November 4, 2009

Company Report
Change in Recommendation

STEC, Inc. STEC: $15.76

Hold Semiconductors

STEC: Believe Competition And Pricing Imply More

Downside; Downgrade To Hold
THINK ACTION: Vijay Rakesh
STEC reported September-quarter results ahead of the Street. But, revenue 312-201-3133, vrakesh@thinkequity.com
guidance for F4Q09(Dec) at $102M is below the consensus of $106M. STEC Christopher Eberle
attributed weak guidance to Zeus Inventory at EMC. Also, STEC said it will 212-468-7010, ceberle@thinkequity.com
probably take through 1Q10 to clear out inventory. We believe new
competing solutions in 1Q/1H10 could make ZeusIOPs a tougher sell, Changes Current Previous
with solutions at SAS, PCIe from Seagate, Micron, SMOD, Pliant, FusionIO, Rating Hold Buy
Samsung, and Intel and alternative solutions from the storage OEMs Sun, FY09E REV (M) $350.2E $350.9E
NetApp. We got this one wrong, and lower our rating from Buy to Hold. FY10E REV (M) $435.0E $489.2E
FY09E EPS $1.62E $1.54E
KEY POINTS: FY10E EPS $1.96E $2.28E
STEC reported September-quarter revenues/EPS of $98M/$0.50 versus the
consensus of $94M/$0.47. Revenues grew 14% Q/Q and gross margins flat at 52-Week High: $42.50
49.8% versus 50% last quarter. 52-Week Low: $3.42
Shares O/S-Diluted (M): 50.0
Market Cap (M): $788.0
STEC did $67M in ZeusIOPS SSD revenue in the September quarter with
Average Daily Volume: 4,848,763
$55M from EMC. STEC also saying now qualified at EMC, IBM, Sun, HPQ and
Short Interest: 16.5%
Hitachi.
Debt/Total Cap: 0.0%
Net Cash Per Share: $2.54
STEC guiding December quarter to $101-103M versus consensus of P/E (12-month forward): 13.0x
$106M. Company saying weaker guidance due to inventory of ZeusIOPS Est. Long-Term EPS Growth: 20.0%
storage solutions at EMC as it has not been able to sell through all the P/E/G: 65%
solutions. STEC saying the slower sell through on the ZeusIOPS has been due Fiscal Year-End: Dec
to customer perception of a longer payback period on the more expensive SSD After-market price
investment. STEC is therefore setting up a sales team to jointly market the REV (M) $ 2008A 2009E 2010E
SSD solutions with EMC and other storage OEMs to potential customers. Mar 50.7A 63.5A 95.0E
Jun 56.2A 86.4A 105.0E
We believe 1) the fact that the ZeusIOPs SSD has not been able to sell Sep 63.7A 98.3A 112.0E
through on its lower cost of ownership merits could imply more pricing pressure Dec 56.9A 102.0E 123.0E
on the Zeus solutions, which combined with higher marketing expense make FY 227.5A 350.2E 435.0E
for a less profitable enterprise opportunity. 2) STEC also saying could take CY NA NA NA
through 1Q10 to clear out the ZeusIOPs SSD at EMC, which could enable the
competition to close the technology gap. 3) By 1Q/1H10, we believe there FY P/S 3.5x 2.3x 1.8x
would be multiple solutions in the market from Seagate, Micron, SMOD, Intel, CY P/S 3.5x 2.3x 1.8x
Pliant, FusionIO and Samsung for both the Server and storage markets in SAS EPS $ 2008A 2009E 2010E
and PCIe to compete with ZeusIOPS FC SSDs. 4) We believe the competitive Mar 0.07A 0.17A 0.43E
offerings could imply market share and pricing risk for STEC, also 5) other Jun 0.09A 0.42A 0.49E
Storage OEMs not as keen on SSDs. Sep 0.10A 0.50A 0.50E
Dec 0.05A 0.52E 0.54E
Given the increasing competitive pressures and risk of pricing, market FY 0.31A 1.62E 1.96E
share, inventory risk, continuous pressures on lowering cost of CY NA NA NA
ownership from competing solutions the risk to the downside. While we
FY P/E 50.8x 9.7x 8.0x
believe STEC has an extremely large market opportunity ahead of it, we
CY P/E 50.8x 9.7x 8.0x
believe the competition is catching up with the slower market adoption of
existing solutions and other Storage OEMs almost a year behind EMC in
adopting SSDs. Lowering our 2010E from $489M/$2.28 to $435M/$1.96. We
believe a per-share fair value on STEC shares is $15, with $2.54 in net cash
per share and tangible book of $4.77.

Please see analyst certification (Reg. AC) and other important disclosures on pages 5-6 of this report.
 November 4, 2009
Company Report
Change in Recommendation

VALUATION:
We believe a per-share fair value on STEC shares is $15 based on 8x our 2010 EPS estimate of $1.96, in line with STEC's
EPS growing 20% Y/Y. We believe that is a significant earnings deceleration versus the 400% EPS growth in 2009. STEC
shares have historically traded between 10x and 20x forward P/E, our discount P/E primarily the result of increasing new
competition from multiple new players could affect market share, gross margins and proprietary value of STEC's solutions.

INVESTMENT RISKS:
STEC competes in a cyclical, technologically intensive industry and sells to a concentrated customer base. Its ability to meet
our financial expectations and achieve future growth is subject to a number of risk factors, including, but not limited to, the
following:
Market Risks
• STEC's continued success of its research and development efforts and timely execution of its new products;
• STEC has a high customer concentration with Cisco, at almost 40% of revenues;
• Cyclical growth in semiconductor demand and production, as well as growth in key consumer electronics markets;
• Competition and pricing pressure from other low-cost OEMs, ODMs, and suppliers and possible new market entrants from
Asia-Pacific, including China and Taiwan; and
• Unexpected changes in legal and regulatory requirements, tariffs, and exchange rates, political and economic stability,
staffing and management issues, and potentially adverse tax consequences for its international operations.
Technology Risks
• Potential loss of its intellectual property;
• Startup costs and execution on the Malaysian manufacturing facility;
• NAND-based solid state drive competition from upstream NAND majors; and
• Commercialization of competing technologies.

COMPANY DESCRIPTION:
STEC, Inc. designs, develops, manufactures, and markets custom memory solutions based on flash memory and dynamic
random access memory (DRAM) technologies in the United States and internationally. Its flash products include ZeusIOPS
solid state drives that provide enterprise-class data storage solutions; Zeus solid state drives, which are designed to meet
the data storage requirements of a range of industries, including defense and aerospace, automotive and transportation,
industrial, and communications industries; and MACH solid state drives, which are small form factor storage solution for
mission-critical systems in a variety of industries.

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Exhibit 1: STEC Inc. Income Statement
(in $ 000s, except per-share data)
2008 2009E 2009E 2010E 2010E
Mar Jun Sep Dec Mar Jun Sep Dec
Year Q1 Q2 Q3 Q4-E Year Q1-E Q2-E Q3-E Q4 Year

Street Consensus (Thomson First Call) 95,770 109,550 358,530 112,630 119,210 126,940 135,020 478,150
THINK Difference 2.6% (6.9%) (2.3%) (15.7%) (11.9%) (11.8%) (8.9%) (9.0%)

REVENUES 227,465 63,536 86,350 98,293 102,000 350,179 95,000 105,000 112,000 123,000 435,000

Cost of Goods Sold 149,935 38,233 43,105 49,368 51,000 181,706 49,400 54,600 59,920 67,035 230,955
GROSS PROFIT 77,530 25,303 43,245 48,925 51,000 168,473 45,600 50,400 52,080 55,965 204,045

OPERATING EXPENSES
Sales & Marketing 19,804 4,772 5,031 5,162 5,300 20,265 5,900 6,100 6,500 6,800 25,300
G&A 13,647 3,876 5,749 5,616 4,500 19,741 4,700 5,000 5,400 5,800 20,900
R&D 20,210 5,520 5,423 6,569 6,300 23,812 6,500 6,800 7,200 7,800 28,300
TOTAL OPEX 53,661 14,168 16,203 17,347 16,100 63,818 17,100 17,900 19,100 20,400 74,500

OPERATING INCOME 23,869 11,135 27,042 31,578 34,900 104,655 28,500 32,500 32,980 35,565 129,545

INTEREST INCOME 1,280 (12) 614 14 210 826 220 225 230 235 910
Interest Expense 0 0 0 0 0 0 0 0 0 0 0
Other Income/(Expense) 0 0 (560) 0 0 (560) 0 0 0 0 0
Total Other Income 1,280 (12) 54 14 210 266 220 225 230 235 910

PRETAX INCOME 25,149 11,123 27,096 31,592 35,110 104,921 28,720 32,725 33,210 35,800 130,455
TAX EXPENSE 9,449 2,636 5,796 5,570 7,514 21,516 5,744 6,545 6,642 7,160 26,091

Pro-Forma Net Income 15,700 8,487 21,300 26,022 27,596 83,405 22,976 26,180 26,568 28,640 104,364

DILUTED SHARES (000's)51,130 49,063 50,702 52,239 52,639 51,161 52,839 53,039 53,239 53,439 53,139

EPS (Fully Diluted) $0.31 $0.17 $0.42 $0.50 $0.52 $1.62 $0.43 $0.49 $0.50 $0.54 $1.96

Street Consensus (Thomson First Call) $0.39 $0.45 $1.39 $0.48 $0.51 $0.54 $0.56 $1.95
THINK Difference 27.7% 16.5% 16.2% (9.4%) (3.2%) (7.6%) (4.3%) 0.7%

Trailing Twelve Month Data CY09E CY10E

Net Revenues 240,301 270,452 305,094 350,179 381,643 400,293 414,000 435,000
Operating Income 29,704 50,034 73,930 104,655 122,020 127,478 128,880 129,545
Net Income 20,387 37,244 58,329 83,405 97,894 102,774 103,320 104,364
Diluted EPS $0.41 $0.74 $1.14 $1.62 $1.88 $1.95 $1.95 $1.96

35.8%
Street Margin Consensus (Thomson First Call) 40.4% 41.6% 42.1% 41.1% 41.6% 41.6% 41.6% 40.6%

Margin Data
Gross Margin 34.1% 39.8% 50.1% 49.8% 50.0% 48.1% 48.0% 48.0% 46.5% 45.5% 46.9%
Sales and Marketing 8.7% 7.5% 5.8% 5.3% 5.2% 5.8% 6.2% 5.8% 5.8% 5.5% 5.8%
G&A 6.0% 6.1% 6.7% 5.7% 4.4% 5.6% 4.9% 4.8% 4.8% 4.7% 4.8%
R&D 8.9% 8.7% 6.3% 6.7% 6.2% 6.8% 6.8% 6.5% 6.4% 6.3% 6.5%
Operating Margins 10.5% 17.5% 31.3% 32.1% 34.2% 29.9% 30.0% 31.0% 29.4% 28.9% 29.8%
Pre-Tax Margin 11.1% 17.5% 31.4% 32.1% 34.4% 30.0% 30.2% 31.2% 29.7% 29.1% 30.0%
Net Margin 6.9% 13.4% 24.7% 26.5% 27.1% 23.8% 24.2% 24.9% 23.7% 23.3% 24.0%
Tax Rate 37.6% 23.7% 21.4% 17.6% 21.4% 20.5% 20.0% 20.0% 20.0% 20.0% 20.0%
Q/Q Growth
Revenue 11.6% 35.9% 13.8% 3.8% (6.9%) 10.5% 6.7% 9.8%
Cost of Goods Sold (0.7%) 12.7% 14.5% 3.3% (3.1%) 10.5% 9.7% 11.9%
Sales and Marketing (0.6%) 5.4% 2.6% 2.7% 11.3% 3.4% 6.6% 4.6%
G&A 13.3% 48.3% (2.3%) (19.9%) 4.4% 6.4% 8.0% 7.4%
R&D (8.1%) (1.8%) 21.1% (4.1%) 3.2% 4.6% 5.9% 8.3%
Operating Income 166.7% 142.9% 16.8% 10.5% (18.3%) 14.0% 1.5% 7.8%
Interest Income (85.2%) NMF (97.7%) 1,400.0% 4.8% 2.3% 2.2% 2.2%
Pre-Tax Income 171.7% 143.6% 16.6% 11.1% (18.2%) 13.9% 1.5% 7.8%
Net Income 236.8% 151.0% 22.2% 6.1% (16.7%) 13.9% 1.5% 7.8%
EPS 247.0% 142.9% 18.6% 5.2% (17.1%) 13.5% 1.1% 7.4%
Source: Company reports & ThinkEquity LLC estimates

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Exhibit 2: STEC Inc. Balance Sheet

Balance Sheet 2008 2009

FY Ends December Mar Jun Sep Dec Mar Jun Sep
(000's) Q1 Q2 Q3 Q4 Q1 Q2 Q3
Cash and Cash Equivalents 73,669 62,847 29,359 33,379 62,663 93,703 132,925
Marketable Securities Held to Maturity
- - - - - - -
Accounts Receivable 32,064 32,901 49,767 43,516 37,897 50,500 51,856
Inventory 39,272 78,915 80,248 63,985 44,699 37,656 35,555
Deferred Income Taxes 638 1,980 1,652 1,302 1,593 2,992 1,946
Other Current Assets 5,897 4,210 4,173 8,264 6,637 2,769 8,206
Total Current Assets 151,540 180,853 165,199 150,446 153,489 187,620 230,488

Marketable Securities 6,808

Leasehold Interests in Land 2,618.0 2,607.0 2,595.0 2,587.0 2,618.0 2,562.0 2,551.0
Furniture, Fixtures, and Equipment
38,093 43,169 44,152 44,406 42,537 39,899 39,056
Intangible Assets, net 965 870 775 573 496 419 349
Deferred Income Taxes 3,590 3,644 4,633 4,407 4,473 4,144 5,669
Goodwill 1,682 1,682 1,682 1,682 1,682 1,682 1,682
Other Long-Term Assets 1,207 1,689 1,698 1,784 2,735 3,544 4,288
Total Non-Current Assets 54,963 53,661 55,535 55,439 54,541 52,250 53,595
Total Assets 206,503 234,514 220,734 205,885 208,030 239,870 284,083

Current Liabilities
Accounts Payable 22,709 40,243 22,562 13,097 10,674 10,028 17,068
Accrued and Other Liabilities 7,184 8,070 9,612 9,795 10,648 13,875 13,529
Total Liabilities 29,893 48,313 32,174 22,892 21,322 23,903 30,597

Long-Term Income Taxes Payable 862 875 1,067 1,430 1,494 1,538 2,484

Commitments & Contingencies

Shareholders' Equity
Preferred Stock - - - - - - -
Common Stock 49 50 50 48 48 49 50
Additional Paid in Capital 126,052 134,464 135,427 129,670 130,342 140,193 152,287
Retained Earnings 49,647 50,812 52,016 51,845 54,824 74,187 98,665
Total Shareholders' equity 175,748 185,326 187,493 181,563 185,214 214,429 251,002

Total Liabilities & Shareholders' 206,503

Equity 234,514 220,734 205,885 208,030 239,870 284,083
Check

DSO 58 53 71 70 54 53 48
Q/Q Inventory 24.5% 100.9% 1.7% (20.3%) (30.1%) (15.8%) (5.6%)
Q/Q Sales (4.4%) 10.8% 13.3% (10.6%) 11.6% 35.9% 13.8%
Days of Inventory 108 197 174 151 106 79 66
Inventory Turns 3 2 2 2 3 5 6
Current Ratio 5 4 5 7 7 8 8
Return on Equity 2.10% 2.40% 2.72% 1.37% 4.55% 10.76% 11.93%
Return on Sales 10.45% 11.94% 12.07% 7.34% 17.53% 31.32% 32.13%
Return on Assets 1.84% 1.89% 2.24% 1.22% 4.08% 8.88% 9.16%
Net Cash per share $1.44 $1.23 $0.57 $0.66 $1.28 $1.85 $2.54
TBV/Share $3.39 $3.57 $3.60 $3.55 $3.74 $4.20 $4.77
Source: Company reports

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 November 4, 2009
Company Report
Change in Recommendation

COMPANIES MENTIONED IN THIS REPORT:

Company Exchange Symbol Price Rating
EMC Corporation NYSE EMC $16.55 Buy
Intel Corporation NASDAQ INTC $18.50 Hold
Micron Technology, Inc. NYSE MU $6.65 Buy
NetApp, Inc. NASDAQ NTAP $27.80 Buy
SMART Modular Technologies (WWH), Inc. NASDAQ SMOD $3.92 Hold

Important Disclosures
Analyst Certification
I, Vijay Rakesh, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the
subject securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed in this research report.
I, Christopher Eberle, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the
subject securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed in this research report.

The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firm's total
revenues, a portion of which is generated by investment banking activities.

ThinkEquity LLC makes a market in Micron Technology, Inc., Intel Corporation, SMART Modular Technologies (WWH), Inc., NetApp, Inc.,
EMC Corporation, and STEC, Inc. securities; and/or associated persons may sell to or buy from customers on a principal basis.

Rating Definitions
Effective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tier
Buy/Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, including
previously published reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600
Montgomery Street, San Francisco, California, 94111.

Buy: ThinkEquity expects the stock to generate positive risk-adjusted returns of more than 10% over the next 12 months. ThinkEquity
recommends initiating or increasing exposure to the stock.

Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stock
is fairly valued.

Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquity
recommends decreasing exposure to the stock.

Distribution of Ratings, Firmwide

ThinkEquity LLC

IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [B] 119 66.50 13 10.92
HOLD [H] 54 30.20 2 3.70
SELL [S] 6 3.40 0 0.00

This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The
information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. The
opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past
performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or
implied, is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall
there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or
qualification under the securities laws of any such state. This research report was originally prepared and distributed to institutional clients
of ThinkEquity LLC.

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 November 4, 2009
Company Report
Change in Recommendation

Recipients who are not market professionals or institutional clients of ThinkEquity LLC should seek the advice of their personal financial
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LLC unless otherwise mentioned.

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ThinkEquity LLC unless otherwise mentioned.

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