Read-Rites' Shareholders' Meeting - 2/25/99
Note from the Meeting
Cyril did the required ballot and item things in less than 8 minutes, and began his presentation, which apparently was a version of the Goldman presentation send in New York at that investment forum. Within his presentation, and combining the Q&A, here are the points that I found interesting:
Maxtor, Samsung and Fujitsu are the new competitors fighting to get market share in the hard drive sector. Their fight is being fought in price at a cost of reduced margins. In the Q&A I asked how the pricing pressures are effecting RDRT. The answer was not clear, because RDRT is responding to each order. The example was RDRT does not know what will be sold until CPQ tell the hard drive maker who in turn orders the materials from RDRT.
In my opinion that sets up the situation we had last quarter. I absence of a clear forecast the Sell side analysts are forecasting the worst case and I think it is possible that another upside surprise could occur this quarter. The negative is that the Company does not have good visibility for its forecasting because of the competitive nature of the current environment with the above three new comers who are trying to get business. Cyril confirmed that that margin pressure is being passed on to RDRT. He did not say that it was any worse last quarter. This whole situation is further confused with the improvement in delivery times and reduction of inventories.
Cyril reported that in December 1997 it took RDRT 87.9 days to turn around and deliver a new product. Today because of their improvement program it is down to 59.7 days, a reduction of approximately 32%. RDRT's goal is around 49 days and is continuing to work on that goal with good progress. What is does for the Company is substantially reduce its capital expenditure needs. The budget for CapEx in fiscal 1999 is $130 to $150 million, which was reported to be a very substantial reduction to prior requirements. The prior President of RDRT, who was at the meeting, complimented the current staff saying that he could not get the Company where it is now with these TAT and CapEx improvements.
What does that mean, in my opinion we have a leaner RDRT that can be more responsive to the market and at a lower cost. That lower cost could be an offset to the margin pressures expected by the hard drive wars discussed above. The analyst may not have figured this out yet, and could help explain their surprise at the last quarters better than expected performance.
What is better delivery without new and better product? Cyril was very proud of the September 1998 announcement of the 13.5-Gigabit per square inch. While we may not have understood, or remember it because of the current price fall of RDRT, the Company holds the record for this being the largest capacity head, bar none, in the world. It took the record away from IBM!!! Thus, Cyril is proud of the technology at RDRT and points to that accomplishment.
RDRT is the only pure play for the hard drive head supply industry in the U.S. I asked about what the real objectives were in hiring Dallas Meyer, announced yesterday morning, and complimented the gather of the team. Cyril proudly said he is gathering the best in the business to have the best technology, so they can deliver the best and most competitive products to the market.
He went on to say that Meyer would also be very helpful in getting RDRT transitioned from Nano to Pico heads. What that means, as I understand it, is that RDRT is transitioning from a Nano head which takes 50% of a wafer to a Pico head which takes 30%. It is a size reduction of the moving parts. Cyril reported that all existing products are being produced with Nano heads and that that is currently the norm accepted by the marketplace. The drive towards Pico heads is an improvement in product that will be needed for the next generation of hard drives. But Cyril did report that the Japanese manufacturers are doing Pico heads in their current MR products, and that while RDRT is not doing it yet plans to be doing it soon.
Cyril believes that the Nano to Pico is well underway, and that the Company is making good progress in this area. This, I believe, has been the issue so discussed on the Yahoo thread about back-end quality. It appears that the "problem" deals with future, not current revenues, and future, not current products. I got the impression that when it is time to ship product RDRT will be ready.
What is the market? In one of the overheads, Cyril laid out the market as Portable growing at 14.6%, Desktop growing at 13.8% and High-End growing at 13.0%, (Portable being defined as 2.5"). The characteristics are that the Desktop units had been dropping in head counts. Cyril reported that they are now stabilizing at approximately 3 heads per drive, which is good news. The high-end drives use 8 to 10 heads per drive.
Looking at each of these segments:
Portable - IBM is the dominant supplier. RDRT does not compete currently in this area. But RDRT is currently doing a qualification with Fujitsu to enter this market. That could be a whole new area of revenues that RDRT had not enjoyed before.
Desktop - This is RDRT main business. The hit last year was due in part to the reduction in the number of heads per drive. The fact that that is stabilizing is good news. Seagate, WDC, MXTR and Fujitsu are all current RDRT customers. RDRT has targeted Quantum as a desired customer. Cyril reported that the qualification there are going well and that he expects by year end that QNTM will be a RDRT user. That is significant because according to the presentation QNTM is the number 2 hard drive manufacturer. Below are the market share information presented:
Seagate 21.2%, QNTM 18.2%, WDC 14.0%, MXTR 11.6%, IBM 11.5% and Fujitsu at 10.9%.
Of that list QNTM and IBM, are not customers. Getting QNTM could be a significant boost to RDRT. Again Cyril is expecting this by year-end and reports it is going well. "Re-engaging to do a number of long term designs with Quantum". Cyril reported that QNTM and MKE, who had tried to get into the head business, may have spent a half billion dollars before deciding not to carry forward that venture and are now not looking to go vertical any longer.
Further, growth in this segment is expected by the continuing trend of the hard drive manufactures moving away from vertical integration. SEA was 5% of 4th quarter revenues and Cyril reported he expected that to increase because they have moved away from the vertical model and are relying on suppliers like RDRT.
Cyril reported that he had just returned from Japan and meeting with Fujitsu. While Fujitsu is making 50 to 60% of its own heads, RDRT is working on a new specially designed unit and is in the qualification stages of potential new business in that account.
So, in the main business, SEA, Fujitsu and QNTM are the main potentials for revenue growth. But the Company is also participating through its relationship with Maxtor in the unit price competition that is occurring. So while margins could be down, units could be up, but that is just a guess seeing how many hard drives are being sold through the retail channel, I think it could be a good guess.
High End - This is also an area that RDRT has not been in strongly before. But the much reported in the press move of WDC to IBM failed to mention that RDRT is the only supplier for the high end WDC 18 Gig hard drive. So RDRT has a product with success in the high-end area now and will be working that segment, too. Remember these units are 8 to 10 heads per unit versus the main business being at 3 heads per unit. I am also assuming that the price competition is not as strong at this level, but would enjoy some information on that.
Other products: Cyril reported that RDRT is also working with QNTM on a SDLT product that could be 10% of future revenues. RDRT is the sole supplied to IOM for their back-up products, and a major supplier (60% marketshare) to the tape drive head industry (hmmm? A Y2K play?). QNTM and RDRT are working on the next generation of products, which could add to revenues and display the Company's superior technology.
Competition: Cyril reported that there seems to be consolidation in the Japanese head manufacturers, with TDK, Alps and Fujitsu (see above, they don't even produce their full need) being the strongest in that order. IBM is the only real U.S. competitor, and is respected as formidable. This consolidation is directly opposed to the dis-consolidation that is occurring with the drive manufacturers and their related price competition.
Cyril reported that GMR would be a stable product for a number of years. This supports the program development that MBA laid out in Yahoo post 2416. Further the optical work, which was funded by a customer, had been terminated. GMR will be the domain design for the next few years. Optical just did not work out, and will not be a part of the future of this industry. The problem was having to carry power on the head to optically transmit the data. That change terminated tens of people (I heard 40) and could be responsible for the "back-end" terminations, but I am just trying to make a logical guess here.
Someone asked about the effects of Y2K on the hard drive industry. Cyril reported that not one really knows what will happen, but RDRT's own experience, based on a very recent internal review, is that they will be buyers of hardware to upgrade their internal systems in the latter half of 1999. He also said that he is hearing that from other CEO's. That software fixes are being done in the first half of 1999 and hardware upgrades are being done in the second half of 1999.
While I don't like the stock's action there is too much potential upside for me to take a loss. The Company has funds to operate, appears to be doing real business and has a future especially when the price wars stop, but the unit volume on a more efficient production model might help us.
Later,
(-8 Dennis 8-)
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