51.5 F
Laguna Hills
Thursday, Mar 28, 2024
-Advertisement-

Sorting Out Western Digital

Western Digital Corp. has seen it all this year.

The Lake Forest disk drive maker has dealt with a price war and growing concerns about demand, seen its biggest competitor get bigger, and found itself in the options backdating controversy.

Western Digital hasn’t escaped unscathed. Its shares are off 25% since spring, vs. a 14% decline for rival Seagate Technology LLC.

But Western Digital Chief Executive Arif Shakeel can claim some victories with nice gains in market share and improving profits as the industry readies for more growth.

The company “has demonstrated in the last five years that with an appropriate business model, execution and a competitive cost structure, companies can succeed and make serious money in the hard drive industry,” Shakeel said.

Western Digital has prided itself on not necessarily being first with drive innovations and instead following as a low-price, efficient drive maker.

Shakeel helped engineer the company’s strategy as chief operating officer in the early part of the decade before rising to the chief executive’s spot last October. Matt Massengill relinquished the chief executive’s job to become executive chairman.

The upside for Western Digital’s tightly competitive sector: Some see the business getting healthier as a price war wanes and the market appears poised for growth.

“We’re still expecting that demand is going to tick up in the second half,” said John Rydning of market researcher IDC. “We still have PC demand that is growing.”

Western Digital has gained customers amid consolidation in the sector.

In the spring, Scotts Valley-based Seagate’s $1.9 billion buy of Maxtor Corp. of Milpitas closed. The deal gave Seagate about half the market for some drives, ahead of Western Digital, Hitachi Ltd. and Samsung Corp.


Market Share, Price War

As expected, Western Digital is picking up customers worried about being too reliant on a bigger Seagate.

Last year, Western Digital had 26% of the market for drives for desktop PCs. Seagate and Maxtor had 52.5% combined.

Through the first six months of this year, Seagate and Maxtor dropped to 44% of the market. Western Digital rose to 29%. Hitachi and Samsung also did well.

“Share is the byproduct of strong execution and performance,” Shakeel said. “In this period of transition for the industry, we have remained focused on these attributes.”

Western Digital has gone after customers when there have been “opportunities,” Shakeel said.

Some drive makers have lowered prices to get customers.

Before this year, prices had fallen about 6% in the past two years, said Mark Miller, an analyst with Brean Murray, Carret & Co. in New York.

Then from February to September, the price of an 80-gigabyte drive dropped 15%, he said. The price of a 60-gigabyte drive dropped 6% from April to September.

Samsung and Hitachi have been fingered by some as leading the price cuts. IDC’s Rydning said there may be enough blame to go around.

“If you put all the major players in a room around a table, they would all point to the person on the right,” he said.

Shakeel said he wasn’t surprised by the falling prices. They’re not all bad, he said.

“Let’s be clear: Declining prices of hard drives are a way of life in our industry and over the last several years declines have helped create the multimillion unit growth markets we are embracing and enjoying today as an industry,” he said.

Wall Street has been all over the board on Western Digital’s prospects.

In the past year, Western Digital has watched its often sluggish stock climb more than 30%, though not as fast as Seagate.

But the stock has fared more poorly of late. In the past month, shares of Western Digital dropped 4% while Seagate’s climbed 4%.

Investors have had a lot to mull over.

Earlier this month, a big supplier of parts for drives, San Jose-based Komag Inc., warned demand was drying up and that it expected sales to nudge up 3% in the current quarter from a year earlier. It previously expected 5% quarterly sales growth.

This sent shudders through the drive sector as some analysts sent out cautionary notes about Western Digital and Seagate’s Maxtor.

Western Digital’s stock fell 7.5% the day of the news.

Investors were overreacting, according to Brean Murray’s Miller.

“I don’t think it’s indicative of a major problem,” Miller said.

Miller’s take seemed to prevail as Western Digital and other stocks began to rebound.

Less than two weeks later, another analyst, Paul Mansky of Citigroup Inc., downgraded Western Digital and Seagate, from “buy” to “hold.”

The second half of the year looked to be a little softer than expected, Mansky said.

Mansky pointed to possibly sluggish demand for PCs with the delay of Microsoft Corp.’s Vista operating system. He also cited Komag’s recent news and what he saw as a lack of a clear catalyst for growth.

Yet investors balked at the downgrades. Shares of Western Digital and Seagate actually climbed the day of the downgrades, with Western Digital shares adding nearly 3%.

The following day, Shebly Seyrafi of Caris & Co. shifted his take on the drive sector. Seyrafi had checked on some sources and said he discovered demand for drives was on the upswing.

He also cited the end of the price war.


Industry Growth

The overall growth of the market is another positive.

Shakeel said industry analysts are forecasting growth in desktop PCs of 6% to 8% this year. Drives for portable computers could grow 20% to 25%. And those for digital video recorders could grow 40% or more.

“Those forecasts seem reasonable at this point,” Shakeel said. “Longer term, the growth of storage in an expanding set of both commercial and consumer electronics applications bodes well for continued strong demand for hard drives.”

Western Digital is keeping an eye on competitors, Shakeel said, and is continuing to expand beyond the desktop drive market.

He pointed to Western Digital’s announcement earlier this summer of an 80-gigabyte drive that can fit into a notebook and some consumer gadgets.

Also, the company has expanded its offering of external drives that professionals use to back up files, photos, audio and other data.

Analyst Miller said Western Digital is in good shape. The company builds many of its own components for drives that some competitors outsource, putting them at a cost disadvantage, he said.

“They’re very efficient,” he said.

One other issue for Western Digital: stock options.

Earlier this month, the company said a committee of independent directors may have found some inconsistencies in the dating of options, delaying Western Digital’s Securities and Exchange Commission filing for the 12 months ended June 30.

Shakeel said the review is ongoing and said an update would come as soon as it is practicable.

For the three months ended June 30, Western Digital beat analysts’ estimates of $79 million in income, before one-time gains.

Sales rose 15% to $1.1 billion during the quarter from a year earlier. Analysts were expecting $1.08 billion in revenue.

Want more from the best local business newspaper in the country?

Sign-up for our FREE Daily eNews update to get the latest Orange County news delivered right to your inbox!

-Advertisement-

Featured Articles

-Advertisement-
-Advertisement-
-Advertisement-
-Advertisement-

Related Articles

-Advertisement-
-Advertisement-