Tough times for hard-drive companies, report says

by Guest Contributor | May 28, 2004 1:05:00 PM

Tags: Guest Contributor

Takeaway: Hard disk drive makers face an "extremely competitive pricing environment" and grim profit prospects, Credit Suisse First Boston says.

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By Ed Frauenheim
CNET News.com

The disk drive industry is spinning its wheels, according to a new report.

The industry, a notoriously difficult one in which to succeed, is stuck in a rut of cutthroat pricing and grim profit prospects, according to the report, released Thursday by investment firm Credit Suisse First Boston.

"While demand for hard disk drives remains robust, an extremely competitive pricing environment has emerged, particularly in enterprise drives, which has served to eliminate most of the industry's profit pool for (the) calendar second quarter," the investment firm wrote.

CSFB gave "neutral" ratings to Maxtor and Seagate Technology and an "outperform" rating to Western Digital. "Because of its concentrated product line, which is focused on desktop PC drives, Western Digital is somewhat insulated from the fallout in the enterprise market, making it the most attractive investment candidate in the group," the firm wrote.

Neither Maxtor nor Seagate responded immediately to a request for comment.

Enterprise drives refer to disk drives that end up in powerful server computers and dedicated data storage devices made by companies such as EMC, Hewlett-Packard and IBM.

John Donovan, vice president of research firm TrendFocus, echoed the Credit Suisse First Boston report on drive companies. "These guys just repeated the mistakes of the past," he said. "They just overproduced."

Donovan expects at least some drive companies to post losses in the second quarter of this year. But he anticipates improved results later in the year.

Last year, industry observers voiced optimism about the drive market. Demand for the products was projected to rise, particularly in consumer devices such as music players. And the number of drive makers had shrunk to a handful after Quantum sold its hard-drive business to Maxtor, and Hitachi bought IBM's disk drive division.

Disk drive demand appears healthy. Maxtor, for example, said it shipped 13.6 million drives in the first quarter of this year, up from 12.4 million in the first quarter of 2003.

But Maxtor CEO Paul Tufano called the recent period "a difficult quarter characterized by an industry oversupply of desktop drives in the distribution channel and aggressive pricing in the enterprise market." For the quarter, Maxtor reported net income of $9.2 million, down from $27.4 million in the first quarter of 2003.

CSFB suggested that more gobbling up of drive companies is key to improving the industry's outlook. "We see further consolidation, new product introductions or strong seasonal demand as the best means of alleviating the current situation," the report said.