Micropolis’ Stock Falls After News of Quarterly Loss
Micropolis’ stock, which a little more than a year ago was one of the hottest issues in the over-the-counter market, continued falling Monday in the wake of a company disclosure last week that it will post its first quarterly loss since early 1985.
In its Thursday announcement the Chatsworth company, which makes high-speed disk-drive data storage devices used in computers, said it would post “a substantial operating loss” for the third quarter, which ends Friday. In the year-earlier third quarter, Micropolis earned $7 million on sales of $75.2 million.
Following the announcement, Micropolis’ stock went into a virtual free-fall, dropping $2.75, or 25%, on Friday alone to $8.25 in over-the-counter trading. On Monday, it fell another 25 cents to $8 a share. That is less than 20% of the $44.13 price the stock was trading at in mid-1987.
In addition to disclosing the loss, the company said it expects that “market conditions will remain adverse over the near term,” which will affect its results in the fourth quarter as well.
The disk drives Micropolis makes lets a computer record and read data magnetically on hard platters that are enclosed in metal cases. The company’s newest product is a 380-megabyte model that stores up to 380 million bytes, or basic units of computer information. Its main older products are a 170-megabyte drive and an 85-megabyte drive.
The company’s problems are two-fold: Its move into the more sophisticated, 380-megabyte disk drive has proved a more difficult transition than the company or financial analysts expected. The cost of manufacturing the disk drives in large volume continues to be too high because of various problems, among them difficulties in buying enough of the specialized “heads,” or devices used to read and write the data. The company also had problems finding enough of the parts at reasonable prices.
In addition, Micropolis’ older, lower-capacity disk-drive products face increasing competition from other makers of similar drives, notably Seagate Technology in Scotts Valley, Calif. As a result, prices have been driven down.
The disclosure of an expected loss by Micropolis came as a surprise to securities analysts, although the company’s problems have been well-known since June, when executives first disclosed earnings were being hurt by manufacturing difficulties and by price wars.
Analysts agree that the company must solve all of those problems before it can move manufacturing to its low-cost plant in Singapore.
John T. Rossi, who follows Micropolis in San Francisco for Alex Brown & Sons, said evidence is mounting that the product may never be very profitable.
“Frankly, it looks like this drive by its nature is a costly one to build. They’ve pushed the limit of the technology. It’s just an expensive drive to build,” Rossi said.
Drive in Demand
William D. Easterbrook, who tracks the company for Kidder, Peabody in San Francisco, said it may be well into next year before Micropolis returns to its normal profitable levels. He said, however, that the company’s newest disk drive may ultimately be highly profitable, since a large number of computer makers want to use it.
Dundas I. Flaherty, Micropolis’ chief financial officer, said that the manufacturing costs of its 380-megabyte drive are coming down, but added that prices are soft for all drives throughout the industry because of too much manufacturing capacity. He said he does not expect the company to return to normal levels of profitability until at least next year.
James Porter, who follows the disk-drive business as president of Disk/Trend, said that Micropolis has encountered problems before in making product transitions, but ultimately solved them. He said the company is cautious because it wants to make sure the products it sends its customers are free of defects.
“They have a reputation for excellent reliability. You are talking about things here that mankind has never done before and are highly complex,” Porter said.