Some H&Q post CC report details:
HMT Trims Loss in FQ2; Demand Entering December Quarter Is Strong
· HMT reported its FQ2 results of a loss of ($0.29) on sequentially flat revenue of $44.8 million.
· The company posted a narrower loss and improved gross margins as a result of better factory
utilization and a more favorable product mix.
· We believe the company gained market share at Maxtor during the quarter.
· While slightly more positive on the outlook for HMT, we are maintaining our estimates going
forward and rolling the FQ2 results into our model. We maintain our Market Perform rating.
HMT Technology is a leading independent supplier of media serving the disk drive industry.
Notes:a, b & f
FQ2 Results Slightly Better than Expected: HMT was able to trim its loss in FQ2 relative to
the prior quarter on sequentially flat revenue, unit shipments, and ASPs. The company reported a
loss of ($0.29) per share on revenue of $44.8 million, which was better than our expectation of a
loss of ($0.32) per share on $42.5 million in revenue. HMT posted a loss in FQ1 of ($0.43) per
share. Our estimate for unit shipments was in-line with the 5,700 units reported by the company
in FQ2, but we had been modeling a 5% decline in ASPs. The mix to higher capacity products
was sufficient to offset any price declines for lower capacity disks. Two-thirds of the company's
unit shipments were for capacities of 5.1 GB/platter or higher and about half were of 6.8, 9.1 and
10.2 GB/platter disks. In addition, gross margins improved during the quarter to (24.6%) from
(45.2%) in FQ1. As we expected exiting last quarter, the company appears to have gotten past
the trough of its current downturn and should show improved results again next quarter.
Demand is Solid: HMT stated that it exited the month of September with its highest production
levels in over a year. It is currently running its new manufacturing facility at close to full
capacity, and the outlook for demand looks solid at least through October and into November.
Given that there is considerable uncertainty regarding the strength of disk drive demand heading
into December given the Y2K transition, we are maintaining our current estimate for unit
shipments (7.0 million) and pricing (down 5%) for FQ3. However, the majority of HMT's media
goes into desktop disk drives, and the PC market is likely to see the smallest effect related to any
year-end slowing in purchases. In fact, given the dramatic declines in PC prices, we may see
higher than typical computer shipments in December if supply is able to keep pace.
HMT Gained Share at Maxtor: During FQ2, 50-55% of HMT's units shipped were to Maxtor,
up from 40-45% last quarter. It is our belief that as much as half of this increase may be the
result of higher drive shipments by Maxtor, but the additional increase is likely the result of HMT
gaining market share at the expense of Komag (KMAG, $2.56, MP) and MaxMedia. HMT is
qualified on both 5,400-rpm and 7,200-rpm products with Maxtor. Unit shipment percentages to
other customers were as follows: 15-20% to Western Digital, 15-20% to Iomega, and less than
10% to Samsung. At this point it is difficult to assess whether the lower shipments to Samsung
(15-20% of units in FQ1) represent a loss of share to that customer.
HMT Remains Focused on Execution and Capital Management: While HMT did post a loss
during the quarter and burn some cash, it improved its performance compared to FQ1 during a
seasonally slow quarter in a brutal industry environment. The company is hopeful that it can
maintain its current cash level exiting the December quarter.
Cautious but Incrementally More Upbeat Outlook: Relative to its competition, we are more
positive on the outlook for the December quarter for HMT based on its market share gains and
the lack of negatives in the company's results or guidance. Nonetheless, we expect the industry
to remain extremely competitive and HMT to face significant challenges going forward. We are
maintaining our current estimates for HMT, which in the current environment is something of a
positive. However, we will watch for indications of sustained demand strength, or unexpected
weakening, as the December quarter progresses. Our estimate for FQ3 remains unchanged at a
loss of ($0.18) on revenue of $50 million. We are rolling the FQ2 results into our numbers
bringing FY00 to a loss of ($1.02) on revenue of $192 million, up from ($1.05) per share and
$189 million. HMT's stock may begin to strengthen given its improvement on a competitive
basis. Nonetheless, we maintain our Market Perform rating on HMT until we see more
significant changes in the competitive landscape. |
