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Maxtor Inches Away From Small Drives

Posted by iMark - 2005-11-19

The growth in popularity of consumer electronic products like Apple's iPod, MP3 players, and digital cameras was initially a benefit to makers of small hard disk drives like Maxtor and Seagate, two leading drive manufacturers.
But when Apple announced it would be using NAND flash memory from Samsung for its iPods, Maxtor heard the death knell for microdrives. On Tuesday, Maxtor subsequently announced it is abandoning its 1-inch hard drive, which it had planned to market in 2006.

The result is that Maxtor will be taking a $2 million charge in the fourth quarter to write off the cost of equipment to make the drives -- a charge that will add to the woe the company has been driving hard to reverse. Third-quarter revenues dipped less than 1% to $926 million as drive shipments fell by more than 4% compared with last year, while gross profits fell by $49 million.

As these consumer electronic products shrank in size, the hard disk drive used to store music, pictures, and data had to shrink as well. Many of the devices relied upon drives as small as 1 inch, which can hold as much as 6 gigabytes of data. Yet their small size also limited their performance. They just don't spin fast enough to satisfy the requirements of today's digital media. The electronics product makers began turning to flash-memory chips for their needs.

For the past several years, Maxtor has been laying off employees, most recently a workforce reduction of 5,500 workers in Singapore. It misjudged the market there, too, as it figured attrition would eliminate 2,500 jobs and the rest through severance, but instead only 1,400 positions were eliminated by attrition and the company recorded a $4.1 million adjustment to account for the miscue. Year to date, the company has incurred $16.4 million in severance-related expenses. Those eliminated jobs don't include the exodus of executives that occurred this time last year, when the CEO followed the CFO over the railing as the two abandoned ship when the company forecast losses more than what Wall Street had been expecting.

The new management team brought in to replace the defectors has been trying to right the listing ship. They've been engaged in restructuring the company, although part of the plan has included taking on significantly more debt. In August, Maxtor issued $300 million in convertible notes, bringing the company's total long-term debt up to $575 million.

The company's stock once traded for as much as $15 a share two years ago but now dwells in penny-stock territory -- below $4 a share. With heavy debt, massive layoffs, and undesirable products, Maxtor may find itself inching closer to being an acquisition target than an industry leader.

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