Computer Memories to Lose IBM : Terminated Pact Will Force Extensive Layoffs, Firm Says
Computer Memories, a Chatsworth-based disk-drive company that expanded rapidly over the last two years chiefly on the strength of its orders from IBM, announced Monday that IBM will not renew its contract at year-end.
Irwin Rubin, chairman and chief executive of Computer Memories, said the loss of the IBM business, which accounted for 81% of Computer Memories’ revenue in its first quarter ended June 30, would force the company to make extensive layoffs and other cutbacks. But Rubin said he would not know until later this week how many of the company’s 444 employees in Chatsworth or its 860 workers in Singapore would be dismissed.
The move by IBM puts Computer Memories on the growing list of computer-equipment companies that the computer giant has courted and later jilted.
“It’s obviously a very serious blow to them, although a skeptic could have said they should have seen it was coming,” said James Porter, president of Disk/Trend, a Los Altos consulting firm. “IBM has shown no loyalty to any of its disk-drive vendors.”
Computer Memories’ sales soared nearly sevenfold during the last two years to $108.7 million in its most recent fiscal year ended March 31. Plagued by production foul-ups and other problems in its rush to fill orders for the IBM PC-AT computer, however, the company posted a loss of $3.8 million for the year.
During its first quarter ended June 30, Computer Memories’ profits climbed to $4.8 million--408% over the same period the year before--and its revenue rose 164% to $50.5 million. Rubin predicted that Computer Memories will be profitable this quarter and next but would need to bring in new orders to make money after the IBM contract lapses in December.
In over-the-counter trading Monday, Computer Memories stock fell $2.75 to close at $3 a share on a volume of 619,000 shares.
Rubin said he had had “no inkling whatsoever” that IBM would let the contract expire. He added that he believes that IBM decided that it could replace Computer Memories’ drives with drives it makes itself, along with those it buys from Seagate Technology, a Scotts Valley company.
Analysts suggested other reasons for IBM’s decision.
Michael Murphy, editor of the California Technology Stock Letter, speculated that IBM cut off its business with Computer Memories because of the disk-drive company’s high manufacturing costs. Murphy said Computer Memories sells its drives to IBM for $580 apiece, while Seagate supplies them for less than $500.
David P. Vellante, a research analyst with International Data in Framingham, Mass., said IBM may be “punishing” Computer Memories for its slow production last year.
“It’s really a harsh move by IBM,” Vellante said.
Porter, however, said IBM gave Computer Memories more notice of its plans than it did in similar circumstances for Seagate, Miniscribe or Chatsworth-based Tandon.
A Tandon spokesman said his company’s shipments to IBM were put on hold nearly immediately once IBM decided in January to defer its disk-drive orders.
Porter said IBM may have shown Computer Memories some extra courtesy because it has an indirect stake in the company--IBM is a major shareholder in Intel, which in turn is a major shareholder in Computer Memories.
Rubin said that, while cutting overall expenses, Computer Memories also would intensify its research efforts to try to develop new, higher-capacity models of disk drives, which store and retrieve information for computers.
Computer Memories’ main product--a 20-megabyte drive that can store as much as 20 million bytes, the basic units of computer memory--is considered middle of the road in capacity.
Rubin also said a merger “is not out of the question” for Computer Memories, although the company is not negotiating one.
Analysts said Computer Memories is not in immediate danger of collapse. The company reported that it has $19.4 million in cash and no debt.
“With a little cost cutting, they can get through the first half of next year,” Vellante said.
On the other hand, Porter said that “it is not in the cards that they could replace most of that business from IBM.”
Analysts said Computer Memories will need to find specialized niches in the disk-drive business to continue to turn a profit next year. They said it will be an uphill struggle, however, because other companies already have staked out positions in various parts of the market.
Computer Memories’ expected layoffs would be the second for the company this summer. The company in July fired 177 workers at its Chatsworth plant as a result of increased production at its new manufacturing facilities in Singapore.
Micropolis, another disk-drive maker, is targeting a relatively uncompetitive niche. Page 2.
