Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

STEC, Inc. (NASDAQ:STEC)

Q2 2012 Earnings Call

August 7, 2012 4:30 PM ET

Executives

Mitch Gellman – VP, IR

Manouch Moshayedi – Chairman and CEO

Raymond Cook – CFO

Analysts

Gary Mobley – Benchmark

Kevin Lobes – Deutsche Bank

Aaron Rakers – Stifel Nicolaus

Rajesh Ghai – ThinkEquity

James Snyder – Goldman Sachs

Rich Kugele – Needham & Company

Edward Parker – Lazard Capital Markets

Richard Shannon – Craig-Hallum

Operator

Good day, ladies and gentlemen, and welcome to the STEC Q2 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to introduce your host for today’s conference, Mr. Mitch Gellman. You may begin, sir.

Mitch Gellman

Okay, thank you, Kevin. Thank you and welcome everyone. Thanks for joining us today for our earnings call for the second quarter. We hope that you had an opportunity to read this afternoon’s release containing our results for the first quarter of 2012. Joining me here today for today’s discussion of our results and business outlook and the Q&A session are Manouch Moshayedi, our Chairman and CEO; and Raymond Cook, our Chief Financial Officer.

First, I’d like to update you on our schedule of upcoming investor conferences on August 14, we will present at the Oppenheimer Technology Conference that’s going to be in Boston. And on August 28th we present at the Credit Suisse SSDs and virtualization Investors Day that will be in San Francisco.

Also before we begin, I would like to remind everyone that our prepared remarks and answers to questions will include forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 and are based on management’s current expectations.

These forward-looking statements include, but are not limited to statements concerning growing acceptance adoption and qualification of SSDs within the enterprise storage and server markets, the qualification of STEC’s fourth generation ZeusIOPS SSD, MACH16 SSD, PCIe solid state accelerator, EnhanceIO caching software and other developing technologies; the qualification of STEC’s products and solutions into emerging SSD system vendors, enterprises and non-traditional end user customers, leveraging STEC sales and marketing infrastructure to cater to enterprises directly and develop a new vertical market strategy.

STEC’s key product line initiatives and development, the transition from one product generation to the next, the length of qualification cycles, the capabilities performance cost advantages and benefits of STEC’s products and solutions, the rapidly evolving enterprise storage and server markets expected third quarter 2012 revenue and loss per share and anticipated settlement of the previously disclosed federal and state class actions filed against STEC and several of its senior officers and directors until various significant risks and uncertainties that could cause our actual results to differ materially from those expressed in such forward looking statements.

These risks and uncertainties are detailed in periodic filings with the Securities and Exchange Commission, special attention is directed to the portions of those documents entitled Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 forward-looking statements as representing our views as of any date subsequent to today.

Additionally, as we discuss our financial performance, we will be referring to certain non-GAAP financial measures, please see the reconciliations of our GAAP to non-GAAP measures included in today’s earnings release. Thanks again for joining us today.

And now I’d like to turn the call over to our CEO, Manouch Moshayedi. Manouch?

Manouch Moshayedi

Thank you, Mitch, good afternoon, and thank you for joining the call. The second quarter proved to be a challenging sales period. Looking ahead though, we are encouraged by the activity and traction of our new products and sales efforts.

But before I go into details about the upcoming quarter, I want to briefly address a matter of SEC’s recent decision to file the civil complaint against me. I intend to vigorously defend myself against unsubstantiated allegations and we expect that we and an independent evaluation of facts we’ll find the complaint is without merit.

In the mean time, it will be business as usual at the SEC and I remain as committed as ever to maintaining the same level of outstanding service and top quality products to our customers and to growing our company. I’ll also note that the SEC has decided not to pursue any enforcement actions against the company itself nor any other officers of the company. Since this remains an open case that is all the liberty to discuss at this time as much as I would like to provide you with a more detailed discussion of the relevant facts. Now, back to our business. Less than one year ago, we began the strategic process to fundamentally shift our business model, as we look to expand overall market for our products.

Traditionally, targeting major storage and server OEMs has enabled us to reach the majority of the enterprise market. In order to address the broader market and expand our opportunities, we’re taking critical steps over the past several quarters, including one, looking at emerging class of all existing base system OEMs, two, developing relationships with the large to medium enterprises to gain valuable end-user feedback and three, improving our channel presence. Thus far, we’re pleased with the progress in these areas.

First, as I’ve mentioned in the past, we continue to target and we’re processing a variety of emerging storage OEMs developing all SSD-based systems, and as the penetration of the storage market increases, we expect our business to improve.

Second, we’ve been adding considerable resources and recruiting top talent into our sales and marketing infrastructure over the last few quarters, and we are making good strives towards responding to key customers and helping them solve challenges related to managing datacenters for cloud computing environments.

We are evolving the way we sell to customers broadening our business opportunities and helping to solve critical end-user problems in a direct way. As part of being better in tuned with unique enterprise challenges, we’re selling the benefits of these specific applications focusing on distinct vertical markets.

Lastly, we tend to leverage the existing channels in order to satisfy demand for our products from a broad array of smaller end-users and are working with several partners to improve the availability of products worldwide.

Ultimately, the goal of all these efforts is to diversify our customer base and we expect our business to become a healthy mix of enterprise OEMs and OEM accounts over time. This creates an exciting milestone for us because we believe that once end-users have experienced our products in their environment, the economics of reducing their total cost of ownership and the application acceleration that the experience becomes very compelling, Extending our reach becomes an important factor in accelerating as is the adoption across a wide variety of platforms. We are helpful hopeful that this market diversification strategy will also lead to a shorter overall sales target.

Please keep in mind there are qualification efforts remain in full force for our latest generation of SSDs, our products continue to be actively tested and evaluated in numerous accounts and we have a sizable number of opportunities ahead of us.

Our PCIe accelerator is receiving good reviews from customers throughout the qualification process and we hope to see, gain a lot of traction in the coming quarters as the product matures. Our fourth generations SSDs continue to be qualified by customers and we expect to have shipping out in production soon to our major OEM customers.

These products revenues, with these product families include several key hardware features and firmly enhancements that set them their part, including our own internal developed flash control ASICs and our unique flash management technique known as CellCare. Our proprietary CellCare technology has allowed us to solve the critical issues of using consumer grade flash in enterprise environments. More specifically, we are being able to achieve enterprise customer thresholds regarding endurance and performance, while at the same time passing on MLC price reductions to our customers.

We believe that this technology is going to be a differentiator for us both in the near-term and in the long term. In today’s marketplace, CellCare is one of the most advanced technologies of this sort available, plus we have taken great strides to validate this technology using real data, step that few are willing to take at this point.

Looking ahead, we’ll become increasingly critical and challenging for SSD providers to mitigate the net negative impact of future geometry shrinkage on yield and endurance for both MLC and SLC based products.

At some point our technology may be only, the only way to be useful, to be a useful differentiator, but could also be an enabler for companies who cannot manage MLC’s increasingly deficiencies at smaller notes. This bodes well for our long-term positioning as a SSD provider of choice for customers who demand quality and want to benefit early from our innovations as we bring new performance-enhancing technologies to the market.

Although, we believe that the third quarter will continue to be part of our transitional period, we hope to see meaningful results from our qualifications and new sales efforts in following quarters and to build on those as our products are qualified by more customers.

We continue to take the appropriate steps to prepare for growth and make investments in our leases and development and sales and marketing infrastructures, to remain a leader in flash technology. Thank you again for your time this afternoon. Now I’ll pass it over to Raymond.

Raymond Cook

Thank you, Manouch and welcome everyone. The net revenue for our second quarter of 2012 was $40.7 million, which was within our guidance range of $40 million to $42 million for the quarter. Net revenue by major product category for the fall of flash related products accounted for $39.7 million or approximately 97.3% of total revenue and DRAM related products accounted for $1.1 million or 2.7% of total revenues.

The flash related revenue was comprised of ZeusIOPS $32.2 million, SMART products of $4.5 million and embedded access fees and other flash products of $2.9 million. International sales comprised 49% of our total revenues in the second quarter of 2012. For the second quarter of 2012, our GAAP gross profit margin was 36.6% as compared to 35.9% in the first quarter of 2012. Our non-GAAP gross profit margin was 37.2% as compared to 36.4% in the first quarter of 2012. The increase in gross profit margin was primarily attributable to a decrease in flash component costs, partially offset by an increase in fixed production overhead and labor costs as a percentage of total revenues and a decrease in the average selling price of certain SDD products.

Our Q2, 2012 GAAP sales and marketing expense was $6.9 million. GAAP general and administrative spending was $13.3 million and GAAP research and development spending was $17.5 million. Total GAAP operating expense for the second quarter of 2012 was $37.7 million and non-GAAP operating expense was $28.9 million. Our non-GAAP results for the second quarter of 2012 excluded securities and derivatives action litigation costs of $4.4 million. Stock option compensation expense of $4.2 million, IP litigation costs of $400,000 and employee severance costs of $128,000 that is a combined task impact of $82,000 for the second quarter 2012 non-GAAP items.

Our non-GAAP results for the second quarter of 2012 also excluded $13.2 million related to the non-cash charge to establish evaluation allowance on our U.S. deferred tax assets. The non-GAAP adjustments are detailed in our second quarter 2012 earnings release that was issued earlier today, our provision for income taxes was built in the effective tax rate of approximately 33.6% for the quarter ended June 30, 2012.

The increase in our GAAP effective tax rate of 33.6% for the three months ended June 30, 2012 from 21.7% for the three months ending March 31, 2012 resulted primarily from the establishment of a full non-cash valuation allowance against all of our net U.S deferred tax assets during the second quarter. The establishment of a full non-cash valuation allowance does not have any impact on our cash nor does such an allowance precluded from using our tax losses, tax credits or other deferred tax assets in future periods.

To the extent that we’re able to generate taxable income in the future to utilize our deferred tax benefits, we will be able to reduce our effective tax rate by reducing the full non-cash valuation allowance.

In addition, the valuation allowance has no impact on our foreign taxes including the tax benefit that we’re currently receiving from our operations in Malaysia through the grants on income tax holiday.

Our GAAP diluted loss per share was $1.07 for the second quarter of 2012. Our non-GAAP diluted loss per share was $0.27 for the second quarter of 2012, which was within our non-GAAP loss per share guidance of $0.26 to $0.28.

From our balance sheet perspective, the following are selecting accounts of interest for the second quarter of 2012. Cash and cash equivalents increased $1.4 million from Q1 2012 to $207.2 million. Accounts receivable decreased $2 million from Q1 2012 to $19.4 million. Net inventory decreased $2.8 million from the first quarter of 2012 to $34.6 million. Capital expenditures were $4.7 million for the quarter, offset by $3.7 million of depreciation and amortization.

Current liabilities increased $42.3 million for the quarter to $66.5 million due primarily to $35 million litigation loss contingency representing the mid-point of our estimated range of probable loss for settling our outstanding transaction litigation.

We also recorded a $20 million insurance claims receivable based on the estimated amount of the settlement currently being negotiated that will be contributed from our Directors’ and Officers’ insurance, the net effect was a $15 million charge to other expense plus income during the second quarter. I’ll provide more detail on this shortly.

Continuing with the balance sheet, we had no long-term debt outstanding as of June 30, 2012. Net cash provided by operating activities for the three months ended June 30, 2012 was $4 million. As detailed in our earnings release, the parties to the previously disclosed Federal class action suit filed against STEC and several of our senior officers and directors attended a mediation on July 30, 2012 to afford a potential settlement.

During the mediation, the parties considered a settlement that would create a fund for the benefit of the settlement class with no admission or concession of wrong doing by the STEC or any other defendants. In exchange for

A full and complete release of all claims in the Federal class action. Negotiations are ongoing and in the event that the parties are able to reach an agreement in principle, the settlements would be subject to final documentation of the agreement, the execution of the speculation of settlement as well as preliminary and final approval by the court.

We estimate the range of probable laws for the Federal class action to be between $34 million and $36 million. As mentioned earlier, we’ve recorded $35 million in current accrued and other liabilities, which represents the mid-point of the estimated range of probable loss for settling the class-action litigation.

We have also recorded a receivable of $20 million to insurance claims receivable based on the estimated amount of probable insurance contribution from our Directors’ and Officers’ insurance. The difference between the estimated accrued loss contingency and the estimated insurance contribution represents a $15 million charge taken by us for other expense loss income during the second quarter of 2012.

Turning now to our guidance for the third quarter of 2012, we expect our revenues to be in the range of $40 million to $42 million with non-GAAP diluted loss per share to range from $0.27 to $0.31.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Gary Mobley with Benchmark.

Gary Mobley – Benchmark

Hi, guys thanks for fielding my question. Regarding the qualification of the Gen 4 SSDs, I’m assuming this is primarily EMC that is taking longer than expected and could you share with us, perhaps without naming the customer what is taking longer than expected and have non-EMC customers qualified the Gen 4 product and if so you should recommend shipment and receive the product fairly soon.

Mitch Gellman

Thank you very much Gary for asking the question. Actually on Gen 4, we have the ZeusIOPS qualified across multiple OEMs our retrieved large OEMs have not completed their qualification yet, so it’s not confined to just one customer, too large ones have not and we expect them to finish up their qualification and move into larger level, which is a corporate level were we basically purchase sizable amount of samples and put in the systems and start qualifying in the larger systems by the end of this quarter.

Gary Mobley – Benchmark

Okay. And regarding the PCI cards, what has transpired there if they’re mistaken you’re expecting qualifications to start for those products in May, has that in fact happened and how is that progressing?

Mitch Gellman

Yeah, it’s still ongoing. We do have some enterprise customers who are looking at it, who’s qualification periods are a little bit shorter than OEMs. So we expect those a little bit sooner than the major OEMs that are looking at the PCIe card, but from our point of view it’s – their qualification is going in same directions, hence all our qualification is growing and the customers are telling us what they need and we upgrade and change as those requirements come in.

Gary Mobley – Benchmark

Okay. Last question from me, Raymond. Given all of the legal matters that are taking place right now. Are there any limitations on STEC buying back stock. I didn’t hear any mention of buybacks during the quarter and what would you expect your cash balance to be at the end of the third quarter considering the potential settlement and various other factors?

Raymond Cook

Well. Gary, thank you again for the question. It’s up to the board of directors if they want to do a buyback, there is no – nothing precluding us from doing a buyback at this point in time, as far as our cash we don’t project balance sheet what we do give guidance on is our revenue and EPS in the following quarter.

Gary Mobley – Benchmark

All right. Thanks, guys.

Manouch Moshayedi

Thank you, Gary.

Operator

Our next question comes from Sherri Ann Scribner with Deutsche Bank.

Kevin Lobes – Deutsche Bank

Hi. This is actually Kevin Lobes on behalf of Sherri. You had mentioned last quarter that breakeven levels are around $65 million and you had said, that you had expected to hit those in the first half of 2013. Just given that it looks like the second half of 2012 is weaker, would you still be expecting to breakeven in the first half of next year that been pushed out?

Manouch Moshayedi

Kevin, these are projections outside of the view today. So I can’t really comment they are going to be pushed back into the quarter or not quarter, but online if we hit a quarter where we go above $65 million we expect that to be a breakeven point.

Kevin Lobes – Deutsche Bank

Okay, thanks. And then just a second question is on, a number of flash producers have announced that their cutting capacity in order to balance that market, and you mention this quarter that flash component prices are a little bit lower. So just wondering what are your expectations are moving forward for gross margin also for our flash pricing? Thank you.

Manouch Moshayedi

We are not changing our gross margin projections and flash price is we have basically – the way that we work with our vendors, we do a very long-term price projection of the flash. So we already know what we’re going to be paying in Q4 of 2013 for example. So ups and downs in the market usually don’t have that much of effect on our agreements with our vendors.

Kevin Lobes – Deutsche Bank

Okay. Thank you very much.

Operator

Our next question comes from Aaron Rakers with Stifel Nicolaus.

Aaron Rakers – Stifel Nicolaus

Thanks for taking the question, guys. First just on the model real quickly. How should we think about the – it looks like the excluded non-GAAP charge, the securities and derivative action, a litigation charge, I think it’s $4.4 million this last quarter. How do we think about that going forward?

Raymond Cook

Then there will continue to be litigation costs as we move forward and we will take those into the P&L as incurred.

Aaron Rakers – Stifel Nicolaus

Okay. So we should expect a similar trend or is that increasing here or I’m just trying to think about that from a cash perspective.

Raymond Cook

I will anticipate the moving forward that the amounts would be less than what they have been during this quarter.

Aaron Rakers – Stifel Nicolaus

Okay. And, Manouch, if I’m reading it right, it sounds like you’re not assuming a whole heck of a lot of change in the qualification upfront in the September quarter. You just mentioned that you expect that the PCIe products would get qualified or deployed sooner at enterprise customers, relative to OEMs, when or if, when do you expect the OEM qualifications to start to materialize for that product?

Manouch Moshayedi

Again, I can’t predict when those will come in, but hopefully before we end the year, we should have at least some OEMs qualifying (inaudible).

Aaron Rakers – Stifel Nicolaus

Okay. And then final two questions from me, remind me again, Gen 4 with the MOC, what geometry in NAND Flash, are you shipping with that?

Manouch Moshayedi

24-nanometer, we do 24-nanometer MLC today, and we’re going to move it to 19-nanometer version.

Aaron Rakers – Stifel Nicolaus

Okay. And then there again those qualifications are finished all except for the three major OEMs at this point?

Manouch Moshayedi

I wouldn’t say that everybody’s qualification is finished, but a lot of our OEM, smaller OEM customers have finished, some enterprise customers have finished. And so those are ongoing into production, our other three large customers have not finished qualifications for those product set.

Aaron Rakers – Stifel Nicolaus

And you expect that to happen this quarter or is it –?

Manouch Moshayedi

I’m hoping that by the end of this quarter they would be finished, so maybe next quarter, we can start shipping larger volumes. Okay, thank you.

Mitch Gellman

Thank you, Aaron.

Operator

Our question comes from Rajesh Ghai with ThinkEquity.

Rajesh Ghai – ThinkEquity

Thanks. Good afternoon. Just a question on the second quarter revenue, can you go through the split between Gen 3 and Gen 4 and respective gross margins on the two generations.

Manouch Moshayedi

I don’t think we’ve broken those apart, but I would say the majority was still in Gen 3 in Q2, and that the margins are very similar between the two.

Rajesh Ghai – ThinkEquity

Okay. In the past, Manouch, you talked about some architectural deficiencies in the controller, the storage systems that secured OEMs from using more SLDs. I just want to get an update on what you think, you know, the current status of those storage controller can be potentially use benefit from the higher performance of the SLDs at this point in time. They all look similar as what we heard from you in the past, and what is the outlook going forward on that the architectural issue that have prevented OEMs from using SSDs in the past?

Manouch Moshayedi

Some of the major OEMs in the data storage market, some of the issues is related to the capacity of the system itself, how many IOPS to put it and put out, but at the same time, it also applies to the application that we’re selling it into, and the price that they charge for every gigabyte versus – frankly, from where I see it, the pricing that they’re charging is little unsustainable on SSD side because its 30 times what is out there available.

So that’s sort of pricing is probably in one of the limitation, of the major OEMs suddenly SSD at this moment. And I think that pricing has to come down in order to really get SSD out into the market in hands of everyone through the major data storage system builders. However, when you look at the old SSD, market it’s not only today is not only confined to the data storage market but also all the data centers are using it cloud computing, people are using it and we’re now seeing that most of the data centers of cloud computing guys are putting in at least one SSD a plot across one server when they’ll be joining into a Centers that because they’re able to buy the SSD at a much lower price, then they would otherwise buy it from a data storage manufacturer.

So it’s when you look at it $2 to let’s say $4 of pricing per gigabyte versus $50 to $70 per gigabyte pricing. The big price differential and therefore people and they say, we don’t have to buy Big Data Storage Systems, can use SSDs a lot more than data centers – data storage guys can.

Rajesh Ghai – ThinkEquity

Okay. I appreciate the color on the cloud computing guys have. When you talked about the PCIe solution you talked about qualification that enterprises, I was just curious about your qualification at cloud computing players. If you had seen any traction and when exactly do you see any material pick-up in revenue from that vertical which seems to be helping your key competitor on the PCIe side quite a bit.

Raymond Cook

Right. On PCIe side, we’ve already deployed some samples to the enterprise guys in the cloud computing and data center people and that qualification is going smoothly. And I would say within next three to six months we should be able to get good results from those qualifications on OEM side, I think by the end of the year or into first quarter we should see some qualification than as well.

Rajesh Ghai – ThinkEquity

Thanks. And my last question is, you had some discussion around vertical solutions – vertical SSD solutions in your prepared remarks, Manouch, just wanted to get some color on, how you plan to tailor your SSD solutions for specific verticals. Thank you.

Raymond Cook

We are seeing a lot of applications out there that could use SSD besides using PCIe I think a lot of cloud computing guys are also interested in SaaS products and we’re seeing good amount of traction around those structure qualifications and plus we working with all of the system builder’s those who are building all SSD systems. I think we’ve covered almost 70% to 80% of those customers and I think as they grow our business with them will grow, as a whole we’re very encouraged by the whole SSD market, the trend that is coming about and the customer base that we’re seeing now that we’re looking at the end user enterprise to have our customers, we’re seeing a lot more potential in our markets and we did just even two or three quarters ago.

Rajesh Ghai – ThinkEquity

Thanks. Good luck.

Operator

Our next question comes from James Snyder with Goldman Sachs.

James Snyder – Goldman Sachs

Good afternoon, and thanks for taking my question. Just a follow-up on the Gen 4 qualification. Can you say how many of your total customers have qualified Gen 4 to date, and of those how many you expect to be recognizing sales from Gen 4 in Q3.

Mitch Gellman

I can’t say exactly how many, because these are smaller OEMs. But I think, in Q3 maybe half of our sales could be from Gen 4 going forward they are the largest customers we’ve got on guarantee on Gen 3 have not yet quantified Gen 4, so once they come and hits traction – get them on traction going, then I think you will see much better revenue numbers. On the enterprise side, we’ve got a couple of customers who are using and qualifying all the Gen 4 and I think that will, that effort will continue on and we will see probably 10% customers who are enterprise cloud computing and data center customers rather than just a few of data storage OEMs.

James Snyder – Goldman Sachs

Thanks, that’s helpful. And then from what you just said, it sounds like you expect to basically see a crossover between the Gen 4 sales growing in Q3 and then the Gen 3 sales declining in Q3. Can you talk about how much you may expect the Gen 3 sales to decline going into Q4, just from a rough basis?

Mitch Gellman

Well. First of all, I think Q4 would be the quarter that will not – we will end selling Gen fees at that point. So, I think past Q4 we won’t be selling Gen fees anymore, that business will constantly be declining from this point forward throughout the year.

James Snyder – Goldman Sachs

Great. And then the last one from me would be you maybe just comment on where you see your Gen 4 product pricing relative to some of your largest competitors. I think you talked before about the expectations that would be maybe below what before they were. Can you talk about the changes in the pricing profile from the competitor relative to where you are for Gen 4 today.

Manouch Moshayedi

We are very similar in pricing when it comes to SLT and we are similar in pricing when it comes to MLC. However, we sell the performance so far system, our SSDs plus take endurance of SSDs that are fought beyond what our competition can afford, can offer.

James Snyder – Goldman Sachs

Fair enough. Thanks so much.

Manouch Moshayedi

Thank you.

Operator

Our next question comes from Rich Kugele risk with Needham & Company.

Rich Kugele – Needham & Company

Thank you. Good afternoon. Two questions. First, in terms of the call connect of Gen 4, can I just get one clarification. So you’re saying that some of these top OEMs, the top three, they at the end of this quarter will be able to move into the more formalized process. And then I guess the revenue that you get in Q4 would only be more qual units. So when would you actually be through complete qual, I guess are the questions.

Manouch Moshayedi

Okay. So there are different stages of qualification at most of our customers. So this past most of the qualification periods and what’s remaining is what’s putting our SSDs into systems that go to their first level of customers. So these even though they are calls, they are still going to customers and the customers are all looking at them and making sure that there are no failures in the drives in the field.

We feel that we’re going to pass this stage and move on to that corporate call at the beginning of next quarter. So in Q4, we will get, we will get still sample call revenue, you could count again production is well because it’s going into production of system shippable to customers and are recorded as revenue type of samples from our customers to their customers.

Rich Kugele – Needham & Company

Okay. That helps. And then, do you think that from a bigger perspective that the market has moved on a little bit with the second tier and even the channel where the quals don’t need to be as rigorous, I mean these top three guys they seem to have their own angle an issue, but you’ve mentioned in the press release that the channel is actually now an option in the past, you really hadn’t sold much through the channel. Can you just elaborate on what channel opportunities there might be.

Manouch Moshayedi

Sure, I think the channel opportunities for MACH16, I know if you know are not, but when we build drag specifically for OEM those drives are the only sellable to those OEMs and not sellable to anyone else. So I can’t take IBM driver and sell in order vice versa, they all have their own Gen and software that goes along, so you have to make it generic type of a drive that could be useful across laptops, PCs or any white-box server manufacturer who would want to buy and figuring their systems, obviously those sort of parameters don’t have all of the capacity or all of the capabilities that a OEM level top-tier OEM level SSD would have. And those are definitely sellable into the channel because the demands for all of these are specific commands and the family does not exist.

Rich Kugele – Needham & Company

Okay. Then just lastly, Raymond, the head count versus last quarter?

Raymond Cook

The head count was up slightly. We continued to expand our R&D group as well as our sales and marketing functions. I don’t have the exact numbers with me.

Rich Kugele – Needham & Company

Okay. All right, thank you very much.

Raymond Cook

Thank you, Rich.

Operator

Our next question comes from Edward Parker with Lazard Capital Markets.

Edward Parker – Lazard Capital Markets

Hi. Thanks for taking the question. I think our people are really understanding or when do you think your OEMs can enter large or full production. So can you – maybe you can provide any sort of range of possibility and so when is the latest that could happen, and is it possible that you may not get qualified with you three largest OEM customers and if that doesn’t happen is there a plan in place to right size the business in case that doesn’t happen. Thanks.

Mitch Gellman

Well. Obviously, anything is possible, but the way that everything is going today with our largest OEM customers, it looks like everything is looking good and we’re fully going forward. So I would say that the latest debt qualification could happen and production could happen with any of our customers – any of the larger customers would be first quarter of next year.

Edward Parker – Lazard Capital Markets

Okay, thanks. So then, do you think your competitors, at least your larger competitors are going to have to go through the same time period in terms of qualifications, or do you think that some of them, because they’re just larger and there are more resources they may able to power through the cycle that you’ve been able to?

Mitch Gellman

There is all kinds of different differences between all crisis in our competitors as of these and our PCI cards and our competitors’ PCI cards, one of the major thing is that we have on our system. So people are using either 10X to 25X per day type of life cycles. So it’s completely different as it’s needed then to one of our competitive thing, and if you pay attention to what our competitors are advertising on the endurance of the SSDs and look at the details you see that basically all of them are saying that on a sequential like basis, you can like 10 times per today into SSD.

We don’t differentiate between sequential and random, in a sequential write, you don’t have too many write amplifications you have one-time write-amplification, so therefore, you’re only writing 10 times a day into a drive when we calculate our drive writes, we say it’s good for random or sequential and this 2.6 times write-implication SSDs is designed in.

So we can actually write 26 times if you look at it on a sequential basis. So we’re not selling exactly the same thing as our competitors sell and we don’t go through the same processes, some of the stuff that are being sold today in the market and even on some of our OEM customers so buying them as less of a robust product and putting them into systems that are not as critical of applications as all SSDs goes into and they all have different type of timeline so they might take – sometimes, they might take longer, sometimes it might take shorter.

At the same time, our primary SAS SSDs competitor is using maybe 25% more Flash across their SSDs, and semiconductor manufacturers subsidizing it fully and letting them just sell into the market just to be in the market.

We don’t sell products because we just want to take market, we want to sell products that customers need and we want to make profit off of it. So two different things altogether, and it’s really not comparable with what our competitor is doing to what we do.

Edward Parker – Lazard Capital Markets

Okay, thanks a lot, last question from me. What do you think the mix of your OEM enterprise business looks like one year from now?

Manouch Moshayedi

I would say, probably 50-50 if I were to guess, I think enterprise end-user customers are much bigger in terms of numbers and then on the fuel use that we deal with and based on what’s happening in the market and the amount of data that’s being stored and looked at every single day, it’s getting bigger and bigger every day. Cloud Computing guys are becoming – and NAND guys have becoming a much bigger and more important customer for everyone and number of opportunities in that area is it’s just vast.

Edward Parker – Lazard Capital Markets

Okay. Thanks.

Manouch Moshayedi

Okay.

Operator

Our next question comes from Richard Shannon with Craig-Hallum.

Manouch Moshayedi

Hello, Richard.

Richard Shannon – Craig-Hallum

Hi, Mitch. Hi, Raymond. How are you guys doing? Couple questions from me I guess I have to beat dead horse here on the Gen 4 qualifications. But is there anything fundamentally different in terms of the qualification process to your largest OEMs here, is there a same level urgency, any differences you can help us understand there because it seems to be taking little bit longer than maybe such once we go.

Raymond Cook

So I think our Gen 4, a few challenges that we started with to begin with we had gone from FPGA to ASIC, which was a complete different approach to Gen 4. We went from a from our primary NAND supplier to a second NAND supplier for usage and the flash acts completely, differently than what we’ve been working with for the past ten years or so, that has a difference. We went from a 50-nanometer NAND to a 30-nanometer which was a big difference. We went from SLC to MLC that made a big difference, at the same time while we were in the middle of production with qualification we went from a 3x-nanometer NAND to 2x-nanometer NAND. So there’s been a lot of changes from the day that we started qualification of Gen 4 to today. So basically now we’re at the point where most of our customers are just qualifying a consumer MLC into 2x-nanometer area.

Richard Shannon – Craig-Hallum

Okay, perfect. Appreciate that detail there. Manouch, based on some responses to the few of the previous questions here, I’m wondering what your expectations are for the fourth quarter, it sounds like you’re expecting revenues kind of in the same flattish range with your second and third quarter, is that a good guess as to what your thought process is right now.

Manouch Moshayedi

I certainly hope not so, I won’t, I won’t (inaudible) to guess but, I’d – my hope there has been a lot in the same range as second and third quarter.

Richard Shannon – Craig-Hallum

Okay, that’s fair enough. Thanks for that thought. Maybe one more question from me in terms of your targeting enterprise customers, I guess mostly with your Kronos PCIe express product, but are you, give any specific go-to-market strategy in terms of vertical markets, or what, is there any specific approach here and anyone’s you’re getting more you faster access to and maybe expecting faster qualification cycle.

Manouch Moshayedi

We basically hired seeing good talent in terms of sales and marketing to the enterprise customer base in the segment that customer into a few different areas and we’ve got, we’ve hired heads for most of those in different areas of sales and going forward and qualifying our products and we’re basically seeing good traction across cloud and data centers.

Richard Shannon – Craig-Hallum

Okay. Perfect. I appreciate those thoughts. That’s all from me guys. Thanks.

Mitch Gellman

Thank you.

Operator

And I’m not showing any other questions at this time, I’d like to turn the conference back over to the host for closing comments.

Mitch Gellman

Okay. Thanks very much. Everyone thanks for joining us today. Just again, just kind of recap if you’re going to be in either of the two upcoming investor conferences, as well as please check our calendar or e-mail alert servicing, we’ll let you know as soon as we know what conferences we’ll be at and we look forward to you meeting there. Other than that, we’ll keep you posted and thanks again for joining us today.

Operator

Ladies and gentlemen, that concludes today’s presentation. You may now disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: STEC's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts