From the Finance pages of Electronic News: June 15, 1998 Issue
Drive Makers: No Relief Yet
Bloodbath continues in June quarter with 'unprecedented' string of price decreases; some technical default warnings
By Carol Haber
Turbulence in the disk drive industry continues unabated triggering major cutbacks and the prediction of huge losses among the drive makers themselves and companies depending on them. In addition, some companies are at risk of technical default by the end of the quarter if bank lenders don't renegotiate current terms; for example, Western Digital and Komag (EN, June 8).
Certain drive makers like Quantum have cut back output into the distribution channel preferring to stress direct ties with PC OEMs; they hope that typical holiday buildup will relieve the torpor of the summer quarters. Still, other drive makers continue to flood the distribution channel with product, having no place else to put it, according to a Quantum executive.
"The pricing and inventory in the desktop segment continue to be really tough," said Robert Blair, VP, corporate communications, WD, to Electronic News. "We will probably be seeing another double digit price decrease in this quarter in the industry, which will be the fourth consecutive quarter; this is unprecedented."
While WD is particularly vulnerable, with most of its business in the desktop arena, it is far from alone in its torments.
Last week Read-Rite, a manufacturer of magnetoresistive recording heads, head gimbal assemblies (HGAs) and head stack assemblies (HSAs) for disk drives, said it is doing worse than expected; and Chandler, Ariz.-based ADFlex Solutions, a supplier of interconnect products with applications including hard disk drives and cellular telephones, predicted a large loss.
'We Do It To Ourselves'
------------------------------------------------------------------------
A quarter ago Quantum described too much inventory in the distribution channel (EN, March 27); the story still holds, according to Steve Wilkins, product planning manager at Quantum. "This is one of those cycles that the industry continually does to itself. Too many drives being produced. Quantum actually cut back specifically in the channel to reduce the amount of oversupply from our side.
"There are others that have kept going at their run rates and contributed to the oversupply," perhaps non-U.S. companies not as closely watched--and "punished"--by Wall Street, Mr. Wilkins suggested. "They are continuing to produce more drives than the industry really needs. We see an awful lot of their product in the distribution channel."
Added Renee Budig, Quantum investor relations director, "Our competitors, because they don't have a significant OEM customer base, have to put the drives somewhere. These drives go into the channel and create a very difficult pricing dynamic."
Quantum is stressing its PC OEM ties. "Our focus is to pull back from the channel and we are continuing to do it this quarter," said Ms. Budig. "There's aggressive pricing in the distribution channel right now, and it doesn't make much sense for us to be there."
On top of that, there is the season, June being a tough quarter in any case. Quantum is looking for increased orders in the September time frame as PC OEMs build for the holiday season, Mr. Wilkins said.
The company is seeing revenue "flat to slightly down, earnings flat with last year," for its June-ended quarter.
The Price Of Success?
------------------------------------------------------------------------
According to reseach firm DISK/TREND, Mountain View, Calif., "tough competition in the rigid disk drive industry, combined with rapid advances in magnetic recording technology, is delivering ever-increasing value to disk drive buyers" (read: lower prices). The average price per megabyte for all disk drives shipped in 1997 was below 10 cents; the 1998 average price is expected to fall below 5 cents per megabyte, the report stated. Ten years ago, the industry's average price per megabyte was over $11.
Try to make money in this climate.
Not surprisingly, unit shipments are growing. According to the DISK/TREND report, published last week, rigid disk drive worldwide shipments are expected to be up 16.9 percent in 1998, with 152.6 million drives, climbing to 232.5 million drives in 2001.
"One of the reasons for the profit squeeze several major disk drive manufacturers are currently experiencing can be seen in the lower rate of increase for sales revenues, up only an estimated 7.9 percent in 1998," the report said. The industry's forecasted 1998 sales revenues of $34.2 billion will increase to $38.7 billion in 2001, an average annual increase of only 4.2 percent."
Last week Irvine, Calif.-based WD predicted its performance for the fourth quarter ending June 27, 1998 would fall "substantially short" of current Wall Street forecasts due to greater than anticipated industry pricing pressures and reduced unit volumes. The company is building up its smaller high-end enterprise business. Analyst estimates for WD had been a loss of 45-67 cents per share on revenues of $830 million to $864 million. WD said the operating loss for the June quarter is expected to exceed $100 million, before costs linked to a component supply agreement with IBM for disk drive technology.
Technical Default
------------------------------------------------------------------------
The size of the expected fourth quarter net loss, "unless cured," will result in a technical default under WD's bank credit line at the end of the quarter. The total available credit under the bank agreement is $250 million, of which $50 million is outstanding in the form of a term loan. Borrowing capacity will be subject to the successful re-negotiation of the terms of the credit line agreement; talks are under way.
Komag, a major supplier of media to WD, said pretty much the same thing about itself last week (EN, June 8).
WD, like Komag, has acted to downsize, and says that by the end of its June quarter its workforce will have been cut by 22 percent since November of last year. It continues to eye cost-cutting moves.
With its sole market being disk drives, Read-Rite predicted that "continuing difficult industry conditions" and weak demand would produce sales for its third quarter ended June 28 that were about flat with $187 million in the second quarter ended March 29--below Wall Street expectations. An operating loss for the quarter is expected to be less than the loss of $1.29 per share reported for the just-prior quarter--due to continuing cost-reduction efforts--but larger than analysts' estimates.
Read-Rite CFO John Kurtzweil had this to say to EN: "We are expecting the summer to be choppy; June and July tend to be choppiest months of the year. While it will pick up in August and September, this time I think the pickup won't be as pronounced. I don't see the fast recovery we have had in previous cycles." Read-Rite's customers include WD, Maxtor and Samsung.
Non-U.S. Participants
------------------------------------------------------------------------
According to the DISK/TREND report, non-U.S. drive makers have been growing faster during 1997-1998 than the U.S. industry leaders. Non-U.S. manufacturers captured 22.7 percent of 1997 worldwide disk drive sales revenues, with their share projected to rise to 30 percent in 2001, the report said. The drive manufacturers with the largest 1997 market share increases for noncaptive disk drives were IBM, Fujitsu, Samsung Electronics and Maxtor.
The report also said: "Captive" disk drives, produced and sold by manufacturers of computer systems, hold a smaller share of worldwide sales revenues each year, down from 24.3 percent in 1996 to 19.9 percent in 1997, to an estimated 16.6 percent in 1998.
IBM, with a boost from its growing noncaptive drive sales, became the 1997 world-wide leader in overall sales revenues, with 23.9 percent. Seagate Technology, shipping only noncaptive drives, had declining disk drive sales revenues in 1997 and dropped to second place, at 23.1 percent. Quantum and WD, each with all noncaptive drives, held 15.5 percent and 13.3 percent, respectively.
A breakdown shows that the 152.6 million unit shipments forecasted for 1998 will be 75.4 percent desktop, 12.1 percent mobile, and 12.4 percent server drives.
"The disk drive industry's short product life cycles and extremely competitive nature continue to take a toll, especially on companies with small market shares," said DISK/TREND, noting that 59 companies manufactured rigid disk drives at the beginning of the 1990s, but in 1998 only 20 active manufacturers remain, a net reduction of two from the previous year. |
