Western Digital Drops Portable PCs

Staggering from an industrywide price slump, Western Digital Corp. announced Tuesday that it will stop making disk drives for laptop and notebook computers, taking a charge of up to $95 million for the second fiscal quarter.

The Irvine firm, which has seen its stock fall by more than 60% since August, attributed its corporate shift to cutthroat competition that has wreaked havoc throughout the disk drive industry, driving down profits and stock prices over the past several months.

It was the second time in the past month that Western Digital has warned investors about weak results and follows a similar announcement from industry leader Seagate Technology Inc.

Indeed, Western’s shares, as well as those of rivals Seagate and Quantum Corp., dropped Tuesday after the Irvine company’s announcement.

The market’s reaction illustrates how competitive pressures within the PC market are putting the squeeze on suppliers of components. Experts say this is a cyclical problem for disk drive makers, who build millions of drives featuring the latest technology, while simultaneously trying to sell their inventory of older models at a discount.

Western Digital, known for its ability to stretch the shelf life of older technology, has been slower than its rivals to adopt new standards, analysts said.

“Western Digital is paying the price for that now,” said Alexa McCloughan, an analyst with the research firm International Data Corp. “Their competition made similar moves a year ago, and took their lumps back then.”

As part of its production change, Western Digital will focus on building hard drives for desktop computers and speed up its transition to higher-capacity drive technology.

“The company’s decision to leave the mobile business was a bit of a surprise,” said Matthew Russo, a research analyst with Sands Brothers & Co. “But if they are going to focus on an arena where they can make a difference, they had to do it.”

Western Digital’s mobile drive products represented a “small, but important” piece of the manufacturer’s business, said company spokesman Robert Blair.

“We regret that we’re leaving this field. But the two largest users of these drives--IBM and Toshiba--make all their own hardware,” Blair said. “That leaves a very small piece of the pie for everyone else.”

In early November, Western Digital said its second-quarter earnings would be lower than expected. The company blamed the drop on heavy spending on emerging technologies and the drop in disk drive prices used in the under-$1,000 PC market.

Western Digital is the third-largest drive producer worldwide, following Quantum Corp. and Seagate Technology Inc. The three firms control about 65% of the market for disk drives, which store programs and other data.

Western Digital’s stock, which hit a high of $54 on Aug. 20, dropped $1.75 a share to $19.38 Tuesday in heavy trading on the New York Stock Exchange. Nearly 3.5 million shares changed hands, compared with average daily volume of 2.7 million shares over the last three months.

“We have taken a harder fall on our stock prices because Wall Street had elevated us so high,” Blair said. “Clearly, our financial results are not living up to our expectations or Wall Street’s. But there’s plenty of pain to go around in the disk drive business.”

Shares of Quantum, a competitor, dropped $3.25 a share to $24.25, while Seagate was off 25 cents, closing at $23.88.

Western said it’s taking a second-quarter charge of $85 million to $95 million to write off excess inventory and purchase new equipment for its higher capacity desktop drives, among other things. The company said earlier that it would take a charge of $15 million to $30 million.

Western Digital said it expects to break even, before the charge, for the quarter ending Dec. 27, a big drop from analysts’ estimates of 25 cents a share.

The company earned $64.2 million, or 68 cents a share, in the second quarter a year ago, on sales of $1.12 billion.