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STEC becalmed as Fusion-io streaks ahead

EMC over-ordering breaks STEC's run

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Comment Conditions are variable in the solid state drive (SSD) world, with STEC lagging while Fusion-io has the wind in its sails.

STEC makes SSDs that replace fast hard disk drives (HDD), fitting in HDD slots in storage arrays, and boosting the I/O rates much better than having lots of short-stroked, fast-spinning Fibre Channel drives. Fusion-io deploys its NAND flash as cache, PCIe-connected cache in servers, where it accelerates I/O off all drives in a storage array.

Last year STEC made an amazing clean sweep of storage array vendors, from Compellent to IBM as they all followed EMC's ground-breaking lead in adding STEC Fibre Channel interface SSDs to its arrays. No other vendor made FC interface SSDs, and STEC rampaged through FC storage arrays as every other vendor - apart from hold-outs like Pillar which chose Intel - followed EMC's lead.

STEC's revenues rocketed and so did its valuation. There were no competitors on the near horizon, only distant possible wannabees with most of its competition for storage array flash plumping for SAS interfaces.

But the picture was illusory; EMC over-ordered its ZEUSIOPS SSDs and didn't sell its stock fast enough. STEC's forward earnings now face a trough as EMC is its biggest customer, and the stock sell-off is going to last well into this year.

STEC's other customers are not ramping up their sales as fast as might have been expected, and investors have punished STEC's stock severely for this interruption in its earnings trend. In September last year STEC shares were $41.84 each. As the EMC stocking disaster became visible they fell to $23.15 in early November and then dropped off a cliff, falling to $11.44 in December and now still trading at a lowish $11.14.

STEC has introduced cheaper HDD replacement SSDs in its MACH8IOPS line, but these haven't yet received a wide take-up buy its OEMs. Its last quarterly report was good on the previous growth front; revenue for the fourth quarter of 2009 was $106.0m, an increase of 86.3 per cent from $56.9m for the fourth quarter of 2008.

But that was then and investors are looking ahead and STEC's sales forecasts show a distinct lack of oomph, with CEO Manoush Mossayedi saying: "We believe that the first half of 2010 will be a trough period for our business due to an inventory carryover by our largest customer [EMC]... We now anticipate this inventory carryover to continue to negatively impact our sales to this customer during the first half of 2010, as we do not expect any meaningful production orders from this customer during that time."

Hmm, your biggest customer goes on a buying strike and your other customers aren't ramping up sales fast enough. Cue Wall Street's hissy fit.

Fusion-io isn't suffering from a hissy fit at all. Of course it's still privately-owned but a kind of sustained pre-IPO news flood is coming out.

It's appointed its first chief financial officer, Dennis Wolf, and let slip that it is enjoying more than 80 per cent quarter-over-quarter sales growth and more than 300 per cent sales growth year-over-year. Triple digit growth sounds nice. Wolf himself said "the quarterly numbers have eight digits", so that's a miminum of $10m for the quarter.

To ram the message home Jim Dawson, Fusion-io's SVP worldwide sales, said: “In the 20 years I’ve been working in this industry, I’ve never seen a company grow this fast and I believe we are well poised to triple our growth in 2010.”

The company says it has relationships with the top three server OEMs. It characterises deployment of STEC HDD-replacement flash as being "relegated to a random, high-IOPS niche", whereas its own server-connected flash has a much wider deployment potential.

Fusion-io could be right and STEC has ambitions in the server flash space too. It's gone through a valuation hype bubble and will now grow its stock value at a much more pedestrian pace, whereas Fusion-io is in the growth phase of its hype curve. We might provisionally expect an IPO in 2011, with a year of great growth and good revenues behind it if that happens, and more forecast to come, timed when hype is still rising. ®

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