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CALIFORNIA / News and Insight on Businesss in the
Golden State

$162-Million Loss Caps Brutal Year at Western Digital

July 28, 1998|P.J. HUFFSTUTTER | TIMES STAFF WRITER

Topping off one of its worst financial years in recent history, Western Digital Corp. posted a larger-than-expected loss for its fiscal fourth quarter as sales slumped 40%.

The Irvine disk drive maker lost $162.7 million, or $1.84 a share, as it continued to be battered by industrywide price wars and falling demand. The loss included a charge of about $22 million from a technology-licensing and component-supplying agreement with IBM Corp., which was approved in June, company spokesman Robert Blair said.

The past year has been particularly brutal for the industry's three biggest players: Western Digital, Seagate Technology Inc. and Quantum Corp. All have suffered earnings slumps in the wake of oversupply and weak demand.

"This is a cyclical industry, but we've never seen a [down] cycle of this length before," Blair said. "I think we've all been surprised."

Analysts had expected Western to report a fourth-quarter loss of $1.29 a share, according to analysts surveyed by First Call Corp. A year ago, the company had reported net income of $87.9 million, or 95 cents a share.

In the three months ended June 27, sales fell to $650.5 million from $1.08 billion.

The three big disk drive firms are facing growing competition from an aggressive field of players in the desktop market, including IBM, Maxtor Corp., Fujitsu Ltd. and Samsung Group.

The PC industry has compounded the problems by cutting inventory. Earlier this year, IBM and Hewlett-Packard Co. began trimming their production. This spring, Compaq Computer Corp. closed some of its U.S. manufacturing facilities, analysts said.

"Don't underestimate the weakening demand," said David Takata, a senior analyst with Gruntal & Co. in Beverly Hills. "How bad is the problem in Asia going to be, and how long will it last? Will European demand [for desktops] make up for it? And what do you do about the [slowing] U.S. penetration of PCs?"

As a result, disk drive makers have been forced to make serious cutbacks and other changes. Western Digital has trimmed its work force by about 20% since November, scaled back production and reduced capital spending.

Last week, Seagate's board of directors fired Chairman and Chief Executive Alan Shugart, one of the struggling company's founders.

Meanwhile, Western Digital is pinning its hopes on its recent deal with IBM to eventually pull it out of its slump.

In June, IBM agreed to sell Western Digital a series of computer components that read data from, and write information to, the disk. The venture gives IBM access to new outlets to distribute its products and gives Western Digital a jump on emerging technologies and manufacturing lead time.

Western Digital, which has posted losses for the last three quarters, reported a loss of $290 million, or $3.32 a share, for the fiscal year, compared with net income of $268 million, or $2.86, for the previous year. Revenue dropped to $3.5 billion from $4.2 billion for a year earlier.

Western's shares dropped 31 cents to close at $11.13 on the New York Stock Exchange.

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