Competition, Bugs Throw Micropolis for a Loop
Micropolis Corp. disclosed last week that for the first time in more than three years its quarterly earnings would be lower than year-earlier results. The reason: It’s having trouble cutting manufacturing costs, and it faces increased competition.
The announcement signals quite a change in the fortunes of the Chatsworth maker of computer disk drive data storage equipment. Since 1985, industry analysts have been accustomed to expecting nothing but good news--and often extraordinary results--when it came time for Micropolis to disclose its latest earnings results.
Micropolis, under the leadership of Chairman Stuart Mabon, has been one of the hottest companies in the computer equipment business because it specialized in making high-speed, high-capacity disk drives, which are devices computers use to record and retrieve data on rigid platters through magnetic heads. Its customers have included such major computer makers as Sun Microsystems, AT&T; and Compaq Computer.
Micropolis’ quarterly earnings have climbed steadily in the past three years, sometimes as much as ninefold from year-earlier quarters. Those earnings increases have powered the stock price as well, pushing it to an all-time high of $44.13 a share last year.
Won’t Match Last Year
Micropolis did not project what its weakened results will be for the second quarter, except to say it will not match last year, when it earned $6.8 million, or 60 cents a share, on sales of $80.5 million.
For the past year, Micropolis’ stock price has been erratic. Following the stock market crash in October, it fell to less than $15 a share, but recovered by rising to more than $25 a share in April.
In recent weeks, however, the stock has fallen again as word began to spread that the company was having some manufacturing problems. Since the announcement last Tuesday that Micropolis’ second-quarter earnings would be lower, its stock has fallen $3.50 a share in over-the-counter trading and closed at $17.50 on Monday.
Micropolis now has two major problems. One is working out all of the manufacturing bugs from one of its more complicated hard-disk drives, the 380-megabyte version, to the point where production can be shifted from Chatsworth to its plant in Singapore, where labor and parts are cheaper. (A 380-megabyte drive means it can store up to 380 million characters.)
The disk drive is highly complex, requiring spotless manufacturing conditions to prevent dust, dirt and other particles from getting in the drive and disrupting its operations. Before Micropolis can mass-produce the drive in Singapore, it must iron out all of the delicate manufacturing procedures.
“As you push the technology a little bit further, sorting through the problems will get longer and harder,” said John T. Rossi, a former disk-drive executive who now follows Micropolis as a securities analyst for Alex. Brown & Sons.
The second problem for Micropolis has been dealing with aggressive price cutting from Seagate Technology of Scotts Valley, Calif., which competes with Micropolis in the market of selling some less-powerful disk drives. Micropolis has been selling some of its 85-megabyte drives to middlemen who resell them to computer users who want to upgrade their personal computers. But now Seagate is flooding the market with a similar product and has cut its prices.
Rossi and other analysts said they expect it will take Micropolis the rest of the year to straighten out its problems.
Dundas I. Flaherty, Micropolis’ chief financial officer, says the company faces “a lot of little problems” to work out and said Micropolis is working hard to shift production of the drive to Singapore.
“Our plan is to do it over the next few months to clear the decks here for the next new products,” Flaherty said.
As for the competition with Seagate, Flaherty said that the lower-end disk drive is becoming less important to the company as it shifts its emphasis to making more powerful equipment.
James Porter, who follows the disk-drive industry as president of Disk/Trend Inc., said that despite its current woes, Micropolis is good at ironing out its problems.
“Micropolis is very well managed and a practical bunch of people. Management is very close to the problem. They are not remote,” Porter said.
