STEC's LSI Design Win Confirms Momentum: More Upside to Go

What’s New at STEC (STEC)? LSI Corporation (LSI) announced Monday its latest technology refresh to its flagship LSI Engenio 7900 storage system, which included among other things support for STEC (STEC) ZeusIOPS SSD’s. The LSI Engenio storage systems are sold primarily through large OEM’s [Original Equipment Manufacturer] like IBM (IBM), SUN’s (JAVA) StorageTek, SGI, etc. For instance, the Engenio 7900 is sold by IBM (IBM) as the IBM DS5300. IBM has not officially announced the refresh themselves. But according to an Enterprise Strategy Group Lab Report, as far back as Sept 2008 IBM itself provided a roadmap to SSD’s as a given in Page 18 of the report

IBM has advised ESG that future releases of the DS5300 will support solid state disk drive technology.

I see two significant implications from this announcement:

1) The STEC revenue opportunity: The LSI solution gives an immediate entrée for STEC into new channels such as IBM mid-range, SUN Storagetek product line, SGI (SGIC), etc (I am not mentioning Dell (DELL) because even though Dell OEM’s LSI storage for the MD product line, they do not OEM the 7900). For the sake of argument, even if we discount completely LSI’s all other channels such as Storagetek, SGI, etc. the IBM mid-range alone will be very big.

IBM finally now has SSD support to go up against EMC’s (EMC) Clariion CX4 mid-range storage that has had STEC SSD support for many quarters. To quantify this, according to the ESG Lab Report mentioned above, the IBM DS4000 series which was the predecessor to the DS5000 series shipped 87,000 systems through last year. If IBM is to sell as many of the DS5000 and 10% get sold with SSD drives, each with say, 8 SSD drives, that is a total of 69,600 units. At a price point of $2000/SSD (to STEC) that is $139 million.

I concede that there are a lot of assumptions used in terms of mix, attach rate, price, etc, but nevertheless it gives a good illustration of the magnitude involved.

2) The STEC lead in design-wins: Since the ESG Lab Report mention of the future SSD support is from September 2008 it is obvious that the LSI/IBM design collaboration for SSD support started even prior to that. It is clear that the end-to-end process of designing-in of a SSD drive to an OEM storage array including OEM specific firmware customizations, testing, benchmarking, collateral development, sales and marketing training, etc. that culminates in a product announcement by an OEM can take well over 12 to 18 months. This means that even if a new SSD vendor such as Pliant or Seagate starts the process with a Tier-1 OEM today, it will be well into 2011 before they get a product announcement.

Bottom Line:

In the OEM design-win cycle, it is “Game Over” and STEC has won. Yes, there will continue to be “noise” from new startups such as Pliant and big companies such as Seagate (STX). However, that is just a function of VC’s looking to throw money at the next new thing or big companies placing “bets” with their R&D money.

Remember that the decision makers at the big OEMs are human beings who are conservative with especially low tolerance for risk in this economy – to them STEC is the safest bet. It does not matter that Vendor X has a slightly faster solution or Vendor Y has a slightly cheaper solution, the main thing is you do not get fired for going with STEC. While it may sound simplistic, too many decisions are made like that – but it is especially true when the decision is about a component that goes into a storage array that could cost over $1Million and a loss of even one bit of data can be catastrophic.

While the Department of Justice has always complained about monopolies in technology, it is this conservative decision making of going with the safest bet that create these monopolies in the first place (the “monopolies” may use predatory tactics later to entrench their monopolies, but they usually did not create the monopolies – their customers did).

So we will hear about some competitors getting some design wins at Tier-2 or Tier-3 accounts and that will only be because STEC did not have time to bother with those Tier-n OEMs that in aggregate probably make up less than 10% of the market. Finally, the Tier-1 OEMs will realize that they created a monopoly and frantically sign up second source vendors. But that will be too late.

This is a $1.5+Billion market and STEC will have 70 to 80% of that – this stock has a long way to go. Target price: $60.

Recommendation Summary:

STEC is the leader in enterprise SSD’s and is one of the fastest growing companies in the technology industry with expected growth of 60%+ in revenues in both 2009 and 2010.With the exception of Netapp, STEC has OEM wins with all the major systems OEM’s such as EMC, HDS, HP (HPQ), IBM, LSI, SUN, etc. STEC’s solutions have an extremely compelling customer value proposition – according to a recent EMC presentation (STEC’s largest OEM), a STEC based tiered storage solution provides 18% lower storage costs, 60% more disk IOPS, 17% less power and cooling and uses 30% fewer disk drives. With a large market opportunity that is well over $1.5B, compelling customer value proposition, design-win with all the major OEM’s, minimal competition (heavily overblown as discussed here, huge manufacturing capacity to meet the high demand, and low cost operation makes STEC a fast grower for years to come in both revenues and profits. With the stock trading around 10x 2010 earnings of $3.00/share, STEC provides a 100% return potential over the next 12 months. Recommendation: BUY.

Target price: $60 (up 100%)

Price	Shs Out	Mkt Cap	Float	LT growth	Cash/shr	Oper Mgn
$30.18	50.7MM	$1.53B	63%	50%	$1.85	31%
2008A eps	2009E eps	2010E eps	P/E 09E	P/E 10E	Revs 10E	EV/10Rev
$0.31	$1.70	$3.00	17.8x	10.1x	$598MM	2.4x

Disclosure: Long STEC stock and call options.

Comments

[user1010101:]

could I please get a copy of your model - I am curious what your model assumptions are:

-specifically, how many units do you think they will ship to EMC
-what margins are you assuming given they are running at 50% utilization in asia (I think that 30% op margins are sustainable for maximum 3 quarters).

Great set of articles on this name. Would love to chat more!

Sep 29 10:46 AM

[Reali_STEC:]

An article published last month states that NetApp is using STEC ZeusIOPS SSDs:

www.theregister.co.uk/.../

Also, you don't mention Pillar: They dumped Intel in favor of STEC.

www.computerworld.com/...

This is significant because Larry Ellison is a major investor in Pillar:

www.siliconvalleywatch...

We know that STEC claims Sun as a client:

www.stec-inc.com/commu...

Now, with Pillar using STEC, can the Oracle/Sun alliance produce for STEC?

Sep 30 12:00 AM

[GARP Investor:]

Reali_STEC:
Yes, I have seen the Netapp article, however, I have not mentioned because a) neither Netapp or STEC has formally announced it and b) I have not had a chance to independantly verify it (basically because I haven't had the time to make the calls).

As to Pillar, it is real with STEC and I do know the Ellison connection. The SUN OEM is also real and I personally think the SUN 7000 with STEC SSD's and SUN's ZFS file system that is optimized to use SSDs for the intent logs and as a L2 read cache is a great solution. In fact, I think this kind of software optimizations like in ZFS, EMC's FAST (that will do automatic tiering), Compellent's auto tiering, IBM's write optimization for SSD's, etc that will greatly improve long term adoption of SSD's.

There are many smaller vendors like Pillar, Compellent, etc that probably deserve mentioning and will be incremental to STEC. For instance, just in this LSI announcement, I should have mentioned Teradata who OEMs storage from LSI Engenio. As you know Teradata is the premier data warehousing company and SSD's are great for data warehousing. IBM has already shown great data warehousing performance improvements using STEC SSD's in the IBM DS8000. I can imagine when Teradata gets the new LSI storage with STEC SSD's that will also be incremental to STEC revenues because Teradata has Petabytes at customers like Ebay, Walmart, BofA, Dell, etc.

While all these small players can all help STEC, much of the enterprise SSD adoption is happening at the high-end and the high end is dominated by EMC and IBM. EMC and IBM will provide most of the revenue upside for STEC for some time to come. EMC is making such revenues and margins from STEC drives that the EMC sales force will be driving that gravy train hard. In a recent call, EMC mentioned a single $500,000 SSD order from a customer. That is the kind of stuff EMC and IBM sales people live for.

To your questions about Oracle/Sun and Pillar, who knows? I don't know recently, but Pillar arrays have historically been flaky. SUN has always managed to screw things up (despite so many great innovations). Hopefully Ellison will clean things up. Near term, IBM and HP are poaching SUN customers and that is a good thing for STEC.


On Sep 30 12:00 AM Reali_STEC wrote:

> An article published last month states that NetApp is using STEC
> ZeusIOPS SSDs:
>
> www.theregister.co.uk/.../
>
> Also, you don't mention Pillar: They dumped Intel in favor of STEC.
>
>
> www.computerworld.com/...
>
>
> This is significant because Larry Ellison is a major investor in
> Pillar:
>
> www.siliconvalleywatch...
>
>
> We know that STEC claims Sun as a client:
>
> www.stec-inc.com/commu...
>
>
> Now, with Pillar using STEC, can the Oracle/Sun alliance produce
> for STEC?

Oct 01 10:06 PM

[Wisdom vs. ...:]

GARP, you need to pipe down or you are going to ruin making easy money on the STEC shorts; could you please erase these articles until after the next Q report?

seriously, both analyses are well done, thanks; you specified my generalities

Oct 05 12:25 AM