as the company shifts from being a supplier to OEMs, such as EMC, IBM and Hitachi Data Systems, to a sales model that combines direct sales, VARs and OEMs.
STec has one of the broadest range of flash storage products in the market, with SAS and SATA solid-state drives (SSDs), PCIe flash cards for servers, and flash caching software. But it faces steep challenges. STec's revenue is barely a quarter of what it was two years ago when the company still had a strong presence with OEMs. As a result, sTec lost $25 million last quarter. And Mark Moshayedi replaced his brother Manouch as CEO last year after the Securities and Exchange Commission (SEC) charged Manouch with insider trading.
We recently discussed the company's new direction with sTec CEO Mark Moshayedi and Chief Marketing Officer Ali Zadeh.
What prompted the change in your go-to-market strategy from a complete OEM model?
Mark Moshayedi: With the OEM market we served, we used to have roughly three partners [storage vendors], maybe five, that accounted for 80% of our sales. When those guys started bringing in second sources and alternative suppliers, and flash prices continued to go down, it's easy to see that, over time, it becomes a tough business to be in while competing with the likes of the [flash vendors] Intels, Samsungs and Hitachis of the world.
We saw this 18 months ago -- I wish we would have seen it three years ago -- and started building the team that we have now. Now we're not going after five accounts, we're going after 5,000 accounts. And we put direct staff in each of the vertical channels that we'll be covering ourselves -- oil and gas, government, financial, Web 2.0, and cloud computing. Our guys will cover [the] top 20 accounts in each sector, and we'll use VARs for the rest.
Our goal by the end of the year is to get sales 50-50 between OEMs and enterprise channel.
Ali Zadeh: The side benefit of this is we are in direct contact with the end user. When you go through the OEM model, you don't have direct contact with the end user and you can't have your hand on the pulse of the market. It's much easier when you're dealing with the end user to understand the needs, the trends and the changes in the market. It makes us more agile coming up with solutions.
What trends are you seeing from users?
Moshayedi: We see a trend toward enterprises using other types of storage devices than the traditional NAS/SAN big-refrigerator-size type of system. Flash is the enabling technology behind a lot of these new systems, and customers benefit from being able to scale out or use other types of configurations.
As an example, if you had a database and wanted high-performance storage for it, you had no choice but to go to these big-iron guys and buy a couple-million-dollar piece of equipment with thousands of drives in it to get the I/O performance you need.
Now most databases are less than a terabyte. You can take a single flash card and plug it into those servers. Worst case, if the database is large, you can get 24 drives into a system and plug in 2 TB drives, which will get you roughly 50 TB in one box with a performance that nothing in the NAS and SAN world can match.
So, the information we get from the industry analysts we track is that about 30% of the overall storage end-user market is already transitioned to this type of model. By 2016, 50% of the overall storage market will be basically people putting their own types of systems together with OpenStack and other open compute platforms.
Are you talking to customers looking for the Google model in their data center?
Zadeh: Absolutely. Yahoo and Google started this trend 15 years ago. They've proven there is an alternative that is less costly, more efficient and just as reliable. Most enterprises are more conservative, but now they say, if there's a system that is reliable, scalable and cost-efficient, why don't we take a look at that?
According to IDC, 50% of storage used by enterprises and data centers by 2016 will be through non-OEMs. Who are the non-OEMs? These are system-specific VARs within verticals and geographical markets that offer solutions to customers at huge cost savings and with the same reliability [as] traditional solutions.
With your change in business model, your revenue last quarter ($22.5 million) was less than half of what it was a year ago ($50.4 million) and almost one-quarter of where it was nearly two years ago ($82.45 million). How long will it take you to get your revenue back to where it was?
Moshayedi: We see more and more adoption of flash technology. Not a single customer says, 'I know about flash and don't want to use it.' Our hit rate is extremely high. We go after some very large accounts and competitive situations. At the end of the day, it's not only the best product, but [the] best solution. The more customers we touch with expanding sales force, [the] more probability of success.
Are you expecting enterprises will want to install their own SSDs in large numbers?
Zadeh: Yes. People are looking for tailored solutions to solve their problems rather than going and getting pre-manufactured, off-the-shelf systems offered through OEMs.
Typically, OEMs design a couple of systems and they show up and they say, 'OK, this is the small one, this is the medium and this is the large one. You go and figure out how it's going to solve your problem.' And the end user is looking at alternatives.
As Mark mentioned, if the guy can solve his database problem with less than a $100,000 SAN, his view is, 'Why should I spend a million dollars when I can spend $100,000 and get twice the speed and performance and efficiency, and decrease my footprint from a refrigerator to a 2U or 4U capacity within a rack?'
How important is software to your strategy?
Zadeh: Software is very important. We have expertise understanding the application and having software that enables you to adapt flash to the applications. If you look at a financial environment doing an online transactional processing application, understanding the application and use model of the customer and workloads enables you to architect a system that is efficient and cost-effective and solves a customer's problem.
You sell SSDs for arrays and PCIe flash for servers as well as software. Do you see the market swinging more towards one of those options?
Zadeh: We see a combination of both. If the data set they are dealing with is a smaller size and there is no scalability, we can see traction on the PCIe side. If you are looking for scalability of capacity and performance, you have no choice but to go with a scalable SAS SSD product. If you are running MySQL databases and have hundreds of servers, you might go with PCIe.
We are not trying to corner or push the customer in any direction. We give them a solution that is the best fit. It could be SATA or SAS drives, it could be PCIe, and at times it could just be caching software on their server.
We are not a single-pony show.
Moshayedi: Selling is different on the OEM side than selling to the end user. OEMs want a spec and say, 'Who can meet this spec?' Everybody comes to the party trying to meet that requirement. In the case of the enterprise customers, they have a problem -- the problem is the database is not running fast enough, queries are taking too long, or they just can't scale performance and size. We don't tell these guys we have a SAS drive or a PCIe drive; we go in and analyze their environment, figure out what challenges they have, and we recommend a system solution that solves that problem.
With all the flash vendors in the market, what do you have to do to stand out?
Zadeh: Flash is a commodity. The end users care less about what the commodity is or what the tools are -- they are looking for a solution.
Very few companies in this business have the combination of flash knowledge and intellectual property, with understanding of the application and the expertise to solve customer problems. That's what will make you a success or failure in this field. It's all about expertise to solve customers' problem, not about sticking flash to a board and saying 'I've got a product.'
You became CEO last year when your brother stepped aside after the SEC charged him with insider trading. How much have those legal issues affected your business?
Moshayedi: It has nothing to do with the company. The company and I have been cleared of any wrongdoing. Obviously, Manouch has his case, and it's something he's dealing with. It has absolutely no bearing on the company. [Note: Manouch Moshayedi remains on sTec's board.]
Zadeh: There is some stuff in our control, and some stuff that is not in our control. Our view at sTec is we are going to take care of the business and everything else will take care of itself in due time.