In 1980, Western Digital Corp.'s former president, Charles Messler, placed the figure of a phoenix on the cover of the company's annual report. Almost 20 years later, observers are wondering if that image will prove prophetic, or if the company is destined to go down in flames.
Disk-drive manufacturers are used to laboring under oppressive conditions. Across the board, the industry is suffering from persistent price declines, exacerbated by predatory OEM purchasers eager to cut their own manufacturing costs. Set against this troubling backdrop, WD is grappling with a number of additional setbacks, including a series of management changes, a product recall, and several quarters in the red.
"If you ask folks in the disk-drive industry about a company's impending death, chances are you'll end up talking about WD," said Jim Porter, president of Disk/ Trend Inc., Mountain View, Calif.
That's not the way Chuck Haggerty, chairman, president, and chief executive, sees it. Although he is searching for his own replacement before retiring next June after 35 years in the high-technology sector, Haggerty must still architect the company's transition from a disk-drive manufacturer to a storage company. The company's new chief executive will probably be from outside the disk-drive industry, according to Haggerty.
"People have to understand that we started as a $4 billion company two years ago," he said in an interview from the company's Irvine, Calif., headquarters. "Now, we've lost about $1.2 to $1.5 billion just because of pricing [pressures]. ... We've taken all the hard actions that we've had to, and they have been hard."
As it has struggled, WD's head count has been cut in half from a high of about 16,000. The latest casualty is Russell Stern, the company's co-chief operating officer, who stepped down earlier this week for personal reasons.
Stern, who with Matt Massengill was only recently appointed to his role, managed WD's product lines and R&D. A company spokesman said there are no plans at present to search for a replacement, meaning Massengill will add Stern's responsibilities to his duties managing worldwide operations, procurement, and sales.
Stern's exit was not an isolated event within the storage industry. The week also saw the departure of Peter van Cuylenburg, president of Quantum Corp., Milpitas, Calif., and the sudden resignation of Larry Sanders, chief executive of San Jose-based disk-drive maker Fujitsu Computer Products of America. WD's vice president of worldwide marketing, John Burger, left in August.
At WD, Stern's departure was merely the latest of the company's own set of symptoms, including a manufacturing restructuring that shifted operations from Singapore to Malaysia in August, resulting in charges of $32.3 million to WD's fiscal first-quarter 2000 earnings. WD's desktop-unit market ranking subsequently slipped from third in the second quarter to sixth in the third quarter, according to Dataquest Inc., San Jose-a plunge of about 2.3 million units.
New expenses surfaced last month when the company recalled its 6.8-Gbyte/platter Caviar drive family, which forced a charge against sales of $37.7 million in the quarter. As a result, production halted for about four weeks, Haggerty said, and inventories skyrocketed 44% year-over-year, to $207 million. WD's first-quarter earnings, reported this week, included a loss of $106.3 million on revenue of $407 million.
Still, that was nothing compared with disk-drive component supplier Applied Magnetics Inc., Goleta, Calif., which last week said it lost $236 million on sales of $39 million for the fiscal year.
Other analysts in the industry are still reluctant to publicly write WD off, noting that the 29-year-old company has struggled for years but survived. Some felt that the elimination of WD's co-chief operating officers will streamline operations. Haggerty and other analysts also noted that WD's recent Caviar disk drives, despite the recall disaster, have won laurels from OEMs, hardware-specific Web sites, and industry trade press.
WD holds $185 million in cash and has the option of accessing an additional credit line worth $125 million. The company also holds a stake in Vixel Corp., a Fibre Channel provider, of about 1.4 million shares, worth exactly $42 million at Thursday's close.
Like his rivals, Haggerty has a two-step program for returning to profitability. The first is to reduce manufacturing cost. WD's ASPs declined from $141 to $121 in the third quarter, "and there's no reason to believe that $60 to $65 isn't possible" at some point, Haggerty said. The Malaysian reorganization alone is expected to save $100 million annually, he added.
On the other hand, WD was forced to enter a supply agreement with IBM Corp. to quickly transition into magnetoresistive heads, Disk/Trend's Porter noted. How much profit remains to be eked out after paying IBM is an open question, and one that Haggerty declined to address.
As it battles to chop costs, WD faces competition from start-up disk-drive manufacturer Conner Technology plc, which has begun shipping its first ultra-low-cost 4.8-Gbyte products. Conner's entrance will dilute the disk-drive field further, giving greater leverage to OEMs and challenging WD to lower its prices further, analysts said.
Western Digital is far removed from its days as a supplier of multimedia and networking products, having trimmed or sold off those lines to focus on its storage business. Still, disk drives will prove to be a steppingstone for expansion into higher-margin services, which is the second part of Haggerty's strategy.
"I do anticipate over a three-year period that [disk drives] will contribute less significantly to the company's margins," Haggerty said. Rather, WD plans to leverage its core business-rotating magnetic storage-"and use that as an enabler to move up the food chain," he said.
Like many other disk-drive companies, WD has chosen to enter the market for network-attached storage devices,, small arrays of disk drives attached to a network. In February, WD acquired NAS provider Crag Technologies Inc., San Jose, renaming it Connex Inc. WD also owns SageTree Inc., a data-warehousing business that Haggerty said is strategically important to WD.