New Spin at Western Digital

By KAREN ALEXANDER

June 20, 2001 12 AM PT

TIMES STAFF WRITER

After years of huge losses and sagging sales, Western Digital Corp. is starting to make a comeback.

Its sales are climbing again, hovering around $2 billion annually, making it the third-largest disk drive manufacturer in the world. The company’s losses--which totaled $1.1 billion in three years--have slowed to a trickle at just $3 million in its latest fiscal quarter. And its core hard drive business has been profitable the last two quarters.

The company isn’t out of the woods yet, but Chief Executive Matthew Massengill clearly has revived Western Digital from its moribund state.

Tapped in January 2000, the 40-year-old Massengill moved swiftly, pulling the plug on manufacturing hard drives for high-end computers. He shuttered the company’s Minnesota plant he had once run--flying in during a blizzard to tell more than 400 employees that they were losing their jobs.

“It wasn’t fun,” he recalled. But Massengill had concluded that the business, which accounted for about 11% of Western Digital’s revenue, was losing market share to competitors Seagate Technology Inc. and IBM Corp.

Massengill moved the company’s headquarters from a costly high-rise in Irvine’s technology center to humbler digs up the road in Lake Forest.

Two factories in Singapore were closed as the company shifted most of its manufacturing to Malaysia, saving about $200 million annually in labor costs.

In the latest quarter, Western Digital’s sales edged up 3% to $533.4 million, as the company increased its share of hard drive sales for desktop computers--a segment characterized by cutthroat competition and devastating price wars.

The firm’s stock remains in the doldrums, trading far below its 1997 peak of $54 a share, a reflection of sagging demand for personal computers. Still, the shares have outperformed the overall computer memory-device industry this year.

The stock, which has gained 27% this year, closed unchanged Tuesday at $3.10 on the New York Stock Exchange.

With the personal computer market continuing to lose ground, the company expects to post another loss in the current quarter.

Analysts expect the company to lose 6 cents a share in the quarter, up from a loss of 2 cents in the most recent quarter but much smaller than the loss of 19 cents a year ago. The results will be announced in late July.

All of the company’s top customers--Dell Computer Corp., Compaq Computer Corp., Gateway Inc. and Hewlett-Packard Co.--have stumbled this year.

“Clearly, the industry is in a slower period now,” Massengill said.

Still, he believes that Western Digital is in much better shape to weather a slowdown than when he took the CEO reins.

Massengill had experienced Western’s peaks and slumps, joining the company in 1985 as a product engineer, then moving up the ranks.

But his first few months as the top executive “were very sobering,” he said, as the company reeled from an embarrassing product recall, burned through its cash and lost market share.

Although PC hard drives account for 95% of Western Digital’s business, Massengill has set the company on a course to diversify into potentially lucrative areas.

Once limited to personal computers and conventional office equipment, hard drives are finding new life in futuristic gadgets ranging from the latest video game units and digital TV recorders to portable music players and medical equipment.

The company has a deal with Scientific-Atlanta Inc., a leading supplier of cable television set-top boxes, to develop a line of personal video recorders. The devices--which rely on hard drives instead of magnetic videotape to program, record and play back live TV shows--will allow cable operators to compete with personal video recorder companies.

The products, which are in trials with the leading cable operators, will be available to some consumers by the end of the year, said Greg Kalsow, vice president of marketing for Keen Personal Media Inc., a Western Digital subsidiary created to provide the digital recorders to cable television companies.

Western Digital also landed a contract to supply hard drives for Microsoft Corp.’s Xbox video game console, which is expected to hit the stores this fall. Analysts predict as many as 2.5 million of the consoles will sell by year’s end, although competitor Seagate also has a supply contract with Microsoft.

“This is an indication that disk drives are going to be designed into devices that have not traditionally had them,” Massengill said.

Two other fledgling units make equipment and software for storage networks. Both companies are shipping products and drawing a trickle of revenue, but the businesses are at their earliest stages, Massengill said.

Another subsidiary is developing supply chain management software for businesses.

As expected, the fledgling ventures are losing money, more than offsetting the profit generated by the company’s hard drive business in the last quarter.

Western Digital has done “very well at rebounding from some recent problems,” International Data Corp. analyst Dave Reinsel said. “I think they need to turn those [subsidiaries] profitable fairly quickly. If there’s a prolonged economic downturn, those are not going to bode well for their financial picture.”

After years of perpetual bad news, the company’s progress has not gone unnoticed.

Moody’s Investors Service raised Western Digital’s credit rating in March from negative to stable, citing the “profound transformation” of the company’s hard drive business. Moody’s lauded Western Digital for its draconian measures to cut costs, consolidate manufacturing and repay an outstanding bank loan.

Indeed, the company’s worldwide work force stands at 8,000, half what it was four years ago.

At the same time, however, the company also is finding it easier to hire and hold on to talented engineers and other experienced technicians who were being lured away during the dot-com craze.

“We just spent most of last year trying to recruit because attrition rates were so high. The dot-coms were running wild, and we weren’t doing very well,” Massengill said.

“Now it’s a lot easier because we’re even seen as a stability symbol in this market, believe it or not,” he said.

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Western Digital at a Glance

Stock performance

Weekly closes and latest for WDC on the NYSE

Tuesday: $3.10

Profit* (in millions)

3rd quarter 2001: -$3.1 million

Sales* (in millions)

3rd quarter 2001: $533.4 million

Largest Disk-Drive Manufacturers (market share)

Maxtor: 35%