HDD and Components Companies Upcoming Earnings Preview
READ RITE CORP(RDRT)*
Rating: 1S
04/07/1999
Salomon Smith Barney ~ April 8, 1999
04/08/99 Computers: All; Technology Sector
--SUMMARY:--------------------------------------------------------------
*We expect the March quarter earnings results will reflect tougher conditions than early indications
in the quarter suggested; nevertheless, all of the HDD companies in our coverage have maintained
that earnings are on track to meet earnings expectations for the March quarter.
*Conversely, however, nearly all of the components companies have recently pre-announced
anticipated earnings shortfalls, reflecting a tightened supply chain and slower, more seasonal
demand patterns.
*We expect the companies will give guidance for a June quarter that will likely show signs of
summer seasonality.
*We believe current valuations offer investors with long-term investment horizons potentially
meaningful oppty.; however, we expect there may be a near-term "flat spot" in the stocks as
investors await positive catalysts.
04/08/99 Computers: All; Technology Sector
--OPINION:------------------------------------------------------------------
Coming off a seasonally strong December quarter, which reflected an improved fundamental status
of the industry, the March quarter has been tougher than early indications suggested; however, all
of the hard disk drive (HDD) companies in our coverage have maintained that earnings are on
track to meet expectations.
Conversely, nearly all of the components companies have recently pre-announced anticipated
earnings shortfalls, which we believe may in part be attributable to a keener focus on supply chain
management by the HDD companies in the face of a reduced near-term demand picture.
Going forward, it will become increasingly more important for HDD suppliers to achieve
consistent execution at low cost and to exhibit responsiveness and flexibility. Issues relating to
supply chain management and Year 2000 compliance will remain hot buttons in 1999 and may
provide for a somewhat uncertain pattern of demand over the course of the year.
That said, the long-term demand for storage, and hence, the demand for desktop disk drives,
continues to grow--fueled by higher-performance, higher-capacity systems--despite seasonal
volatility and inventory patterns.
Despite the projected hard disk drive revenue downturn in the March quarter (due primarily to
declining ASPs), the disk drive segment remains a high-growth market, most likely a second half
1999 story after a seasonally soft June quarter.
Based on our analysis, we believe that it is important to continually evaluate the competitive
positioning of the disk drive companies and invest in those companies that have an identifiable
time-to-market and time-to-volume advantage coupled with strong performance on key
parameters, including quality, storage capacity, and performance characteristics.
7-Apr Closing Report Price Date
IOM $5.00 15-Apr MXTR $7.50 22-Apr QNTM $18.56 27-Apr SEG $30.31 13-Apr WDC
$7.44 21-Apr
APM $3.75 TBD HMTT $3.06 20-Apr HTCH $22.50 20-Apr IVAC $5.63 12-Apr RDRT
$6.06 26-Apr
Company Specific Views
Iomega (1-S)- Our 1Q99 forecast reflects caution that seasonality in the quarter will not be fully
offset by new products due to supply constraints (on new products such as the Zip 250 and Clik!
offerings). We forecast a break-even quarter, and although this is a reduction from our prior 1Q
estimate, we believe the company will likely quickly make up the earnings difference in subsequent
quarters. We maintain our EPS estimate of $0.30 for FY99. Our 12-to-18-month price target for
the stock is $11-$13. Going forward IOM will be challenged to translate its progress--including
the improvements the company has made in the last two quarters, many of which are permanent
process improvements--into predictable, sustained profitable growth.
Maxtor Corporation (1-H)- Our most recent industry checks indicate, and conversations with
management affirm, that business for Maxtor appears to be tracking as planned in 1Q99. We
believe that pricing for the HDD companies has been competitive, but in line with the guidance
Maxtor management gave upon its 4Q98 earnings release. Further, units appear to be tracking
with management's guidance for "flat to up" sequential unit shipments. January appears to have
been a good month for Maxtor, February was softer, and March appears to be consistent with
plan but not robust. The June quarter will likely show signs of summer seasonality. Our EPS
forecast for Maxtor's 1Q99 is $0.15, and we expect that the company will come in line with the
forecast. At current levels, we view Maxtor shares as inexpensive; we note that Maxtor shares are
off by approximately 46% since the beginning of the year, and view recent weakness as an
excellent buying opportunity for long-term holders.
Quantum Corporation (1-H)- Most recent guidance from Quantum management indicates that the
current quarter is on plan with prior guidance, and that channel sell-through is good and drive
inventory levels remain low. Quantum is apparently on track to ship a record number of high-end
units in the current quarter and to reach its goal of break-even results in this segment of its business
in fiscal 2Q00. Quantum announced on March 15 a leading areal density desktop drive program
that is slated to ship in calendar 2Q99. The 6.8GB per disk capacity hard drive, the Fireball CX,
features GMR heads--the first implementation of GMR heads by Quantum in its desktop drive
line. We forecast EPS of $0.33 for Quantum for the March quarter and expect that the company
will come in line with this es timate (Quantum's DLT royalty stream will likely provide a helpful
boost in the quarter, partly offsetting lower units and revenues from its hard drive business). Our
current price target for Quantum is $33, which has been based on our traditional methodology.
Seagate Technology (1-H)- Seagate's most recent guidance reflects cautious optimism for the
industry in the current March quarter and improved expectations for the company's performance
in the market and in terms of financial performance. Although Seagate signaled a healthy
marketplace and cautious optimism for the industry in the current quarter, much of the company's
success in the prior quarter and what is fueling its momentum in the marketplace today is due to its
internal efforts over the past several quarters. During calendar 1998 Seagate employed disciplines
and strategies to streamline its business model which have generated good bottom line
performance. We maintain an EPS forecast of $0.46 for the current quarter (fiscal 3Q99), and
expect the company will come in line with the forecast.
Western Digital Corporation (3-H)- Over the past 18 months Western Digital struggled with its
transition to MR-based products and, hence, fell behind in time to market and lost market share;
however, the company has made meaningful strides toward regaining share with its recent product
generations. It has been a longer workout period than we originally thought, although we are
encouraged by improved industry conditions and Western Digital's improved operational status
and execution of its road map. The key to Western Digital's return to pr ofitability is its ability to
restore its positioning (including time to market) in its desktop business, as well as execution in and
growth of its enterprise business and continued focus on improved asset management. We
forecast a net loss per share of $0.72 for Western Digital for the March quarter, and expect that
the company will come in line with (or potentially slightly beat) this estimate. At a recent industry
conference, management reiterated its comfort with the consensus loss estimate of $0.67 per share
from operations, despite the fact that units and revenues will probably be lighter than the
company's original guidance--lower volumes are due to slower pulls from one major OEM
customer during February, compounded by slightly slower distribution sell-through (flat, not
down). Other than the one major OEM noted here, all other major OEM customers appear to be
pulling to plan.
Applied Magnetics Corporation (4-S)- We remain cautious on Applied's shares in the near-term
given our concerns for the company's specific challenges - primarily product qualifications, MR
production ramps, and continued process control; we believe that pricing remains very competitive
for head vendors and that the fewer heads per headstack trend has accelerated during the March
quarter which has generally placed additionally pressure on the heads vendors during the March
quarter. APM however, does appear to be continually taking active cost control measures and
cash management measures to drive its way through its current/near-term challenges. Our
estimates reflect a sequential downtick in revenues in fiscal 2Q99 (we forecast revenues of $10M
in 2Q). We forecast a net loss per share of $6.15 for fiscal 1999.
HMT Technology (1-H)- HMT announced on March 29 that it expects fiscal fourth-quarter
revenues to fall about 15-20% below the third quarter results of $69.8 million, leading to a net loss
in the quarter. The good news, however, is that HMT expects to generate positive cash flow for
the quarter (including interest and capital spending). We have reduced our unit, ASP, and cost per
unit assumptions in our model for HMT's fiscal fourth quarter and expect a net loss per share to be
in the ballpark of $0.05, which would call for fiscal 1999 EPS of approximately $0.02. We have
left our fiscal 2000 estimates unchanged at this time pending further commentary from the
company when it reports its full results for the fourth fiscal quarter on April 20.
Hutchinson Technology (1-H)- Hutchinson announced on March 25 that it will temporarily reduce
its workforce by approx. 550 production employees. The company held a conference call to
discuss the reasoning behind the reduction, but affirmed that the announcement was not signaling a
pre-release on earnings. Hutchinson expects its earnings will be in line with market expectations,
which range from $0.51 to $0.56 per share (according to First Call); our forecast is $0.54.
Hutchinson still expects shipment levels and revenues in 3QFY99 to be up sequentially over
2QFY99.
Read-Rite Corporation (1-S)- Read-Rite announced on March 24 that it expects sales for
2QFY99 ending March 31, 1999 to be approximately 10% below the $230.2 million reported for
1QFY99 ended December 31, 1998, and the company will report a loss for 2Q. We have
reduced our revenue est imate to $207 million on sequentially fewer units (20.8M HGAs down
from 22.7M); slightly reduced our gross margin assumption (to reflect the lower volume); and
lowered our EPS forecast to a loss of $0.10 per share; we note the although Read-Rite has
indicated that it expects to post a loss in the quarter, management has not specified a range (could
be +/- our estimate). We have modestly reduced our top and bottom line assumptions for
3QFY99 to reflect a more moderate sequential trend, however, we note that this is just a first pass
(and does not reflect company guidance). |
