Wed, Oct 25, 2000 page18

• Gigastorage to slash profit target

  DISCS Suffering from low CD-R prices more than the larger firms are, the optical storage manufacturer will lower net income targets for the year by nearly two-thirds

  • By Thomas Ker / CONTRIBUTING REPORTER
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  Gigastorage Corp will slash its expected net income for the year by nearly two thirds when it announces an adjusted financial forecast on Friday, an official at the company said yesterday. The company blamed lower than expected prices for recordable compact discs and delayed capacity expansion bite into profits and revenue for the shortfall.

  The optical storage manufacturer will lower its forecast revenue for the year to about NT$2 billion, nearly 46 percent lower than the previously forecast NT$3.68 billion, an official at the company said. The net income forecast will fall to about NT$300 million, over 60 percent lower than the NT$952 million previously expected. The company is estimating an earnings per share of "near NT$2," less than half the share earnings of about NT$4.50 predicted by local analysts.

  "Price and capacity output are the two reasons [for the lowered projection], so we cannot achieve the forecast," said Carl Lee, department manager of investment.

  The forecast downgrade follows a similar readjustment yesterday by Prodisc Technology Inc, also a recordable compact disc manufacturer. The company lowered its revenue target for the year by 20 percent to NT$6.05 billion. Prodisc also blamed the low price of CD-Rs as a major factor behind its readjustment.

  For Gigastorage, profits have also suffered because of its delayed capacity expansion, said Lee. The company had forecast monthly output of 25 million CD-Rs per month by now. But it's only producing 15 million discs. The lower output translates into costs that are less competitive, and less protection than the larger, more efficient CD-R makers against falling prices.

  "The product cost will be worse than Ritek Corp and CMC Magnetics Corp," said Richard Wu, an analyst at International Securities Co. As a result, profit margins will be lower, he said. Ritek and CMC are the two largest CD-R manufacturers in the world. Gigastorage is one of Taiwan's larger optical storage makers, but is much smaller than the two leading manufacturers.

  What's more, said Wu, Ritek and CMC have the added benefit of investments they can sell to prop up their revenues at such times when CD-R prices tumble and reduce margins. Gigastorage and Prodisc do not have such a cushion. The low prices have encouraged the major CD-R makers to diversify into new products to reduce their exposure to the fluctuating prices of a single product. CMC has moved into the development and production of touch panels and personal digital assistants; Ritek is diversifying into LCD components and small display panels.

  Meanwhile, Gigastorage has developed an MP3 player and is moving into DVD-RAMs erasable, high capacity, optical DVD discs. The company will begin shipping the MP3 player from the end of this month. Still, CD-R sales will continue to account for 80 percent of revenue this year, and about 50 percent to 60 percent next year.

  Compared with other optical media storage makers, Gigastorage's diversification is slow, analysts said. The likes of Ritek, CMC, and Prodisc have been moving very aggressively into other fields, said Eric Chen, an analyst at SG Securities in Taiwan. As a result, he doesn't recommend investors sell these shares. However, in terms of diversification, "Gigastorage has been quite slow to do this," said Chen.

  With CD-R stocks not expected to rebound until the end of the second quarter next year, "We're not going to recommend our investors invest in this sector," said Chen. Further, in an industry in which "we will find that the big get better," Chen anticipates a tough time ahead for Gigastorage.

  International Securities' Wu is more optimistic. While still a challenge, Gigastorage should reach its modified revenue target for the year. Its cooperation with the Industrial Technology Research Institute in developing new technologies should also provide it with opportunities to make new products, said Wu. The ITRI is a non-profit organization that carries out research and development projects entrusted by the government and private companies.
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