Western Digital to See Its 7th Losing Quarter

With lower prices eating away at its profit margins, Irvine-based Western Digital Corp. said Thursday that its fourth-quarter losses would be nearly double analysts’ expectations.

In suffering what will be its seventh consecutive quarterly loss, the beleaguered computer hard drive maker echoed projections by two competitors earlier this month that they would not meet Wall Street estimates.

Western Digital said it would lose between $81.5 million and $88.8 million, not including a $20 million loss that it had previously said it would incur as part of a restructuring of its business. Analysts had expected a loss of about $44 million.

“The pricing pressures we have seen so far this quarter in the desktop drive business, especially in the last three weeks, are among the worst I have seen in the hard drive industry,” said Charles Haggerty, the company’s chairman, president and chief executive, during a conference call with financial analysts.

As recently as April, Western Digital had said it hoped to reach a break-even point on an operating basis by the end of September. Now, officials say Western Digital will be in the red at least until the end of March. The upcoming deficit will bring the company’s losses over the past seven quarters to more than $830 million.

Western Digital shares, which already have fallen 56% this year, lost another 38 cents Thursday, closing at $6.50, their lowest point in several years.

Industry analysts blamed the price pressures on a low-cost drive introduced by Seagate Technology Inc. and on dumping of excess inventory by Korean manufacturer Samsung.

“I don’t see the desktop hard drive business getting better for a while,” said Dane Lewis, an analyst for BancBoston Robertson Stephens. “Western Digital has definitely made some improvements, but in this environment, they’ve got to do more than that.”

The company has been trying to move into the higher-margin enterprise storage business, but nearly 90% of its revenue still comes from the desktop computer drive market.

Western Digital also has undergone significant restructuring this year, including selling its disk media business, consolidating two Singapore plants into one, and combining various functions of its desktop and enterprise storage divisions.

Earlier in the year, the company said it would lay off 750 employees as part of the restructuring, including 70 people in Orange County. The company also shelved plans to expand its headquarters.

Haggerty on Thursday did not rule out further cutbacks.

“We’re going through the company piece by piece looking at the structure and layers of management,” Haggerty said. “I would not be overly concerned if you see a few names that pop up of people who have left the company.”

Earlier this month, Quantum Corp. said its earnings would be half of what analysts had expected, while Maxtor Corp. said it expected to lose $45 million to $55 million this quarter. Analysts had expected a small profit.

With its seven consecutive quarterly losses, Western Digital’s cash on hand has been halved in the last year. The company had $460 million in cash and cash equivalents a year ago, but by the end of this month its cash balance will be “in the low $200 million range,” company officials said.

“We’re going to manage the cash balance closely just like we have been,” said Matt Massengill, executive vice president for disk products. “The goal for the first quarter is to have a cash balance of about $200 million.”

At the rate that Western Digital is losing money, however, that might not last for long.

“In this business, $200 million can go in a flash,” said John Donovan, vice president of TrendFocus, a Palo Alto market research firm.

Well-funded heavy hitters Fujitsu, IBM and Seagate will survive, but “one or two big players are going to have to leave to get this industry back in a good supply-demand balance,” Donovan said. “The writing is on the wall, something is going to happen to someone, and we just don’t know who it is.”

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Western’s Woes Continue

Disk-drive maker Western Digital will post its seventh consecutive loss, estimating that fourth-quarter operating losses will be $81.5 million to $88.8 million, nearly twice as bad as Wall Street’s expectations. The company’s stock dropped to $6.50 on Thursday, its lowest point in several years. Sales and losses in millions and weekly closing stock prices:

1999

Sales

4th qtr:

$639.2*

Losses

4th qtr:

-81.5 to -88.8**

* Estimated

** Estimated operating loss

Stock Price Close 1999

Thursday close: $6.50

Sources: Bloomberg News, Western Digital, BancBoston Robertson Stephens