KOMG: Komag Has Lots of Inventory, Few Buyers
Mid Cap Watch List (Track at Marketocracy) member Komag, Incorporated (KOMG), a leading independent supplier of thin-film media for disk drives, announced revenue of $264.7 million and diluted earnings per share of $0.99 for the first quarter of 2007. Analysts had expected the $0.99 to be delivered on just $255 million in sales. According to the release:
Revenue in the first quarter included sales of precious metals inventory totaling $11.2 million. Gross margin for the first quarter was negatively impacted by the high cost of precious metals primarily used in the production of PMR media and an unfavorable Malaysian Ringgit currency rate change.
That would account for the higher revenue not contributing to net income. Guidance was disappointing:
“We expect that revenue in the second quarter of 2007 will be down approximately 8% to 10%, excluding the $11.2 million sale of precious metals inventory in the first quarter of 2007. While we normally plan for a seasonal decline in the second quarter, we started the second quarter more slowly than normal as some customers readjusted their plans to the current demand environment.
With our expected revenue level, the mix of finished media and substrate sales and lower capacity utilization, our net margin is expected to be in the range of 8% to 10% in the second quarter of 2007.
If we can do the math, that suggests approximately $232 million in sales and $0.62 in earnings per share, compared with analyst estimates of $0.97 on $248 million. Looking at the balance sheet, it is easy to spot the big issue: inventory was up 60% sequentially despite flat sales and predictions for a decline next quarter. As a result, cash flows from operating activities were negative to the tune of $11 million, compared with $59 million in positive cash flow last year.
Worse, the negotiating power is firmly in the hands of Komag’s customers:
Sales to Western Digital (WDC), Seagate (STX - Annual Report) and Hitachi (HIT) Global Storage Technologies accounted for 37%, 37% and 21% of disk product (media and substrates) revenue in the first quarter of 2007, respectively.
The three buyers who account for 95% of Komag’s sales can all see that Komag is stuffed with inventory. And they will all try to negotiate very favorable terms to relieve Komag of it.
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