Nature seems to be wreaking vengeance on technology this year. The floods in Thailand have hit the technology sector hard, even before it could fully recuperate from the catastrophic earthquake in Japan back in March. The ensuing supply breakdown is now feared to show up again.
The flood, caused by heavy monsoon rains, is being considered the worst in the past 50 years. The natural disaster resulted in the close down of over a hundred industrial facilities across different sectors. The precise impact on non-HDD technology companies is still unknown.
Thailand is the major hard drive producer in the world and this flood is making its effects felt in the technology vertical. In fact, continuous power outages and stagnant water has stalled the production of disk drives.
U.S. market research firm IDC stated that more than half of Thailand’s disk drive capacity had been affected. However, the full extent of the damage to the HDD industry will not be known until the flood-waters recede.
HDD Manufacturers – In Rough Water
This is a real hard time for HDD manufacturers. Western Digital Corp. (WDC) has extensive operations in Thailand and appears to be the worst affected of the HDD manufacturers. The company stated that damage to its Thailand operations will make it unable to meet customer demand the rest of the year.
The company lowered its December quarter sales and shipment guidance. Western Digital guided to a December quarter loss range $1.10 to $1.50 per diluted share on a projected 55% drop in unit shipments. The company expects a revenue range of $1.05 billion to $1.25 billion for the upcoming quarter, compared to revenue of $2.69 billion reported in the first quarter of 2012.
Seagate Technologies plc (STX) noted that while its own Thai facilities were not affected by the flooding, it may have difficulty making hard drives because of constraints in getting parts. Seagate now expects to ship 41 million to 45 million units for the second quarter of 2012, narrowing and lowering its estimated shipments to the lower end of its initial outlook of 40 million to 50 million units.
But the flood could prove beneficial to Seagate too. The stalled production at Western Digital opens up an opportunity for Seagate to increase its market share, particularly because of the commoditized nature of the market. Seagate asserted that its facilities in Thailand are operational and at full production levels. With the Samsung acquisition, management believes the company’s capacity will be approximately 70 million units in the March quarter of 2012.
Effects on the PC Industry
The picture is a little less bleak for the PC industry. IDC noted that a large part of PC production for the fourth quarter had already been shipped. Hence it expects the negative effect of the flood on PC shipments to be limited to 10% lower than earlier expectations.
But for the first quarter of 2012, the firm expects total PC shipments to be slashed by more than 20% from previous forecasts. IDC had previously projected 8.2% PC unit growth in the first quarter.
But according to some analysts, the shortage could prove less harmful to laptops and desktop computers due to the secular shift to NAND SSDs (Solid State Drives) from HDD. Moreover, the consumer demand for PCs has been weakened by the current global economic upheaval.
However, the impact is not likely to be limited to PC shipments alone. The surge in the prime raw material cost (i.e. hard drive) would pressurize PC OEM (original equipment manufacturer) profitability. Specifically, research firm iSuppli expects shipments to decline significantly in the December and March quarters that would raise external hard drive prices by roughly 10.0%.
Although the top PC makers, Hewlett-Packard Co. (HPQ), Dell Inc. (DELL) and Acer have not updated their expectations yet, we may expect them to report lower-than-guided numbers in the December quarter.
For fourth quarter of 2011, HPQ estimates revenues of $32.1 billion to $32.5 billion. Management also expects GAAP diluted EPS in the range of $0.44-$0.45, and non-GAAP diluted EPS in the range of $1.12-$1.16.
For fiscal 2011, the company expects revenues in the range of $127.2 billion to $127.6 billion, which is lower than the previous estimate of $129.0-$130.0 billion, given the weak consumer environment noticed in 3Q11 and slower growth in the services business. The lowered guidance was attributable to the uncertain macro environment, higher channel inventories of printing supplies and the Services business transformation.
For the third quarter of 2012, Dell expects to see revenue roughly flat sequentially, which is in line with seasonality over the past two years. Based on strategic decisions to redirect resources from lower- to higher-value solutions and a more uncertain demand environment, Dell has lowered its full-year revenue-growth outlook to 1-5% from the previous range of 5-9%.
What Others Are Saying
Enterprise systems makers EMC Corp. (EMC), NetApp Inc. (NTAP), Teradata, and International Business Machines Corp. (IBM) could see disruptions to the storage and server supply chain as well. But as these companies are enterprise-HDD users, there is a chance that they would buy devices from Seagate and Hitachi (for their specialty in performance-enterprise HDDs) than from Western Digital.
We believe that this could reduce their exposure to the supply chain issues. In IBM’s case, the company’s limited hardware exposure also significantly limits the risk.
Seagate has a Zacks #2 Rank, implying a short-term Buy recommendation. Western Digital and Dell have a Zacks #3 Rank, implying a short-term Hold recommendation. H-P has a Zacks #5 Rank, implying a short-term Strong Sell recommendation.
