Marvell Technology and Thailand Floods

October 19, 2011

Marvell Technology (MRVL) makes semiconductor chips for hard disk drives (HDDs), cell phones, networking and other devices. Marvell's first product was a chip to control hard drives, and in its first decade it came to dominate that market. This year revenue from chips for hard drives has represented about half of total Marvell revenue.

This week massive flooding in Thailand caused Western Digital manufacturing facilities to be shut down there. Obviously this could hurt demand for Marvell's HDD controller chips, at least temporarily. How much trouble could this be for Marvell's Q3 and Q4 results? (its fiscal Q3 ends October 30th; Q4 ends January 31st)

Western Digital is currently Marvell's largest HDD customer. Earlier this year Western Digital acquired Hitachi's HDD division. Marvell is generally granted to have the best HDD controller chips, so it has been expected to expand its already substantial market share by increasingly supplying chips for Hitachi. It has also been becoming a more important supplier for another big HDD manufacturer, Seagate, which is acquiring Samsung's HDD division. In Q1 2011 Western Digital led global shipment in units, but Seagate led in revenues.

According to Western Digital, two of its Thailand facilities were shut because of flooding. In addition there has been flood damage to the supply chain for the plants. It expects a "significant impact" on its ability to meet demand in the December quarter.

Seagate's Thai factories were not directly affected, but it also expects supply chain problems of unknown magnitude.

While all this is sorted out Marvell will probably lose some October shipments, which may impact Q3 revenue, depending on revenue recognition timing. It is too early to predict how long beyond October the effect could last. In the longer run it is likely just a bump in the road. There is inventory at every stage of the chain. HDD sales have not been robust this year, so the inventory situation is probably not bad. PC manufacturers have inventory on hand, and there have been no reports that the flooding ruined any drives already made or in production. To some extent supplies and production could be shifted to other plants, which should have excess capacity, if not now (gearing up for holiday PC sales), certainly in December and January.

The situation is worth watching. If it takes months instead of weeks to get back to full production there could be a substantial impact on Marvell's Q4 results. On the other hand Marvell has been trending to be less reliant on HDD chip sales for its profits. Revenues from its Chinese smartphone chips, which should be ramping in Q3, are probably the best indicator of how well Marvell will fare in 2012.

See also:

Disclosure: I am long Marvell Technology (MRVL).

My August 18, 2011 Marvell (MRVL) analyst call summary
My May 26, 2011 Marvell (MRVL) analyst call summary
My March 2011 Marvell (MRVL) analyst call summary

Keep diversified!

William P. Meyers

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