Hard times for hard drives
It came as little surprise to industry and financial analysts on Wednesday that Seagate Technology Inc. would be closing its disk drive manufacturing plant in Ireland and laying off more than 1,400 full-time and temporary employees.
The news is just the latest blow to an industry that's struggling with over-capacity issues, intense pricing competition, and dramatic economic unrest in Asia.
It's not a lack of demand that's plaguing major disk-drive vendors such as Seagate, Quantum Corp., and Western Digital Corp. In fact, DISK/TREND Inc., a Mountain View, Calif., market research firm, predicts that worldwide sales this year will top $34 billion. Expansion and new products should push sales above $75 billion by the year 2000.
"But the competition is just brutal," said DISK/TREND President Bob Katzvie. "You simply have too many companies producing too many drives at a time when customers can and should afford to be more cost conscious."
Seagate's announcement comes about three weeks after major brokerage firms downgraded the company's stock in anticipation of lackluster second-quarter earnings. The same was true for Quantum and Western Digital, which have both issued profit warnings in light of diminishing profit margins.
In fact, Seagate's once-lofty status as the elite high-performance drive manufacturer has declined as much as the company's stock price. In its first quarter of fiscal 1997, Seagate lost $240 million, or 98 cents per share, on sales of $1.8 billion. In the same quarter of 1996, Seagate posted a profit of $129 million, or 53 cents per share, on sales of more than $2 billion.
Already facing a $100 million charge related to an ongoing restructuring program, Seagate will absorb another huge charge after closing down its plant in Ireland. There's no telling how much damage this will do to second-quarter earnings that were originally expected to be about 24 cents per share.
"They aren't getting the margins they came to expect, especially on their high-end server drives," said Todd Bakar, an analyst at Hambrecht & Quist. "This isn't the first time Seagate's done this. It's almost become routine."
Amazingly, in the midst of one of the most prolific years in market history, Seagate's stock has slid more than 40 percent. It closed down 63 cents per share to $21.38 Wednesday, down from its $53 per share peak in May.
Quantum and Western Digital have suffered through similar slumps. Western Digital peaked at $54 per share in August only to slip to $17.25 Wednesday, while Quantum collapsed from $42 per share in August to $23.81.
"It's been a rough year for the whole segment," Bakar said.
Quantum on Wednesday announced that its third-quarter earnings would come in at between 25 cents to 35 cents per share, well below analysts' estimates, blaming aggressive pricing for desktop hard drives.