Maxtor Lowers Guidance; Plans Layoffs Of 400 to 500

The news from Maxtor caps a generally gloomy week in the storage space following poor pre-earnings news from host bus adaptor maker Emulex and from storage appliance and tape library vendor Overland.

In addition to falling below expectations for the quarter, the three have another common thread: Much of their business comes from top-tier OEM customers, possible a foretelling of things to come from the larger vendors.

Maxtor officials said the Milpitas, Calif.-based company expects shipments for the second quarter, which ended on June 26, to be 11.6 million units, about 10 percent below initial guidance for the quarter. Revenue for the quarter is expected to be between $820 million and $825 million, with a loss expected of $20 million to $30 million, or 8 cents to 12 cents per share.

Maxtor officials blamed the shortfall to a seasonally weak second quarter and softness in the distribution channel, especially from whitebox builders and systems integrators which delayed purchases in hopes of declining prices. They seem to be getting their wish, and Maxtor's average selling price for its drives dropped to about $71, down $4 from the previous quarter.

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"We are extremely disappointed in our second quarter performance, which was the result of a very aggressive pricing environment in both the OEM and distribution channels and lower than expected unit shipments, primarily to distributors," said Paul Tufano, president and CEO, in a statement. "During the quarter, we took steps to control costs and expenses to partially offset the shortfall in volume and revenue. We will continue our efforts to cut costs and lower the breakeven point of the company through a reduction in force, beginning this month."

A company spokesperson said that specifics about who will be laid off, including geographical area of department, have yet to be finalized. As of Thursday, no one in the company had been notified they would be laid off.

Maxtor hopes to cut expenses by $60 million to $80 million annually as a result of the layoffs.

Further details are expected when the company issues its quarterly earnings report on July 21.

On Wednesday, officials of San Diego-based Overland Storage said revenue for its fiscal fourth quarter, which ended June 30, would be about $54 million, or about 10 percent below initial guidance. Even so, the company still expects revenue for the year to be about $237 million, up 21 percent over fiscal 2003.

The company blamed the shortfall mainly on lower-than-expected revenue from its OEM sales.

"While we are extremely pleased with our strong year-over-year growth during fiscal 2004, we are disappointed with our performance for the fourth quarter. Nevertheless, we remain optimistic about our prospects for fiscal 2005. The mid-range of the backup and recovery market, our focus, continues to provide exciting growth opportunities for us, and early results indicate that our new disk-based backup appliance is being well received in the marketplace. We expect these opportunities will lead to continued growth in both revenue and earnings in fiscal 2005," Overland Storage President and CEO Christopher Calisi, in a statement.

"The core of our business strategy in fiscal 2005 is diversification of channel distribution and product mix. We recognize that dependence upon any single customer can lead to quarterly fluctuations, as we just experienced, and we continue to aim for greater predictability and consistency of results. I believe we are making great strides in each of these two directions of diversification," he added.

Overland expects to report its fourth quarter and fiscal year earnings on August 13.

Wednesday also saw officials of Costa Mesa, Calif.-based Emulex pre-announce lower-than expected revenue. The company now expects revenue for the quarter to be between $85 million and $86 million, down from the $100 million to $103 million range predicted last quarter. Earnings for the quarter are now expected to be 18 cents per share compared to initial projections of up to 25 cents per share.

While demand or sell-through with three of its top four OEMs grew sequentially, a downturn in demand from two OEMs led the company to revise its revenue, company officials said.

Tom Curlin, director of equity research at Memphis, Tenn.-based analyst RBC Capital Markets, said in a report that the Emulex shortfall seems related to supply chain management changes at Hewlett-Packard and changes in new programs at EMC.

Paul Folino, Emulex Chairman and CEO, said in a statement, "Despite the challenges encountered during our fourth quarter, industry fundamentals appear solid as the shortfall in fourth quarter revenue is largely related to interim issues at a couple of OEM customers. The upcoming transition to a hub based program will align all of our top OEMs to a common model. While we do expect to implement modest cost containment measures to control operating expenses during the first quarter, with no change in the industry outlook, we will continue to invest in revenue growth opportunities in the storage networking market, which reflects our confidence in our future growth potential."

Emulex plans to announce its fourth quarter and year-end results on August 5.