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STEC, Inc. (NASDAQ:STEC)

Q2 2009 Earnings Call

August 3, 2009 5:30 pm ET

Executives

Mitch Gellman - VP, IR

Raymond Cook - CFO

Manouch Moshayedi - Chairman & CEO

Analysts

Rich Kugele - Needham & Company

Gary Hsueh - Oppenheimer

Gary Mobley -Noble Financial Group

Kevin Cassidy - Thomas Weisel Partners

Kevin Vassily - Pacific Crest

Aaron Rakers -Stiffel Nicholas

Jeffrey Schreiner - CapStone Investments

BJ Rakesh -Bank Equity

Mike Crawford - B. Riley & Co.

Nahal Troksey - Technology Insight Research

Robert Susman -Bentley Capital

Operator

Thanks so much for holding, everyone. Welcome everyone to the STEC, Inc. Q2 earnings conference call. At this time, I’ll turn things over to our host, Mr. Mitch Gellman, Vice President, Investor Relations. Please go ahead, sir.

Mitch Gellman

Thanks, Will. Good day, everyone, and welcome to our second quarter 2009 earnings conference call. Today’s call is being recorded and I want to thank everyone for joining us. We hope you get an opportunity to read the earnings release that we put out earlier this afternoon after market close and we look forward to discussing the second quarter of 2009 and our outlook for the third quarter of 2009 with you today.

Joining me today for our discussion and Q&A session are Manouch Moshayedi, our Chairman and CEO, and Raymond Cook, our Chief Financial Officer.

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 10K, our quarterly reports on Form 10Q, and our current reports on Form 8K, including the 8K filed earlier today for this news release. The files are available under the category SEC filings in the Investor Relations section at our website, which is 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 represent 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 for joining us. And now I would like to turn the call over to Raymond Cook, our CFO. Raymond?

Raymond Cook

Thank you, Mitch, and welcome, everyone. We are very pleased to report our second quarter of 2009 net revenues of $86.4 million, surpassing our revised guidance of $82 million dollars to $84 million and up 36% over the first quarter of 2009.

Revenues from our signature ZeusIOPS SSDs was $57.7 million for the quarter and up 25% over Q109 revenue of $25.7 million.

For the Q209, revenue by product lines was follows. Flash related products accounted for $76.6 million or 89% of our total revenues, a 37% sequential increase from $56.1 million in the first quarter of 2009.

DRAM related products accounted for $9.4 million or 11% of total revenue, an increase from $6.6 million in the first quarter of 2009, and service and other revenue was $0.4 million or 0.4% of total revenues.

International sales comprised 36% of our total revenues in the second quarter of 2009, a decrease from the prior quarter of 49%.

Our average sales price for non-service revenue was $91 per unit, up from $62 per unit in the first quarter of 2009.

Average shipment density of our memory products decreased 13% quarter-over-quarter to 3.4 gigabytes in Q2 versus 3.9 gigabytes in first quarter of 2009.

We shipped 0.9 million total non-service units in the second quarter of 2009, a decrease from the 1 million units in the first quarter of 2009 reflecting our continued transition to the lower volume, higher ASP enterprise SSD storage and enterprise SSD server platforms.

Our GAAP gross profit margin for the second quarter of 2009 was 50.0% compared to 36.3% for the first quarter of 2009.

Non-GAAP gross profit margin was 50.1% for the second quarter of 2009 versus 39.8% for the first quarter of 2009. This increase was the result of our continued transition to flash related products primarily through our enterprise server SSD and enterprise storage SSD platforms in addition to lower manufacturing costs in Malaysia.

GAAP sales and marketing expense from continuing operations increased to approximately $0.2 million to $5.0 million from $4.8 million in the first quarter of 2009.

Non-GAAP sales and marketing expense from continuing operations increased to approximately $0.3 million to $4.8 million from $4.5 million in the first quarter of 2009. The increase was primarily related to increased inside sales commissions partially offset by lower outside rep firm commissions.

GAAP general and administrative spending from continuing operations decreased approximately $0.7 million to $6.7 million from $7.4 million in the first quarter of 2009 and GAAP R&D spending from continuing operations decreased approximately $0.1 million to $5.4 million from $5.5 million in the first quarter of 2009.

Non-GAAP general and administrative spending from continuing operations increased approximately $1.3 million to $6.3 million from $5.0 million in the first quarter of 2009 and non-GAAP R&D spending from continuing operations increased approximately $0.4 million to $5.0 million from $4.6 million in the first quarter of 2009. This increase was due primarily to the fact that we have discontinued treating our Malaysia operations on a non-GAAP basis.

We recorded special charges of $2.0 million for the second quarter of 2009, primarily comprised on $1.6 million of fixed asset impairments and $0.45 million of employee severance costs, both related to the winding down of our manufacturing operations in Santa Ana and transition to our facility in Malaysia.

The second quarter of 2009 reduction in force affected 49 US-based employees of which 37 were in manufacturing.

In addition to special charges, our non-GAAP results for the second quarter of 2009 excluded stock option compensation expense of $1.0 million, offset by a cost reimbursement from the Malaysian government for R&D expenses previously incurred of $0.6 million.

These non-GAAP adjustments are detailed in our second quarter of 2009 earnings release that was issued earlier today.

Our provision for income taxes was booked in an effective tax rate of approximately 22% from 40% in 2008. The decrease in our tax rate is principally the result of the transition of operations to our Malaysia facility.

GAAP diluted earnings per share from continuing operations for the second quarter of 2009 was $0.38 as compared to $0.07 in the first quarter of 2009.

Non-GAAP diluted earnings per share from continuing operations for the second quarter of 2009 was $0.42 as compared to $0.17 in the first quarter of 2009.

From a balance sheet perspective, the following are select accounts of interest in the second quarter of 2009.

Accounts receivable declined $12.6 million from the end of March 2009 to $50.5million.

Net inventory declined $7 million quarter-over-quarter to $37.7 million.

Capital expenditures were $2.3 million for the quarter, offset by $3.1 million of depreciation and amortization, and current liabilities increased $2.6 million quarter-over-quarter to $23.9 million as of June 30, 2009.

Net cash provided by operations for the three month ended June 30, 2009 was $24.5 million.

Cash, cash equivalents, and short-term investments increased to $93.7 million as of June 30, 2009 compared to $62.7 million as of March 31, 2009.

In addition, our $35 million unsecured line of credit with Wachovia Bank remains in place with no balance outstanding for the quarter ended June 30, 2009.

Turning now to our guidance for the third quarter of calendar 2009, we expect our revenues to be in the range of $95 million to $97 million with diluted non-GAAP earnings per share in the range of $0.145to $0.47.

That concludes my prepared remarks regarding our financial results and guidance, but before turning to any questions you may have with respect to the quarter, I wanted to talk to you about the fact that the company has filed a universal S3 shelf registration, which became effective upon filing in order to provide the company with the financial flexibility to issue securities effectively and quickly in response to rapidly changing market conditions over the next three years.

Concurrent with the filing of the registration statement, we also filed a prospective supplement for the sale of $7.5 million common shares plus a 15% over allotment in all secondary offering. Manouch Moshayedi, co-founder of the company as well as CEO and Chairman of the Board, and Mark Moshayedi, our President Chief Technology Officer, Chief Operating Officer, Secretary and Director, are the selling shareholders.

The selling shareholders have decided to utilize a secondary offering in lieu of their outstanding 10B5 one plans, which have now been terminated. A significant portion of their assets will remain FTEC shares and they will continue in their day-to-day executive management roles. As you know, we are limited of what we can say about the offering in this forum, but I would note that the prospective supplement related to the offering contains additional information.

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

Question-and-Answer Session

Operator

Thank you, Mr. Cook. (operator instructions) We’ll go first this afternoon to Rich Kugele with Needham & Company.

Rich Kugele - Needham & Company

When it comes to the agreement that you recently signed with one of your OEMs, is there any inventory impacts we should be expecting?

Manouch Moshayedi

As you saw, our inventory was pretty low again in Q2. I think inventory will be built to this quarter. At the end of the day, I think we’ll be comfortable with about $45 to $50 million dollars of inventory.

Rich Kugele - Needham & Company

Okay, and it will all be basically tied to the agreements anyway, right?

Manouch Moshayedi

Right.

Rich Kugele - Needham & Company

When it comes to the gross margin, which obviously was much better than anybody was looking for, can you talk about the sustainability of that margin profile?

Manouch Moshayedi

We think on a go-forward basis on margins for ZeusIOPS will remain in the 50 to 60% area. As you know, we have no competition at this stage. In addition to that, we can hard drive manufactures in the enterprise area. We’re still making upwards of 40% margin in that business. Going forward, if we have competition in the area of enterprise, moving to Malaysia, also the capacity to be built in Malaysia and streamline all of the buildings. I think we will be able to maintain about the 50% margin for ZeusIOPS.

Rich Kugele - Needham & Company

Can you give us a sense on how the revenue may have broken down between MOCH8 and DRAM.

Manouch Moshayedi

MOCH8 was about $6.5 to $7 million. DRAM was about $9.5 maybe and flash was about $9.5 and we still had some legacy business of about $3 million.

Operator

Next now to Gary Hsueh with Oppenheimer & Co..

Gary Hsueh - Oppenheimer Co.

How much exactly the second half of the ply contract for $120 was factored into guidance for $95 to $97 million in Q3?

Manouch Moshayedi

All of it, basically. Not all of it. I would say $5 million out of the $120 was built into the Q3 numbers.

Gary Hsueh - Oppenheimer Co.

Just along those lines, if you look at your biggest customer, 39% in the 10Q filing for Q2 and that’s coming from 20% Q1, if you assume this biggest customer is driving basically all the ZeusIOPS, in terms of ZeusIOPS revenue, that would be roughly 49% of ZeusIOPS revenue in Q1 and 58% in Q2. What happens to this percentage in terms of ZeusIOPS as you go into the second half? I got to assume with more customers and newer customers that you gain in the first half starting to hit volume production in the second half that really this percentage for this biggest customer as a percentage of the total of ZeusIOPS business has to start coming back down a little bit? Would that be right?

Manouch Moshayedi

Exactly. So, Gary, just to be clear, I think on the ZeusIOPS side that the other four customers that we have in this area, they have to come up and do the marketing and sales that the first customer is doing to get up to those sort of volumes. But going forward, I can’t predict exactly if it’s going to be next quarter or the quarter after. Everybody is working extremely hard getting SSD on enterprise storage devices. We’re trying to devise new systems energy based only. So I think this is a very good indication of what could happen to our revenues going forward.

Gary Hsueh - Oppenheimer Co.

Okay. I just want to make sure if I take 120 and divide it by .6, that’s not out of bounds in terms of what expectations or what mathematically I could think of ZeusIOPS revenue being in the second half of 2009.

Manouch Moshayedi

We have to look at the numbers. For example, for Q3, we are forecasting between $95 and $97 million. Out of that, we are forecasting about $67 to $68 of ZeusIOPS. We are still forecasting very marginal gains going forward. Hopefully we can come to agreement with the rest of the customers once they start seeing a huge amount of sales on their part. At this point, we’re very moderating our approach in terms of what we are predicting for ZeusIOPS in Q3.

Gary Hsueh - Oppenheimer Co.

Raymond, what should we be modeling right now for 2010 in terms of tax rate?

Raymond Cook

Our blended effective tax rate right now in 2009 for the second quarter was 22%. I believe that is the tax rate that we should probably go forward with at this point in time. That model will changed based upon our end customers’ consumption of the product into which territory.

Manouch Moshayedi

Gary, the way that that model is calculated is how much of our shipments out of Malaysia are shipped back to the U.S. As we go forward we move forward and our customers start taking parts out of the United States, our taxes will come down. So when we go to CMs outside in China or Malaysia or Singapore or Hungary or wherever you might be, I think our taxes will come down, maybe 5 points in 2010.

Operator

We’re next now to Gary Mobley -Noble Financial Group

Gary Mobley -Noble Financial Group

I was hoping you could give us an update on where you stand with procuring a capacity and supply of flash right now?

Manouch Moshayedi

Flash wise, as you know, we make one of our agreements for our needs with a supplier and we schedule it out and everything starts hitting based on the schedule. So we’ve got no shortage of flash. Flash is coming to us as we need it. We discussed this on the last call, Malaysia has been built to supply about 120,00 ZeusIOPS on a quarterly basis. Today, we are at a run rate of about 25,000 units on a quarterly basis. So we still have a long way to go in order to catch up with what’s available in capacity in Malaysia.

Gary Mobley -Noble Financial Group

Can you give us a competitive update for the MOCH8 products and ZeusIOPS products and what we might see out of the flash summit next week?

Manouch Moshayedi

On the MOCH8 side, again, we have seen Samsung and Intel announcing products and obviously they’re one of the three vendors in our customer base looking to qualify. On the ZeusIOPS, we still haven’t seen anyone coming out with anything that is compatible with our ZeusIOPS. So unless somebody actually comes out with a product, it’s tough to speculate when they will be coming out with it.

Operator

We’ll go next to Kevin Cassidy with Thomas Weitzel.

Kevin Cassidy - Thomas Weitzel

On the MOCH8 product, are there any plans that come out with a PCI express type of interface?

Manouch Moshayedi

We have a pretty good road map of products coming out in the next 12 to 18 months. On the MOCH8, it will go into a 16 channel, very fast gig. We’re coming out with a fast 6 gig also in the next couple of months. I think people will be extremely happy with the road map that we have ahead of us in terms of products.

Kevin Cassidy - Thomas Weitzel

About the supply agreement, did you say you expected more of your OEMs or your customers to come up with supply agreements or do you think that’s going to be the norm from here out or is this unusual?

Manouch Moshayedi

The issue here that we have is that when you get to a point where the amount of components that you need are extremely large, we can’t or we won’t at least go make those commitments to our suppliers and bring the parts in on a whim. We need to have very solid forecast and solid commitments in order to do that. I think it’s going to be more normal for us to get those agreements in place.

Kevin Cassidy - Thomas Weitzel

On the ZeusIOPS, you say you haven’t seen any competitors coming out with any products similar to that. Would you expect even I guess lower probability that anyone would come out with a fiber channel interface?

Manouch Moshayedi

I would give the probability of someone coming out with a fiber channel interface, ZeusIOPS like. The timeline that fiber channel will exist will be probably the next two to three years. Imagine if someone comes out with a fiber channel SSD within the next six months or so, is going to take him until 2011 to get qualified on a customer base and then they’ll have one more year of run rate and I don’t think that people would want to put a lot of R&D behind such a short technology.

Operator

We’re next now to Kevin Vassily from Pacific Crest.

Kevin Vassily - Pacific Crest

Quick question on DMC, your largest customer. They made a comment on their earnings call about shipping close to a pedabyte, actually over a pedabyte, of flash related storage year-to-date. The conference call took place three weeks into the month of July. Obviously there’s been a fairly steep ramp, particularly in light of, if we’re guessing correctly, through that large supply contract you signed the second half of the year involves. How much, if we’re thinking about that pedabyte shipped, was July a fairly big month for you guys in terms of shipments so far?

Manouch Moshayedi

We think that ZeusIOPS sales from q-to-q is going to up about $10 million bucks from Q2 to Q3. So the ramp is right now about 20% rate on a quarterly basis. That’s basically based on one customer in production, four customers are still in pre-production type of stage.

I think we will start seeing the ramp. One of our customers is in the middle of discussions in terms of M&A discussions. I think once that gets resolved, the customer will kick back in and start buying its original rate. The other three customers are very large and it takes them longer to get all the parts right.

So I think once these start kicking in, you will see huge ramps in sales of our ZeusIOPS going forward. I don’t know if it’s going to be next quarter or the quarter after, but it’ll come sooner or later.

Operator

Next now to Aaron Rakers with Stiffel Nicholas.

Aaron Rakers -Stiffel Nicholas

A couple of questions. First question on the model. Where do you guys, now that you’ve seen a big gross margin, 50%, and you’re seeing this very strong mix of Zeus product. Where do you want people to think about gross margin trends here going forward as they look at their models?

Manouch Moshayedi

At this point, I don’t want anybody thinking different than what we have already achieved. We are hoping that as the ZeusIOPS becomes a very large portion of our business and market IOPS kicks in, we will start getting a little better margin than we are getting today; however, we’ve already surpassed our long-term goal of 40/20. We are now doing 50/30 and we’re happy with that.

So model-wise, I think we’re going to keep that sort of a number going, within a range, and we’ll update as things change.

Aaron Rakers -Stiffel Nicholas

One point I’m a little bit confused by is that you have said that the average size gigabytes per unit was down sequentially although you saw very big mix shift towards the Zeus products. What are you seeing from a capacity perspective that even with that mix shift that drove that average capacity down?

Manouch Moshayedi

Average capacity of ZeusIOPS? I don’t think that has come down. The average capacity for unit that we ship, that just means that the TCIE that we ship out, maybe that increased a little bit, the number of units or some DM modules that we sent out. We ship out a million units a quarter and 25,000 of that is ZeusIOPS. So 25,000 is not going to really affect the total capacity of the individual units that we ship out.

Aaron Rakers -Stiffel Nicholas

If I’m looking at the math right with the 39% of revenue that you got from your largest customer be it maybe EMC will assume and what you’re guiding I guess still reiterating the 220 in terms of Zeus revenue for the full year. Are you being relatively pretty conservative with regard to the ramp to the other customer opportunities, which I think last quarter you said would reach into full production in Q3?

Manouch Moshayedi

I think other customers are taking a little bit longer than expected in terms of full production. They’re introducing the systems into the market. It looks like everybody is going through the same trials and tribulations that our first customer went through in terms of sales and marketing side. So it’s still I would say another quarter or two for ramp and production.

Aaron Rakers -Stiffel Nicholas

What’s your expectation for MACH8 for the full year?

Manouch Moshayedi

We thought about $30 million would do it on MACH 8, but at this point, I think we’re going to surpass that number.

Operator

Next now to Jeffrey Schreiner with CapStone Investments.

Jeffrey Schreiner - CapStone Investments

I was wondering when we look at the OpEx levels here, that there might be some higher OpEx implied in the Q3 period, leverage down a little bit. I’m just wondering how much of the true OpEx savings from Malaysia facility is currently running through the income statement and is a larger portion likely to curve into the second half of 09 or early first half of 2010?

Manouch Moshayedi

Running through financials at this point, but you have to realize that R&D continues to move on.

So as the other competitors in the market think that they can catch our leadership position in the market, we are adding R&D positions every single day and we’re trying to run as fast as we can to be staying ahead of people.

So on the R&D side, we’re going to keep on spending. We haven’t put any sort of a damper on R&D. So any increases on OpEx that you see will be singularly coming from our R&D business.

Raymond Cook

Q2 was the first quarter that we have discontinued the non-GAAP of Malaysia cost. So if you look at the non-GAAP operating expenses as a percentage of revenue from Q1 to Q2, you’ll see that it dropped about 3 and a half points.

Jeffrey Schreiner - CapStone Investments

Just wondering if you thought about the market and early on, kind of a low hanging number that you put out there. I can’t remember the number exactly, but how much of a low hanging fruit has already been picked already and what do you need to go out and earn now?

Manouch Moshayedi

I think we put in a number of $50 million for 2008 and we surpassed that. We put a number in I think it was in 2008 timeframe for 2009 of about $200 million bucks and clearly I think we’ll surpass that also.

Jeffrey Schreiner - CapStone Investments

Do you still think there’s plenty of low hanging fruit out there for the company to capture?

Manouch Moshayedi

We’ve only picked one fruit at this point and there are four more fruits left.

Jeffrey Schreiner - CapStone Investments

Final question. I was just wondering, gentlemen, pretty strong yields on the investment portfolio in terms of interest income. Was there any special items driving that there and is that something we should expect in terms of a steady run rate when you look at your product order balance?

Raymond Cook

In our other income and expense was the reclass of the cost that we received back from the Malaysian government for our R&D expenses and those flow through other income for the quarter.

Operator

Next to BJ Rakesh -Bank Equity

BJ Rakesh -Bank Equity

Just wondering on the ZeusIOPS side, looks like activity was $200 million for 2009 pretty nicely with just one EMC. 2010, any stab at where ZeusIOPS ends up at?

Manouch Moshayedi

I’m done guessing these numbers, because the numbers are going very fast and we don’t know what’s going to happen. So beyond this year, I really don’t have forecast at this point.

BJ Rakesh -Bank Equity

$350 million or thereabouts? Four OEM sound good?

Manouch Moshayedi

Again, BJ, stop pushing me on putting numbers out.

BJ Rakesh -Bank Equity

How many ZeusIOPS were you doing in the June quarter?

Manouch Moshayedi

How many units? 13-14,000 units.

BJ Rakesh -Bank Equity

Any stab at where third quarter ends up at?

Manouch Moshayedi

Ballpark for third quarter should be somewhere around maybe 17-18,000 units.

Operator

Next now to Mike Crawford - B. Riley & Co.

Mike Crawford - B. Riley & Co.

Last call you talked about MACH8 being on very similar projectory to ZeusIOPS and I’m wondering if you still think that’s the case for next year?

Manouch Moshayedi

You have to understand that MACH8 piece of business goes into enterprise server markets. Enterprise service is about 30,000 slides for hard drives. So when we talk adoption into the enterprise server market, if you were to take every single hard drive in that market, you’re talking about a very, very large market at about a $4 dollar per gigabyte. There’s a huge market for MACH8. Still hasn’t picked up in a big way. We’re doing about $30-$40 million this year, but I think the growth for coming years will be huge on the market.

Mike Crawford - B. Riley & Co.

You also talked about coming out with a six gig fast interface. When do you think the market is going to switch from three to six?

Manouch Moshayedi

We’ll have it available at the end of this year, within the next couple of months we’ll have that available. So I think our customers will start evaluating it somewhere around I think third quarter of next year.

Operator

Next now to Nahal Troksey - Technology Insight Research

Nahal Troksey - Technology Insight Research

The mix within ZeusIOPS, can you give us any color on how much traction you’re seeing in the mid-range market or is it all in the high range at this point?

Manouch Moshayedi

I think it’s half and half right now. Our customers have started to introduce a new system just exclusively with all ZeusIOPS. So that has taken a good amount of market and we have crossed many, many platforms, not only with our largest customer, but every customer that we ship out. So I would say it’s half and half at this time.

Nahal Troksey - Technology Insight Research

Any thoughts how that’s going to trend going forward?

Manouch Moshayedi

I think the high end from what we have seen from our customers, I think every one of our customers will come out sooner or later with a fully (?) system. I think at that time we’ll see the high end completely convert over from hard drives.

Nahal Troksey - Technology Insight Research

MACH8 server, talk about 30 million slots. How should we think about the replacement ratio? Is that a 1:1 replacement ratio or is that more like you’ve got some excellent type of replacement ratio?

Manouch Moshayedi

At this time, it’s still is very early and the systems today existing have not even built in built to really take advantage of these. So we’ll have to wait and see on that and at this time even at 10% of that market will be a huge market for us.

Nahal Troksey - Technology Insight Research

Can you give us an update on OpEx outlook for the full year?

Raymond Cook

We anticipate our OpEx going forward for Q3 and Q4 to be approximately what you’re seeing now in Q2 with the non-GAAPing of Malaysia out of the numbers; however, as Manouch had mentioned, we do anticipate that our R&D will continue to grow at a small rate as we go forward in the quarters as we’re able to find extra talent to assist us in our project.

Operator

We’ll hear now from Robert Susman -Bentley Capital

Robert Susman -Bentley Capital

I’ve got two questions. Can I assume from your earlier comment that very little of the increase in ZeusIOPS revenue from Q2 to Q3 is coming from either the four or five customers that are not really in full production and most of that is coming from your largest customer?

Manouch Moshayedi

Yes.

Robert Susman -Bentley Capital

My second question. From what I have gathered, the market share in the storage market would be EMC about 23, let’s say IBM 15, HB 12, Hitachi 9, etc. Would you expect two or three year out now that your revenues to these customers would be proportionate to their end market share in the storage market or will EMC represent a much greater percentage of your sales in than overall storage market would?

Manouch Moshayedi

I think all percentage of sales will mimic the percentage of traction that they’ll get in their own markets.

Robert Susman -Bentley Capital

Last question. On the 7.5 million shares. I haven’t seen the filing, but can you indicate how much is coming from you, Manouch, and how much from Mark, and for each of you, what percentage of your total share is the 7.5 million total represents?

Manouch Moshayedi

50% is coming from me, 50% from Mark. Today we own approximately about 35 to 36% of the company. The two of us going forward after this offering will approximately own about 20% of the company.

Operator

Gentlemen, no further questions, I’d like to turn the conference back to you for any closing comments.

Manouch Moshayedi

Thank you very much for joining us today. We’ll hope to see you on the road. Thank you.

Operator

Thank you, and again, that will conclude our conference call. We’d like to thank you all for joining us. Wish you all a great afternoon. Good-bye.

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