Analysis

posted on 20 June 2008 08:49

STEC has announced more design wins and has expansion plans for its Malaysian manufacturing facility.

STEC's Malaysia plant is in Penang and comprises 210,000 square feet. Malaysia has given it a 15-year tax holiday, which STEC is using to cut its global tax bill, with intellectual property (IP) developed outside the USA not being brought into the USA.

The company has 250 staff employed there now and expects to ramp the number up to 500 by the first quarter of 2009. Currently some 25-30% of STEC's output comes from Malaysia and the proportion is expected to grow to 75-80% in 2009. All this Malaysian expansion is due to booming business.

Currently STEC sells solid state drives (SSDs) exclusively to enterprise storage supplier EMC. But, once EMC's exclusivity deal regarding STEC's Fibre Channel interface drives comes to an end in Q3 it can supply EMC's competitors.

IBM and Hitachi Data Systems (HDS) are expected to be announced as STEC customers then. IBM will complete its STEC product qualification by the end of 2008 and HDS by the end of Q1 2009.

The company intends to start selling SSDs into the notebook market in the future, building on its enterprise storage array business. It believes that the notebook flash market will become a very large one and will be dominated by flash foundry owners such as Intel, Samsung and Toshiba. STEC will look to sell enterprise-class SSDs into that market as a niche play. It has apparently gained a design win for multi-level cell (MLC) drives in Apple's Macbook Air notebook.

STEC buys in its chips from Hynix, Numonyx and Samsung. Apart from sourcing the chips it does everything else in-house: its own drive controllers; its own firmware for them; designing; testing; and manufacturing.

STEC shares are priced at $11.25, down from the 52-week high of $14.25 of a few weeks ago when stories of a Seagate acquisition interest appeared to have driven the price up. The interest is not being sustained.

Competitive pressure is going to come from other SSD suppliers whose SATA interface SSDs can be used by OEMs to build Fibre Channel interface SSDs using an Emulex SATA-to-FC bridge chip that should be ready for early 2009. It is an existing SATA hard drive to FC bridge chip that is being re-tuned to work with SATA interface SSDs. This will remove the existing de facto monopoly that STEC has on the supply of FC interface SSDs. Emulex says that it has a wide range of OEM interest in this chip.

In the mid-term as the 6Gbit/s SAS II interface starts to appear and FC drive sales begin being impacted by SAS II then the value of owning direct FC SSD interface technology will diminish. Thus SAS II represents an issue STEC has to deal with.

^{[Based on an Investor's Business Daily article and other information.]}

^{[Chris Mellor.]}