Micropolis Was Never Really King, Unfortunately

Micropolis Corp. investors can be thinking only one thing right now: “It’s about time.” After six straight quarters of losses totaling (gulp!) $57 million, the high-end disk-drive maker says it’s about to turn the corner. Honest.

Stuart Mabon, CEO of the Chatsworth, Calif., company, expects a profitable fourth quarter and 1995. Most analysts agree. And Wall Street has taken notice — pushing Micropolis’ shares above $9, from about $7 to $8 in October. And how’s this for a major vote of confidence: An Atlanta investor recently bought more than 500,000 Micropolis shares, boosting his stake in the company to 6 percent. What gives? Micropolis is experiencing strong demand for its new high-capacity drives and is carving out a space in t he burgeoning video-on-demand business. There are lessons here for other drive makers: If you can’t make money in the cutthroat PC channel, look for a high-margin market. And don’t be afraid to spend aggressively on R&D.

One of the keys to the Micropolis turnaround is its expansion into subsystems — RAID (Redundant Arrays of Independent Disks) and video servers. The decision to get into subsystems was part of a bigger effort more than three years ago — when the company was profitable — to come up with a way to “smooth out” the profit peaks and valleys common to the drive industry, Mabon says. The key to pulling it off: Create products that “add value” to Micropolis’ drives; don’t go off on tangents. The company’s subsys tem business has grown to about 20 percent of revenue today from about 5 percent in 1992. Mabon wants subsystem sales to make up one-third of revenue by 1997.

The beauty of getting into the subsystems market is that it’s a 40 percent to 50 percent gross margin business, compared with the high teens to low 20s for PC disk drives, says Dennis Waid, president of Peripheral Research Corp. And Micropolis needs the boost. Its third-quarter margins were 14 percent. To get back into the black, it has to increase quarterly margins to 20 percent and quarterly revenues to $100 million, says Executive Vice President Joel Appelbaum. The company has done neither since mid-199 3.

One of the potentially largest markets Micropolis has tackled is VOD (video-on-demand). The home market is a ways off, but hotels are buying these systems now. And there are plenty of them out there. The top nine U.S. hotel chains have 3,600 sites with 890,000 rooms, Waid says. (Overall, some 3.2 million hotel rooms populate the country.) VOD is a natural market for Micropolis because it demands high-capacity storage. You need about 2G bytes to store a 2-hour movie.

“Despite all the hype and BS [about VOD], we’re delivering,” Mabon brags. “I’m not sure anyone else can say that.” By the end of this month, Micropolis will supply all of the video servers to the 106 U.S. hotels in the Hyatt chain, as part of a deal between EDS and SpectraVision. It also has a deal with Matsushita Avionics to put VOD systems on airliners. The duo expects to have systems running on Singapore Airlines by the middle of next year. Striking early partnerships in the VOD market should allow Micropolis to remain competitive as the market gets crowded, predicts Phil Devin, an analyst for Dataquest.

The company’s other critical factor in Micropolis’ turnaround: spending money to make money. Its R&D investments totaled 14 percent of sales for the past two quarters, compared with between 4 percent and 8 percent at other drive makers. That big spending has paid off with its new VOD servers, which shipped in July, as well as the September shipments of its new of 2G-, 4G-, and 9G-byte Javelin disk drives and a new hardware RAID, the Radion LTX.

As proof that Micropolis is on the right track, Appelbaum points out that its backlog totaled about $58 million at the end of the third quarter, up from about $31 million in the second. The backlog is a broad mix of all the company’s new products — from drives to subsystems. There is strong demand for the company’s new Javelin drives, which ramped slower than anticipated. “[The delay] was a significant factor in the loss in the third quarter,” Mabon says, “and it is certainly going to contribute to moving into the black if we pull off the current plan.”

Micropolis may be making a comeback, but that doesn’t mean it has an easy road ahead. For one, it’s the smallest of the six independent disk-drive makers (at $383 million), so it has to pick its targets carefully. “They have to rifle-shot rather than shotgun it,” says Bob Katzive, vice president of Disk/Trend Inc.

Staking out the high end of the market has not made Micropolis immune from competition. IBM and Seagate also target that market. And why not? Demand for storage is exploding. A whopping 33 million disk drives of 1G byte and beyond will ship worldwide in 1997, compared with 3.2 million last year, Disk/Trend predicts. And let’s not forget that the lucrative VOD market is going to get crowded. It’s on the radar screens of DEC, IBM, HP, Silicon Graphics, Sun, and Western Digital, among others.

But when you’ve been around since 1976, you learn how to survive. “[Micropolis] has shown a remarkable degree of adaptability and flexibility over the years,” Katzive says. That’s probably the biggest thing Micropolis has going for it. That and its co-founder/CEO. “Stu Mabon is a real visionary in the industry,” Devin says. “He’s been respected for a long time for his ability to latch onto opportunities like video-on-demand early.” Once everyone else catches up to VOD, will Mabon have an answer? Stay tuned .

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