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Maker of Tape Drives Finds Itself in Squeeze : Computers: Rexon Inc. is maneuvering to overcome an erosion of its profit margin. New products may prove to be the key.

March 23, 1993|JAMES F. PELTZ | TIMES STAFF WRITER

There's a rule in the computer business that has ruined more than one company that couldn't heed it: A product invariably will keep dropping in price even as its performance improves.

Witness prices of the personal computer, the semiconductor or the videocassette recorder. And it's a rule that Rexon Inc. and its Simi Valley-based unit, Wangtek, are now struggling to keep up with.

Rexon, through Wangtek, makes so-called cartridge tape drives that provide back-up memory for relatively powerful PCs used by engineers, scientists and others, or for networks of linked PCs. Roughly the size of a toaster, these drives work in conjunction with the main data-storage device in a PC, the hard disk drive.

Another Rexon division, WangDAT in Irvine, produces the latest version of these products, called digital audiotape drives, which offer more storage capacity than conventional so-called "quarter-inch" drives. The drives are sold to such computer makers as Compaq, NCR and NEC.

But like all those high-tech products before them, tape drives are dropping in price as Rexon and its rivals try to protect market share. And lately, the price cuts have been draining Rexon's profits and cash reserves.

The good news for Rexon is that tape drives are a rapidly growing market, and Rexon is fighting to be the No. 2 player behind Hewlett-Packard Co. Rexon also gets high marks from analysts for its quality, service and ability to quickly stay in step with new technologies.

But in Rexon's fiscal first quarter ended Dec. 27, its profit plunged 84%, to $414,000, despite a 6% sales gain to $48.2 million. A weak economy in Europe, where Rexon sells more than 40% of its goods, didn't help. But Rexon also conceded that the lower earnings reflected its price-cutting and its inability to get its manufacturing costs down just as fast.

Rexon has also been rapidly burning cash. Its excess cash and equivalents as of Dec. 27 totaled $4.2 million, down 44% from three months earlier and less than half the $11.8 million it had on hand at the end of fiscal 1991.

Not surprisingly, then, Wall Street has wiped away about half of Rexon's market value during the past year. Rexon's stock closed at $6 a share Monday on the NASDAQ market, down from a high of nearly $14 last year.

If Rexon can't keep lowering its costs, the company could have even more problems. Rexon need only ask TSL Holdings Inc. (formerly Tandon Corp.) in nearby Moorpark. TSL had competed with relatively low prices, but after the PC industry's big players cut their prices, TSL's advantage and cash both disappeared and the company recently sought protection in federal Bankruptcy Court.

Rexon is a much healthier company, but Hugh K. Gagnier, president of Wangtek and WangDAT, said he's always looking for ways to keep expenses down. So far he's merged the two subsidiaries' sales and marketing groups. Also, WangDAT is shifting its manufacturing to Puerto Rico, where labor costs are half those in Irvine. Annual savings: Nearly $1 million.

Wangtek's manufacturing plant is in Puerto Rico, while Rexon itself is based in Manhattan Beach. The Simi Valley plant is home for Wangtek's 300-member sales, engineering and executive staffs.

Gagnier's strategy to survive that price-performance rule also calls for his units to keep unveiling new, more powerful drives before the competition does. That way, Rexon temporarily benefits from the higher profit margins on those drives until its rivals catch up "and hit us pretty good on pricing," Gagnier said.

For instance, WangDAT is within weeks of introducing its latest generation of DAT drives that have twice the storage capacity of its existing DAT drives, and Gagnier predicted that "you'll start to see a migration" to the new products by Rexon's existing customers.

"We try to take advantage of our size to move fast and have the ability to come up with a new product before they can," he said of the competition.

But Bob Abraham, vice president of Freeman Associates Inc., a Santa Barbara consulting firm, said Rexon is not known as the industry's premier innovator. "They're a strong, steady, reliable player even if they aren't the first to market with every new product," he said.

Before the drop in its latest quarterly earnings, Rexon had posted a 6% profit gain for its fiscal year ended Sept. 30, to $11.5 million, on a 14% rise in sales to $208.2 million. So the company earned 5 1/2 cents per sales dollar; that's considerably less than the nearly 9 cents-per-dollar margin the company enjoyed five years ago.

Irvin R. Reuling, Rexon's chief financial officer, said margins will improve this year, but are unlikely to return to their late-1980 levels because Rexon's rivals now include so many big players with the financial means to stomach a price war.

"We're up against people like Conner Peripherals, which has learned to live" with lower margins, Reuling said.

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