Updated from 4:56 p.m. EDTWeak gross margins pushed hard-drive maker Maxtor ( MXO) 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.
There were a few bright spots in the quarter. Shipments of high-margin SCSI drives, generally used for network storage, were up by 5%, a bigger than expected increase. The company made a number of fiscal moves, including the retirement of loans totaling $77 million, which should have the effect of lowering long-term debts and extending the life of the debt, said CFO Duston Williams. But guidance for the fourth quarter was off the mark. The company now expects a loss of $10 million to $20 million, or 4 cents to 8 cents a share, on sales ranging from $940 to $960 million. Analysts were looking for a profit of 4 cents a share on sales of $1 billion. Net income includes a one-time gain of $5 million, which means the operating loss is actually larger, perhaps ranging from 6 cents to 9 cents or 10 cents a share, said Santiago, whose company does not have a banking relationship with Maxtor.