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Disk drive slump may be ending

Excess inventory and falling prices in the disk drive market have devastated manufacturers, but there may be light at the end of the tunnel.

There may be light at the end of the tunnel for the beleaguered disk drive industry.

The excess inventory and pricing pressures that have devastated the industry may be beginning to subside, analysts say. Companies are reporting that products that have been backlogged for months are finally beginning to make it to market.

"The inventory correction is much closer to the end than the beginning," Credit Suisse First Boston analyst Charles Wolf said in a research report. As a result, Quantum was upgraded to a "buy" from a "hold" recommendation earlier this month.

A backlog of inventories has persisted since last fall, a build-up attributed to the success of Maxtor and Fujitsu in winning a number of contracts with major PC manufacturers, according to analysts. That left top-tier disk companies such as Seagate, Quantum, and Western Digital with excess products.

Prices dropped as supply far exceeded demand, and many of these companies reported significant drops in revenue and earnings during the last quarter.

Western Digital yesterday reported a drop in revenue and a wider-than-expected loss for the quarter ending last month. The company said, however, that it has made progress in the areas of inventory reduction, the accelerated transition to new "MR head" technology, and profitable growth of the enterprise storage business.

Western's revenue for the last quarter dropped to $831.3 million, down more than 20 percent from $1.1 billion reported a year ago. Net loss was $45 million, or 51 cents a share, compared with profits of $82.6 million, or diluted earnings of 88 cents a share, last year. The loss was 6 cents wider than expected, and the company's stock fell about 10 percent after the earnings announcement.

But the company believes that it may finally be past the worst of its problems.

"For the first time in a while, we are beginning to see some signs of improvement in both industry conditions and our desktop business," Chuck Haggerty, chief executive officer of Western Digital, said in a statement.

Allan Roness, an analyst for JW Charles Securities, agreed that things are looking up for Western, but cautioned that its earnings "may not set the world on fire" in the near future. "The worst may be over," he said, but "it's going to be very, very tough to make money. There's a lot of competition."

Western Digital is not the only firm beginning to see improvement. Industry bellwether Read-Rite, a company that makes disk drive "heads," which are the components that record data to the disk, said yesterday that things are starting to improve in the disk drive industry.

Read-Rite president Alan Lowe said the disk drive industry bottomed out in March, and said he remains confident that his company will see 10 percent to 20 percent sequential revenue growth during the third quarter.

"March was definitely the bottom," Lowe told analysts at a Hambrecht & Quist technology conference this week. It was an "ugly quarter" for the disk drive industry, he said, referring to the March quarter as a period that had been plagued with a glut of inventories, price cuts, financial shortfalls, and layoffs for some of the major disk drive makers.

Analysts agreed that the situation is improving. Credit Suisse's Wolf, for example, cited a recent inventory reduction by Seagate Technology as a sign that the industry slump may be subsiding.

Seagate, the world's largest manufacturer of disk drives, posted a net loss of $128.5 million, or 53 cents a share, compared with a net income of $256.8 million, or $1.01 a share, a year earlier. Excluding restructuring charges of $165.7 million to cover the cost of 10,000 layoffs, Seagate had an operating loss of 10 cents a share.

The losses and excess inventory has wreaked havoc on these companies' stocks.

Western Digital is trading about 65 percent lower than its 52-week high, which was reached last September. The stock closed at 19.25 yesterday, off from its high of 54.75. Seagate is trading down 52 percent, at 25.94, from its year high of 54.25. Read-Rite has lost 54 percent, to hit yesterday's close of 13.89, down from its high of 30.38.

Despite the recent prices, the quotes mark improvements over the lows of the past three months.

Wolf said that, even if more bad news was in store for these companies, the stocks are not likely to underperform.

"When the signs that the correction is over are visible," he said, "it will already be too late to buy these stocks."

Reuters contributed to this report.