From Page One of Electronic News: April 27, 1998 Issue
Bleeding Disk Drive Makers
By Carol Haber
There is some disagreement whether first quarter PC unit shipments are up 20 percent, as some analysts say, flat, or down since companies refuse to reveal their shipment data. But whatever growth there may have been has been at the low price end. In this segment, almost everyone is battling to eke out a profit--everyone, that is, except Dell Computer and Gateway, which long ago slashed their costs with the much-vaunted build-to-order model of PC distribution. Probably nobody suffered more in 1Q98 than disk drive makers.
The PC "slowdown" has been described as nonexistent--only a reflection of price erosion. It has also been described as the reflection of commercial PC buyers waiting for the right price, as they see the disparity between the prices of commercial and home PCs. Some say the drivers for upgrade aren't there.
Disk drive companies and companies selling to the PC market are going through a bloodbath. Several of them reported severe revenue declines and losses--or sharply reduced earnings--in the most recent quarter.
At Seagate, which has announced a number of restructuring charges, layoffs and volatile results in recent quarters, Chairman/CEO Al Shugart said: "The whole computer business, including high performance, started to slow down eight or nine months ago. Disk drive companies had been building capacity to meet demand in all markets, but then growth slowed and we ended up with too much capacity, too much inventory. It will take a few more quarters to work out. We're starting to see a little bit of light. At least, we've all stopped building capacity."
In its most recent quarter ended April 3, 1998, Seagate reported revenue of $1.68 billion (down 33 percent from 1997's first quarter) and a net loss and net loss per share of $129 million, or 53 cents, respectively. Excluding the restructuring charge of $141.9 million and special charges of $23.8 million and tax effects, the pro forma net loss would have been 10 cents per share. In the year-ago quarter, the company logged revenue, net income and diluted income per share of $2.50 billion, $257 million and $1.01, respectively. Excluding special charges and write-offs, net income per share would have been $1.07.
"The restructuring charges taken last quarter and this quarter reflect steps the company is taking to align worldwide operations with current market conditions and to improve the productivity of operations," it was stated. The company spoke of "continuing weakness in demand."
Another giant, Quantum Corp., with yearly revenues of $5.8 billion, up from the year before, last week reported 4Q98 sales of $1.29 billion, down from $1.6 billion in the same quarter a year ago; net income for the quarter ended March 31, 1998 was $2.7 million, or 2 cents per share diluted, a whopping drop from $87.7 million, or 56 cents per share, in the same quarter last year. Yearly gains were said to be due to the first two quarters only.
Said CEO Michael Brown: "Oversupply conditions for the desktop hard disk drive market have persisted, resulting in continued aggressive pricing for the second consecutive quarter." The company added that it had reduced its inventory levels from the previous quarter by $108 million and also reduced its channel inventory levels.
Further down the supply chain, firms selling into the disk drive market are also suffering.
Read-Rite Corp., a manufacturer of recording heads, head gimbal assemblies and head stack assemblies for disk drives--and magneto-resistive heads for tape drives--saw net sales drop 24 percent to $187.1 million in its second quarter ended March 31, 1998 from $282.1 million in the same quarter a year ago. It posted a net loss of $62.2 million instead of net income of $23.6 million in the year-ago quarter. Loss per share was $1.29 versus earnings per share (EPS) of 48 cents in the year-ago quarter.
"The disk drive industry continued to experience a product oversupply during the second quarter of FY98, which reduced demand and significantly increased pricing competition in the recording head manufacturing sector," stated the company. To reduce costs, the company plans to reduce overall headcount by about 1,800.
In Goleta, Calif., Applied Magnetics Corp., a manufacturer of magnetic recording heads, head-gimbal assemblies and headstack assemblies for computer hard disk drives, reported a net loss of $31.9 million, or $1.33 loss per share, for its 2Q98, on sales of $58.8 million. This, versus net income of $31.1 million, or $1.06 fully diluted earnings per share, on sales of $126.3 million in 1Q97. Net sales for the second quarter decreased 53.4 percent compared with the same quarter in the prior-year period and slid 21.0 percent from net sales of $74.4 million in 1Q98.
"Due to significantly lower sales volumes, pricing declines and lower yields, the gross margin in 2Q98 was 6.3 percent, compared with a gross margin of 38.4 percent for the same period last year and a negative 9.5 percent in 1Q98," the company stated.
"Operating losses and the decline in revenue for the first half of FY98 are a reflection of the current softness in market demand being experienced by component suppliers to the disk drive industry as well as declining prices and a change in the mix of head-gimbal assembly and headstack assembly products."
The company previously expected revenue to be flat from 1Q98 to 2Q98, but "continued reduction in demand" for inductive thin-film products from its largest customer resulted in lower revenues. It now expects revenue may decline more than 25 percent in 3Q98 from 2Q98, then increase during 4Q98.
Santa Clara, Calif.-based StorMedia, Inc., a supplier of thin-film disks for hard disk drives, reported net sales of $39.2 million, a net loss of $27.2 million and a net loss per share of 52 cents for the quarter ended March 28, 1997. The company said its performance was negatively impacted by "continuing adverse industry conditions resulting in ongoing overcapacity and price reductions."
Slowing PC growth is hammering disk drive makers but equally important is that the hotbeds of activity have drifted to the lowest and highest ends--segments that mass storage companies have yet to address adequately.
The low-end PC has thrown down the gauntlet to the major drive makers to come up with a low-cost product that could produce a profit in such a market. An extremely differentiated tack at the highest end has also seemed to work for some companies, such as IBM, which for now says it won't go near the sub-$1,000 PC with its drive offerings.
"We don't really play in the sub-$1,000 PC arena," a disk drive spokesperson said. Although the company alludes to price erosion in its earnings results, it is gaining market share.
The company, with a comparatively small PC segment unit volume in drives, is taking a highly differentiated route, and with that, is said to have made a solid dent in the market share of disk drive rivals, especially Seagate.
David Walling, manager of HDD strategy and support, IBM storage systems division, observed: "We do not participate in the low-end market. We participate at the other end where you expand demand by increasing the number of functions and capability so you can move up the market into markets with higher price points. We provide higher capacity price performance for the PC market to help customers provide server-class performance on a desktop drive," he added.
Mr. Walling said most drive makers used existing designs to go after the low end, hurting their financial performance. "It did not give them the return on capital they needed. Many of the companies are working on specific designs for that market, where returns will always be difficult."
Also finding refuge at the high end is Fremont, Calif.-based HMT Technology, which designs and markets high-performance thin-film disks for high-capacity hard disk drives for high-end applications. HMT recorded net sales for its fiscal year ended March 31, 1998 of $356.2 million, up 35.3 percent from $263.2 million in FY97.
At DiskTrend, Bob Katzive, VP, said: "The worst may be over. Everyone I talk to thinks the situation has bottomed out and we are in a one or two-quarter recovery period. By fall all the excess inventories will be absorbed and the industry should be looking healthier," he said.
At Dataquest, Kimball Brown, who oversees the computer group, said the "slowdown" in PCs is just an adjustment of commercial PC buyers waiting for the right price. "They see $799 PCs at Good Guys, but they see $1,400-$1,600 for commercial PCs. They just want the better pricing."
At Channel Marketing, President David Goldstein thinks, "The price today for a SCSI drive is half of what it was just 40 days ago, a 9 gigabyte drive was $900 the first of March. Today it is $350-$499."
Meanwhile, Seagate's Mr. Shugart noted: "Everyone is hard at work looking for a super low-cost drive."
--Additional reporting by Cynthia Bournellis |
