RDRT Posts In-Line Results; Outlook Improves with RDRT's Potential Entrance into the Optical Filter Market.
July 27, 2000
Robertson Stephens; R E A D - R I T E
RDRT Posts In-Line Results; Outlook Improves with RDRT's
Potential Entrance into the Optical Filter Market.
Dane E. Lewis (415) 248-4071 dane_lewis@rsco.com
ROBERTSON STEPHENS ROBERTSON STEPHENS
Read-Rite Corp. RDRT $3.69 07/27/00
Industry: Computer and Office Equipment RDRT
Change in. Yes/No Was Is $3.94 Dane E. Lewis (415) 248-4071
Rating: Yes LTA Leslie Gent (415)-248-4670
EPS 1999A Actual ($2.94) FYE Sept 1999A 2000E 2001E
EPS 2000E Yes ($2.94) ($3.03) EPS: 1Q $0.02($1.15) A ($0.11)
EPS 2001E Yes $0.00 ($0.05) 2Q ($0.39)($0.81) A ($0.05)
3Q ($0.95)($0.67) A $0.00
52-Week Range: $7 - 1 4Q ($1.61)($0.40) $0.10
Shares Outstanding (MM) 57.1 Year ($2.94)($3.03) ($0.05)
Market Cap. (MM) $210 P/E nm nm nm
Avg Daily Trading Vol (000) 2,257.6 Cal Yr ($4.12)($1.98) $0.25
Bk Value/Sh $0.68 CalYr P/E nm nm 14.7
Tot Debt/Tot Cap 88% Revs($MM) 1999A 2000E 2001E
ROAE -238% 1Q $230.2 $114.5 A $173.2
Price/Book Value: 5.4 2Q $206.2 $154.5 A $159.9
Net Cash/Sh ($3.42) 3Q $174.8 $140.9 A $163.4
Div/Yld: 0.00% 4Q $105.3 $156.8 $173.3
3-Yr Sec Growth Rate: 15% Year $716.5 $566.6 $669.9
Key Points:
** Read-Rite reported a CQ2 operating loss of $37.7 million or $0.67 loss per
share. The operating loss of $0.67 per share was in line with the Street's
estimated loss. Revenue decreased 9% sequentially to $141 million in what
is typically a seasonally weak quarter. Read-Rite shipped a total of 17.8
million recording heads (i.e., HGAs) in the quarter. The trend of fewer
heads per disk drive reversed during CQ1 as the HGA per HSA ratio increased
to 3.1 q/q. Gross margins remained in negative territory (-8.3%) but
improved 300bp due to cost savings and to improved ASPs.
** RDRT's entrance into the Optical Filter business looks promising. RDRT has
a dedicated team of people looking into the possibility of working on dense
wave division multiplexing (DWDM) for the fiber optic component market. We
believe RDRT will outline its business strategy for this market in the next
few months and we foresee product prototypes being available in 1H:C01.
** We are lowering our F2000 estimate to a loss of $3.03 per share from a loss
of $2.94 and our F2001 estimate to a loss of $0.05 from $0.00. We believe
RDRT is on track to deliver break-even numbers by CQ4:00 (on an operating
basis). We are revising our estimates based on management's outlook for
RDRT, specifically, and the industry, in general. We remain optimistic
about the company's competitive position in the merchant head market and
believe that RDRT's proposed entrance into the optical filter market could
deliver upside to our C01 numbers. We maintain our Long-Term Attractive
Rating.
Summary
Read-Rite reported a CQ2 operating loss of $37.7 million or $0.67 loss per
share. The operating loss of $0.67 per share was in line with the Street's
estimated loss. Revenue decreased 9% sequentially to $141 million from $154 in
what is typically a seasonally weak quarter. Read-Rite shipped a total of 17.8
million recording heads (i.e., HGAs) in the quarter, of which 17.2 million were
GMR heads. The trend of fewer heads per disk drive reversed during CQ1 as the
HGA per HSA ratio increased to 3.1 from 2.9 sequentially. Gross margins
remained in negative territory (-8.3%) but improved 300bp due primarily to cost
savings and to an improvement in ASPs
Gross margins improved due to higher volume shipments and yield improvements,
but remained negative. Gross margins improved during the quarter to --8.3%
from --11.8%. Benign pricing during the June quarter (up slightly q/q) and
ongoing cost reductions helped improve gross margins. We expect this trend to
continue and believe that RDRT will deliver positive gross margins in the
September quarter (we are modeling 2%).
RDRT's entrance into the Optical Filter business looks promising. Read-Rite
has a dedicated team of people, we believe around two dozen engineers, looking
into the possibility of working on dense wave division multiplexing (DWDM) for
the fiber optic component market. We believe Read-Rite will outline its
business strategy for this market in the next few months and we foresee product
prototypes being available as soon as 1H:01.
GMR represented 97% of total HGA shipments. RDRT built 17.2 million GMR heads
this quarter. GMR heads represented 97% of revenue compared to 90% last
quarter. As expected, Read-Rite's shipments of head-stack assembly (HSA's)
dropped during the quarter reflecting the transition to subcontracting HSA's
outside the company.
Quantum became a 10% customer in CQ2. Read-Rite's current customer base
remains relatively broad and, in our opinion, suggests a more diverse revenue
stream in future periods. During the quarter, four customers accounted for
greater than 10% revenues and represented 89% of total sales: Maxtor, Western
Digital, Samsung, and Quantum. Business at HDD (Quantum) improved
significantly during the quarter with Read-Rite's shipments to Quantum now
representing greater than 10% of total revenue. Other customers include
Iomega, Fujitsu and Seagate.
Read-Rite's wafer fab restructuring essentially complete. During the quarter,
Read-Rite recorded final charges of approximately $12 million associated with
moving its Philippine manufacturing operations and dissolving its Read-Rite SMI
joint venture. The company plans to consolidate its Philippine headstack
operations into its facility in Thailand. By combining all HGA and HSA
assembly into one facility, management believes that it can realize a quarterly
saving of approximately $15-$20 million. In the future, Read-Rite plans to
maintain its own sales office in Japan to support MKE/Quantum.
Expanded enterprise business on the horizon. Read-Rite is now shipping in
volume at Quantum's enterprise business, where it recently qualified on the
Atlas 10K program. We believe Quantum's enterprise business will deliver
meaningful volume in 2H:F00. This is an important market for Read-Rite as
enterprise drives will help stem the tide of fewer heads per disk drive.
Read-Rite's tape head business recorded revenues of $6.5 million in CQ2. RDRT
shipments to into Quantum's Super DLT product line continued to ramp during
quarter. Volume shipments to the Super DLT line will not begin in earnest
until late in the calendar year, in our view. We believe Read-Rite's tape
business is on track to represent 10% of revenues by CYE2000.
Exchange offering could dilute earnings when RDRT is profitable. The structure
of the exchange offering, in our opinion, makes it likely that all the debt
will convert to common, thereby diluting earning (when RDRT is profitable) by
approximately 100%. This, however, would significantly reduce RDRT's debt
level. With the new bonds, Read-Rite has the flexibility to pay interest
expenses in cash or stock. We believe paying interest expense in stock could
result in an influx of roughly 1.6 million shares every six months, however the
flexibility of the payment method gives needed flexibility in managing cash
balances.
Cash reserves decline to $81 from $97 million. Cash and equivalents decreased
$16 million sequentially to $81 from $97 million with cash burn from operations
of $38.6 million. Inventory of $32.4 million increased $13.1 million q/q and
inventory turns increased to 19x from 16x. Accounts receivable decreased by
$11.9 million sequentially to $62.7 million and DSOs declined to 41 from 44
days. We remind investors that RDRT has obtained a waiver on its bank facility
($50 million line of credit) in order to negotiate and complete the new
financing agreement, which is expected to be finalized during FQ4:00.
We are lowering our F2000 estimate to a loss of $3.03 from a loss of $2.94 per
share and are lowering our F2001 estimate to a loss of $0.05 from $0.00 per
share. We believe Read-Rite is on track to deliver break-even numbers by
CQ4:00 (on an operating basis). We are revising our estimates based on
management's outlook for Read-Rite, specifically, and the industry, in general.
We remain optimistic about Read-Rite's competitive position in the merchant
head market and believe that RDRT's proposed entrance into the optical filter
market could deliver upside to our C01 numbers. We maintain our Long-Term
Attractive Rating.
THE COMPANY AND INVESTMENT THESIS: Read-Rite, headquartered in Milpitas, CA, is
a merchant supplier of inductive, magneto-resistive (MR) and giant magneto-
resistive (GMR) heads for use in hard disk drives. The company has its roots
in head design and has grown up through troubled times. Unfortunately, the
company has allowed its competitors to narrow the advantage in head technology
that Read-Rite itself created. Over the next few quarters, Read-Rite is
expected to ramp GMR shipments. Several companies, notably IBM and several
Japanese companies, manufacture GMR product in larger volume.
INVESTMENT RISKS: Among the risks is the historically cyclical nature of the
personal computer and disk drive markets. In addition, increased competition
from IBM and Japanese competitors as well as internal head development efforts
by some of Read-Rite's customers could change the dynamics of future growth
patterns and GMR recording head pricing going forward.
Robertson Stephens maintains a market in the shares of Read-Rite, Quantum, and
Western Digital. |
