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Western Digital weathers storm

Despite a revised first quarter, analysts see potentially good news on the horizon for Western Digital, which reported its earnings today.

Western Digital (WDC) today beat revised estimates and said it is on track for an improved December quarter.

The company reported a net income of $62.7 million, or 67 cents per share, compared with net income of $32.9 million, or 35 cents per share, for the first fiscal quarter ending September 27. Analysts' revised estimates expected profits of 65 cents a share, according to First Call. Previously, analysts had expected profits of 81 cents a share.

Revenue grew to $1.1 billion, up from $883.1 million in the first quarter of last year.

"We are encouraged by the 91 percent profit gain, but obviously disappointed in not meeting the earlier Wall Street expectations for the quarter," Chuck Haggerty, Western Digital's chairman, president, and CEO said in a statement. "We are looking at strong demand for the December quarter from the major PC and server manufacturers."

He added that the company's new storage drives, including the 9.1 gigabyte Enterprise SCSI drive and the new 2.1 gigabyte per platter Caviar platform, are going to be ready for customer demand.

The company, which announced during the quarter it would miss expectations by about 20 percent, with profits in the range of 63 cents to 66 cents a share, has seen its stock sink just over 10 points, or 20 percent.

In trading today, however, Western Digital stock gained over 5 percent to end the day at 40-3/8, up from yesterday's close of 38-1/4.

The company attributed its shortfall to competitive pricing pressures, which offset gains from record unit-shipments of 6.3 million hard drives during the quarter.

Western Digital said hard-drive pricing cut into results as a major competitor liquidated excess inventory in the distribution channel. The maker of disk drives said its attempts to change the product mix during the latter part of September in order to offset the effects did not fully emerge.

The company said its plan to adjust its production plan for the December quarter to help reduce the industry's excess inventories is already underway.

Analysts said that Western may see some benefits in the long term because the industry's dynamics are favorable, but the short term is likely to experience more volatility associated with "irrational pricing," David Kerdell, an analyst with Oppenheimer & Company, said in a recent research report.

Kerdell noted that there are currently 12 disk drive manufacturers in business, down from 56 in 1989. Four of the 12 control nearly 80 percent of the market, he said.

"We caution that pricing will likely remain highly volatile and periods of inventory-dumping causing irrational pricing will recur," Kerdell said. "The key is that these periods are likely to become less frequent and perhaps less severe over time."

Kerdell added that, despite the current condition, Western Digital remains "solidly profitable." He pointed out that this type of volatility and stock movement typically create excellent entry points for long-term investors who can endure the volatility.

Western Digital management expects fiscal year 1998 unit shipments to reach approximately 29 to 30 million drives, which is up from last year. Average sales prices, particularly during the first half of 1998, will be approximately $175 per drive. That price, however, is below analysts' expectations.