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Technology Stocks : Western Digital (WDC) -- Ignore unavailable to you. Want to Upgrade?

To: Pierre-X who wrote (8013)	12/4/1997 2:03:00 PM
From: William T. Katz	Read Replies (2) \| Respond to of 11057

DD net margins at QNTM are dependent on the sector, desktop vs server/enterprise. The high-end is always in the red and you might remember that WDC has only been minimally involved in this area [although they picked it up last qtr]. Yes, the worst case scenario is that the non-DLT business turns in net loss, but I'm hearing that OEM sales are strong. Take a look at all the high-end Pentium-II workstations shipping ... they all have Ultra ATA drives which, for the most part, are dominated by QNTM. What other manufacturer has 3.2/4.3/6.4/8.4 gb Ultra ATA drives to stick in those Dell, Compaq, Micron, etc. high-end computers? Also QNTM has had plenty of opportunity to drastically lower estimates but has not chosen to do so. While that does not preclude their missing numbers, I think it would indicate that they are not seeing the meltdown that SEG and WDC are seeing. Also, the one-time charge is addressing the biggest problem (enterprise drives) and should help staunch the bleeding there. With regard to your numbers, remember that DLT is growing very quickly ... we can use a decent 50% annual growth rate. This will also change the relative contributions of the two businesses, particularly if the DD sector hits a rough spot.

To: Pierre-X who wrote (8013)	12/4/1997 2:36:00 PM
From: still learning	Respond to of 11057

P-X: Re QNTM calculations: If the following facts are correct: 20% Revenues from DLT I think it's more like 25% DLT => 80% Revenue from DD I think it's more like 75% DD 1553 Sales in Sep quarter => 1242 Sales from DD =>1165 60% Income from DLT Don't know about this #, but accepting it at face value, means 61.9 from DLT. If it increases at 50% that will mean 92+ just from DLT. If DD is not losing money overall -- and we have every reason to think it isn't, they will have a very reasonable chance to make this Q's #s. It all dedends on DLT income growth rate. Since we know that at a certain point profits have a turbo effect on bottom line, and DLT fixed costs are clearly already met, any significant increase in DLT sales will cause a disproportionately large growth in net income. I do not have a detailed model of what that will be, unfortunately. Perhaps you do? => 40% Income from DD 103.7 Income in Sep quarter => 41.8 Income from DD =>1165 => 3.3% net margin DD at QNTM vs 5.8% net margin at WDC Check my numbers? 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. 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.

To: Pierre-X who wrote (8013)	12/5/1997 1:31:00 AM
From: Frodo Baxter	Read Replies (3) \| Respond to of 11057

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.