Western Digital’s Losses Continue in 4th Quarter
Topping off one of its worst financial years, Western Digital Corp. posted a larger-than-expected loss for the fiscal fourth quarter as sales slumped 40%.
The Irvine disk drive maker lost $162.7 million, or $1.84 a share, as it continues to be battered by industrywide price wars and falling demand. The loss includes a charge of about $22 million from a technology licensing and component supply agreement with International Business Machines Corp., which was approved in June, said company spokesman Robert Blair.
The past year has been particularly brutal for the industry’s three biggest players--Western Digital, Seagate Technology Inc. and Quantum Corp. All have suffered earnings slumps in the wake of oversupply and weak demand.
“This is a cyclical industry, but we’ve never been on a [down] cycle of this length before,” Blair said. “I think we’ve all been surprised.”
Analysts had expected Western to report a fourth-quarter loss of $1.29 a share, according a survey by First Call Corp. A year ago, the company had reported net income of $87.9 million, or 95 cents a share.
For the three months ended June 27, sales fell to $650.5 million from $1.08 billion a year earlier.
The trio also is facing growing competition from an aggressive field of players in the desktop market, including IBM, Maxtor Corp., Fujitsu Ltd. and the Samsung Group.
The PC industry has compounded the problems by cutting inventory. Earlier this year, IBM and Hewlett-Packard Co. began trimming their production. This spring, Compaq Computer Corp. closed some of its U.S. manufacturing facilities, analysts said.
“Don’t underestimate the weakening demand,” said David Takata, a senior analyst with Gruntal & Co. in Beverly Hills. “How bad is the problem in Asia going to be, and how long will it last? Will European demand [for desktops] make up for it? And what do you do about the [slowing] U.S. penetration of PCs?”
As a result of all these factors, disk drive makers have been forced to make serious cutbacks and other changes. Western Digital has trimmed its work force by about 20% since November, scaled back production and reduced capital spending.
Last week, Seagate’s board of directors fired Chairman and Chief Executive Alan Shugart, one of the struggling company’s founders. Shugart was replaced by Stephen Luczo, a former investment banker and current Seagate president. Luczo is pushing the company into software, generally a more profitable business than the drive market, and has plans to sell a section of its Seagate Software unit through a public offering.
Western said it expects that these industrywide problems will continue to depress earnings for the next three fiscal quarters. “We expect to return to profitability by [our] June quarter 1999,” Blair said.
The company does not have any plans for future layoffs, but “if industry conditions continue to worsen, we’ll take any steps that are necessary” to stay in business, Blair said.
Meanwhile, the company is pinning its hopes on its recent deal with IBM to eventually pull Western out of its slump.
In June, IBM agreed to sell Western Digital a series of computer components that read data from, and write information to, the disk. The venture allows IBM access to new outlets to distribute its products, and gives Western Digital a jump on emerging technologies and manufacturing lead-in time.
But analysts say Western’s prediction about its return to profitability could be premature and overly optimistic if the economics of the drive industry don’t change.
“The thing that Western Digital will apparently have going for it is access to IBM technology early enough so that it will have a cost advantage [over competitors] to build the drives,” said Mark Specker, vice president of research for Soundview Financial Group. “Still, this is a very challenging market.”
Western Digital, which has posted losses for the last three quarters, reported a net loss of $290 million, or 3.32 a share, for the fiscal year, compared with net income of $268 million, or $2.86 a share, for the previous year. Revenue dropped to $3.5 billion from $4.2 million.
Western’s stock dropped 31 cents a share to $11.13 on the New York Stock Exchange.
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Plunging Profile
Western Digital is still feeling the impact of the economic crisis in Asia and competitive pricing practices in the computer hard drive market. Quarterly sales and net income, monthly closing stock prices:
Sales (in Billions)
1998
4th qtr.: $.651
Net income (in millions)
1998
4th qtr.: -$163
Stock Trend
1998
Monday’s close: $11.13
Sources: Bloomberg News, Times reports
