Read-Rite Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RDRT)") else Response.Write("(NASDAQ: RDRT)") end if %>
345 Los Coches Street
Milpitas, CA 95035-5428
(408) 262-6700

Buffalo, N.Y., July 17, 1996/FOOLWIRE/ --- Read-Rite reported earnings for Q3 1996 this afternoon. A quote from Read-Rite's Chairman sums up the results:

"I enjoyed life a lot more last year than I am enjoying it right now."--Cyril Yansouni, Chairman, Read-Rite

Sales for Q3 1996 were $238.3 million, down 5.8% from Q3 1995. Nine months sales for fiscal 1996 have increased 11.4% to $795.7 million. For the quarter, Read-Rite reported earnings per share $(0.49) compared to $0.69 last year. Before the charge the company took for an inventory write-down, EPS came in at $(0.28). For the nine months ended, EPS was $0.44, or $0.97. Trailing four quarters earnings are now $1.37 or $1.92 before charges. In the quarter, Read-Rite took a $10 million charge for the reduction in inventory valuation at the end of a product's life.

The third quarter was obviously a difficult one for Read-Rite because they were late entering the market with several major advanced inductive products, had lower yields, and higher start-up costs with these new programs. As a consequence, they were not able to cover fixed costs, operating under capacity, on start-up programs as well as on continuing operations. The company also saw some softness in the disk drive industry with the cancelling of customer programs at the end of the third quarter: "The key point to know at this time is that the revenue was on track to exceed last quarter's revenue until late in the quarter, when two customers cancelled and rescheduled deliveries of our products, significantly impacting out third quarter sales.

Revenue breakdown:

Inductive thin film $184.2 million
Metal in gap 48.2
Magneto resistive (MR) 2.6 (First quarter of volume MR shipments)

Gross margin equalled 4.8% of sales compared to 16.5% in the previous quarter. Without the charge of $10 million to gross expenses, gross margin would have equalled 9% of sales. 25.4 million HGAs (head/gimble assemblies) were shipped compared to 27.3 million in Q2. Start-up costs and the wind-down of MIG heads increased costs--R&D was $3.9 million over the normal quarterly run rate, pushing those quarterly expenses to $12 million. The development of planar technology is on schedule.

BALANCE SHEET

Ending cash was $204 million up from $189 million last quarter. During the quarter, the company took on a five-year term loan, the payments on which begin in the third year. Read-Rite ended the quarter with $111 million in accounts receivable, down from $149 million in the last quarter. This represents 41 days sales outstanding, as compared to 46 DSO last quarter. Inventories ended at $82.5 million, up from $79.5 million in March. Inventories turned 11 times, flat with the last quarter.

INVENTORY BREAKDOWN

Raw materials $19.1 million

Work in process 43.3

Finished goods 20.1

Work in process and finished goods increases were primarily due to customer push-outs. Property and equipment additions during the quarter were $91 million. Depreciation and amortization were $28.8 million, up from $25 million last quarter. Total assets are now $1 billion. The company has $189.6 million in working capital and has a current ratio of 1.85 and is trading within a negligible difference of its book value.

CUSTOMER MIX

                      Third quarter 1996   Third quarter 1995

Western Digital           48.5%               38.2%
Quantum                   27.4                32.8
Seagate                    9.1                11.2 (Conner)
Maxtor                    10.7                11.7

Product mix had 66.3% for headstack assemblies (HSA) and 32.6% for HGAs (head/gimble assemblies). In terms of units, HGA shipments were 25.6 million, of which 20 million were thin film and 5.6 million were MIGs. HSAs were 3.8 million.

The company was qualified on a "key" MR program of 1 GB per 3.5" form and has been begun production in volume on that volume. Over 200,000 heads have shipped and is a milestone in their MR head program's progress. The company has made excellent progress with the planar recording head technology and has provided customers with engineering samples of heads with aerial density in the 900+ Mbit per square inch capacity, which translates to 1.4 GB per 3.5" platter.

ANNOUNCEMENT OF A PENDING Q4 LOSS

The company has also completed the design on their 850 MB/3.5" disk technology, which is another goal achieved. This program is beginning to ramp and will incur start-up costs in the coming quarter. The ramp-up goal is to proceed quickly with this program. The majority of MIG product has reached the end of its life. The revenues from this program should show "very limited revenue, if any, of MIG products during the September quarter. Our MIG revenues represented $48 million of our $238 million of revenue. We anticipate that sales for the September quarter will be significantly lower than the $238 million that we just reported, and based on our absorption costs, we expect that we may have a greater loss in the fourth quarter than we have in the third quarter."The company is reviewing all possibilities for costs reductions in fixed costs as well as in discretionary and capital spending.

Without the turbulence in the industry or among RDRT's customer base this year, the company has experienced a very eventful year in exiting MIG and shifting to HGA to HSA shipments (2/3 or revenues coming from HSAs and 1/3 from HGAs). The company is pleased with their MR progress and expects to produce 1.5 million MR heads and is excited by the next generation of MR heads, which will go into production in Q1 FY1997. The planar head programs, a "cost effective inductive technology," will go into production in Q1 calendar 1997.

Read-Rite's products mostly end up in PCs although some of the new products are aimed at the high end of the market, meaning enterprise or server storage. Overall, demand right now is "very soft or flat," though. They would definitely characterize the coming quarter as being "quite soft." Hewlett-Packard's exit from the business will not negatively impact Read-Rite. As their exit from the business may create opportunities for Read-Rite's customers, it may help Read-Rite itself on the high-end.

Read-Rite produces heads for the Iomega Jazz and that was definitely part of the revenue picture for the June quarter, albeit a small one, being included in the "all others" category of revenues, which encompasses everything below 5% of revenues. They do expect Iomega to be a more significant customer in the coming quarter/s.

The company is committed to R&D although those expenses should remain flat on an absolute basis (meaning that they will probably increase as a percentage of sales). 8-10% of revenues is the model, though. Capital expenditures should be significantly less than those made in 1996. The model is in the $50 million range for FY1997. There are a number of MR head programs being readied for Q41996 and FY1997.

On improving costs: There are two parts of the cost structure--fixed and variable. Wafer yields determine the variable costs, which gives the company great incentive to keep up R&D spending and keep up the fast ramp of new programs. The company is reducing fixed costs, specifically with the MIG facility, in moving that capacity toward thin film technology. Seagate continues to be the large consumer of MIG heads, and while Mr. Yansouni would't comment on the relatioship going forward, he did say that they continue to go after design wins with Seagate and elsewhere in. Seagate will probably get to a lower point before increasing, as a percentage of revenues.

At the moment planar technology is an extremely cost effective solution for higher aerial densities, although MR is the longer-term solution. The cost structure of the industry with respect to inductive heads is more favorable to the planar technology at the moment, though. The merchant side of the head makers has started to ramp volumes, though they remain moderate. Read-Rite believes that they are in the middle of the pack on 850 Mbit/in.2 heads and will be ramping the 1 Gb/in.2 heads soon.

"Last year, we were kicking TDK's behind and this year, they're kicking ours. It's as simple as that." They definitely have gained market share, "and I enjoyed life alot more last year than I am enjoying it right now." They're catching up on inductive and in MR, they've been doing it longer than RDRT. But Mr. Yansouni believes RDRT is making progress with MR and intends to "get back on the offensive as quickly as possible."

The June drop-off was due to three customers' difficulties, one of which is not a publicly traded company. Certain form factors were in oversupply and certain new programs didn't perform as well as expected, hence, the pushouts. "I think the market is not very strong for end-products...but some companies can do well in a down global market." RDRT has such broad exposure that a wide slowdown does hit their sales, though.

[Asked to forecast] One year from now, MR will be 40% of revenues; planar, 20%; and advanced inductive, thin film, the other 40%. On the Q3 slowdown, Mr. Yansouni expressed that there was no way to see the customers' pullout on certain orders and that they just can't force product down people's throats. He expressed that some of the inventory on the balance sheet, as of the reporting date, has already been shipped and that they've done well in the face of industry uncertainty.

As to industry consolidation, the company believes that there will be more stability within the industry and that Read-Rite remains a leader in the merchant market. 1995 was more a year of acquisitions and restructurins for customers while 1996 and 1997 are looking to be less turbulent. They wouldn't comment on the possibility of consolidating Read-Rite with another company [a question posed to them during the call--not a rumor in the market].

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event.

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