Staktek Holdings Inc. (STAK)
Interview with:
James Cady, President and CEO
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
IP and manufacturing services for the cost-effective miniaturization of electronic components and systems for original equipment manufacturers, silicon manufacturers, memory module manufacturers and contract manufacturers.

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Staktek's Performance Stakpak®, and Value Stakpak®are used by leading computer manufacturers in their server and workstation products

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Staktek Holdings Inc.

8900 Shoal Creek Blvd., Suite 125
Austin, TX 78757
Phone: 512-454-9531

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James Cady
President and CEO

Interview conducted by:
Lynn Fosse
Senior Editor
July 2004

James Cady joined Staktek in May 1991 and served as executive vice president of engineering until 1996, when he became general manager. In 1999, Cady was appointed president and in November of 2001 he was named chief executive officer. Cady was elected to the Company's Board of Directors in December 1998. Prior to joining Staktek, Cady served as a technology and operations executive with KDT Industries and as director of systems integration at National Advanced Systems, a subsidiary of National Semiconductor Corporation. Cady holds BS and MS degrees in Electrical Engineering and is named as inventor or co-inventor on more than 20 U.S. Patents. Cady received the Austin “Entrepreneur of the Year” 2004 award from Ernst & Young.

Company Profile:
Staktek Holdings Inc. (STAK-NASD) is a rapidly growing provider of IP and manufacturing services for the cost-effective miniaturization of electronic components and systems for original equipment manufacturers, silicon manufacturers, memory module manufacturers and contract manufacturers. Staktek's high-density memory stacking solutions increase operational performance by doubling, tripling or quadrupling memory in the same physical footprint as the underlying packaged component.

With an IP portfolio of more than 100 patents and patent applications pending, the company offers flexibility for customers, including outsourced manufacturing, technology licensing and custom engineering. Staktek’s business model offers customers the flexibility to outsource the manufacture of stacked memory products to Staktek, to purchase stacked products from Staktek’s license partners, to license Staktek’s proprietary stacking technologies, or to combine these options to best satisfy customer needs. Staktek also offers various value-added services such as the design of custom stacked memory assemblies and electrical modeling assistance.

Staktek's Performance Stakpak® is used by leading computer manufacturers in their server and workstation products and is also used in a wide variety of other commercial, industrial and military applications where high-density memory is required. Their proprietary stacking technology enables higher part density with superior thermal management. Staktek's stacked solutions use standard components available from all major silicon providers and comply with industry-standard memory footprints. The Performance Stakpak® is used in servers and workstations, storage systems and networking switches and routers. The Value Stakpak® is for entry-level servers and consumer PDAs, MP3 players or set-top boxes. Staktek’s next-generation High Performance Stakpak® will be used with DDR-II for servers, workstations, networking switches and routers.

Staktek’s sophisticated manufacturing processes combine proprietary assembly equipment with standard back-end automation in state-of-the-art manufacturing facilities in Reynosa, Mexico and Austin, Texas. Staktek continues to increase the degree of automation, overall efficiency and production yield of its manufacturing processes that enable average volume turnaround times of two to three days. In addition, Staktek conforms to accepted industry standards such as ISO, JEDEC, IPC/EIA, and MIL-STD's. Staktek has been ISO certified to the ISO9001:2000 standard since July 2001, as assessed by Bureau Veritas Quality International (N.A.) Inc. As part of our commitment to continuous improvement, Staktek undergoes regular audits by BVQI, customers and Staktek's own internal audit team.

CEOCFOinterviews: Mr. Cady, you have been with Staktek since 1991 and served in many positions before becoming CEO. How has Staktek changed since you have taken over the leadership?

Mr. Cady: “The first CEO of Statek, Carmen Burns, was CEO until 2001. I was named general manager in 1996, president in 1999 and then CEO in 2001. I think we are growing into a larger organization and we have more infrastructure in place than we used to. We used to be a small company in a small company environment. Now that we have gone public, we have put in the systems and controls that are necessary for a public company. We still maintain our entrepreneurial spirit here, and many of the employees in the company are inventors and had their first invention as a Statek employee, so we encourage that in our culture.”

CEOCFOinterviews: Why was this the right time to go public?

Mr. Cady: “We have been in the position where we could have gone public earlier but for various reasons, we were not able to. After we were acquired by Austin Ventures, the IP market came back and we saw it as an opportunity to de-leverage our balance sheet.  Austin Ventures was a leveraged buyout, so we saw it as an opportunity to take advantage of our momentum, to clear off our balance sheet and have cash in the bank in case we wanted to expand and needed the cash.”

CEOCFOinterviews: Will you tell us about your main product?

Mr. Cady: “Our core business is high-density memory. We have adopted our memory stacking technologies to stack other semiconductor devices, including an entire computer system, and we can do it in an affordable way. This new technology gets us into additional markets that are not as memory-centric, and I believe the potential application will play a significant role in our future growth in addition to our core memory-stacking technology.”

CEOCFOinterviews: Who is using this equipment and in which way are they using it?

Mr. Cady: “In 2003, 99% of our stacked memory products went into the information technology platform space; primarily servers, routers and storage directors. About 94% of our business went into servers, so that is really our core market. What high-density memory does to a server is leverage the server’s performance. Servers are sold on the basis of their performance, so an OEM such as IBM can use high-density memory, leverage the performance of its server platform and sell it for a higher price than it otherwise could.”

CEOCFOinterviews: What is it about the Staktek high-density solutions that make people want to use this equipment?

Mr. Cady: “Our technology for leaded packaged stacking is differentiated in two important ways: One is that it is Best of Class in thermal performance compared to the other stacking technologies. Secondly, it offers identical interface to the stack as to the standard component. So, our OEM customers can leverage their design and boards, sockets, or whatever they use, with standard memory. It is very easy for them to adopt those designs to use stack memory. That design detail, while seemingly trivial, is very important to Staktek because it allows us to leverage the investment that the industry has made in automation tools for the standard component. We are advantaged in a couple of ways by having that common interface. I think that along the way we recognized that some of these larger multi-platform programs available at the big OEMs would not design us in unless we had a more robust supply of the technology. So in 2002, we licensed our leaded packaged stacking technology to Samsung and that dramatically increased the availability of our technology to the market place.”

CEOCFOinterviews: Will you tell us more about the agreement between Staktek and Toshiba?

Mr. Cady: “Toshiba has a fast-cycle DRAM because of FCRAM (Fast Cycle RAM), and it is targeted for the network and communications market for companies such as Cisco and Lucent to make the switchers and routers. They need to put a lot of memory in a very small space and it must be extremely reliable and operate at the highest speed. They looked around for ways that could be done and decided that we offered the best solution with our new high-performance stacking technology. We developed the high-performance stacking technology primarily for DDR-II, which is the next generation of DRAM in a non-leaded package, which we adopted to stack the Toshiba FCRAM. Although in 2003 that market only accounted for about 5% of our business, it is one of the fastest growing segments of the overall market.”

CEOCFOinterviews: What other segments do you see growing in the future?

Mr. Cady: “We look at our company as the leading supplier of intellectual property and services for miniaturizing memory components. We want to continue our leadership position in this area and, at the same time, expand our products and intellectual property for miniaturizing other widely used components including the complete system. For example, modules: the module market is diverse and large, and we think there are opportunities certainly in aerospace but also in automotive, medical, and commercial modules where our stacking technology could be deployed.”

CEOCFOinterviews: How do you reach your customers?

Mr. Cady: “In our core market, which is the server market and the router market, the vast bulk of all the hardware that is built is done by very few companies such as IBM, Dell, Hewlett Packard, Intel and Cisco. These companies are not that many in number and they have a desire to use standard solutions across multiple platforms. We work directly with this small group of OEMs and industry influencers. We do that directly and through the JEDEC standardization process. Our need to go out and cover a wide footprint of customers is just not there for our core business. In the new area we are expanding into, we will add to our marketing sales group because it will require more feet on the ground to identify these opportunities.”

CEOCFOinterviews: Will the reputation that you have had so far help you in this area?

Mr. Cady: “Reliability is the first and sometimes the second and third most important thing about which our customers are concerned. It is important that we provide an inherently reliable solution. If you think about it, most businesses rely heavily on their servers and if the server has a problem where it goes down, often the enterprise goes down as well. So, reliability is a key factor and since our reputation is good in this area, I think it will help us in these new markets.”

CEOCFOinterviews: How has the general downturn in technology affected Staktek, and how do you see things improving?

Mr. Cady: “The downturn started in 2001, and we think it had a significant dampening affect on our growth, especially at the end of 2001. At the same time, we have favorable trends that are helping us. For example, as server form factors are decreased, blade servers, which have less space to put memory, require a higher-density solution that makes stacking more compelling in that application. The other favorable trend is that memory speeds continue to increase and it becomes difficult to operate the memory at high speeds over a wide footprint. The number of sockets that are available in a server to put memory has been diminishing dramatically. Simultaneously, the requirements for memory have gone up and therefore create a compelling need for higher-density solutions. We have had the overlay of the downturn dampening our growth; we saw it come back in 2002 and it was strong in 2003. If you look at our unit growth over that period, we were growing three times faster than the underlying server market. So the favorable trend has helped us even though the macroeconomic background was not great.”

CEOCFOinterviews: You recently were named a Regional Finalist (Winner) for the Ernst and Young 2004 “Entrepreneur of the Year”. Will you tell us about that and what it means for you personally?

Mr. Cady: “I think it is an important concept, which Ernst and Young started, to recognize people who take a risk to gain personal wealth, and if they are successful, that helps the local community and ultimately helps the entire country. I think this is a nation that was built on the entrepreneurial spirit. Our founding fathers were a bunch of revolutionary entrepreneurs. We think that is a good thing to promote and advertise, and I think the Ernst and Young award that they put out every year is very important to promote that.”

CEOCFOinterviews: Will you tell us about your manufacturing facilities?

Mr. Cady: “We originally started manufacturing at our headquarters in Austin, Texas. Until late 2002, that was the only manufacturing area, but we recognized the need to produce higher volumes at lower prices, so we opened our second manufacturing facility in Reynosa, Mexico, which is about five hours from Austin by automobile. At the present time, that facility produces a little over 75% of our unit volume and we still produce a little less than 25% here in Austin. We do all of the new product development and bring up new products in Austin, and when they reach maturity and certain volume points, we then transfer the bulk of the production to our facility in Reynosa.”

CEOCFOinterviews: Do you need to maintain much inventory?

Mr. Cady: “For the most part, and certainly dollar-wise, our inventory is quite small. A significant number of our customers provide the DRAM to us on consignment, so we do not take an inventory position in the DRAM itself. We have other customers that have a different model whereby they sell us the DRAM and then we sell it back to them at the same price in stack form, and the difference is simply our stacking premium. We have two licensees; Samsung and our latest licensee Infineon, that simply pay us a per-unit royalty.”

CEOCFOinterviews: You have a very adaptable business model!

Mr. Cady: “We are very flexible with a flexible business model. We service the small number of OEM customers in the way that they like to buy our products, sometimes directly and sometimes through their silicon provider. It would certainly support that model in a case of Samsung and Infineon by license. Infineon is also a service customer, for customers who prefer our technology over their stacking technology, which they build under a partial license. The other model is a pure service approach, which Micron uses: OEMs can buy directly from Micron and Micron uses our stacking service. Some OEM customers like to have their supply chain managed by contract manufacturers, and we support that model through leaders like Celestica and Smart Modular.”

CEOCFOinterviews: In closing, why should investors be interested and what should they know that they may not realize when they first look at Staktek?

Mr. Cady: “First, we are very profitable; we have a great amount of cash and in the last two years, we have brought out three new products and the supporting intellectual property. The first product that we brought out, our Value Stack, grew to about 16% of our shipments in the first quarter of this year. The last two products, the High Performance Stakpak, which is used in the product that we jointly announced with Toshiba, and the Systems Stakpak, which I just discussed, have been very well received -- I expect both of these products to provide significant upside potential for investors. That is why they should look at us.”


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