mike Crawford – B. Riley & Co.

Like what percent might be DRAM?

Manouch Moshayedi

We don't usually give that guidance out.

Mike Crawford – B. Riley & Co.

Okay, I imagine the only part that could potentially be part of MACH [ph] could be the DRAM, are you at all worried about any charges that might have to come from there given that that is a business that is declining in importance.

Manouch Moshayedi

I doubt it because as we mentioned just in the past few minutes, we took a good couple of million dollars inventory obsolescence charge against our DRAM inventoried, and obviously besides other things in our inventory last quarter. So we should thinking going forward on our inventory. And as you can see our inventory has dropped tremendously since Q2, Q3 of last year.

Mike Crawford – B. Riley & Co.

Another line, so IBM has announced at least through some of its developers or engineers have announced on their blogs that it has chosen STEC SSD controllers for the DS8000 series and probably for the DS5000 as well. Has that not been an official announcement from IBM?

Manouch Moshayedi

There has not been an official announcement from our customers yet. So, we basically announced as you have seen in our facilities also. The three customers that we announced in our joint facilities, there are two more customers, the very largest ones still left. And we expect those two releases to come in the next few weeks.

Mike Crawford – B. Riley & Co.

Okay great, and then the other piece of great news, I thought during the quarter was the abrupt dismissal of this case that Seagate brought against you guys. Now had that case even got to a markman [ph] stage yet, have there been markman hearings or rulings or arguments made. At what stage was that case?

Manouch Moshayedi

We were 10 months into it, and we were quiet through the discovery stage. So I can't really comment more than that. The case was dismissed. It was great. We all enjoyed it. And hopefully that shows everyone what kind of IP we're holding in our SSD business.

Mike Crawford – B. Riley & Co.

Can you comment on what likelihood of having STEC having a business relationship with Seagate going forward with respect to SSDs?

Manouch Moshayedi

I can’t comment on anything like that. I have no idea.

Mike Crawford – B. Riley & Co.

I mean but once you like to supply them with business.

Manouch Moshayedi

I think I am doing quite well by myself, without needing anyone else. Our ZeusIOPS business is going through the roof. So I don't need anyone else to help me with that. I've got the best customers in the world wanting my ZeusIOPS. Our ZeusIOPS is known to be the best drive out there. Everyone is trying to copy it. They have tried for two years, they have failed. And I think we will continue on just trucking with this product for the next few years until something else comes along.

Mike Crawford – B. Riley & Co.

Okay great. And then final question is, so you have guided one quarter on revenues, two quarters on Zeus expectations, and I think implicit in the statement you just made is that Zeus, all else held equal, was continuing to grow. So I believe that is what most people are going to be assuming, but what would have to change in the world for that not to happen in the second half of the year for you not to have more Zeus revenues in the second than the first half?

Manouch Moshayedi

You know, frankly I have no idea what is going to happen in the second half of this year in terms of Zeus, but looking at the whole world today, the economy of the whole world. And still growing this business at a 100% rate, I think is just tremendous. So, it just tells you that when we come in with a product that saves you money, it is green. It saves you thousands of dollars every year that you use it, in terms of power consumption. You don't have to maintain this much. You don't have to cool it as much. You don't need to add much (inaudible) in it. I think it is slam-dunk deal for our customers to go to their customers whose data storage needs always grow, and sell them a product that uses our SSD rather than a 30-year-old system.

So if in this environment that we are in today, we can grow, I don't know. If the environment was better, we might do a lot better.

Mike Crawford – B. Riley & Co.

Okay, thank you.

Manouch Moshayedi

Welcome.

Operator

(Operator instructions) We will go next to Jeffrey Schreiner with Capstone Investments.

Jeffrey Schreiner – Capstone Investments

Hi gentlemen. Thanks for taking my call today. You know, we have seen NAND prices kind of tick up, and I was wondering, if you guys could kind of comment on what impact may be that might have had in terms of kind of your March quarter guidance. If you saw any real impact when you are looking out right now in terms of NAND pricing, and then – and in terms of that, can the Malaysian facility with the benefits it is bringing you in terms of taxes and moving offshore, could that offset potential higher NAND prices in 2009?

Manouch Moshayedi

We don’t buy the NAND prices that you would see tick up or tick down. We're not buying MLC parts that you see on your screen, probably from all the exchanges out there, all the brokers out there. We only buy it at a very specific single level cell chip that is not available to anybody else. You can't really go buy it in the open market. So there is no going price for the product. And that product’s pricing has not been coming down as much, and has not been going up as much. So it is a pretty stable product, and we don't count on that product pricing going up and down on a yearly basis, and our customers don't look at that in that sort of way. So – and going to Malaysia doesn’t have anything to do with price of NAND. It will definitely give us a better cost structure in terms of our total cost of build, and gives us a tax benefit, but it has nothing to do with NAND pricing going up or down, and we are really not involved in NAND pricing that goes up and down.

Jeffrey Schreiner – Capstone Investments

Okay, thanks for that explanation. You know, how long does fiber channel kind of lead the shipments for STEC. At what point do we see some of the other technologies begin to really gain some traction?

Manouch Moshayedi

Actually, I would say SAS is a pretty big product for us – right now, I think we are almost in a head-to-head type of a situation between SAS and fiber channel, and in fact SATA also. Our ZeusIOPS ship in SATA, SAS, and fiber channel and I will say that all three are pretty much in similar revenue range.

Jeffrey Schreiner – Capstone Investments

Okay, I was wondering if gentlemen, where there still some net book revenues that were going to possibly on the consumer side be recognized in December, and maybe the last recognized revenue would come in in potentially March. Is there anything there and that you could guide us with results to that, and is the company still really trying to keep away from the consumer market at this time?

Manouch Moshayedi

The answer to your last question is yes, we are staying away from it, and after this product line and this contract finishes with our current customer, we would not be bidding on this type of a product again. This is the last of our consumer business as far as I'm concerned. So we think that the PCIe business, I think, it is called PCIe for net book, we did $13.5 million of it in December quarter. We would probably do to nearly $10 million of it in this quarter, and maybe a similar or a little bit lower next quarter, but we will probably finish up everything that we've got by the end of second quarter of this year.

Jeffrey Schreiner – Capstone Investments

Okay, thank you very much gentlemen. Great job on the quarter.

Manouch Moshayedi

Thanks, Jeff.

Raymond Cook

Thanks, Jeff.

Operator

And we have a follow-up from Richard Shannon, Northland Securities.

Manouch Moshayedi

Hi, Richard.

Richard Shannon – Northland Securities

Hi, my questions have already been asked and answered. Thank you.

Manouch Moshayedi

Very good.

Operator

And at this time there are no further questions, I would like to turn the call back over to management for any additional or closing comments.

Manouch Moshayedi

Well, thank you very much for joining us today. We're very excited about the ZeusIOPS prospects for this year. I think we're going to do a great job in terms of bringing our costs down, bringing our taxes down, and bringing our gross margins down. Thanks a lot and see you on the road next time. Bye-bye.

Operator

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

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Source: STEC, Inc. Q4 2008 Earnings Call Transcript
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