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Thursday, October 17, 1996 Iomega was up $1 17/32 Wednesday, closing at $25 27/32 (+6.30%). TODAY'S RECAP: Today's the day. After the close of trading, Kim Edwards and Len Purkis will sit next to the ol' speaker phone and report Iomega's earnings for the third quarter. We are beyond all prognostication at this point. There is nothing left to do but listen to the numbers as The Guys In The Suits read 'em off the sheet. Required study for white-knuckled Fools is MF Ben's Foolish Scorecard, in his post (6++) below. You may not agree where Ben sets his hurdles, but it will without a doubt help you focus on what is and what is not important as you look at today's earnings report. On the news front, Wednesday, Sony announced the release of its StorStation drive system, "a 1GB native, 2GB compressed tape drive," according to a Sony press release, designed "specifically for the home and small office user," and developed by Sony in association with Iomega. This product is the Sony version of Iomega's Ditto 2GB tape drive, which is already on the market. The complete story is available to America Online users at Keyword: Market News. REMINDERS: Need help figuring out Iomega's third quarter report? Don't forget tonight's Iomega Earnings Event, beginning 9PM ET -- just click the button on The Motley Fool's main screen. We'll have MF Ben, MF Chiros, and Robert Garner onstage crunching the numbers and answering questions from the audience. Also, to hear a tape replay of Iomega's Q3 Conference Call Thursday night, call 1-800-633-8284. The Password is 2021724. The tape will be available by approximately 6:30PM Eastern Time -- Thursday, 10/17 -- and will remain available until midnight on Monday, 10/21. INDEX: Use the Search or Find feature of your word processor to locate the article number (Find: 1++, 3++, etc.)--or use AOL's Edit>>Find in Top Window Feature. If Find in Top Window is dimmed, just click on some text, anything, in the IOMG Today window and try again.
1++AHocherman asks a number of questions he hopes will be answered in Thursday's
conference call. And now, the Best of the Board...Started 3 a.m. 10/16/96. 1+++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subj: Questions for third Quarter
I have a list of questions in my head that I hope will be answered in the conference call and/or the balance sheet. 1.) The backlog situation; a: What is the backlog going into Q 4? b: Can we decipher anything by looking at the backlog to inventory ratio? i.e. Do they have enough in finished goods to meet the backlog mediately? c: What can we tell from looking at the backlog trend from Q to Q? If it has gone up is it a good sign that demand is up and coming, or is it a bad sign that production is not up to par? If it is down, is it a sign that demand is slowing, or does it signify that production is efficient? From the information gathered from the io board I think it is a combination of solving the supply problem, more efficient production, and a flattening out in the growth of the product demand. Will the balance sheet give us clues to make a more clear and accurate assessment?
2) Secondary funds: Is there any way we can know how they are being used? I recall from the boards KE saying that they will be used to ramp up production for Jaz drives, and promotion to land OEM contracts (please correct me if my memory is inaccurate).
3) It seems to be the consensus on the streets and on the io boards that there should be a flattening out in the growth rate. Will new OEM's be enough of a spark to resume the previous meteoric growth rate? Can we deduce any thing about the future growth rate by looking at the past and present growth rate in the balance sheet?
4) On the one hand, this company seems able to invest their cash toward future growth, yet they still operate on the lean side in terms of cash holdings. a: How long can they do this? b: At what point should we expect this company to start fattening out their cash vaults? i.e. If it turns out they spend up to 70% of the secondary funds towards operations should we just write it off as necessary expenses to fulfill their master plan, or should it be cause of concern that this company goes to unhealthy extremes to achieve its growth?
Just a few questions I have, that I'm sure will be answered shortly. AH
Adam 2+++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subj: Iomega Digital Camera
Speculation: If there is an Epson/Iomega Zip drive then there could very well be an Iomega/Epson Camera.
Why? Iomega can now get shelf space that Epson can only wish for thanks to the phenomenal success of the Zip and Zip rebate. The digital camera product could also be modified to use a Zip Iomega/Epson drive in a move that would benefit both firms.
Thinking of Q3 & Q4 earnings? The cost of the Zip rebate not only helped put Zip on shelves, it also put all those other more profitable Iomega products on more shelves than might have happened. If I were Iomega, I would blackmail retailers to carry the other items in order to stay in good graces with regard to Zip supplies and support.
If Iomega came out with a line of toothpaste, I'll bet they could get some respect and shelf space at any reputable computer retail store these days.
H. R. 3+++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subj: Bypassing Q3, Buying Q4?
I agree with some of the posters that the current accumulation (buying) of IOMG is for Q4. I don't think today's nice but gentle price action is due to any expectation of good Q3 numbers. Rather it is for Q4 or other pending news that may positively affect Iomega's future potentials.
One very important point I like to add. Not everybody is buying for Q4 yet. I think there may be a lot of buyers waiting for the Q3 numbers announcement to officially get out of the way before jumping in, regardless of what the Q3 numbers are (even if the EPS number is slightly below the First Call number). That may be the case unless the Q3 was so bad and the conference call outlook is also bleak, which is not likely. Therefore a few of them want to get a head start and choose not to wait and start buying now.
There may be other potential buyers (such as Certain Character X who posts on this board - I never like to get personal on negatives) who are praying for some very poor Q3 numbers so that if and when announced there will be a pull back and they can jump in too as bargain hunters. And in doing so, they may act as a safety net for Q3 results.
Anyway you look at it, Q4 and a bright Iomega future is ahead and Q3 is history. And of course if Q3 numbers turn out to be not so bad, close to, or even meeting the First Call number, then so much the better. 4+++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subj: Revised EPS estimate
I have revised my EPS estimate to reflect current thinking on Zip and Jaz unit sales. Reading Iomega's press release and JPM's estimate I thought a reduction in Zip sales and an increase in Jaz sales were more reflective of the seasonally weak quarter. I assume that gross revenues will be reported less the cost of the rebate at 100%. Drive and dollar amounts are in thousands.
QTR3-1996
IDE 150 @ $75.00 = $11,250
Retail 700 @ $133.00 = $93,100
Rebate = ($29,750)
Zip drive Gross Revenue = $74,600
10-pack 1105 @ $10.80 = $11,934
Co-Brands 1933 @ $9.83 = $18,998
Iomega 2486 @ $12.24 = $30,429
Rebate = ($2,210)
Zip disks Gross Revenue = $59,150
Insider 58.5 @ $259.35 = $15,172
Portable 71.5 @ $324.35 = $23,191
Jaz drives Gross Revenue = $38,363
5 pack 197 @ $69.30 = $13,652
Single 322 @ $83.85 = $27,033
Jaz disks Gross Revenue = $40,685
Ditto Gross Revenue = $27,000
Other Gross Revenue = $6,000
Total Gross Revenue = $245,799
Cost of Sales = $179,433
Gross Margin = $66,366
SG&A = $40,557
R&D = $10,832
Operating Income = $14,977
Interest Income = $1,333
Taxes = ($6,361)
Net Income = $8,616
Weighted Shares = 132,000
EPS = $0.065
Good luck tomorrow. Can't we move the auditorium event to 9:30 so as not to tread on Seinfeld?
PKeeler Patrick Keeler
P.S. If anyone has the Dataquest/IDC press release that estimated sales of all storage devices through 2000 could you email it to me? I accidentally deleted mine. :( 5+++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subj: Poss. IO Competition
For all of those who think IO is a company subject to other competition and you are not blinded by the wrath of the ZIP drive here is some info that I have taken directly from the material I received from Swan. I hate the thought of possible competition just like the next IO diehard, but c'mon guys we have to be realistic. I have been an IO long for almost two years, and still am optimistic, but I have kept my eyes open. Well here it goes, Swan Drive Specs (remember this is STILL vaporware but ????) Transfer Rate=3.1 MB/sec Buffer Mem Size 512kb Avg Seek Time =20 msec Capacity=130MB + The unit is the exact same size as that of a conventional 3.5". The drive is backward compatible and can read and write to conventional floppies at appx. 3x the rate. The main thing I find interesting is that there is an actual built in hard drive in the unit. This hard drive is 100 MB and I assume that it would be used to increase the read/write capabilities. I will post more as I read more. REMEMBER THIS PRODUCT IS STILL VAPORWARE SO DON'T BE ALARMED BUT BE AWARE!!!!!! Colin 6+++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subj: Foolish Scorecard
My Q3 Earnings Scorecard. Actual Q2 numbers listed as reference.
The grades assigned reflect my opinion. Nothing more.
I have previously found it better for me to set realistic limits (both up and down) for a company's performance BEFORE the earnings come out, just as statisticians don't "peek" at their data for fear of tailoring their conclusions, so that I do not merely "see" what I want to see from the report.
I have based my assumptions primarily on historical performance using Q2 (the most recent quarter) as the benchmark for all numbers. Deviations from Q2 levels are based on analyst reports, public company "guidance" and, perhaps most influential of all, personal analysis based on three months of posting and very helpful "sculpting" from other Fools on this board.
I post this scorecard with the hope that it will inspire some last minute debate on my numbers and help other Fools learn to evaluate Iomega for themselves.
These grades are NOT meant to be predictive but to give me a basis with which to judge the earnings report tomorrow evening.
1) Revenue. Q2: $283,638
For growth companies, growth is king. DOH! You can only grow margins so much (to 100% anyway), but revenue, theoretically, is forever. While Iomega hasn't had a sequential down quarter to quarter revenue number since 1984 (Q2 I believe), this one looks to break that hitting streak.
End of the world? Nope. Just gets hard to break that seasonality factor when the FY sales rate is running $1 billion plus. Here's how I am looking at prospective revenue numbers.
A: >$284 million Anything above $284 would be sensational! The seasonality factor, well, to put it plainly, sucks, but its hard to get consumers to buy anything but ice cream and convertibles in July and August, so overcoming the seasonality factor and the revised down expectations would be the dream. I'm not holding my breath -- though I have clicked my heels a few times and whispered...
"There's no place like growth, there's no place like growth..."
B: $275 - $284 million. While a slight revenue decline is expected, I would consider $275 million to be a pretty good job of managing the quarter. I think that revenue may sneak in somewhere here near but only on an optimistic day. Most likely it came down, as usual, to the last day or two of the quarter and how much they shipped then. A photo finish, most likely.
C: $265-274 million. I always wondered why students were labeled either "overachievers" or "underachievers" but there was never anyone who was happily labeled "achiever." The C grade is the "achiever" in my mind. Pappy Jack at GE wouldn't be proud of a C on a report card but the shareholders probably shouldn't put KE over their knee for it either. Survivable. Utterly expected. Just fine. Nothing to shout about either way.
D: $255-264 Don't wanna talk about it. I'd be very dissatisfied with revenue in this range, especially the bottom end. A 10% revenue drop is poor management handling of the seasonality factor.
I'm assuming IOMG won't fail this course. Revenue below $255 without a damn good reason and I'd have to think long and hard about why I'm holding shares in this company. There's no place like growth, there's no place...
2) Gross Margin. Q2: 26.86%
Revenue surely measures the growth rate of the company but gross margin is very telling of management's ability to manage that growth. We should be starting another upswing in margins pretty soon as higher disk to drive sales kick in -- if only because another manufacturer will be making and selling IOMG drives, leaving IOMG with the fat and sassy disk sales -- AND a skewed tie ratio. But that is something to look forward to in Q4. For Q3 we had the rebates as heavy downward pressure on gross margins. Redemption rate will affect this so its hard to grade.
A: 28%+ Q1 gross margins hovered around the same 27% level and IOMG seems to have had some trouble sneaking by it. This would be astounding. I don't expect it for much more than a nano-second. Reality bites.
B: 26.5%- 27.9% Improving gross margin slightly or having it decline slightly is the fact of the world. With the rebates, a slight slide in gross margins (offset by an increase in efficiencies) would be some slick management and cost savings. I'd be impressed.
C: 25%-26.4% Without the rebates, a GM of 25% would usually have me writing posts I'd just end up getting flamed for by screennames I've never seen...with the rebates I expect IOMG gross margins to be around the 25-26% range. Giving back $50 has to hurt. :-)
D: 23%-24.9% I would need an explanation in gross margins dropped below 25%. Sure, I'm being a little harsh but I don't expect rebate redemption to be more than 40% so I expect only a slight decrease in GM from what isn't being offset already.
F: <23% Ugh.
3) Inventory. Q2: $146,173
No grades here but I'd like to see Iomega with a couple of weeks of finished goods inventory going into Q3. With the equivalent percentages of raw and WIP, that would put inventory north of $200 million (assuming a $400 million Q4). Anything less and I'd be afraid of them flushing sales by managing inventory too tightly.
4) EPS. Q2: $.11
This really even shouldn't be in here because I will easily sacrifice short term profitability for long term profitability. To make it easy, its a pass/fail test.
PASS: EPS > $.06 FAIL: EPS < $.06
I'll call $.06 the push. Honestly, the number isn't that important to me. Revenue and gross margin are much more important. While missing estimates might hurt the stock price, it wouldn't faze me as a shareholder. I'd love to see them beat estimates but I'd rather see them grow revenue than concentrate on short-term profitability. Of course, all three should be possible. I still will take, for the seasonal quarter, revenue over EPS. For the non-seasonal Q4 the story changes. Since the analysts downgraded so recently I give THEM the benefit of the doubt and $.06 it is as the mark.
5) Accounts Payable. Q2: $159,341
I figure Q3 and Q4 as the last two quarters IOMG can take advantage of this free source of financing. I doubt the larger suppliers, such as Intel, will be happy with IOMG stretching past the due date. In terms of days, anything north of 70 would be great and show some real squeezing of the stone for some free money.
The flip side, of course, is Accounts Receivables. Keep it under 60 days please. Iomega should have the clout to get those checks in FAST, if their customer wants that next shipment of Zipcakes, that is. :-) Skillful AR and AP management is not only a great way to supplement the "usual" sources of funds, but is a sign of management fully involved with all aspects of the business.
THE SCORECARD WRAP-UP:
To me this is all an exercise in expectations. Mine haven't been extremely high this quarter to begin with. Nine months ago I would have been labeled a decrease, no matter how slight, in Q over Q revenue as a major disappointment. Most bulls here would have called it an impossibility as little as 5 months ago. Maybe less. This quarter I expect it.
The facts are that few people are expecting Iomega revenue and GM numbers to show the incredible growth they have over the past 7 quarters. It's hard to grow at a huge percentage rate forever. 6 more years of that fast growth and their revenue number would have exceeded the GNP! You get the picture.
As I said months ago, I'm very much looking forward to Q4. However, Iomega's current product line is now seasonal, call them mortal. This quarter will reflect that mortality.
I will try to remember that mortality in what may be heady days to come.
Cheers,
Benjamin 7+++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subj: Re:Foolish Scorecard (2)
MF Ben,
<<3) Inventory. Q2: $146,173
No grades here but I'd like to see Iomega with a couple of weeks of finished goods inventory going into Q3. With the equivalent percentages of raw and WIP, that would put inventory north of $200 million (assuming a $400 million Q4). Anything less and I'd be afraid of them flushing sales by managing inventory too tightly.>>
I couldn't agree more. 4th qtr sales are primarily slanted towards the beginning of the qtr (October and November) rather than heavily towards December. That is the business of wholesale selling to retail. The stores need the goods. The goods come from their outside warehouses or distributors (Ingram Micro for example). These guys need the goods a couple of weeks before a customer walks out the door with the sale. In other words, if IOMG doesn't have at least two weeks worth of finished goods (between 70 and 90m) and enough raw materials and WIP to make a strong push for the October/November shipping season, lost sales will be the result. That is a far greater sin than carrying too much inventory.
Fool On,
Robert 8+++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subj: Re: IOMG digital camera
<< "Digital cameras will become more prominent in the future, with its ease of "developing" (you know Kodak isn't dumb enough to get left behind on this one), and it's ease of distribution. Think of this. . . a professional photographer snaps a picture at a news event, loads the picture immediately into a laptop, and e-mails it to HQ via cell phone within minutes to beat a deadline. It's coming".--MF ETurkey
Hi all,
I'm usually a lurker on this board, but you've touched on an area of my expertise and I just had to respond. I'm a photographer for a major wire service here in the US. where, in many bureaus, we use Kodak's NC2000 (News Camera 2000) digital camera (a Nikon N90 with a Kodak digital back-$17,000) for about 50% of all events we shoot. I can see us at close to 100% in the next year or two and many individual photographers are already there. The storage medium we use is a portable 170 megabyte PCMCIA hard drive ($400 ea.), which holds 123 images. A six inch fall will ruin a disk and the images held on it. This is not good if you just shot that Pulitzer on it. This medium definitely needs a more durable storage device like the Zip.
The scenario you describe above is precisely what we do. The pictures are shot onto the hard drive (producing a 3.5 meg file). The disk is then taken out and loaded onto a laptop, where the pictures are edited and worked in Photoshop (toned, cropped, captioned, expanded to an 8 meg file and compressed) and then sent over a land line or cellular in about six minutes. Many of the pictures that you all see in newspapers, magazines and here in AOL's "Newsstand" were produced by digital cameras.
<<"At PC Expo this past June, my brother and I canvassed all the digital camera makers asking questions about the ability to transfer direct from camera to Zip disk. It can't be done, and the Zip is too big anyway. A new format needs to be created".--MF ETurkey
This is an interesting idea. The digital cameras that we use have a SCSI outlet on the back for connection to a laptop for instant access to pictures and for software upgrades. It stands to reason that you could hook a Zip to the back of the camera, but I have not tried this. I'll have to check and see if it will record the images.
Best of luck to all of you IO's today.
Mark J. Terrill
End Report. Posts covered through 3 a.m. 10/17/96. _______________________________
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