With $5.07/share in cash and short term securities and this potential, either I'm stupid or the market is.
<<Quantum Makes a Big Bet on TiVo and the Personal Video Recorder Industry
By Eric Moskowitz
Senior Writer
10/14/99 8:11 PM ET
Hard-drive maker Quantum has been under the weather recently, but the company could be getting a boost from its early bet on the heavily publicized personal video recorder industry and the industry's IPO star TiVo (TIVO:Nasdaq).
A PVR is essentially a very smart video recorder; instead of using a removeable tape, like a videocassette recorder, the PVR stores viewing material on a hard disk, similar to the kind found in a personal computer. This way a hard disk can simultaneously play video programming and record other programming; another element of this new technology is that it allows viewers to zap out the commercials. Since its IPO Sept. 30, TiVo has jumped 143% from its offering price.
Analysts say PVRs, with their simple on-screen guides and ability to record programs by relying on keywords such as "Chicago Bulls" or "NYPD Blue," will revolutionize TV viewing habits. But it's the popularity of hard-drive recording technology that could benefit Quantum investors. Apart from TiVo, Quantum also supplies disk drives to another PVR company, Replay Networks, which recently secured $57 million in its second round of financing from media big wigs like Time Warner (TWX:NYSE), Disney (DIS:NYSE) and Viacom (VIA:NYSE). Despite the high prices and low penetration now, there will be 14 million homes with PVRs by 2004, predicts the tech research firm Forrester Research.
Indeed, Quantum likes to raise consumer awareness of its role in these cool new consumer products, to the same level that Intel (INTC:Nasdaq) achieved with its "Intel Inside" ads.
But will Quantum's investment pay off? Two months ago, Quantum split its stock into two tracking stocks -- Quantum DLT & Storage Systems Group (DSS:NYSE) and Quantum Hard Disk Drive Group (HDD:NYSE). Since then, the DLT unit is down 25% while the hard-drive unit has declined about 6%. The rest of the disk-drive industry has also been hit hard of late. Western Digital (WDC:NYSE), shares of which have plummeted to 4 from 15 this year, had to recall 400,000 disk drives last month.
On Thursday, Quantum's DSS unit reported net income of $58 million for the fiscal quarter ended Sept. 26. The Hard Disk Drive unit reported a net loss of $49 million.
Quantum has been hard hit by falling prices for disk drives amid the growing popularity of low-cost PCs. It has been forced to cut staff and look to alternative markets. CEO Michael Brown is placing a big bet on PVR technology and has led Quantum to take a minority stake in TiVo.
"The hard drive has been used as a weapon in a price war that has lowered our market cap by $2 billion," sighs Brown. "We need to rethink the competitive behaviors which are not benefiting any of our businesses. Our reinvestment in technology is one new way of doing this."
It helps that the company is the exclusive provider of PVR-ready QuickView storage drives to TiVo and Replay Networks, and Quantum has deals with the old-guard network of Sony (SNE:NYSE ADR), Phillips (PHG:NYSE ADR) and close partner Panasonic. "The company needs to find applications that use storage for video, and television is much better at receiving information than a PC," says Josh Bernoff, an analyst for Forrester Research, which has no consulting relationship with Quantum.
"While PVRs are not going to generate a lot of revenue right now for HDD, it's definitely coming," says Dane Lewis, an analyst at Robertson Stephens, who has a long-term attractive rating on HDD. (Robertson Stephens has not performed any underwriting for the company.)
PVR's high-capacity storage drives, with 30 hours of capacity, allow for better margins. A PVR retails for about $1,000, and TiVo pays Quantum "a few hundred dollars" per unit, Brown says.
"We took an early lead here that will ensure us a big chunk of this growing industry," says Brown.
Quantum's Stocks Need a Big Push
HDD DSS
Revenue* $3.6 billion $1.3 billion
Expected quarterly EPS** -0.62 0.34
This year's EPS (March 2000) -1.71 1.39
2001 EPS -0.21 1.69
Market cap $545 million $2.3 billion
*At end of fiscal year (March 1999). **Released later today. Source: First Call/Thomson Financial.
The move into consumer electronics will help the QuickView line achieve 100% to 150% annual growth in unit shipments over the next five years, says Brown. The company's HDD unit also expects to receive royalty payments from its PVR partners, giving it a potentially lucrative revenue stream going forward, adds Brown.
Skeptics warn that it is by no means certain that Brown has made the right bet. A number of companies, including WorldGate (WGAT:Nasdaq) and Microsoft's (MSFT:Nasdaq) WebTV Networks, are vying for dominance of the next generation of TV set-top boxes that allow users to access the Internet via the television. Archrival Seagate (SEG:NYSE) may already have the inside track. "Seagate may in fact be best situated here because it's more vertically integrated and has a relationship with WebTV," says Shaw Wu, an analyst at Bear Stearns, who has a neutral rating on HDD. (His firm has done no Quantum underwriting.)
With a number of high-profile media companies backing TiVo and Replay, Brown has high hopes that his QuickView drives will be a winner. Relay has already bought "several thousand" QuickView drives since April, says Steve Shannon, Replay's vice president of marketing. He notes his company's high-end device (28 hours of storage capacity), which costs $1,499, comes with two 14-gigabyte drives from Quantum.>>
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