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WDC warning hurts storage sector

News of a more than $100 million loss for Western Digital ripples through the disk drive industry.

News of a more than $100 million loss for Western Digital rippled through the disk drive industry today.

In addition to Western's shares losing more than 25 percent and falling well below the company's 52-week low, shares of most of the big storage players lost ground as well. Read-Rite, for example, dipped to a new low after it dropped as much as 11 percent, to 7.38, while Quantum fell about 10 percent, to 21.19, and Seagate lost 75 cents.

Western Digital--which, by the end of the June quarter will have reduced its workforce by 22 percent since last November--warned yesterday after the markets closed that its fourth-quarter results would fall "substantially short" of analysts' expectations, before one-time charges, and that it expects an operating loss of more than $100 million, or $1.14 a share.

Analysts had expected a loss of 55 cents a share, according to First Call.

WDC attributed the shortfall to intense pricing pressures and reduced unit volumes in its desktop hard drive business.

This latest storage slump comes as something Western Digital stock chart of a surprise, as these companies had been bullish during recent months, arguing that the worst was behind them and that their outlook going forward was positive. But a backlog of inventories--which analysts said were built-up as smaller players, such as Maxtor and Fujitsu, won contracts with major PC manufacturers--continues to put a strain on the sector.

After reporting a much-larger-than-expected loss for its March quarter, Western predicted that it finally had moved 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 of Western, said in a statement at the time.

Others agreed with his assessment.

Read-Rite president Alan Lowe told analysts in late April that the disk drive industry had bottomed out in March, and that he remained confident that his company would see 10 percent to 20 percent sequential revenue growth during the third quarter.

If Western's problems are industry wide, however, the warning Read-Rite issued today could signal more problems ahead.

"We continue to be concerned about overall PC demand, as weakness in Asia and a 'wait-and-see' attitude seem quite prevalent," Patrick Tenney, an analyst at BancAmerica Robertson Stephens, said in a report released today.

He noted that possible culprits of purchase delays include Intel's price cuts and the push by personal computer original equipment manufacturers to transition to new models, resulting in higher-than-expected PC inventory.

"This soft demand and resulting poor PC inventory picture has brought about earnings concerns in disk drive stocks," Tenney said.

Indeed, Haggerty has changed his tune about the industry's outlook.

"Despite the reductions in finished goods inventory that we saw among industry leaders last quarter, there remain too many drives in the distribution channel," he said in a statement released yesterday about WDC's upcoming $100 million loss.

Western plans to report its financial results for the June quarter on July 29, 1998.

"It's been a bad business for a long time. But this is probably the bottom for Western Digital and the industry," said David Chiang, an industry analyst with Nikko Research Center. One sign he cited: a recent rebound by Seagate Technologies.

Salomon Smith Barney upgraded Seagate yesterday to "buy" from "neutral," arguing that the company was poised for a turnaround.

Chiang maintains a "neutral" rating on the stock, but said he remains bullish about the sector's future because "the [storage] products are necessary to make a PC work; there's no alternative right now."

Business editor Jeff Pelline contributed to this report.