A few thoughts on the conference call:
DLT forecast to grow at the rate of server growth - 25%-35% was stated in the conference call - plus a little more if you included the attachment rate which was running at 15% last quarter. Therefore, I'd expect growth of around 30% for the next couple years (this quarter could be an exception as they make the transition to the new DLT and come off allocation). They also stated several times that they will have no real competition until the second half of 1999 - so little margin pressure (40% gross margins currently on $330M in sales for the 3rd qtr - numbers sound pretty enticing to me!)
As for the rest of the company:
Desktop - mgmt sees little improvement over the next couple of qtrs, but did say that they say saw cutbacks in production that will eventually ease the oversupply. Also said that the industry grew at 3-4% in the quarter while their shipments grew at 6% - taking some share and staying on top. The inventory inhouse is normal (3 weeks), but cutting back some just to make sure. The inventory in the channel is at the high-end of normal (6-7 weeks). OEM still making up about 80% of sales (HP-13%, CPQ-10%, Dell, Digital.....).
Referenced these box makers push to achieve 0 inventory as one of the problems, but said that has been washed through the system. Mgmt has set up a good logistics system to work closely with the box makers to accomplish a build-to-order operation. Think in the long run this will help smooth the cycles - eliminate overcapacity.
Also cited the shift in market shares as a big reason for the oversupply. Said that some players hadn't reduced their output to correspond with their shrinking market share and were causing alot of the problems.
High-End Drives are still hurting. This is where they took the charge (all of it - none of it was associated with the desktop). It was larger than expected because the mkt wasn't improving as the qtr went on and they didn't want to make these charges a recurring event. They said that demand could be starting to improve this qtr and combined with a bigger marketing push, hoped for some improvement (currently #3)- no profitability for a couple qtrs though. They lost $32M in this business before the charges.
Hoping to improve the high-end with a better production process and moving the drives to a common platform. Spending more R&D and Marketing dollars in this area.
Revenue and unit shipments were higher in the qtr and the sell through hit a record in December. Inventory in the channel was at 5 weeks, but the overall industry had a higher inventory in the channel that still needs to get worked through.
In general, mgmt thinks were close to or at the bottom of this cycle. But to be conservative, the have issued their forecasts based on no improvement for the next couple of qtrs. If they'll be able to make in the $.30 range with no industry improvement, I'll be happy camper. They also said they were not scaling back their operations very much, because they want to be able to take advantage of the situation when the industry turns-up. They still have positive cash flow from operations ($738M in cash on the balance sheet at the end of the qtr) so should be able to ride out the rest of the cycle smoothly.
I think this is a great buying opportunity for someone looking out 12-18 months. Just my thoughts.
RFF |
