Donald;
<<Something doesn't compute for me. It is this:
Data storage bit growth is something like 100% per year and accelerating. GMR transition seems to be in full swing. Yet, the DD companies remain in a persistent funk and VECO's orders seem flat at best. Are you able to reconcile this, in 100 words or less (or more, if you want)?>>
If you do not mind my coming back to this question of yours from over a week ago I would like to supplement Zeev's answer with some comments of my own. (I have been "off the air" lately on a demanding project and am just now catching up on some necessities like SI and sleep).
You suggested 100 words or less but in its most common denominator we could say one word: overcapacity. But that doesn't tell the whole story. Here is my cut at it: VECO has focused, through acquisitions and development, on the HDD business which has resulted in an extraordinary tilt in that direction in terms of their revenue percentages. In my opinion, the main reason they have more or less "kept it together" at all, is due to the timeliness of their technology as it relates to GMR head production in tandem with a shift to pico sliders (smaller heads). To illustrate the importance of this shift lets' use some recently published numbers from a well known market watcher. According to them the transition from MR to GMR has recently been as follows:
(Units = Millions)
-----CQ1'99---------Q2'99
MR 156.9-----------125.8
GMR 48.0------------74.1
VECO has enjoyed time to market on products that play into this transition quite well. They have managed a BTB that looks much more attractive then their competition because of this.
Your were quite right to point out that these last two years, paradoxically perhaps, has also been a period of dramatic increases in areal density. This is exciting except that this rapid increase in density has occurred at a time when users at the desktop have had few new applications that gobbled storage as was the case three years ago with the introduction of Windows 95 and new additions to MS' "Office" apps. At that time users were spurred to buy larger drives, but the most rapid application segment in the last two years has been internet access. In that application there is a lag in available bandwidth that has prevented users from downloading large files because it simply takes too long. But they can access and view all kinds of content and let the disk drive molder except for occasionally downloading the latest calendar girl pic. In order to exploit this market, Dell pressed up their Build-To-Order (BTO) model of business and sold direct. Other followed. This put additional pressure on the DD guys because BTO models simply pass the risk of inventory down the food chain. Simultaneous to this passing of risk, intense price pressure mounted up as the inventories built up. This had some devastating effect on the entire food chain. So with capacity requirements diminishing in the very important desktop segment, DD makers began to compete on price and look for ways to lower costs. The result has been use of the new technologies to introduce very low cost drives with much fewer components at capacity points that appealed to the casual internet user (3 - 5 GB). Fewer components mean fewer sales for the head makers. More pressure. To give you an idea of how severe this has been, in 1998 the average number of heads in a disk drive declined 25% from the previous year. In 1999 it is expected to decline another 20%. Prices of MR heads have fallen as well, as much as 6% in CQ2'99. A good example of this is Seagate's so-called U4 product, aimed at very low cost. (Around $75 in OEM quantity if my sources are right). Few people realize that it uses many of the same components as Seagate's higher performance drives and is based on an initiative SEG has fully underway to use common platforms to realize design cost savings, reduced time-to-market lead times, and volumetric savings in material costs.
All this is to say that we need to watch for a few things to happen to see VECO take off and become the "undervalued jewel" that Zeev has called it (accurately IMO). First we need to see bandwidth improvements that will prompt internet users to download more content (MP3 music files, digital photos,movies, porn, whatever). Second we need to see further consolidation in the DD industry. A reduction in players up and down the food chain seems more then warranted. It is inevitable IMO. Thirdly we need to see some new applications mature. Voice recognition, digital photography, and a first generation of non-pc appliances seem to hold promise.
I agree with Zeev that we will likely see a better buying price on VECO. I have placed heavy bets on Seagate and will up the ante as I expect to see a similar decline on their price as well in the near term. (Fortunately my avg. is well below today's price but I plan to buy more). I think you will be presented with an opportunity to accumulate more VECO. I expect to re-enter the stock and plan to weight it pretty heavily frankly. I believe we will have a chance to buy it at 27.
A quick note on Carl's question about VECO's new acquisition of Optimag: I have had a chance to make a query or two and the technology looks promising. It has the potential to dramatically speed up "visual" inspection of finished sliders (the actual read/write element before it is epoxy'd to a flexure)and remove some of the subjectivity of the current manual inspection that is largely being done. This has additional benefits in that fewer operators will be required (cleaner clean-rooms, less payroll, less training, etc) and it may lend itself to automation for even higher throughput.
All of the above is admittedly not "100 words or less". Sorry <G>
Best,
Stitch
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