Erasable Optical Disk Costs Still Causing Losses for Cipher Data’s Optimem Unit

SAN DIEGO — Despite significant cost-cutting over the last several months, Cipher Data Products’ Optimem subsidiary lost $800,000 over the quarter ended Sept. 30, President Gary Liebl told shareholders at Cipher Data’s annual shareholders meeting Thursday.

The red ink followed Optimem losses totaling more than $4.3 million on revenues of $10 million during the fiscal year ended June 30. Cipher Data bought Optimem, a Mountain View-based optical disk drive manufacturer, from Xerox in June, 1986, for $6.3 million. As recently as July, Liebl was saying Optimem might break even for the first quarter.

The heavy losses were attributed by company officials to lower-than-expected revenue and to high research and development costs related to Optimem’s efforts to develop an “erasable” optical disk, a technology that so far has proved elusive to Optimem and several other companies.

Erasable optical disks would be re-recordable as are the rigid and floppy magnetic computer disks used in many computers. So far, despite the millions of dollars spent on research and development, Optimem and several other companies have marketed only optical disk drives that are similar to phonograph records in that they are recorded on just once.

Cost Outweighs Benefit

A cost-competitive, erasable, optical disk drive could find a huge market because the disks have up to 1,000 times the data storage capacity of magnetic disks.

But Cipher Data has apparently decided that the costs of developing such a product outweigh the potential benefits. Cipher Data Chairman Don Muller said Thursday that the company has put all research and development connected to the erasable-disk product “on the back burner,” although he denied that Optimem has dumped the erasable-disk project altogether.

In addition, Optimem’s work force has been reduced by more than one third down to the present 78 employees and Optimem’s operations have been moved out of its own 60,000-square-foot plant in Sunnyvale and into one of Cipher’s previously leased plants in Mountain View, Muller said. Optimem President Peter Loydresigned earlier this year.

Still, Liebl said, Optimem may break even for the current quarter and possibly be profitable in 1988. His optimism springs from the change in Optimem’s market focus to the write-once products already developed, including a 12-inch disk drive that has been sold as part of a data storage system to the U.S. Patent Office.

Cipher Data suffered a blow earlier this year, however, when a Japanese manufacturer beat out a team including Cipher for a multimillion-dollar follow-on contract with the patent office. In any case, Liebl hopes that Optimem revenues will increase 50% to $15 million in fiscal 1988.

Disappointing Profit

More than Optimem went wrong in fiscal 1987 for Cipher Data, whose core business is a line of computer tape drives or data storage devices that use tape for storage media. The company posted a disappointing $4.3-million profit on $178.2 million in revenue, contrasted with a $7.2-million profit on $163 million in sales for 1986.

Most of the 1987 profit came from a tax credit resulting from Cipher Data’s purchase of Optimem. And most of the increase in year-to-year sales was from adding Optimem’s sales.

Cipher Data’s fortunes continued to skid over the recently completed first quarter. The company reported that net income shrank to $686,000 on revenues of $39.3 million. For the year-ago quarter, Cipher had a profit of $1.03 million on $44.8 million.

In addition to the Optimem problems, the company has been hit by lower demand for its line of quarter-inch tape drives, caused in part by a design change in one of its more popular models introduced last year, Liebl said.

The company had hoped by now to be introducing a new line of half-inch drives geared to International Business Machines’ 9370 series of computers, but that introduction has been delayed, Liebl said.

As a result, Cipher Data’s stock price has plummeted in the last 18 months. In Thursday trading, Cipher Data shares closed down $.25 at $6.50 per share. In the stock market crash last month, the shares sank as low as $3.50. As recently as fourth quarter 1986, Cipher Data stock traded as high as $21.50 per share.

Stock Repurchase

The low stock price has prompted Cipher Data’s board of directors to authorize the repurchase of up to $10 million worth of its shares. As of Thursday morning, the company had bought 120,000 shares, nearly 1% of the 14.4 million outstanding, at a total cost of $833,000, or an average $6.90 per share.

Shareholder Donald Stone criticized the stock repurchase plan at Thursday’s meeting, describing it as “speculation” and a misuse of the company’s cash that could better be used in the future to “weather storms.”

In response, Liebl said the low stock price in relation to Cipher Data’s book value of $9.59 per share made the repurchases attractive.

Cipher Data has instituted an extensive effort to trim overhead and increase productivity, Liebl said. Total employees have been reduced by 25% over the last five quarters to 1,881 and more than 80% of the company’s manufacturing capacity is now in a lower-cost plant in the Far East, contrasted with 40% a year ago.