In less than one week, on Sept. 12th, Apple (NASDAQ:AAPL) will release the much awaited update of the iPhone, the iPhone 5. It is also speculated that Apple will release a smaller version of the iPad within weeks, dubbed iPad mini. While we are getting closer to the release date, the exact technical specifications are still unknown. Nevertheless, what we know for sure is that both devices will be powered by the increasingly popular NAND flash. Storage solutions such as Solid State Drives also known as SSDs also use such components. With major product releases and record-breaking pre-orders, Apple's success might hurt SSD vendors such as OCZ Technology (NASDAQ:OCZ).
When the new iPad was released in spring 2012, the Apple store saw record orders and more than 3 million devices were sold in less than 3 days. For the most recent quarter Apple sold 26 million iPhones and 17 million iPads, a combined total of 43 million devices. Apple customers are waiting for the new device to the point that it starts hurting Apple's revenue, and some are switching to other models such as the Samsung (OTC:SSNLF) Galaxy S3. It is important to think about how Apple is gearing up for mass production, which might have started in August.
Apple isn't a NAND flash manufacturer, therefore it has to source its components from vendors such as Micron (NASDAQ:MU), Hynix (OTC:HXSCF), Toshiba and Samsung. Due to market oversupply, NAND flash manufacturers such as Toshiba cut their production by 30%. Apple is shooting for monster quarters and dries out all of the NAND flash supply, affecting SSD vendors using the same technology/process node (25nm MLC NAND) for their products.
On Sept. 5th 2012, OCZ Technology released a statement to lower preliminary revenue guidance. Revenue is expected to be roughly 10% less than predicted, between $110 and $120 million instead of the $134 million analysts agreed upon recently. During the conference call, Ryan Petersen answered multiple questions regarding NAND flash supply and inventory. It was stated that starting mid-August, NAND shipments were not received at the manufacturing site. To build Vertex 4 products, they had to take parts with enterprise grade.
While the OCZ stock price tumbled down 21% in after-hours, listening to the conference call provided more information on what to expect in the earnings release on October 3rd:
- Ryan Petersen acknowledged there was still no need to raise capital, and that an increase in pricing might occur in the next quarters to recoup losses on forecasts.
- It was indicated that supplying agreements with NAND flash vendors were in the talks to prevent component shortage moving forward.
- OCZ will be moving faster to technology nodes which are available on the NAND market (20 to 19nm node). Their Everest 2 and upcoming Barefoot 3 controllers are supporting 20/19nm MLC NAND flash. We can also expect a swift move to TLC NAND Flash.
- It is important to note that enterprise grade parts are still in inventory and that no shortage is expected on that side. Microsoft (NASDAQ:MSFT) Azure and other enterprise customers will be ramped up in early Q3, faster than planned originally.
The NAND flash market is cyclical, and companies such as Apple can disrupt it by placing gigantic parts order to enable the launch of latest iOS devices. SSD manufacturers without NAND manufacturing capabilities such as OCZ are hit by shortages, unable to manufacture enough products to meet demand. This situation pushes OCZ to move faster in the consumer SSD space, releasing products with new controllers and smaller process memory.
More details will come to light in the earnings conference call on October 3rd. OCZ's management has one month to turn around the situation.
Disclosure: I am long OCZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.