Lackluster demand and falling prices for disk drives could conspire for a less-than-happy holiday season for Lake Forest’s Western Digital Corp.
The company could see shrinking profits and flat demand for its drives, which go into computers and consumer electronics.
The company is getting hit from all sides—a back-to-school shopping season that didn’t live up to expectations for technology products, an oversupply of drives, meager PC demand projections and a price war.
Western Digital and its rivals have seen a steady slump in prices for their drives, which in turn crimps profits.
The average selling price for Western Digital’s drives declined 8% to $46 from the end of June to the end of September, according to the company.
Prices could slip another 5% by the time the current quarter ends, Chief Executive John Coyne said in a conference call with analysts last month.
That would mark the fourth straight quarter of falling prices for drives, according to Kaushik Roy, an analyst at Wedbush Securities Inc. in San Francisco.
“It seems like in the September quarter there was a bloodbath in terms of pricing that hurt margins,” Roy said. “Because there was excess supply, vendors were willing to undercut each other on prices.”
Western Digital tried to keep out of the fray.
“In light of the sluggish demand in July and August, we reduced our bill plans for September, delayed our capital spending and selectively stepped back from participating in some very aggressive pricing at the end of the quarter,” Chief Operating Officer Tim Leyden said.
In a commodity business such as drives, Western Digital is forced to ride the waves of supply and demand.
Investors and analysts often come down hard on the company when the industry’s equation is off-kilter.
Stock
Western Digital’s shares are off 25% in the past six months on a market value of $7 billion last week.
The company’s September-quarter profits took a hit as margins got squeezed.
It posted $197 million in profit for the period, down 32% from a year earlier but ahead of Wall Street’s lowered expectations of $186 million in profits.
“Analysts had cut estimates throughout the quarter as the demand and pricing situation worsened,” Roy said.
Western Digital reported quarterly sales of $2.4 billion, up 9% and just ahead of analysts’ expectation of $2.35 billion in revenue.
Part of falling drive prices comes down to rivals—Seagate Tech-nology LLC of Scotts Valley and Hitachi Global Storage Technologies Ltd., a unit of Japan’s Hitachi Ltd.—making plays to gain back market share.
“In the past two quarters, some competitors have made aggressive bids to recover market share,” Coyne told analysts.
Western Digital sees price cuts as inevitable in a hyper-competitive industry cycle.
“What you’re seeing is competitive behavior in a slightly, just slightly, unbalanced supply demand situation,” Coyne said. “This is a scenario we have seen play out from time to time over the years. Our observation is that these are temporary skirmishes.”
Earlier this year, Western Digital surpassed Seagate as the No. 1 drive maker by product shipments. Seagate still is tops by revenue, as it gets more of its business from pricier drives for servers.
Hitachi is third by shipments and revenue, based on second-quarter data from El Segundo-based market tracker iSuppli Corp.
The revenue gap between Seagate and Western Digital is projected to have widened in the third quarter, with softer sales of portable computers, where Western Digital is bigger than Seagate.
PC Demand
The outlook for PC demand—the biggest driver of drive sales—isn’t pretty.
“We expect desktop demand to be marginally down and notebook demand to be marginally up in the December quarter,” Coyne said.
Typically, the final quarter of the year is a big one for PC sales during the holidays—when discounts and promotions often lure consumers to buy consumer electronics.
“Seasonally, the fourth quarter is a very strong quarter for PCs and disk drives,” analyst Roy said. “Nobody is expecting a strong uptick sequentially. People are thinking more like flat unit growth off of a weak third quarter.”
Western Digital’s guidance reflected the muted outlook.
The company expects profits of $115 million to $138 million for the three months through December, down roughly 70% from a year earlier.
Sales are seen coming in at $2.3 billion to $2.4 billion, down about 10%.
Analysts have lowered their expectations. On average they project profits of $143 million on sales of $2.37 billion.
