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Technology Stocks : Disk Drive Sector Discussion Forum -- Ignore unavailable to you. Want to Upgrade?

To: Arthur who wrote (1518)	11/11/1997 12:23:00 PM
From: LK2	Read Replies (2) \| Respond to of 9256

LEH report on WDC dated 11/07/97 lehman.com >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Headline: Western Digital: Pre-Announces Downward 2Q, Reducing Estimates Author: Kimberly Alexy, CFA 1(212)526-3141 Rating: 2 Company: WDC SEG QNTM Country: EPS CUS Industry: COMPUT Ticker : WDC Rank(Prev): 2-Outperform Rank(Curr): 2-Outperform Price : $23 7/8 52wk Range: $55-26 Price Target: $47 Today's Date : 11/07/97 Fiscal Year : JUN ------------------------------------------------------------------------------ EPS 1997 1998 1999 - - QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr. 1st: 0.35A 0.67A 0.67A - -E - -E - - 2nd: 0.67A 0.84E 0.22E - -E - -E - - 3rd: 0.87A 0.90E 0.46E - -E - -E - - 4th: 0.95A 1.02E 0.66E - -E - -E - - ------------------------------------------------------------------------------ Year:$ 2.85A $ 3.44E $ 2.01E $ - -E $ - -E $ - $ - Street Est.: $ 3.92E $ 3.44E $ 4.81E $ 4.23E $ - - $ - - ------------------------------------------------------------------------------ Price (As of 11/6): $30 1/4 Revenue (1997): 4.2 Bil. Return On Equity (97): 47.0 % Proj. 5yr EPS Grth: N/A Shares Outstanding: 94.0 Mil. Dividend Yield: N/A Mkt Capitalization: 2.84 Bil. P/E 1998; 1999 : 9.0 X; N/A Current Book Value: $6.60 /sh Convertible: - -Debt- to-Capital: 0.0 % Disclosure(s): None ------------------------------------------------------------------------------ ****************************************************************************** * This morning, Western Digital announced that pricing pressure and production issues will negatively impact earnings for the quarter. Management gave EPS guidance of $0.20-$0.30, compared to previous First Call consensus of $0.83. * The company described an environment of highly aggressive pricing in desktop drives, particularly in the distribution channel. Fujitsu was cited as the chief price aggressor. * Unit guidance remains in the 7.3MM to 7.5MM range for the quarter. However, price erosion - already double-digit and 2%-3% more than normal - is expected to continue to worsen. Ramp issues in 1.7GB/platter TFI are hurting costs and mix. * WD plans to respond to these issues by speeding its transition to MR, upping its mix outlook to 50% MR in the March quarter and 75% MR in the June quarter. The current quarter may see a charge of $15-$30MM related to TFI issues. * We are reducing our 2QFY98 EPS estimates to $0.22, on pricing and transition issues. The company has deferred 2H guidance until Comdex; we will likely revisit our 2H numbers thereafter. We cautiously maintain our 2-Outperform rating on the shares. ****************************************************************************** PRE-ANNOUNCEMENT SUMMARY ------------------------ This morning, Western Digital announced downward revisions in its earnings guidance for the quarter. Two primary issues were cited: highly aggressive pricing on desktop drives in the distribution channel; and negative cost and mix impact related to ramp problems in the company's late-generation TFI drives (particularly in the 1.7GB/platter product). The company described an environment of highly aggressive pricing in desktop drives, particularly in the distribution channel. Fujitsu was cited as currently being the main price aggressor, and implications were made by WD management that Fujitsu may be selling product at or below cost. The company stated that last quarter's aggressive pricing by a major US vendor was responded to by Fujitsu. However, WD believes that Fujitsu has continued its pricing aggressiveness, moving into the 2.0GB - 2.5GB range. Other industry players are said to have also responded in kind. Going forward, Western stated they are nervous about pricing in 3GB products. Pricing in 4GB products was also said to be aggressive. The company was careful to express its opinion that the pricing pressures are due not to weak demand, but instead to excess supply as some companies try to gain market share. On its conference call, management made reference to a statistic showing that production cuts among HDD vendors had the effect of reducing overall HDD production by 17% for the quarter. Another negative factor has been the company's difficulties in ramping its 1.7GB/platter TFI products. These issues have led to decreased manufacturing efficiencies and increased costs for these products, and have also negatively impacted product sales mix. We see this as a symptom of the company's industry-lagging MR transition starting to catch up with them. Management stated that it hopes to gradually replace the ailing 1.7GB TFI product with the 2.1GB/platter MR product, which it says is ramping ahead of plan. Western plans to accelerate its MR transition in the coming quarters, projecting 50% MR mix in the March quarter and 75% MR mix in the June quarter. Previous guidance was for 40% and 60% MR, respectively. The company is still targeting 1.5MM MR units (~20%) for the current quarter. The company is considering a $15-$30MM charge for the current quarter due to the TFI issues. While channel inventory was said to be in a better position than at the end of September, levels were still higher than desired, with WD management estimating slightly above six weeks of inventory in the channel. This has recently been driven in part by the rapid price reduction in the gray market, as buyers await further price decreases. INVESTMENT RECOMMENDATION ------------------------- Reflecting the price and transition issues, we have reduced our 2Q EPS estimates to $0.22, and our year number to $2.01. This is based on our new model which shows current-quarter GM slightly above 10%. WD intends to give a presentation at Comdex a week from this coming Monday, at which time it will discuss its outlook for the second half of its 1998 fiscal year. We expect that we will be revisiting our 2H FY98 numbers at that time. We maintain our 2-Outperform rating, but remain cautious on the shares until we see visibility into improvement in business conditions. BUSINESS DESCRIPTION: Western Digital is an industry leader in information storage management, providing a broad array of hard disk drives for portable, personal and enterprise-wide computing. ------------------------------------------------------------------------------ Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities. <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< Larry