Margins Drive Maxtor Lower

Updated from 4:56 p.m. EDT

Weak gross margins pushed hard-drive maker Maxtor(MXO Quote) into a disappointing third quarter, despite a 10% increase in unit sales.

And the end of the company's hard times is not yet in sight. Maxtor is late to market with new, high-capacity drives and instead of the expected fourth-quarter profit, Maxtor forecast a substantial loss.

The Milpitas, Calif.-based company on Wednesday said it lost $17 million, or 7 cents a share, compared with a loss of $95 million, or 38 cents a share, in the same quarter of 2004.

Revenue was off slightly to $926.5 million vs. $927.2 million last year.

The loss included $7.5 million in one-time charges, such as $4.2 million related to layoffs in the company's Singapore facility.

Maxtor does not give pro forma estimates, but sources close to the company said that including items, the loss was about 4 cents a share. Analysts polled by Thomson First Call were looking for a loss of 3 cents on sales of $938.6 million.

In recent after-hours trading, shares were off 9 cents, or 2.5%, to $3.55 on the announcement, after ending the regular session down 5 cents to $3.64. The stock would have taken a bigger hit, "but it's already priced very low," said Piper Jaffray analyst Leslie Santiago. "The stock already reflects low expectations."

Indeed, the stock is approaching its cash value of about $2.20 a share.

Gross margins slipped to 11.1% from 13.2% in the second quarter as average selling prices declined to $70 from $77.

Desktop-drive units increased sequentially to 12.2 million compared with 11.1 million. But margins, the company said, were "constrained" because of internal production problems.

The issue, which according to the company, has been resolved, limited supplies of media (material that makes up the drives), increased costs, decreased yields and led to the temporary loss of customers who would have purchased higher-margin products.