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November 13, 2007 at 16:05 PM EST
STEC Announces Third Quarter 2007 Results; Company Achieves An 81 Percent Increase in Order Backlog Driven Primarily by Increased SSD Orders

SANTA ANA, Calif., Nov. 13, 2007 (PRIME NEWSWIRE) -- STEC, Inc. (Nasdaq:STEC) announced today the Company's financial results for the third quarter ended September 30, 2007.

Revenue for the third quarter of 2007 was $44.7 million, a decrease of 16.9% from $53.8 million for the third quarter of 2006, and an increase of 2.3% from $43.7 million for the second quarter of 2007. GAAP gross profit margin was 29.0% for the third quarter of 2007, compared to 34.5% for the third quarter of 2006, and 31.3% for the second quarter of 2007. GAAP diluted earnings per share from continuing operations was $0.01 for the third quarter of 2007, compared to $0.12 for the third quarter of 2006, and $0.04 for the second quarter of 2007.

GAAP results in the third quarter of 2007 included start-up costs related to the Company's Malaysia facility that is currently under construction, a non-recurring inventory write-off, global tax structuring costs, first-year implementation costs related to Sarbanes-Oxley Act Section 404, fees and expenses related to the arbitration of the Consumer Division asset sale post-closing purchase price adjustment and the short-term impact of the implementation of the global tax structure on the Company's effective tax rate. Non-GAAP results are explained and reconciled to GAAP results in tables included in this release. Non-GAAP gross profit margin was 31.1% for the third quarter of 2007, compared to 34.5% for the third quarter of 2006, and 31.8% for the second quarter of 2007. Non-GAAP diluted earnings per share was $0.05 for the third quarter of 2007, compared to $0.12 for the third quarter of 2006, and $0.05 for the second quarter of 2007.

Business Outlook

Strategic Initiatives on Target

"During the third quarter of 2007, sampling activity and revenue from our ZeusIOPS Solid-State Drives ("SSD") again accelerated in the Enterprise Storage and Video-on-Demand ("VoD") sectors," said Manouch Moshayedi, STEC's chief executive officer. "In fact, it now appears that we will end the year at the top end of our first-year revenue target of $5 million to $10 million. Despite various announcements from other potential SSD manufacturers and the subsequent misunderstanding and misinterpretations by analyst reports, we do not see any competition currently in the ZeusIOPS portion of our business nor have we seen any announcements which indicate any potential competitors might be introducing an SSD with similar performance as our ZeusIOPS anytime during 2008. Furthermore we have not received any feedback from our customers who are currently qualifying our ZeusIOPS SSDs that a competitor has given them any indication that they might be introducing a product similar to our ZeusIOPS. As we had stated in previous conference calls, we expect a significant impact from our ZeusIOPS SSD product line to come in 2008 and beyond, with only modest, first-year revenue coming in 2007.

Backlog

"We achieved an 81% or $15.8 million increase in our order backlog during the third quarter of 2007 driven primarily by increased SSD orders. We ended the quarter with backlog of $35.2 million, up significantly from $19.4 million at the end of the second quarter of 2007. We believe that our SSD technology is clearly the leading technology for Enterprise-level applications. As our increased order backlog indicates, we believe that our long-term prospects for our SSD technology in the Enterprise-Storage and -Server markets, including VoD applications, are very bright.

New Technology for the Enterprise-Server Market

"We expect to have our Mach8 SSD product line, which features our proprietary 8-channel controller, ready for customer sampling by the end of November 2007. The Mach8 and Mach8IOPS products will enable our Enterprise-Server customers to achieve high read and write IOPS performance at a competitive cost.

Malaysia Facility

"We are on target to complete construction of our Penang, Malaysia facility by the end of this month. We have already achieved ISO certification and several significant customer audits have been successfully conducted at our current facility. We expect our permanent facility to be operational in the first quarter of 2008 and ramp up to meaningful production levels by the end of the second quarter of 2008. We expect our investment in this new facility to help reduce average production and engineering costs, improve access to growing markets in Asia, improve supply-chain efficiency and lower our overall long-term effective corporate tax rate.

Guidance

"We currently expect fourth quarter of 2007 revenue to range from $48 million to $51 million with diluted non-GAAP earnings per share to range from $0.07 to $0.09. We are excited about our future in the ever-expanding Enterprise-SSD markets. We also look forward to the opening of our Malaysia facility and the implementation of our long-term global tax strategy."

Conference Call

STEC will hold an open conference call to discuss results for the third quarter of 2007. The call will take place today at 1:30 p.m., Pacific/4:30 p.m., Eastern. The call-in numbers for the conference are 1-800-781-3662 (United States and Canada) and 1-706-643-7710 (International).

Webcast

This call is being webcast. The webcast can be accessed by clicking on the "About STEC/Support," link at www.stec-inc.com then "Investor Relations." The webcast will be archived and available for replay beginning approximately two hours after the live call concludes.

About STEC, Inc. (Nasdaq:STEC)

STEC, Inc. designs, develops, manufactures and markets custom memory solutions based on Flash memory and DRAM technologies. For information about STEC and to subscribe to the Company's "Email Alert" service, please visit our web site at www.stec-inc.com, click "About STEC/Support," then "Investor Relations" and then "Email Alert."

The STEC logo is available at http://www.primenewswire.com/newsroom/prs/?pkgid=1079

Use of Non-GAAP Financial Information

To supplement the consolidated financial results prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), we use non-GAAP financial measures (non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP income from continuing operations before provision for income taxes, non-GAAP income from continuing operations and non-GAAP diluted earnings per share from continuing operations) that exclude start-up costs related to the Company's Malaysian facility that is currently under construction, a non-recurring inventory write-off, global tax structuring costs, first-year implementation costs related to Sarbanes-Oxley Act Section 404, fees and expenses related to the arbitration of the Consumer Division asset sale post-closing price adjustment arbitration fees and the short-term impact of the implementation of the global tax structure on the Company's effective tax rate. Management excludes these items because it believes that the non-GAAP measures enhance an investor's overall understanding of the Company's financial performance and future prospects by being more reflective of the Company's core, recurring operational activities and to be more comparable with the results of the Company over various periods. Management uses non-GAAP financial measures internally for strategic decision making, forecasting future results and evaluating current performance. Guidance is provided only on a non-GAAP basis due to the inherent difficulty of forecasting the timing or amount of such items. Difficulties in forecasting the non-GAAP items include the timing of customer audit approvals for the Malaysia facility which would impact the ramp up of production, registration costs for new entities related to our global tax structure, the resources required to implement and be compliant with Sarbanes-Oxley Act Section 404, a prolonged arbitration proceeding with respect to the Consumer Division asset sale post-closing price adjustment dispute and unexpected delays in shipping new products developed by our foreign subsidiaries in lower tax jurisdictions than the United States. These items could be materially significant in our GAAP results in any period. By disclosing non-GAAP financial measures, management intends to provide investors with a more meaningful, consistent comparison of the Company's core operating results and trends for the periods presented. Non-GAAP financial measures are not prepared in accordance with GAAP; therefore, the information is not necessarily comparable to other companies' financial information and should be considered as a supplement to, not a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. A complete reconciliation between GAAP and non-GAAP information referred to in this release is provided in tables included in this release.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:

This press release contains forward-looking statements that involve risks and uncertainties, including, but not limited to, statements concerning: expectation to end the year at around the top of our ZeusIOPS revenue target, expected significant impact from our ZeusIOPS SSD product line, our belief that there currently isn't any competition in the ZeusIOPS portion of our business, our belief that our ZeusIOPS technology is clearly the leading technology for Enterprise-level applications, belief that our long-term prospects based on our SSD technology in the Enterprise-Storage and -Server markets, including VoD applications, are very bright, expected availability of our Mach8 SSD product line for customer sampling, expected timeframe for our new Malaysia facility to become operational and ramp up to meaningful production levels, expected benefits from our investment in the Malaysia facility, revenue and diluted earnings per share guidance for the fourth quarter of 2007; enthusiasm about our future in the SSD markets and management's rationale for using non-GAAP financial measures. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes and results to differ materially from current expectations. Important factors which could cause actual results to differ materially from those expressed or implied in the forward-looking statements are detailed under "Risk Factors" in filings with the Securities and Exchange Commission made from time to time by the Company, including its Annual Report on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K. Other factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements include the following risks: we may not realize the expected benefits of the recent divestiture of our Consumer Division; disruptions from the divestiture of our Consumer Division transaction could make it more difficult to maintain relationships with customers and employees; changes in demand from certain customer segments; the cost of raw materials may fluctuate widely in the future; our backlog may not result in future revenue; excess inventory held by our customers may reduce future demand for our products; we may not realize the expected benefits from our operations in Malaysia or from our global tax restructuring; unexpected delays in or increased cost associated with the construction of our Malaysia facility; unexpected delays in the qualification process of our products with customers; our growth initiatives may not be successfully implemented; slower than expected expansion of our international business; we may not realize the anticipated benefits from any acquisitions of businesses, technologies, or assets we have and may undertake in the future; excess availability of DRAM or Flash memory could reduce component pricing resulting in lower average selling prices and gross profit; DRAM or Flash memory supply may tighten requiring suppliers to place their customers, including us, on limited component allocation; interruptions or delays at the semiconductor manufacturing facilities that supply components to us; higher than expected operating expenses; new and changing technologies limiting the applications of our products; our inability to become more competitive in new and existing markets, our inability to maintain and increase market share, difficulty competing in sectors characterized by aggressive pricing and low margins; new customer and supplier relationships may not be implemented successfully; higher than anticipated capital equipment expenditures; adverse global economic and geo-political conditions, including acts of terror, business interruption due to earthquakes, hurricanes, pandemics, power outages or other natural disasters; and potential impact of high energy prices and other global events outside of our control which could adversely impact customer confidence and hence reduce demand for our products. The information contained in this press release is a statement of STEC's present intention, belief or expectation. STEC may change its intention, belief or expectation, at any time and without notice, based upon any changes in such factors, in STEC's assumptions or otherwise. STEC undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.



                              STEC, INC.
                      CONSOLIDATED BALANCE SHEETS
                            (in thousands)
                              (unaudited)

                                            As of           As of
                                         September 30,   December 31,
                                             2007            2006
                                          -----------     ----------
                              ASSETS:
 C

The non-GAAP financial measures included in the following tables are non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP income from continuing operations before provision for income taxes, non-GAAP income from continuing operations and non-GAAP diluted earnings per share from continuing operations, which adjust for the following items: (a) start-up costs related to the Company's Malaysia facility that is currently under construction, (b) a non-recurring inventory write-off, (c) global tax structuring costs, (d) implementation costs related to Sarbanes-Oxley Act Section 404, (e) fees and expenses related to the arbitration of the Consumer Division asset sale post-closing purchase price adjustment and (f) the short-term impact of the implementation of the global tax structure on the Company's effective tax rate. Management believes these non-GAAP financial measures enhance an investor's overall understanding of the Company's financial performance and future prospects by being more reflective of the Company's core operational activities and to be more comparable with the results of the Company over various periods. Management uses non-GAAP financial measures internally for strategic decision making, forecasting future results and evaluating current performance. By disclosing non-GAAP financial measures, management intends to provide investors with a more meaningful, consistent comparison of the Company's core, recurring operating results and trends for the periods presented. Non-GAAP financial measures are not prepared in accordance with GAAP; therefore, the information is not necessarily comparable to other companies' financial information and should be considered as a supplement to, not a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP.

The items excluded from GAAP financial results in calculating non-GAAP financial results, are set forth below:



 (a) The Malaysia facility start-up costs primarily relate to costs
     associated with our 25,000 square foot interim facility,
     depreciation on equipment, and operational, sales and marketing,
     general and administrative and research and development personnel
     costs. The Company uses its interim facility to train production
     employees, obtain facility certifications such as ISO
     certification, initiate the accounting and information systems
     and conduct customer audits to better prepare for the opening of
     the Company's 210,000 square foot facility. The Company expects
     to attain meaningful production volume from its full-scale
     production facility in the third quarter of 2008. As the interim
     and full-scale production facilities are not expected to
     contribute meaningfully to operations until the third quarter of
     2008, management believes excluding such items from the Company's
     operations provides investors with a means of evaluating the
     Company's current operations.

 (b) Printed Circuit Board ("PCB") inventory write-off costs relate to
     a one-time write off of certain stacked PCBs. These PCBs were a
     component in stacked DRAM modules that were built with thin small
     outline package ("TSOP") DRAM chips. DRAM memory chips used in
     modules for the server market have substantially transitioned
     from TSOP memory chips to ball grid array ("BGA") memory chips.
     Although the company typically purchases DRAM memory chips only
     after a related order is placed by a customer, PCBs are typically
     purchased in large lots and are stocked in order to keep unit
     purchase prices at a minimum. The PCB inventory write-off
     resulted from this one-time technology transfer occurring more
     rapidly than expected for its server customers.

 (c) The global tax structuring costs relate primarily to tax
     consulting, legal fees and filing fees associated with
     establishing various corporate entities throughout the world, and
     establishing cost-sharing and transfer pricing agreements among
     the worldwide entities. Management believes these costs should be
     excluded when evaluating core operations since management expects
     such costs to be immaterial after 2007.

 (d) First-year Sarbanes-Oxley costs relate to accounting and
     consulting fees related to the Company's preparation to comply
     with Section 404 of the Sarbanes-Oxley Act in 2008 and the
     incremental amount of the first-year audit costs upon the Company
     first becoming subject to Sarbanes-Oxley Act Section 404 in 2008
     over the expected Sarbanes-Oxley audit costs in subsequent years.
     Management believes these costs should be excluded when evaluating
     core operations since management believes these costs will be
     immaterial after the first quarter of 2008.

 (e) Consumer division arbitration fees relate to legal and consulting
     fees incurred in the arbitration proceeding with Fabrik, Inc.
     ("Fabrik") over the final purchase price adjustment for the sale of 
     the assets of the Consumer division to Fabrik on February 9, 2007.
     The original amount in dispute subject to a formal arbitration 
     process was approximately $6.7 million which has been reduced to 
     approximately $2.7 million. In accordance with the Purchase 
     Agreement, both parties have agreed to submit the disputed amounts 
     to a third party arbitrator to resolve such matters. Management 
     believes that legal and consulting fees incurred in conjunction 
     with this arbitration proceeding should be excluded when evaluating 
     core operations since management believes these costs are 
     non-recurring and will be not be incurred once the matter is settled.

 (f) The short-term impact of the implementation of the global tax
     structure on the Company's effective tax rate is related to an
     increase in the provision for income taxes as the result of
     research and development cost sharing arrangements made between
     the Company and certain of its foreign subsidiaries. The
     short-term impact of these intercompany agreements has resulted
     in research and development expenses being incurred in a foreign
     jurisdiction with a zero tax rate which has resulted in less
     overall tax benefits for the Company in the third quarter of 2007. 
     However, as new products are being developed and sold in foreign
     jurisdictions, the Company expects to incur future profits that
     will be taxed at a lower rate than in the United States, resulting
     in long-term tax savings that will more than offset the short-term 
     increases. Management believes that the increase in the Company's 
     effective tax rate is temporary and the incremental increase
     should be excluded when evaluating core operations.


                               STEC, INC.
  Schedule Reconciling Non-GAAP Income From Continuing Operations to
                GAAP Income From Continuing Operations
                            (in thousands)
                              (unaudited)

                              Three Months Ended    Nine Months Ended
                                 September 30,         September 30,
                             -----------------------------------------
                               2007       2006       2007       2006
                             --------   --------   --------   --------
 Net income from
  continuing operations      $    506   $  5,996   $  4,276   $ 11,376
                             ========   ========   ========   ========

 The non-GAAP amounts
  have been adjusted to
  exclude the following
  items:

 Excluded from cost of
  sales:
   Malaysia facility
    start-up costs (a)       $    248   $     --   $    532   $     --
   Inventory write-down (b)       674         --        674         --
                             -----------------------------------------
                                  922         --      1,206         --

 Excluded from operating
  expenses
   Malaysia facility
    start-up costs (a)       $    648   $     --   $  1,773   $     --
   Global tax structuring
    costs (c)                     153         86        424        357
   First-year Sarbanes-Oxley
    implementation costs (d)       41         --        129         --
   Consumer division sale
    arbitration fees (e)          868         --        868         --
                             -----------------------------------------
                                2,632         86      4,400        357

 Income tax effect on
  non-GAAP adjustments            992         32      1,659        133
                             --------   --------   --------   --------
 Net effect of adjustments
  to GAAP net income            1,640         54      2,741        224

   Global tax structuring
    implementation
    short-term income tax
    impact (f)                    538         --        538         --

                             --------   --------   --------   --------
 Non-GAAP income from
  continuing operations      $  2,684   $  6,050   $  7,555   $ 11,600
                             ========   ========   ========   ========

 (a) - (f)  See corresponding footnotes above.


                               STEC, INC.
            Schedule Reconciling Reported Financial Ratios
                              (unaudited)

                              Three Months Ended    Nine Months Ended
                                 September 30,         September 30,
                             -------------------   -------------------
                               2007       2006       2007       2006
                             --------   --------   --------   --------
 GAAP gross margin               29.0%      34.5%      30.3%      30.6%
 Effect of reconciling
  item on gross margin            2.1%       0.0%       0.9%       0.0%
                             --------   --------   --------   --------
 Non-GAAP gross margin           31.1%      34.5%      31.2%      30.6%
                             --------   --------   --------   --------


                               STEC, INC.
                Selected Non-GAAP Financial Information
               (in thousands, except per share amounts)
                              (unaudited)

                             Three Months Ended    Nine Months Ended
                                September 30,         September 30,
                             -------------------   -------------------
                               2007       2006       2007       2006

 GAAP gross margin           $ 12,980   $ 18,570   $ 41,113   $ 43,282
   Malaysia facility
    start-up costs (a)            248         --        532         --
   Inventory write-down (b)       674         --        674         --
                             --------   --------   --------   --------
 Non-GAAP gross margin       $ 13,902   $ 18,570   $ 42,319   $ 43,282
                             ========   ========   ========   ========

 GAAP operating expenses     $ 12,380   $  9,346   $ 36,193   $ 26,527
   Malaysia facility
    start-up costs (a)           (648)        --     (1,773)        --
   Global tax structuring
    costs (c)                    (153)       (86)      (424)      (357)
   First-year Sarbanes-Oxley
    costs (d)                     (41)        --       (129)        --
   Consumer division sale
    arbitration fees (e)         (868)        --       (868)        --
                             --------   --------   --------   --------
 Non-GAAP operating
  expenses                   $ 10,670   $  9,260   $ 32,999   $ 26,170
                             ========   ========   ========   ========

 GAAP operating income       $    600   $  9,224   $  4,920   $ 16,755
   Malaysia facility
    start-up costs (a)            896         --      2,305         --
   Inventory write-down (b)       674         --        674         --
   Global tax structuring
    costs (c)                     153         86        424        357
   First-year Sarbanes-Oxley
    implementation costs (d)       41         --        129         --
   Consumer division sale
    arbitration fees (e)          868         --        868         --
                             --------   --------   --------   --------
 Non-GAAP operating income   $  3,232   $  9,310   $  9,320   $ 17,112
                             ========   ========   ========   ========

 GAAP income from
  continuing operations
  before provision for
  income taxes               $  1,674   $  9,621   $  7,732   $ 18,133

   Malaysia facility
    start-up costs (a)            896         --      2,305         --
   Inventory write-down (b)       674         --        674         --
   Global tax structuring
    costs (c)                     153         86        424        357
   First-year Sarbanes-Oxley
    implementation costs (d)       41         --        129         --
   Consumer division sale
    arbitration fees (e)          868         --        868         --
                             --------   --------   --------   --------
 Non-GAAP income from
  continuing operations
  before provision for
  income taxes               $  4,306   $  9,707   $ 12,132   $ 18,490
                             ========   ========   ========   ========
 GAAP income from
  continuing operations      $    506   $  5,996   $  4,276   $ 11,376
   Malaysia facility
    start-up costs (a)            896         --      2,305         --
   Inventory write-down (b)       674         --        674         --
   Global tax structuring
    costs (c)                     153         86        424        357
   First-year Sarbanes-Oxley
    implementation costs (d)       41         --        129         --
   Consumer division sale
    arbitration fees (e)          868         --        868         --
   Global tax structuring
    short-term income tax
    impact (f)                    538         --        538         --
   Income tax effect on
    non-GAAP adjustments         (992)       (32)    (1,659)      (133)
                             --------   --------   --------   --------
 Non-GAAP income from
  continuing operations      $  2,684   $  6,050   $  7,555   $ 11,600
                             ========   ========   ========   ========
 GAAP diluted earnings per
  share from continuing
  operations                 $   0.01   $   0.12   $   0.08   $   0.24
 Impact of non-GAAP
  adjustments on diluted
  earnings per share         $   0.04   $   0.00   $   0.06   $   0.01
                             --------   --------   --------   --------
 Non-GAAP diluted earnings
  per share from
  continuing operations      $   0.05   $   0.12   $   0.14   $   0.25
                             ========   ========   ========   ========

 (a) - (f)  Refer to the corresponding footnotes above.
CONTACT:  STEC, Inc.
          Media Contact:
          Patrick Wilkison, Vice President, Marketing
           and Business Development
            (949) 476-1180
            pwilkison@stec-inc.com 
          Investors and Financial Media Contact:
          Mitch Gellman, Vice President of Investor Relations
            (949) 260-8328
            ir@stec-inc.com
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