Western Digital Warns Wall St. of Yet Another Dismal Quarter

By P.J. HUFFSTUTTER

June 10, 1998 12 AM PT

TIMES STAFF WRITER

Reeling from plummeting prices and lower sales, Western Digital Corp. warned Tuesday that its earnings in the fiscal fourth quarter will fall far below Wall Street expectations, forcing the Irvine disk-drive maker to cut more jobs.

The company also said that if the losses materialize as expected, it could fall into technical default on one of its bank credit lines.

Western Digital said it expects to post an operating loss of more than $100 million, or in excess of $1.13 a share. Analysts had expected the company--which posted losses for the previous two quarters--to lose 45 cents to 67 cents a share for the three months ending June 27.

“The magnitude of the loss is surprising,” said John Moulton, a partner with the technology group at Deloitte & Touche LLP.

“The industry troubles are a significant piece of the problem. All you have to do is look at Quantum Corp. and Seagate [Technology Inc.], and you’ll see that everyone in the drive market is suffering. But Western Digital could be hurting the most right now.”

Disk-drive manufacturers have suffered financially for nearly a year, as the industry has been battered by oversupply and weak demand.

While Quantum has relied on its diverse product line to help weather the slump, Western Digital has focused at least 80% of its business on desktop machines, the hardest-hit segment of the industry.

“We’re seeing double-digit price declines,” said company spokesman Robert Blair. “That’s just unprecedented.”

With PC sales slowing and prices dropping, Western Digital’s inventory continues to rise. The company has trimmed nearly 22% of its staff, the majority of the layoffs coming at its manufacturing plants in Asia. Western Digital has 13,000 employees worldwide.

On Tuesday, the company also announced it will switch to shorter workweeks in its Singapore and Malaysia plants. This month, it shut down its Santa Clara plant for one week.

Western Digital has lost $127.5 million in the first nine months of its current fiscal year, including a $45-million loss in the third quarter. The company had earned $87.9 million, or 95 cents a share, on sales of $1.08 billion for its fourth fiscal quarter last year.

Although this year’s projected fourth-quarter loss could create a technical default on a line of credit, analyst Moulton said the impact should be minimal. The company has about $50 million outstanding on the $250 million lending agreement, officials said.

“This just gives the banks more opportunity to watch the business more closely. There’s no way a company of their stature is going to go out of business,” Moulton said. “I have never seen a company that has snatched itself from the brink of disaster more times than Western Digital.”

In 1991, Western Digital’s losses were mounting and the company was on the verge of bankruptcy. It took 18 months of negotiating--and a new chief executive officer--to win revised lending agreements with its banks.

Business began to pick up after that. Though Western Digital hit a rough patch in 1994, and again had to renegotiate its credit lines, the company survived a price war that battered the industry.

In April, Western’s chief executive, Charles A. Haggerty, told reporters that the company, though expected to post losses until the fall, was on the rebound. Analysts insist that Haggerty’s optimism was premature.

“They’re still struggling with getting rid of older products,” said Danielle Levitas, a research analyst with International Data Corp. “It also hurts them that they’ve lost some customers, and now have fewer outlets to move their drives.”

While Western Digital tries to ride out its current troubles, analysts say the drive maker is relying on a recently announced deal with IBM Corp. to pull itself out of its ongoing slump.

In May, IBM said it will sell Western Digital a series of computer components that read data from and write information to the disk.

The agreement allows IBM access to new outlets to distribute its products, and it gives Western Digital a jump on emerging technologies and manufacturing lead-in time.

“Western Digital would like to be to the disk-drive industry what Dell is to the computer world,” said Mark Specker, vice president, research at SoundView Financial Group in Stamford, Conn. “Maybe it’ll happen. But I don’t see the IBM deal making a lot of impact on Western Digital until the middle or end of next year.”

The company announced the anticipated loss after the market closed. Western’s stock was up 25 cents to $15.50 on the New York Stock Exchange.

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Red Tide

Western Digital, which lost $127 million in the first nine months of its fiscal year, expects to lose more than $100 million in the fourth quarter. Quarterly sales and net income, in millions:

Sales

1997

3rd qtr.: $1,096.2

4th: 1,079.9

1998

1st qtr.: 1,090.2

2nd: 969.6

3rd: 831.3

Net Income/Loss

1997

3rd qtr.: $82.6

4th: 87.9