It has been expected for some time now that the fallout from Thailand’s well publicized flooding and resulting hard drive shortage would have wider ramifications than just impacting the businesses of Western Digital and Seagate and driving up hard drive prices, and now those other outcomes are finally starting to occur. Today Intel became the latest casualty of the shortage when they announced that they were reducing their Q4’11 earnings estimate from $14.7B in revenue to $13.7B due to the shortage and its impact on new computer sales.

Even though Intel is a moderately diversified business – they have their hands in everything from CPUs to NICs to SSDs – virtually everything Intel sells is tied to the sale of new computers. As the hard drive shortage has continued and existing stocks of hard drives have been emptied the lack of cheap hard drives has made them the de facto bottleneck in computer production, leading to the slowing the production of new computers for both the consumer and enterprise markets. This in turn is directly reducing the demand for Intel’s products, most notably CPUs, and is why Intel has had to revise their earnings estimate down.

Intel notes that Q4’11 computer sales are still up over Q3, which means sales are still rising as they traditionally do, but at this point the lack of hard drives is capping computer sales at a lower level than they would otherwise reach. After the final sales are tallied at the beginning of next year, Q4’11 sales will almost certainly be down versus Q4’10, representing an unusual contraction in an otherwise good year for the PC industry.

Intel’s own guidance suggests that the shortage will continue to dog the company through Q1’12, and only finally begin to abate in Q2’12. It may very well take longer than Q2 for hard drive production to recover, but Intel isn’t speculating out that far. Regardless, Q2 is widely expected to be the launch for their Ivy Bridge CPUs, so it will be in Intel’s best interest for the shortage to come to an end quickly.

Intel of course won’t be the only casualty, but by taking a $1B reduction in revenue (and shaving 0.5% off of their legendary gross margin) they’re among the largest. By the time the shortage ends we’re expecting to still see several more companies and industries take a hit; AMD is a likely candidate for the same reason as Intel, but also NVIDIA & AMD for their GPUs, and the DRAM industry is highly prone to boom/bust cycles – this being at a time where DRAM is already at record low prices. There are very few industries that can go unscathed when 25% of the global hard drive production capacity for Q4’11 disappears overnight.

In Intel’s case they are at least partially diversified against a hard drive shortage through their SSD business, and while Intel doesn’t provide estimates for specific businesses it’s likely to be one of their stronger units for the quarter. Still, SSDs are not great replacements for hard drives (in an economic sense) so strong SSD sales cannot compensate for the significant drop in CPU sales due to the hard drive shortage.

Source: Intel Investor Relations

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  • GuinnessKMF - Monday, December 12, 2011 - link

    How is this the "bigger problem" in what sense? This is a company that was projecting ~$15 billion and revised to ~$14 billion (revenue, not earnings). This is a 7% revenue projection reduction. That might not be commonplace, but they're a business affected by a natural disaster, I'm sure they're not shrugging it off like it doesn't matter, but they're changing projections to keep themselves from falling short, which when it comes to investors is worse. I hardly think this article reflects the demeanor of Intel and its investors, the face of the company needs to be confident, to act like this isn't a big deal to reassure investors.

    I think the bigger problem would be the people affected by the flood. If you're trying to make a comment that a company shouldn't be this big, this is hardly the article for it.
  • BSMonitor - Tuesday, December 13, 2011 - link

    Exactly. If someone were thinking in these companies that mass produce SSD drives. Now is the time for reinvesting in a lower cost higher capacity drives. We don't need a bunch of 240GB 510MB/s drives. How about filling the market with 500GB 100MB/s drives from the previous generation controllers. Do not discontinue them, reinvest in them to replace HDDs.
  • Mathieu Bourgie - Monday, December 12, 2011 - link

    Speaking of Intel's SSDs, do you have any news on Intel's 510 series replacement, the upcoming Cherryville?

    According to your own news back in September: Cherryville is supposed to arrive in Q4.
  • chizow - Monday, December 12, 2011 - link

    Gonna be a rough holidays for Intel....
  • Hector2 - Monday, December 12, 2011 - link

    Rough ? Maybe for AMD, but not for Intel. They had forecasted another record breaking quarter before HDDs got hit. So maybe they won't break records this quarter, but they'll still be getting pretty huge revenue, profit and margin numbers. And Ultrabooks coming out now and ramping in Q1 use primarily SSDs and not HDDs.
  • Hector2 - Monday, December 12, 2011 - link

    While some models have hyrid mixing of SSD & HDD technology, many of the Ultrabooks are 100% SSD, so those ought to unaffected by HDD shortages
  • BSMonitor - Tuesday, December 13, 2011 - link

    Any set ups with SSD are unaffected. Some player in the SSD market should be looking to a ~$100 500GB SSD, but I doubt it'll happen.

    Where this hurts is the business PC market. Most of the machines there are mass quantity generic 250-500 GB HDD's. These were as low as $25-30, probably less OEM, and are now in the $80-120 range. Almost certainly, Dell and HP are holding back orders of HDD's until the price returns to normal. And since most of their business customers are on PC refresh cycles, waiting a few months isn't going to affect them long term.
  • shompa - Monday, December 12, 2011 - link

    In real life: This is the start of the ARM effect.

    100 million tablets sold/year. 250 million smartphones sold/year. Intel have to loose some customers to them. The 8% fall that Intel predict is inline with ARM.

    The average selling price of iPad is higher then average price of a PC. Many tablet buyers skips net-tops effectually killing that market that used ATOM.

    And it will be worse for Intel. Yes. ARM is slower then Intel on an unoptimized system, but its fast enough starting Q1 next year. You get 50% of Intels performance for 10% of an Intel CPU price.

    Since 2006 AMD have not pushed Intel to release new products. This have made Intel lazy.
    Intel: 2006-->2011 Intel have dubbed its performance.
    ARM: 2007--->2011 Increased performance 17x.

    Ivy Bridge will use 77 watt + motherboard.
    Quod core 2.5ghz ARM 2watt. Cost 25 dollar and will have at least 50% of Intel's performance.

    Before Windows and X86, RISC and *nix ruled. We have had a 12-15 year there windows and X86 have grown stronger. We now see the comeback of *nix and RISC/PPC. Almost 500 million *nix mobile devices sold /year and 8 billion performance ARM sold/year.
  • Metaluna - Monday, December 12, 2011 - link

    "The average selling price of iPad is higher then average price of a PC. Many tablet buyers skips net-tops effectually killing that market that used ATOM."

    Yep, except that's one of Intel's lower margin product lines, which is one of the reasons they never pushed Atom that much and pretty much lost the tablet market. Servers are where they make their huge margins. Those fancy tablet and smartphones really can't shine without a huge datacenter behind them, and Intel is all over that market. ARM is totally unproven in this space, and few except people with vested financial interests (e.g. Nvidia, various ARM startups) claim to know if ARM can scale.

    "Ivy Bridge will use 77 watt + motherboard.
    Quod core 2.5ghz ARM 2watt. Cost 25 dollar and will have at least 50% of Intel's performance."

    You seriously think ARM is going to have anywhere near 50% of Ivy Bridge performance in the same time frame?
  • BSMonitor - Tuesday, December 13, 2011 - link

    Is that why most Tablet sales are failing minus the iPad??

    ARM provides a niche product with no profit margin. All this ARM technology is boosting Data Center sales and growth. Hence Intel is booming because of it.

    Everyone loves a Xeon.

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