Smaller Computer Firms Have Rough Going in the Midst of an Industrywide Downturn

Whether or not an economic recession emerges soon, the computer industry already is slowing down. Major computer makers such as International Business Machines, Apple Computer and Digital Equipment are grappling with slower sales growth, shaved profits or both.

If the biggest, healthiest companies have things to worry about, what about the weaker computer companies?

Two San Fernando Valley computer-equipment companies, Micropolis and Tandon, have had enough of their own troubles and have been struggling financially for several quarters. So the industry’s slowdown only puts more pressure on them to recover quickly or risk their survival.

To their credit, both companies have shown modest improvement recently.

Tandon, a Moorpark-based builder of personal computers that are sold mainly in Europe, reported a 45% gain in sales, to $83.8 million, for the quarter that ended Sept. 30, and earned a $2.2-million profit compared with a $12-million loss a year earlier.

Nonetheless, Tandon--which also made computer data-storage devices, called disk drives, until it was driven out by Japanese competition in the mid-1980s--has yet to convince investors it is a durable player in the hotly contested personal-computer market. Tandon’s stock, which hit a peak of $34.25 a share in 1983, continues to trade for less than $1.

Micropolis, a Chatsworth-based manufacturer of disk drives, was running dangerously low on cash last summer as its losses mounted and sales dropped. Its cash totaled $871,000 as of Sept. 30, down from $15 million only nine months earlier. Micropolis’ stock followed suit; it now trades around $4.50 a share, down from $40 in 1987.

But in last year’s fourth quarter, Micropolis rebuilt its cash to nearly $9 million as its business improved slightly, and as the company cut back its inventories, reduced its raw-materials expenses and took other cost-cutting steps.

In the latest quarter, which ended Dec. 29, Micropolis showed some improvement. The company reported a $2.2-million loss in the quarter, down from a $15.1-million loss a year earlier, as its fourth-quarter sales edged up to $80.9 million from $80 million. For all of 1989, however, Micropolis took a beating, posting a loss of $49.8 million, compared with a $19.4-million loss in 1988, as its annual sales dipped 13% to $307.3 million.

Understandably Micropolis Chairman Stuart P. Mabon prefers to focus on the improvement in the latest quarter and said it reflected a small upswing in demand for the company’s disk drives, which are mainly used in personal computers and minicomputers. He also vowed that Micropolis’ cost-cutting steps would continue in order to replenish its cash and profits.

Is it enough to pull Micropolis out of the fire? Some analysts don’t think so. Phil Bevin, an associate director at Dataquest, a technology research firm in Cupertino, said Micropolis should even be looking for a buyer.

“Frankly, I think a company in their position is faced with the question of whether they should court an acquisition by one of their major customers,” Devin said. Lacking the cash to develop products with the latest technological advances, “the best they can look forward to is maintaining the lesser position they now hold,” he said.

Other analysts aren’t as harsh. “Micropolis has had problems but they’re a sound company,” said James Porter, president of Disk/Trend, a research firm in Mountain View. “They are regarded by their competitors as a strong competitor.”

Porter noted that Micropolis, seeking to save money, last year cut back on development of a new 3 1/2-inch disk drive, which is the next generation to succeed the 5 1/4-inch drives currently made by Micropolis and others. But he said Micropolis’ existing product line “is consistent with major growth areas in the industry today,” and should give the company time to get healthy before it must resume development of the new models to stay competitive.

Micropolis also has gotten breathing room from its lenders. The company missed a $4-million debt payment in October, but worked out a plan to extend the payments while it also tries to secure new financing.

Tandon, meanwhile, faces a twin menace. Although 90% of its computers are sold in Europe, the company insists it is still trying to broaden its U.S. presence. That could be a tall order, given that Apple and other major PC makers are complaining of slowing sales and narrower profit margins in the United States because of price-cutting by the industry.

Moreover, some PC executives meeting at an industry convention in Arizona last week warned that competition in the European market is likely to increase soon.

A major cause of the narrowing profits from U.S. sales of PCs is overcapacity in the industry, meaning companies are building far more PCs than customers are willing to order. As a result, more producers are entering the European market, where Tandon competes, the executives said.

Tandon, which is headed by founder Sirjang Lal Tandon, a flamboyant engineer from India, needs to build on its recent success in Europe. (Company spokesman Mike Sanders said Tandon was not available for comment, and that the only other executive authorized to comment was executive vice president Ranjit Sitlani. He did not respond to an interview request.)

After earning $23.5 million in 1987, Tandon lost $19.9 million in 1988 on sales of $309 million. And through September of last year, despite the third-quarter upturn, it still lost $9.6 million on sales of $274.2 million. To cut costs, Tandon laid off a quarter of its work force last year to reduce employment to 700 from 940.

Still, Tandon’s improvement stands out because it occurred despite a strengthening of the U.S. dollar. As the dollar advances against European currencies, Tandon’s sales in Europe convert into fewer dollars. Nonetheless, Tandon said it earned 23 cents per sales dollar before taxes in the third quarter, up from 19 cents a year earlier.

The dollar also has gone Tandon’s way since then, having dropped about 15% against the West German mark, for instance.

CASH DRAIN AT MICOPOLIS AND TANDON

Micropolis, a Chatsworth producer of computer data-storage equipment, and Tandon, a Moorpark builder of personal computers, are trying to regain financial health after several difficult quarters in which their cash balances, as shown below by quarter, in millions, dwindled sharply. The cash here represents the companies’ non-borrowed, internally generated cash that is listed as an asset on their balance sheets.