re QNTM/WDC numbers:
All right, I'll play ball.
>20% Revenues from DLT
=> 80% Revenue from DD
1553 Sales in Sep quarter
=> 1242 Sales from DD
60% Income from DLT
=> 40% Income from DD
103.7 Income in Sep quarter
=> 41.8 Income from DD
=> 3.3% net margin DD at QNTM
vs 5.8% net margin at WDC
Check my numbers?
Not true. Sept Q, DLT made up 22% revenue. Using details provided by management, contributions to operating income (net before joint venture loss, interest and tax) breaks down to about $84 mln each by DLT and desktop, and -$27 mln for enterprise.
>The data I have show that total net margin at WDC has exceeded total net margin at QNTM in every quarter back to Dec95. Higher DLT margins than DD margins at QNTM would impliy an even greater spread in DD margins between the two companies.
True enough. However, this is because WDC has a much lower tax rate than QNTM. I suspect this is through 'financial engineering' more than anything else. WDC carries $42 mln of income tax liability on their books; QNTM has $78 mln of tax liability offset by $123 mln tax assets. Also, QNTM has to pay to service its debt; WDC has no debt. If you look at the more relevant operating margin, QNTM and WDC are very close, but WDC still wins out. However, crunch the numbers some more, and you'll see that WDC is highly capital intensive, and had been thoroughly unrealistic (in retrospect, obviously) in building up inventory. This sowed the seeds for destruction that is now upon them... inventory write-offs, accelerated depreciation for end-of-life products, etc. In fact, free cash flow was kinda pitiful, and they exacerbated this with their buybacks.
>You've stated before that the worst case scenario for DD profits is zero. But isn't it possible for large losses to occur in DD from D&A on the capital investments? I note that they reported 45.4 of D&A in the Sep quarter.
Nice try. The $45 mln was fiscal year-to-date. QNTM's D&A was $21 mln for the most recent Q; WDC's was $22 mln. Most recent CapEx for QNTM is $46 mln, compared to $63 mln for WDC. WDC will EAT THROUGH THEIR CASH in short order, if management projections about earnings are to be believed, and will have to dip into debt at a time when their business model least supports it.
So I'm extremely pessimistic at WDC's situation. The only way to play this, IMHO, is as a potential takeover target (price needs to freefall some more, though). WDC is underleveraged, after all, so anybody with deep pockets and/or a good credit rating can attempt a take-out. I'm willing to bet even money that WDC will not survive 1998 as an indy. |
