Western Digital’s Losses Widen : Technology: The Irvine company says its quarterly deficit will surpass forecasts. Its stock price sinks 8%.
Western Digital Corp. said Tuesday it will report another larger-than-expected quarterly deficit, bringing its total losses over the last two years to nearly $1 billion and calling into question its long-term prospects as an independent company.
The Irvine-based computer hard-drive manufacturer, one of Orange County’s seven Fortune 500 companies, is suffering through an industrywide slump as production capacity outstrips demand and competitors slash prices.
The expected loss announced Tuesday, which could be as much as $118 million, highlights one of the most dramatic corporate tailspins in Orange County history. Western’s stock price sank another 8%, to $4.25, on Tuesday, down from $54 two years ago.
Industry experts said Tuesday that Western’s prospects do not look good. At least seven major companies make hard drives for desktop personal computers, and many observers view Western as among the weakest in a crowded field that could stand to be trimmed.
“I don’t think Western Digital has any sort of sustainable edge which would suggest that they would be the long-term leader in this market,” said David Takata, an analyst with Los Angeles-based Gruntal & Co.
Western competitors IBM Corp. and Fujitsu Ltd. have large operations that can subsidize disk drive businesses, even if they lose money. Seagate Technology Inc., the largest independent manufacturer of disk drives, has a profitable business in high-end drives for large enterprises that it uses to bolster the low-margin desktop drive business.
Quantum Corp. sells more disk drives than any company, although it too is losing money.
That leaves Maxtor Corp., which, like Western, gets the vast majority of its sales from hard drives for desktop computers, and Samsung Electronics Co. Ltd., whose future has been clouded by uncertainties in the South Korean economy.
“It’s an extremely difficult business to be in for virtually all of the participants,” said Jean Orr, an analyst with Nutmeg Securities in Westport, Conn. “Everyone wants to put one or two of these companies together. I think it’s just as likely that a somewhat unrelated company with deep pockets will see the potential in the business and say, ‘OK, this is an opportunity to get into this business at a cheap price.’ ”
On Tuesday, Western said it will lose $109 million to $118 million, or $1.20 to $1.30 per share, in its fiscal first quarter ending Oct. 2. Analysts were expecting a loss of about $1.06 per share, according to a survey by First Call Corp. The quarterly deficit would increase total losses over the last two years to about $963 million.
Sales are expected to drop to the $550-million to $560-million range, from $650.9 million a year ago.
Some analysts had expected Western to break even by the end of June. Six months ago, Western officials expressed hope that the company would break even on an operating basis as early as the current quarter.
Company officials said they have addressed the factors that led to this quarter’s earnings shortfall, including a shortage of components by some suppliers and lower-than-anticipated demand for drives by “a few” computer makers.
Western officials also plan a charge of about $30 million either this quarter or next for expenses related to moving production from a plant in Singapore to Malaysia, a shift that the company hopes will save it $100 million a year.
Company officials said they have enough assets that can be readily turned into cash to last for the “intermediate term,” including about $175 million in cash and more than $225 million in other financing arrangements.
On the horizon, the company hopes it will be able to grow its emerging business of high-end hard drives that store data for networks, which have higher profit margins than the desktop models. Also, Western has been developing drives specifically for consumer electronics devices, such as digital video recorders, which could prove to be a bigger market than desktop computers.
“The growth in storage is accelerating with everything going on in the Internet and in consumer appliances, so there is some potential there, definitely,” analyst Orr said.
But the market for digital consumer appliances won’t arrive until at least next year’s holiday season, and everyone is eyeing those growing markets, not just Western.
Can Western hang on until then?
“From a balance sheet perspective, Western Digital is in the worst position of the public U.S. companies in this market,” said Dane Lewis, an analyst with BancBoston Robertson Stephens. “That presents challenges, and as a long-term investor in the company, you have to monitor that.”
With the price competition in the desktop hard-drive market not showing any signs of letting up and merger opportunities few and far between, “it’s going to be a long, ugly road to force attrition” among the players in the industry, Lewis said.
In the last year, Western has extensively restructured its management and operations, slashing employees from both its Irvine headquarters and its factories in Asia. The company has cut a quarter of its senior executives and employs less than 10,000 people, down from 16,000 at its peak in 1997, when sales reached $4.2 billion. In 1997, the company had 1,100 employees at its Irvine headquarters, but that has fallen to 760.
In July, Western’s chief executive of six years, Charles A. Haggerty, said he would step down by next June, and the company has launched a search for a successor.
Western’s rivals have not fared much better.
Last week, Scotts Valley-based Seagate Technology said it will take a $200-million charge against its earnings and slash more than 8,000 jobs over the next nine months, decimating its work force.
Seagate, which has been slashing prices for hard drives in an attempt to gain market share, also missed a quarterly earnings target.
Milpitas-based Quantum said last month it will lay off as many as 800 people in the next year in an effort to save $100 million per year.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Western’s Woes
Disk-drive maker Western Digital will post its eighth consecutive quarterly loss, estimating that first-quarter operating losses will be $109 million to $118 million, about 20% more than Wall Street expected (sales and losses in millions).
Sales 1st atr 2000: $550 to $560
Losses 1st qtr 2000: -$109 to -$118*
* Estimated
Western Decline
The company’s stock dropped to $4.25 on Tuesday, down 38 cents. Weekly closing stock prices: Tuesday’s close $4.25
Sources: Bloomberg News; Western Digital’ BancBoston Robert Stephens
