Micropolis Cuts Back in Drive to Trim Heavy Losses

If a ship starts taking on water, it’s time to start bailing. At Micropolis, the Chatsworth computer-equipment company, management has the bailing pails out.

Last week Micropolis announced a $10.6-million loss for its second quarter, which ended June 30, its fourth consecutive losing quarter. For the first six months of this year Micropolis’ losses have hit $23.9 million, as sales declined 10% to $160 million, and computer analysts expect Micropolis to lose from $34 million to $46 million for the year.

Not surprisingly, the company’s stock slumped since last week, closing Monday at $3.25 a share, a world away from its high of $40 a share only two years ago.

The problem? Micropolis makes disk drives, those boxlike devices that store computer data magnetically on hard platters. But the disk-drive market has been so crowded that prices for some models have fallen 38% in the past three years, according to Dataquest, a San Jose market-research firm.

In a Squeeze

Add to that Micropolis’ production delays with some newer disk drives, lower than expected sales, plus the usual yo-yo instability of the computer industry, and the company has felt a financial squeeze. Last month, Micropolis decided to quit making a smaller, 3 1/2-inch disk drive, and instead will invest its resources on its more conventional 5 1/4-inch disk drives.

Micropolis Chairman Stuart Mabon said, “There is no question that the potential of the 3 1/2-inch market is very great,” but slowing company sales “forced us” to abandon the product. Mabon said about 100 of the company’s 700 domestic employees would be laid off.

As computer manufacturers have begun designing more compact personal computers, there is a growing demand for smaller disk drives.

Mabon said the company’s basic 5 1/4-inch disk-drive market is “quite adequate to support some growth for the next few years and allow the company to recover some of its financial poise,” adding that he expects Micropolis to post a profit next year.

But not all computer analysts agree with that prediction.

“Their survival is probably at stake,” said Hinda Chalew, computer industry analyst for Dataquest. “The rigid disk-drive industry has not been particularly stable. We’ve seen a lot of people hurting and Micropolis is hurting.”

Tax Credit

Wedbush Morgan Securities analyst Aharon Orlansky said, “You’ve really got to be creative to pile up such losses” as Micropolis, noting that the company’s second-quarter loss would have been higher had it not been for a $10-million tax credit. He also points to Micropolis’ weakened balance sheet: as of June 30, Micropolis’ assets had dwindled by $46 million, to $164 million, in the past six months.

“Right now it would take a miracle for Micropolis to survive,” Orlansky said. “The problem is your customers know the balance sheet as well as you do. They become the first rats to leave a sinking ship.”

Mabon disagreed, saying his customers were staying put. “Outsiders don’t necessarily understand the details of what’s going on,” he said.

Other analysts were more upbeat about Micropolis. William Easterbrook of Kidder Peabody said that while Micropolis’ losses are disappointing, “the liquidity position was much better than I thought.” The company’s bank debt declined by $2 million in the past quarter, he said, and he expects a modest profit next year.

And James Porter, president of Disk/Trend, a Mountain View research firm, tends to agree.

“The company is well-managed,” he said. “Micropolis has a nice broad, diversified customer base. And they’ve got good people.”

Top Executive Quits

But Dundas Flaherty is one old hand the company won’t have any longer. Mabon confirmed last week that Flaherty, Micropolis’ chief financial officer, resigned last month for personal reasons. Neither Mabon nor Flaherty would say if the resignation was tied to the company’s recent problems.

Mabon has high hopes for a new so-called “half-height” disk drive. The idea is that two shorter drives can be stacked on top of each other, thus speeding computer performance. The company has been selling the line since November, but Dataquest’s Chalew said “other companies have been shipping that for a year now.”

Another part of Mabon’s strategy is to hang on to its 5 1/4-inch disk-drive market, and in a few years, when mini-computer manufacturers start shifting from larger disk drives to 5 1/4-inch models, to grab as much of that $1 billion-a-year market as possible.

In the meantime, Micropolis has to watch its costs and trim its losses. “The industry perceives them as struggling,” Chalew said. “But then the whole industry is struggling. Micropolis is just a casualty of the industry.”