"Western Digital Affects Vulnerable Read-Rite" (06/10/98; 7:26 p.m. ET)CMPNet TechWeb at techweb.com
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Western Digital Affects Vulnerable Read-Rite
(06/10/98; 7:26 p.m. ET)
By Gabrielle Jonas, TechInvestor
A profit warning issued by Read-Rite on Wednesday -- its third in as many quarters -- is a sign of the storage company's over-dependence on lead customer Western Digital, which issued its own dire forecast on Tuesday.
Read-Rite [RDRT], which makes recording heads used in disk drives, sank 3/4 to 7 9/16, more than 9 percent on Wednesday. After market close Tuesday, Western Digital [WDC], said it would miss analysts' estimates in its fiscal fourth quarter and could default on a credit line.
Blaming difficult industry conditions and reductions in demand, Read-Rite said it now expects revenue for the third quarter ending June 28 to be close to sales of $187 million it posted in the second quarter, resulting in a loss worse than analysts' expectations of 51 cents per share.
Read-Rite was vague about the extent of its expected third quarter operating loss. In a statement, the company said it would be "less than the loss of $1.29 per share reported for the second quarter," but "greater than current analysts' expectations" -- that is, the loss of 51 cents per share.
Read-Rite, based in Milpitas, Calif., said it will not elaborate on the profit warning until reporting third quarter results after market close Monday.
Read-Rite did not excel in its second quarter either, posting a hefty loss of $62 million, or $1.29 a share, on revenue of $187 million, compared to earnings of $23.6 million, or 48 cents a share, on revenue of $282 million in the comparable quarter a year before.
At the time, Read-Rite blamed an inventory glut in the disk-drive industry as a whole. The company subsequently cut 1,800 jobs, bringing its work force down to just above 23,000. Though analysts Wednesday praised Read-Rite for lowering operating costs and cutting out some fixed costs during the quarter, they expressed qualms about future performance -- even well into 1999.
Read-Rite is one of many struggling data-storage companies, which include Quantum, Komag, and Seagate, though the latter benefited substantially Tuesday from an analyst upgrade by Salomon Smith Barney.
"I'm surprised Read-Rite can even report flat revenue," David Takata, an analyst with Gruntal & Co., said, "because revenue in the industry overall will be down sequentially."
But Takata is also skeptical because one of Read-Rite's primary customers is Western Digital. "Western Digital is substantially 50 percent of Read-Rite's customer base," he said.
Katie Dahlstrom, head of investor relations at Read-Rite, acknowledged the company's dependence on Western Digital, but said that is in the past. "Western Digital has been a 51 percent customer in fiscal 1977," she told TechInvestor, "but in our second fiscal quarter, Maxtor and Western Digital combined supplied us with about 80 percent of revenue."
Western Digital was responsible for a little more than half of that, she added. "We're trying to diversify our customer base." Read-Rite added Seagate as a customer in April, Dahlstrom added.
Exacerbating Read-Rite's predicament, Takata said, Western Digital appears to have more closely aligned itself with IBM for disk-drive heads. "IBM even today is outshipping to Western Digital for [giant magneto-resistive] heads, and a contract for 2.8 gigabytes per platter takes Western Digital through most of the rest of the year."
Dahlstrom said Western Digital and IBM have not yet signed a licensing agreement, adding, "That is more applicable to product that's scheduled to be available in 1999. Currently we're supplying both IBM and Digital with product."
But that is exactly the problem, Takata said. As tough as 1998 has been for Read-Rite, 1999 promises to be even worse.
"Starting next year, a relationship whereby IBM will design and sell GMRs to Western Digital will kick in," Takata said. "The most fundamental structural issue at Read-Rite is how to reorganize to reduce its dependence on Western Digital."
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