Storage sector sees hard times

Quantum (QNTM) today said it will take a $40 million third-quarter charge, following the lead of other storage makers that recently acknowledged that competitive pricing pressure would hurt their quarterly results.

The maker of hard-disk drives wants to streamline its business and lower its break-even point for the high-end portion of that business in an effort to get costs under control and generate returns in what is currently a competitive environment.

The bulk of the charges are related to the company's transition to its next generation of high-end products, and includes severance, asset write-offs, inventory write-offs, and inventory-valuation adjustments.

Earlier this week, Seagate (SEG) said continued weakness in demand for its high-performance products, combined with greater-than-anticipated pricing pressure, will push the company's second-quarter earnings downward, causing it to miss Wall Street expectations for the earnings period ending January 2, 1998

In addition, restructuring charges are likely to exceed the high end of Seagate's previously estimated range of $50 million to $100 million.

Western Digital (WDC) announced earlier this month that its second-quarter results would be impacted by "significantly higher-than-normal competitive pricing pressures" in the desktop hard-drive business.

Analysts reacted by lowering ratings and earnings expectations for the storage maker sector.

This week, Gruntal & Company lowered its earnings estimates on shares of both Seagate and Quantum after Seagate said second-quarter results would be weaker than expected.

Gruntal analyst David Takata cut Seagate's second-quarter profit expectations to 11 cents per share from 25 per share, and revised his 1998 estimate to 85 cents a share from $1.37 a share.

Takata cited supply-demand imbalance in the disk-drive industry, high channel inventory, and little visibility going forward as the reason for the downgrades.

He also lowered his 1998 earnings estimate on Quantum to $2.51 per share from $2.70 per share.

Hambrecht & Quist analyst Todd Bakar also cut his recommendation on shares of Quantum, and also downgraded his recommendations on Read-Rite (RDRT) and HMT Technology (HMTT) to "hold" from "buy." He said the downgrades were based on continued concern about the outlook for disk-drive companies over the next six to nine months.

"="" rel="">Deutsche Morgan Grenfell, Needham & Company, and Salomon Brothers lowered their ratings on Western Digital to "hold" from "accumulate."

Quantum could not be reached for comment.