Re: expected profitability
Outlook Bleak For Disk Drive Makers Outlook Bleak For Disk Drive Makers ( 1/07/98; 8:00 p.m. EST)
By Gabrielle Jonas, TechInvestor Things will get worse before they get better for disk drive makers this earnings season, and some profit-impaired companies may not survive at all in the long run, according to analysts.
On Wednesday, Seagate was the latest in a long line of storage companies that issued profit warnings. Seagate said it would report a substantial loss for the second quarter. On Monday, Read-Rite said it expected to report lower-than-expected sales and earnings for its first quarter.
The company, based in Milpitas, Calif., said it will report sales of $261 million. Read-Rite [RDRT] will report earnings Jan. 21.
In addition, Quantum [QNTM], a disk drive maker also based in Milpitas, was downgraded by three different analysts in December after issuing its own profit warning. But Quantum and Seagate aren't alone. Western Digital is also making profit warnings a habit.
Get used to it, because the short-term prognosis is ugly. A combination of sub-$1,000 PCs, Asia's financial turmoil, and excess inventory are all hurting storage stocks.
"There's a little bit more pain to be felt," said David Takata, an analyst at Gruntal & Co., based in Beverly Hills, Calif. "Typically, these companies in the real bad lulls will dip into losses, and I think this quarter, you'll see losses because of one-time charges. I wouldn't be surprised to see that continue for one or a couple of quarters, until there's some sort of shakeout in the industry."
Ashok Kumar, an analyst at Loewenbaum & Co., in Austin, Texas, said things won't shape up for a while. "Short term -- for the next couple of quarters -- there's going to be some pain, but long term, everything will work out," he said.
The Largest Will Survive
The shakeout in the disk drive industry may leave only the strongest standing, Takata said.
"The last time there was this kind of problem, Maxtor was acquired by Hyundai. Maxtor [virtually] faded from view," Takata said. "I think the same thing -- some consolidation in the industry -- will happen again."
Takata has picked his winners and losers. "Seagate is probably in a very strong position to survive, and likely to emerge stronger than ever," he said. "After the shakeout, Quantum is a very strong vendor with its strong Japanese partner, Matsushita-Kotobuki Electronics, to make the hard drives. Western Digital is probably my third pick."
Quantum, Seagate [SEG], and Western Digital [WDC] comprise 75 percent of the desktop market, and 62 percent of the total market overall, analysts said. For the first nine months of 1997, Quantum shipped 6.6 million units; Seagate, 7.8 million units; and Western Digital, 6.2 million.
Quantum in particular, with 60 percent of its profits coming from its tape-drive division, is well-positioned to meet increasing consumer demand for that kind of data storage.
Patrick Tenney, an analyst at Robertson Stephens, based in San Francisco, likes Seagate. "This is a good business -- it's also very cyclical and very seasonal," he said. "Seagate will emerge from this down cycle stronger."
Of the three, Western Digital is in the weakest position. "Western Digital has the least vertically integrated of any of the companies," Takata said. "It has the least control over its own technology, depending on outside vendors for technology such as heads. Therefore, Western probably needs to do something to shore up its technology portfolio, or either acquire or get acquired."
Smaller Players Hurt
Until the disk drive vendors can get their houses in order, companies such as Read-Rite, which supply heads to the disk drive vendors, will be hit hardest, Takata said.
"Some smaller players -- vendors like JTS, which tried to address niche opportunities -- will probably fall by the wayside," said Kumar. "Clearly, they won't have the critical mass to make it through."
JTS [JTS], which was acquired by Atari in 1996, designs, makes, and markets hard disk drives for desktop PCs. In December, the company said in an Securities and Exchange Commission filing that it had incurred significant losses associated with the costs of designing, developing, and marketing new products, establishing manufacturing operations, and developing a supplier base.
Revenue from the disk drive division for the quarter ended Nov. 2, 1997, was $23.8 million, from $32.1 million in the year-before quarter. During the quarter, JTS shipped 201,000 disk drives, mostly 3.5 inches, from 1 gigabyte to 4.3 GB.
Who's To Blame?
A combination of factors have put storage companies in their predicament. Analysts can recite the factors with ease -- sub-$1,000 PCs, Asia's financial turmoil, and excess inventory.
Analysts said companies such as Fujitsu, Maxtor, and Samsung were gaining market share by undercutting larger players. Those moves, coupled with an overall slowing of the PC market growth rate to 14 percent estimated in 1998 from 20 percent in 1997, have put the squeeze on vendors. Toss in Asia's problems, and disaster can't be too far behind.
Cheaper PCs are one of the prime reasons for disk drive makers' woes. "The sweet spot of the market has gravitated to the lower end," said Kumar. "The hottest-selling item today in the retail market is the sub-$1,000 PC, and at that price point, the budget for a 2-GB hard disk drive is around $99 -- which means most of these vendors are selling below cost."
But supply and demand is the root of all disk drive makers' problems.
"Regarding the supply and demand imbalance, at the beginning of the year, we thought it was just a supply problem," said Tenney of Robertson Stephens. "Now we have a demand problem, which makes the whole thing worse."
"There are no major operating systems or software cycles driving PC growth, so PC growth in the U.S. -- though it can look very good -- is coming from low-end PCs, and that's not beneficial to disk drive makers," said Tenney. "It does not appear those low-end PCs are bringing in new consumers."
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