New Cost, Ailing Market Create Western Digital’s Worst Quarter
Irvine-based Western Digital Corp. on Monday reported its biggest quarterly loss ever, a deficit of $194.7 million, which was highlighted by a one-time charge for anticipated increases in warranty costs.
The company, the third-largest independent manufacturer of computer disk drives, has been bogged down by a combination of falling prices for desktop computers, softened demand for personal computers and the crisis in Asian economies.
Analysts said they were surprised by the company’s $77-million charge to increase warranty reserves to accommodate an expected higher rate of return and higher cost of repairs for disk drives.
The company’s one-time charges also included $7.5 million for terminated hedging contracts in the Malaysian currency, the ringgit.
“Our plan to gradually reduce the operating losses and return the company to profitability remains very much on track,” said company spokesman Robert Blair. “The recovery is taking place; it’s just slow.”
The total loss, which amounted to $2.20 a share, was much higher than what analysts had anticipated. But when one-time charges are not included, the results are in line with the losses of $1.23 per share that analysts had been expecting.
A year ago, the company posted a profit of $62.7 million, or 67 cents a share.
Revenues for the three months ended Sept. 26 fell nearly 41% to $650.9 million from $1.1 billion.
“This quarter really demonstrates how difficult the disk drive industry is and what a large challenge Western Digital has ahead of it,” said Gillian Munson of Morgan Stanley Dean Witter. “Not only do they have a tough time manufacturing them, but in the field they’re having a tougher time than usual with their stability.”
The increased reserves for warranties reflects the difficulty that the company has encountered in producing its last generation of hard drives using an older technology. The company said there has been a slight increase in the percentage of disk drives being returned, and it’s costing more to repair the returned drives.
Even greater challenges lie ahead as the company tries to regain its position as a leader in introducing new products, Munson said.
“It’s all about time to market. Getting the right product at the right time is going to be super-critical here,” Munson said.
The company has been moving from the older, thin-film disk drives to newer magneto resistive heads, which most of the rest of the industry had adopted earlier. Magneto resistive heads allow more data to be squeezed onto a disk and use fewer components than the older technology.
Western Digital’s competitors also have been experiencing difficult times.
Last week, industry leader Seagate Technologies Inc. of Scotts Valley said its quarterly revenues dropped 18%, and Milpitas-based Quantum Corp. said its second-quarter profits fell 83%.
Western Digital reported the results after the U.S. markets closed. The stock, which has fallen about 49% this year, closed at $8.13, up 38 cents a share.
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Down Note
Western Digital began fiscal 1999 with a fourth consecutive quarterly loss and a 40% decline in sales compared with the same period the previous year. Quarterly sales and net income in millions:
Sales
1st qtr. 1999: 650.90
Net Income
1st qtr. 1999: -194.70
Source: Bloomberg News
