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Is EMC looking away from STEC?

The silence is deafening

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Comment Since STEC revealed that EMC had over-ordered back in November last year, the company has been waiting for EMC orders to get back on track. Will they?

It's now five months since STEC revealed this:

One of our customers entered into a $120 million supply agreement with us for shipments covering the second half of 2009. We recently received preliminary indications that our customer might carry inventory of our ZeusIOPS at the end of 2009 which they will use in 2010.

That customer was STEC's most important one, EMC, and the latest news from STEC is that EMC's order rate has still not recovered, with STEC CEO Manouch Mossayedi recently 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.

EMC ordered $120m worth of the ZEUS SSDs from STEC in November last year and still hasn't exhausted its inventory. That stock might not be emptied by June and the EMC order rate might not pick up until past the mid-year point.

STEC has a current monopoly on the supply of Fibre Channel interface SSDs that can replace Fibre Channel hard drives. The product is quite high-priced and it's being suggested that the EMC over-order problem reflects an EMC under-selling problem - customers just aren't buying the stuff.

The internet is full of suggestive whispers about this. Reuters reports a recent class action against STEC, one of many filed by lawyers ambulance-chasing on behalf of investors wanting to get compensation for buying what they now think were over-inflated STEC shares when STEC directors were selling some of their own holdings, stated this:

The problem was not a lack of sales force effort or consumer knowledge about SSDs, but consumer resistance to purchasing the ultimate product due to its cost, performance, and flexibility of use.

Obviously, EMC's customers are not ordering the flash drives fast enough and someone in EMC's purchasing department, it appears, goofed. Another pair of whispers: 3PAR has added STEC SSDs to its enterprise storage arrays, but not Zeus product. Instead, it chose the significantly lower-priced Mach8IOPS ones. Ditto Pillar Data with its 2.6TB SSD Brick.

Both could have chosen the Fibre Channel-connected and higher-performing Zeus product, but they didn't.

Financial analyst Aaron Rakers of Stifel Niklaus offered this fourth whisper of a thought: "I definitely think that EMC will get someone else qualified - Samsung, HGST/Intel, etc. - in 2010."

EMC's Rick Lacroix, its PR Director for storage platforms and SW, said: "We have a multiple supplier strategy for components [and] we've never positioned our relationship with STEC as exclusive."

Is EMC qualifying a second supplier for its SSDs? "We can't provide any details about this [but] we prefer a multiple supplier arrangement."

Second-sourcing would be a lever to force STEC's prices down, as well as ensuring continuity of supply if one vendor experienced production difficulties. If, by the mid-year point. EMC orders had still not picked up, STEC would be desperate to get an EMC order. Then let EMC drop the bombshell that, er, yes, it actually had a second source whose product was 30 per cent cheaper and, unless STEC adjusted its pricing, EMC would prefer to order product from the second vendor.

If this happens, and the other STEC Zeus customers follow suit - and why wouldn't they, second-sourcing being normal - then Zeus revenues take a heavy hit.

Join these dots up and the picture revealed is that STEC's good times with its Zeus SSD product are over. Other vendors are not taking up the Zeus slack from EMC, and indeed, two of them have rejected Zeus all together. EMC itself is highly-likely to find a second source, and Zeus prices will then just have to come down. ®

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