Although Maxtor Corp. reported both increased sales and revenue compared with a year ago, company executives said channel resellers apparently held onto inventory to negotiate better deals.
During a conference call Wednesday, Maxtor executives stopped short of accusing its resellers of any impropriety and did not name specific firms. But company executives said their tests had determined that channel resellers had used pricing protection mechanisms to help their own margins.
Maxtor reported net income of $38.8 million on revenue of $1.17 billion, a 12 percent increase in revenue from a year ago, when Maxtor reported a net income of $3.6 million. For the fiscal year, Maxtor reported net income of $102.3 million on revenue of $4.09 billion, versus a net income of $334.1 million on revenue of $3.78 billion during fiscal 2002.
“Were extremely pleased with our results, which reflect actions taken in the past several years to return to profitability,” sad Paul Tufano, president and CEO of Maxtor, in Milpitas, Calif.
Maxtor, primarily a supplier of disk drives to desktop PC OEMs, shipped 15.8 million hard disk drives during the quarter, of which 14.9 million went into PCs. A little over 1.6 million disk drives were shipped to consumer-electronics customers, Maxtor said, and about 854,000 disk drives were sold to enterprise customers. Average selling prices (ASPs) climbed to $74; during the third quarter, ASPs hovered at $71, according to Robert Edwards, the companys chief financial officer.
Sales of 40-GB-per-platter products represented 60 percent of fourth-quarter sales, and the company is carefully negotiating the shift to 80-GB-per-platter products, Edwards said. Maxtor used 2003 to build its base in enterprise drives, he added.
But on Dec. 30, Edwards disclosed, longtime manufacturing partner Matsushita-Kotobuki Electronics (MKE) filed a patent suit against both Maxtor and Quantum Corp., which sold off its disk business to Maxtor. Although Tufano said Maxtors attorneys believe the suit is without merit, Maxtor will shift its next-generation Atlas server drives out of MKEs manufacturing facility and into its own plant in Singapore. MKE and Maxtor have a healthy working relationship, and the transition should be made gracefully, without any effect on supply, Tufano said.
Although certain models of disk drives have been able to command higher margins, sales of drives for desktop PCs have always balanced on the edge of commodity status, where price is the deciding factor. Undercutting a competitors price to buy market share is a not-unheard-of practice, and OEMs are always eager to strike deals. Overbuilding a drive also can lead to dumping in the market, which forces prices downward.
Edwards and Tufano both said Maxtors goal is to continue to drive margins and profits upward. “Whether or not companies are overbuilding is not something I want to comment on,” Tufano said. “I think its in everybodys best interests that supply and demand is balanced; that is why we focus on sell-in equals sell-out,” or adjusting production to meet demand, he said.
During the fourth quarter, especially at the end of October, Maxtor noticed that point-of-sales reports from distributors werent as high as predicted. “We were very surprised,” Tufano said.
Maxtor began to audit distributors, the company found that its own drives had not “sold through” channel distributors and on to customers as quickly as it would have predicted. Like other manufacturers, Maxtors distributors had been granted “price protection”; if Maxtor lowered prices on any of its products, distributors would be able to lower the price on the drives they held, too. Unfortunately for the distributors, that applied to price hikes, as well.
On Nov. 24, Tufano said, Maxtor raised prices to test its distributor channel. The result? We caused a short squeeze on distributors,” Tufano said. “If our competitors had followed suit, there would have been a total short squeeze.”
Now, Maxtor is looking at the distribution channel and its practices “a lot more critically,” Tufano said.
“We must ensure that supply and demand remains in balance and not grow market share at the expense of price,” Tufano said, especially in new markets. “Market share must be earned.”