<<Does anyone want to hazard a guess on how HIGH htch may go and when? Does anyone see any signs that conditions are ripe for demand for TSA to pick up soon?>>
Interesting question?....but the answer probably needs a long term view.
If we look at unit growth over a relatively long time (starting in Dec94) we see that it went from about 80 million/qtr run rate to 170 million by Dec96 then peaking at 200 million in the first two quarters of 97. What follows is then a precipitous drop to 160 million and a further decline to 122 million by Sep98. In the year since it has remained flat at 140-150 million. Since HTCH units are tied to platters they have been hurt in the same way as HMTT and KMAG by the steep initial rise in arial density afforded by MR/GMR technology, a rise so steep that it has exceeded the rise in the market demand for raw storage space. What saved HTCH from the more dire fates of APM, HMTT, KMAG, and RDRT was the TSA program which raised their average ASP from 75 cents in 1994 to about 1 dollar now, even as platter and head ASP?s have declined. Consequently, even though HTCH units shipped have declined 25% from their peak in 97, revenue is actually higher.
Currently the TSA/conventional mix is about 50/50 up from 0/100 in two years. In another year the TSA % should be in the 70-80% range. Thus even with flat unit growth we should see a 20% rise in the average ASP and a corresponding rise in revenue. Since their excess capacity (in financial, not necessarily physical, terms) lies primarily in the TSA production lines gross margins should improve substantially and a substantial chunk of that revenue increase should make it to the bottom line. A mere 10% of unit growth should add a further 12% to revenue. The decline in the average platter count/per drive has to decelerate as it approaches unity so a 10% net growth in units is not all that unreasonable looking forward this year.
If you assume that net earnings returns to historical levels of 5-8% of revenues then we should see earnings in the neighborhood of $2-3 a share giving you a price range of 30-45 at a 15 PE (wow, doesn?t that PE date me!). It could be substantially better than that if TSA gross margins turn out closer to 30% than the historical 20% conventional gross margins. Such an outcome would push the stock closer to $90 a share at the same PE.
On the other hand??..
The changes from quarter to quarter in unit shipments and customer mix can be astounding. Sales to IBM in the QE Jun 98 were 27 million (already up from 14 the prior quarter), rising to 56 million in QE Dec98 then dropping to 13 million in the QE Jun99. IBM alone gave HTCH the chance to grab 210 million in the 5 million share secondary offering last Feb; it does make one kind of wonder, doesn?t it? Yamaha is a 10% customer that is supposedly dropping out shortly, Readrite has gone from a steady 15% customer to not worth a mention lately, and Seagate has gone from a steady 35% down to as low a 10% in Dec98 though it seems to be coming back. Indeed the only truly stable customer has been SAE/TDK.
With qtr to qtr dynamics like these its tough to talk in terms of "ripe conditions" and "exactly when". More important are the longer term trends in arial density, platters/drive, and drives shipped.
Finally, its quite bothersome that Seagate has apparently still not adopted TSA suspensions. They produce a lot of drives and as long as they can do that competitively using something besides TSA suspensions a substantial technological threat remains on the horizon. If HTCH had to make it on conventional suspensions from this point they would be in the same leaky boat as the poor platter and head companies.
Personally, I expect to get a chance to sell my HTCH at 90ish sometime (but I couldn't begin to tell you exactly when) in the next 2 years.
Tom
PS?you can find the quarterly data back to 94 as a .wks file at www.htch.com under the "just the numbers" tab. I wish all companies would do that.
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