Hard drive revenues lag behind shipments

A new International Data Corporation study said that while hard drive makers are projected to ship 166 million drives in 1999--an increase of 15.5 percent--revenue increases will not keep pace with shipment growth, as other studies are predicting.

IDC expects revenues to only grow 1 percent over last year, and that's a best case scenario, according to Danielle Levitas, a research manager with the firm.

A study in June from Disktrend predicted a similar increase in shipments and a 7.7 percent increase in revenues. But both studies confirm that it is getting increasingly difficult for disk drive makers to make money, even in a period of robust sales growth.

What's happening in the hard drive market can also been seen across the computing landscape. IDC found in another survey that server revenues for the first quarter of 1999 were down from the same period a year ago, even though unit shipments were up markedly.

PC makers are also feeling the squeeze, having to branch out into services--most notably Internet access--to boost profit margins. Similarly, drive makers have to look to increase their presence at the high end of various markets, where new products with better performance and more storage capacity can garner higher prices, as well as look at new areas that need hard drives such as "digital VCRs" or home servers.

"Most drive companies are investing into other markets, because they understand nobody really values hard drives," Levitas said. Seagate is moving into software, and Quantum is pushing into the network attached storage market, for instance, she notes.

So why stick with hard drives? Levitas said it is difficult to walk away from a market with established revenues. Besides, the demand for hard drives is fine, she says--it's just that the companies aren't pricing products rationally.

"They need to stop the blood bath, that they themselves are somewhat responsible for, just to gain market share," she said.

Last month Seagate, the largest drive maker, warned that its profits for the current quarter would fall short of analyst estimates because of continued price pressures and a sales shortfall. While Wall Street had been predicting profits of 49 cents per share, after the warnings, analysts revised estimates downward to 36 cents per share, according to First Call.

Still, things are looking better for the hard drive industry as a whole compared to 1998 results, where NationsBanc Montgomery Securities analysts say revenue growth declined around 7 percent.

Seagate's anticipated profits should outpace last year's earnings of 11 cents per share. Meanwhile, Quantum is expected to earn 10 cents per share, compared to last year results of 2 cents, according to consensus estimates from First Call. Both Seagate and Quantum report earnings later in July.

Levitas in her report said entry-level servers will be the largest source of growth for hard drive makers. That market segment is expected to grow 21 percent annually through 2003.

The largest market segment will still be drives used in desktop computers, constituting 205 million units sold by 2003. The market for drives in computer workstations--high-powered desktops used for scientific, engineering, and financial applications--is expected to shrink by 6 percent annually during the same period.

Not everybody will share in the upswing. Western Digital, which is expected to close out fiscal 1999 with another loss, will continue to lose money for most of fiscal 2000 according to financial analyst estimates. Analysts are predicting a loss of 94 cents per share for Western's fiscal fourth quarter 1999, compared to losses of $1.59 during the same period a year ago, First Call reports.

Maxtor, which IDC said doubled its shipments last year, issued a warning last month that it would post a loss, where a slight profit had been expected. Analysts are predicting a loss of 46 cents per share for its second quarter 1999, according to First Call.

Estimates were revised downward based on the company's warning that "extremely aggressive pricing" in the desktop market coupled with lower than expected shipments for the month of May would impact results. Maxtor is expected to lose money through the third quarter of fiscal 2000, according to consensus estimates.

Both Maxtor and Western report earnings on July 22.