Matt Massengill knew what he was getting into when he took the top spot at computer disk drive maker Western Digital Corp. in January.
Having been with the company in several junior positions during a tumultuous 15 years, he’s seen first-hand the erratic nature of the disk drive market and its unforgiving pace of innovation and price cuts.
And those forces aren’t letting up. Analysts expect Western Digital to announce its 11th consecutive quarterly loss later this month. And even as Chief Executive Massengill and other Western Digital officials seek out new markets for their products, some analysts contend they have a long game of catch-up ahead.
“They have been consistently behind the time-to-market leaders,” said William Lewis, an analyst for Chase H & Q; who rated the company “market perform” along with all other publicly traded drive makers.
Though other analysts concur with Lewis, it’s a charge Rich Rutledge, Western Digital’s vice president of marketing for disk drives, adamantly rejects.
“Analysts are better at keeping historical data than they are at making future projections,” he said. “Because I don’t think the facts support that at all.”
In many ways, Western Digital and other drive makers have become victims of their own success. As manufacturers stuff more storage capacity into their drives and dozens of scrappy players vie for a piece of the market, supply has far exceeded demand. The result: price wars that have cut deeply into profits, even as drive shipments soar.
But while some of its largest competitors are making dramatic comebacks on Wall Street,rival Seagate Technology Inc. last week beat analysts’ quarterly profit estimates,Western Digital has waned. Last week, its depressed stock was lumbering around 5.
Losses Narrowed
Still, Western Digital may be making progress in its turnaround. Unofficial “whisper” forecasts pin the company’s loss at 11 cents per share for the recently concluded quarter, less than the consensus estimate of 17 cents. That would be the best quarter in nearly two years for Western Digital, which plans to move from Irvine to Lake Forest in November. In the year-ago quarter, Western Digital lost $1.12 a share.
Thanks to cost-cutting measures, such as closing down plants and exiting segments such as server drives, Western Digital has dramatically narrowed losses.
“If you want to think of us as a bouncing rubber ball, hopefully we’ve hit the bottom and are starting to bounce the other way,” Rutledge said.
But regaining profitability could prove a tougher assignment.
Industry watchers expect an upswing in demand for drives because of the increasing popularity of video and music played on computers and a slew of consumer electronics that use drives for storage.
But those same analysts said Western Digital has fallen behind the industry’s development curve, putting its largest competitors in a better position to cash in on the trend.
Western Digital’s recall last fall of 400,000 drives that contained a faulty chip didn’t help the company’s reputation.
But Rutledge points to the company’s newest WD Caviar drives as a showcase of quality engineering. He argues the drives will be the fastest of their kind when they ship this fall.
But with Western Digital’s share price lower than it’s been since 1994, the company remains vulnerable. Analysts said they don’t know of any imminent takeover plans but add a number of Western Digital acquisition scenarios aren’t out of the question.
Shares in Western Digital’s biggest competitors, Scotts Valley-based Seagate and Maxtor Corp. of Milpitas, have more than doubled in the same time frame. The company’s drive business is going private as part of a merger with Veritas Software Inc. But Seagate, with a market value of more th2an $14 billion, could easily take over Western Digital. Even Maxtor’s $1.28 billion market cap puts it in a strong position relative to Western Digital, whose market capitalization last week stood at $749 million.
What either Seagate or Maxtor would gain from a Western Digital takeover is another matter, though. Neither needs the capacity Western Digital would bring, and both have brand names at least as strong as that of Western Digital.
Another acquisition scenario could come by way of a consumer electronics company such as Sony Corp., or even Microsoft Corp., which is eyeing the storage market with its WebTV devices and upcoming X-Box video game console.
A company like Microsoft, which will use Western Digital drives in the newest generation of its WebTV boxes, conceivably could seek to bring components such as drives in-house to ensure consistency and supply.
Still, with a glut of drives available, Sony, Microsoft and others likely would find it easier to outsource drive production. Western Digital itself outsources production of most drive components and simply assembles final products,something that renders its contribution as an in-house drive provider negligible, said Jim Porter, president of Mountain View market research firm Disk/Trend Inc.
“They’ve got a brand name,” Porter said. “But the other brand names are at least as well as if not better well-known. So it’s not clear what they would bring to the party.”
Unfortunately for Western Digital, only 25% of drives are sold independent of computers, and the aftermarket is the only segment where brand matters. PC makers and other drive customers pay more attention to price and performance, where Western Digital is weaker, analysts said.
Network-attached storage units and storage-area networks, both of which make information on drives more accessible over a computer network, are expected to become an even bigger market than they are now, with implications for Western Digital and other drive makers.
Acquisition a Long Shot
But an acquisition by an EMC Corp. or other big networking storage company remains a long shot, since Western Digital already is targeting that area with its Connex subsidiary. Seagate and Maxtor have made similar moves. Seagate generates much of its profit from network storage segments.
Earlier this month, Western Digital announced a software division called SageTree, which makes products that store and analyze mounds of corporate data.
Western Digital is looking into other areas for potential growth as well, Rutledge said, which could eventually transform the company into an entity that barely resembles its current self. It wouldn’t be the first time,the company started out in 1970 making semiconductors, moved into circuit boards and only later into hard drives.
To compete in any market, though, Western Digital will have to narrow the engineering gap with rivals, Disk/Trend’s Porter said. If that were easy, Western Digital wouldn’t be in its current predicament, he said.
Still it’s too early to count the company out, Porter added. If Massengill can translate his experience in operations into faster product development and vigilance in spotting new markets, he has shot at reversing his company’s fortunes.
“It’s going to take the right combination of management to make it happen,” Porter said. “You’ve got to get there on a timely basis and get those customers early in the lifecycle. If they start doing that, they can pull it around pretty quickly.” n
