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Monday, October 21, 1996 Iomega was up $1 3/16 Friday, closing at $24 1/16 (+5.19%). TODAY'S RECAP: Apparently, Fools did nothing all weekend but post in our Iomega folder, because the poor, defenseless online messaging system was bursting with analysis. Two main threads dominated the forum: discussion of the LS-120 drive (seen as a potentially important competitor for Iomega's Zip drive, should it ever ship in quantity) and Iomega's just-released third quarter earnings report. Either of these topics could have filled our entire report this morning with excellent commentary on all sides of the issues. We have chosen to focus on Iomega's earnings, since Thursday's report and conference call comprise the major breaking story here. We will resume our coverage of our other threads in later reports; for now, let's tear apart that earnings statement. 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++MF Ben explains his stance on Iomega's third quarter. And now, the Best of the Board...Started 3 a.m. 10/18/96.
1+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:reality check Date: 96-10-18 09:34:40 EDT From: MF Ben
<<<Now they tell us that, well, nine cents and 310 million ain't all that great.
Well, I didn't think the quarter would be much either. It is nice to be surprised.>>>
Ricster,
Put it this way, Edwards didn't lie when he said this quarter would be challenging. In a way, $310 and $.09 ISN'T that great. Hear me out.
*EPS went DOWN from Q2 *Revenue growth was a paltry 9%
Essentially, this revenue should have been the revenue number for Q2. I expected Q2 revenue to be around this level. So did many people.
In that respect, looking at this company BEFORE Edwards' Q2 comments, BEFORE Q2 numbers, which were relatively disappointing, BEFORE understanding the seasonality of the product line, in that respect these numbers ARE pretty lousy.
After the Q2 numbers many people refused to reality check their unbridled optimism, refused to accept the word "challenging", refused to admit seasonality, refused to believe Europe couldn't be fixed in a day.
If I refused to believe all that I'd be disappointed. I did believe all that. I was called a bear and short.
This quarter WAS challenging. EPS dropped and revenue only grew by 9%.
Anyone who says that isn't reflective of a damn hard quarter for Iomega is lying to themselves. Last quarter 27% revenue growth was considered anemic. This quarter 9% growth is considered a triumph of sort.
The ironies of life.
As I said in my Q3 write-up, this ISN'T the same company it was a year ago. It has changed and adapted to its new form pretty well and Iomega appears to understand the trade-offs that might have to be made. It is unfortunate that so many shareholders have not changed with it.
It is fortunate so many have. Otherwise, all those who believed that the EPS downgrades by H&Q and JPMorgan were a "ruse" would we waking up this morning to a "missed estimates by $.02" instead of a "beat estimates by $.02"
Don't get me wrong, I am impressed they did so well, though I do see trouble spots which I will be keeping me eye on. However, it IS all relative. I can see how some people can say this quarter was disappointing.
Many die-hard bulls would have said $310 and $.09 would be a shorts dream for Q3 numbers just 4 months ago.
Funny how things can change.
Cheers,
Benjamin 2+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:reality check Date: 96-10-18 10:53:43 EDT From: MF Ricster
MF Ben
<<Put it this way, Edwards didn't lie when he said this quarter would be challenging. In a way, $310 and $.09 ISN'T that great. Hear me out.>>
Ben, I agree with you. My point is that, like many people, I expected worse. In fact, it is clear from the conference call that Iomega's management was also pleasantly surprised by how well the quarter ended up.
True heady expectations some of us had last May were not realized. But we are a long way from last May. I agreed with your post the other day when you indicated you would be pleased with revenues that simply came close to last quarter. If $285 million would have been an A, what is $310?
I know that from the perspective of early June, these numbers would have been bad. From the perspective of late June, they are the opposite.
Rick 3+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: 3 Qtr Results - Another View Date: 96-10-18 19:27:01 EDT From: HYPEMENOT
My overall reaction to IOs 3rd Qtr results is similar to that of MF Ben. The results while noticeably better than recently downward revised forecasts, were still well below what most analysts were expecting prior to the Q2 conference call. As Ben pointed out, the Q3 total revenue number of $310mm now being hailed by many here as a terrific accomplishment, is actually noticeably below what had been the consensus expectation on this board for the SECOND QUARTER. Considering the circumstances, I think revenue was impressive, but the mere fact that seasonality has become a significant factor tells you something important about the changing nature of IO.
Where I part company with Ben and especially NOVWOO ( 9.3 cents a small miracle) is in interpreting the effect of the rebate on IOs performance. NOVWOO talks about the fact that with a 50% hit rate, the rebate cost IO 0.09 to 0.11 in EPS after-tax. He then goes on to, somehow, use this as a basis for more readily supporting a quarterly result on the order of .018 -0.19 EPS. Looking at the same set of facts I reach a far LESS favorable conclusion. As stated by more than one questioner in the conference call a 50% hit rate for the rebate appears quite low (one analyst indicated that in checking with retailers about rebates of this magnitude generally, an acceptance rate in the range of 70%-80% is normal. Let me say clearly, that I am not inferring that the IO rebate acceptance rate is understated, merely that the Company has been extremely fortunate in having it come is so low (thus far). Rather the point is that, using the reverse of NOVWOOs approach, had the rebate acceptance rate come in at 75% which again, one analyst indicated would be normal for a rebate of this magnitude, IOs 3Q earnings would have only been 0.05 per share - well BELOW even the downward revised consensus.
More important than this COULD HAVE BEEN analysis, is the meaning of the third quarter results in the context of Iomegas repeatedly stated goal of ultimately reducing the retail price of the Zip drive down to $99.95. Consider what actually happened in the third quarter. Iomega instituted what was purportedly a $50 price reduction, that actually resulted in a revenue decrease of ONLY $25 per drive. Nevertheless, even though the real cost to Iomega was only HALF the ADVERTISED price reduction, the company still suffered a consecutive quarter decline in earnings - from 0.11 to 0.09, in the face of a more than 9% increase in consecutive quarter revenues. And dont forget that, as Len Purkis outlined in the CC, approximately 1 cent of the 9 cents reported for the 3rd Qtr represented INTEREST EARNINGS on the large cash position (which is steadily diminishing) created by the June stock offering.
I dont see how anyone can look at these results and have confidence that IO can continue to pursue price cuts on the Zip (and Jaz) and MAINTAIN, let alone EXPAND its profit ratios from the LOW level reported in the 3rd Qtr. Keep in mind that again, according to Purkis comments, IO had a negative cash flow in the 3rd Qtr. of $73 mm ($68.6mm before the $4.4mm spent to repurchase 300m shares). Although MF Ben focused his analysis primarily on revenues, the fact that in Q3 IO brought down only 4.1% of revenues to final earnings, and that these earnings supply only a small fraction of the cash needed to sustain the companys growth, should be a source of concern to any experienced analyst. Maybe IO can reduce costs fast enough to offset future price cuts, but IMO the results thus far are not encouraging. The data speaks for itself, so Ill close by including a brief statistical table.
4Q-95 1Q-96 3Q-96 4Q-96 Total Revenues $ 149mm $ 222mm $ 284mm $ 310mm Net Income 9.9mm 10.1mm 14.1mm 12.8mm Profit Ratio 6.6% 4.5% 5.0% 4.1%
HYPEMENOT 4+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Earnings reaction Date: 96-10-18 19:29:13 EDT From: Foolshdog
Hi. Well I've thoroughly reviewed the Q3 earnings and conference call and here are my thoughts:
1) The tone of the conference call says a lot. It was very positive. Managements' command of all aspects of the biz was in sharp contrast to last quarter(example Europe problems were still 'a surprise' to KE last quarter and now they have a specific plan and schedule to fix). The analyst questions were also very different. As MF Equity pointed out the shorts were obviously scared and were reaching for problems like they had during Q1 call. There were more analysts with more questions than ever before which confirms increased institutional interest and for a change a few of the questions were even good ones.
2) Revenue of $310M and GM of 26.3% were both a bit higher than I expected. That is recent expectations! Like Ben and others have pointed out, these would not have been looked on favorably 4 or 5 months ago. I especially thought that GM would come in under 26% so was certainly pleasantly surprised there.
3) The reason GM was decent was Zip tie ratios. I was wrong on my recent thinking that this ratio has trended down since Q1. KE clearly said that this ratio has trended slightly upward for several quarters now. That was very nice to hear.
4) On the other hand, Jaz GM fell from last quarter primarily because their tie ratio is down. Jaz has been the goat all year. I don't think IOMG has made a dime on these things and I am still scratching my head on their decision to lower prices on the Jaz.
5) Ditto improvement was a nice surprise. I really like this new 2GB unit and the associated deal with Sony. Every deal with Sony is a good deal.
6) No surprises on the balance sheet or with 50% rebate redemption or 10% OEM or lower backlog. It was nice of them to give us these ballpark numbers however(the 50% and 10%).
7) Perhaps the most positive thing about the conference call was how good the Penang start up is going. I mean they couldn't of been more upbeat on that baby. I had kind of expected that to become another excuse(I mean reason) for another bad quarter coming up. But instead it has gone so well that it apparently is changing their entire outlook regarding manufacturing.
8) The 300,000 share buyback is nice but I'm not sure why they didn't buy more. Hell I almost bought that much when the stock was that cheap (just kidding).
9) Finally another negative I haven't heard discussed was the apparent slippage in the Laptop Zip schedule. Now it is late Q1/early Q2 as opposed to Q1.
All things considered, I think it was a good report and a great conference call. I think we will look back to Q3 FY96 as a low point in this phase of the Iomega phenomena. My models indicate to me that gross margin and earnings will be rising from here. As for the stock price, I am totally not surprised by the lack of reaction to this earnings release. Like I've said before this became a non-event as soon as JPM and H&Q lowered their estimates recently. The stock is in a fair value range and I would suspect only a slight upward bias until the OEM penetration success or failure becomes more apparent. The real stock moving event may be when the short interest comes out next week but as always this will just be a short term thing.
Best of luck,
Jim Arden(Foolshdog) 5+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Zip margins Date: 96-10-19 00:15:11 EDT From: MF Ricster
From MF Debit's synopsis of the Iomega conference call: <<While they don't break it out in any more detail, compared to last quarter Zip and Ditto margins were essentially flat while Jaz was down>>
I have not seen this discussed here, but what Kim Edwards said about Zip margins struck me like a lightning bolt. Even with a $50 rebate, Zip margins were unchanged from last quarter. True, the tie ratio increased, which added to margin, and the redemption rate for the rebate was only about 50%, but, even still, think what this means about how much manufacturing costs of the Zip drive must be declining. When the rebate went into effect, our bearish friends were sure it would result in a plummeting margin. Kim Edwards had told us months earlier that prices would be reduced when manufacturing costs allowed it.
Guess who was right.
MF Ricster 6+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:WHY short Iomega Date: 96-10-19 01:08:06 EDT From: Angel 101
Because the LS-120 is coming. Because the Swan drive is coming. Because IOM's growth rate has hit a speed ramp (not a bump). Because there are weak and shakey little longs at 20 or so. Because there are weak and shakey little longs at 27 or so. Because even with INTC and MOT news the stock hardly budged. Because all the reliable technical indicators are screaming "sell". Because declining Q2Q EPS don't excite institutional investors. Because Jazz doesn't look like it works. Because AAPL/CPQ and GATE don't appear interested. Because you should love things other than a stock/company. Angel 7+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Earnings reaction Date: 96-10-19 03:39:30 EDT From: Foolshdog
<My models indicate to me that gross margin and earnings will be rising from here.>>
>>>>>>>>>>>>>> Could you explain the above in a little more detail? I don't see why that should happen soon since manufacturing cost reductions are expected to be passed on through lower prices. Also there will be the ramp up costs on the 15mm Zip etc. <<<<<<<<<<<<<
Burt, starting with the current quarter, I look at three items that can change the overall gross margin. Zip's margin, Jaz's margin and the revenue mix between the two product lines. I think it is safe to say that any changes to Ditto's revenue or margin would be small and even if a significant change for Ditto does occur, it still wouldn't have much influence on the company's overall gross margin. So let's look at the three items separately.
Is Zip margin likely going to increase, decrease or stay the same in Q4? Well the drive cost continues to go down as time passes and for this quarter the price will be approximately the same($199 retail with $50 rebate). One could argue against this by saying maybe more rebates will be redeemed or maybe the costs won't decrease or maybe retailers will demand lower wholesale pricing but these don't hold water IMO. So Zip drive margins will increase. If the trend continues the tie ratio should increase and I don't see any reason for disk margins to go down. So all components of this most important item, Zip product line margin, are pointing up.
How about Jaz margin? Again costs should trend down and the price will be the same so drives should have a better margin. I don't know about the tie ratio but apparently it is already depressed so I'm assuming the disk part of the equation will at least tread water. I think it is likely overall Jaz margin will be better in Q4 but it could be a little lower.
That leaves the revenue mix. I think the consumer nature of the Zip should be helped more by holiday shopping than the corporate nature of the Jaz. So Zip should be a larger part of total revenue in Q4 than it was in Q3 and that is of course good for the overall gross margin. There is nothing certain in any of this but I think you can see that gross margin should increase for Q4.
Now next year is a little tougher and that seems to be your main concern. I don't think the Laptop Zip ramp by itself could cause enough grief to bring down the company's gross margin. In fact, I would hope they charge enough for these puppies especially at first so that they would actually help the margin. This is what I thought they would do with Jaz but it never worked out, so your point is well taken. Another thing with the Laptop Zip is I think it will be great for tie ratios since that group of users tend to be computer junkies with lots of storage needs. Although the other side of the coin says many buyers of Laptop Zips already will own a Zip so that may kill some people's personal tie ratio(the denominator goes to 2).
As far as the Zip going to $99 with the dream team and all, I don't see why this means lower Zip margins. I believe IOMG has typically gotten 15%-20% margins on the drives but they have always targeted their margins on a composite basis. That is drive with x# of disks. Well something very interesting happens when you bring the revenue per drive down and keep the tie ratio and disk margins relatively constant. The disk portion of the revenue increases and therefore influences the composite margin more. When this adventure kicked off last year IOMG was probably getting $150 - $160 a drive and sometime next year that will probably be down to $73 or so. While their revenue per drive has been cut in half, they still get about 80 to 90 bucks in disk revenue for every drive. I'm not saying the disk revenue per drive hasn't changed at all but I doubt it has much and it certainly hasn't been cut in half. Since the margins on the disks are a lot higher than the drives this little trick does wonders for the composite margin. Just to run an example calculation lets use 20%/50% for drive/disk margins and $150 to $75/constant $80 for drive/disk revenues. The composite margin goes from 30.4% to 35.5%. I hope I've explained this clearly.
So KE has this little trick up his sleeve but also just looking at the drive margins(without disks), I don't see a problem with maintaining margins in the long run. The long run meaning not every quarter is going to have good margins(like Q3) but it will all even out(some quarters will have better than normal margins). They only need 15% to 20% and as time goes on even less. So on that $75 drive they sell next year, it could cost them up to $65 without even causing them to sweat. In other words where they needed to make $30 a drive a year ago, now they only need to make $15 or $20 a drive, and next year that will be down to $10, and the year after that.... ..hello MCI.
And that brings us to the last reason I'm not worried about lower gross margins and the most obvious. That is in the long term if we get into the box, the gross margin we get from disks is about all we will need. The numbers here are dependent on penetration rates into PC's and the growth rate in PC's. My best guess right now is that by 1999, Zip penetration should be in the 50% area and gross margin derived only from the sale of disks for OEM Zips should represent ~50%(a coincidence) of all the gross margin for IOMG that year. This takes into account a lower tie ratio for OEM Zips and lower prices for disks. Even if I am way off on these calculations, the important point here is that I believe margins will increase because the Zips that will be put into PC's will be mostly licensed and therefore IOMG will just be selling disks into this new market. If all goes well this will have a significant impact on overall company gross margin as soon as next year.
In summary, Q4 looks real good to have better GM. Without knowing KE's pricing policy for Q1/Q2 it is impossible to say for sure where GM will be but hopefully it will either be up a couple points if pricing is same or flat if he further cuts prices. I suppose Jaz may even be profitable by then. Then the last half of Fy97 should see some help from OEM penetration and Zip licensing.
Goodnight,
Jim Arden(Foolshdog) 8+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Inventories Date: 96-10-19 12:43:48 EDT From: AParksherb
Inventories were somewhat lower than expected considering large buildup for 4th Q. Why? Iomega as stated said they would have large presence in computer stores so they bought space in Sept and stuffed the channels for the end of the Q. Now IMHO Iomega needed this exposure to try and continue sales . Rebate and price point to 149.00 did not increase sales in zips as they hoped , the only thing that saved IO this Q is that because they Believe only 50% of the people will send in rebates, it create some borrowed time out of 4th Q, especially if that rebate program increase to 60% or 80%. The biggest mistake Io made was the rebate program to early, Especially since Iomega says most people do not care about the rebate. On the comdex note, don't hold your breath.
Big dog sees short term disaster turning ugly. 9+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Flip Flop Date: 96-10-20 03:06:03 EDT From: AParksherb
True I have gone short after looking at 3Q results and listening to call. Reasons: 1: Jaz tie rate a disappointment as stated by KE 2; 08 earnings after backing out 01 for interest 3: MAIN REASON 16 million for rebates which approx 2 million are for disk rebates balance for zip rebates which Mr. Edwards stated was aprox 50% which means to me that 14 million dollars are set aside to pay for rebates of ONLY 50% therefore If price point of zip was 149.00 this past Q Iomega would have reported a 2 million dollar Loss. with a increase in tie rate to disks. PLEASE someone answer why this thinking is not correct. Iomega is deferring . Eventually the piper will have to be paid. The writing is plain as day .
Big dog teaching all the bulls to learn to question 10++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Main Reason Date: 96-10-20 03:29:49 EDT From: AParksherb
Let me make this more clear If Iomega did not have a rebate last Q and actually reduced the price of zips to 149.00 what would have been the outcome??? I'll tell you the outcome they would have lost 2 million dollars. The only reason they were profitable last Q is that Iomega believes that less than 55% of all people will get there rebate. Iomega cannot reduce the price of zip to 149.00 and make money even with a higher disk tie rate . This is not good news Think about it Please respond
Big Dog talked to some people in the loop 11++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:HYPEMENOT 1 Date: 96-10-20 11:11:06 EDT From: MF Ben
<<<Let me say clearly, that I am not inferring that the IO rebate acceptance rate is understated, merely that the Company has been extremely fortunate in having it come is so low (thus far).>>>
HYPEMENOT,
First, as usual, a very thoughtful and though provoking post. That said... :-)
Actually, I believe the reserve to be quite fair. My initial estimate was 40%. The analyst that you refer to specifically stated that the 70%-80% redemption was "normal" but he did not specify the type of product, only the type of store, CE. Another analyst said his checks put the redemption at 40%. What do we have? A bullish analyst and a bearish analyst, neither an expert in the field.
I call them a wash and rely on my own intuition and Iomega's accounting methods. My experience is that often the rebate form is nowhere near the drives and that many consumers simply don't know about the rebate, something Hill should change I believe, but a factor in any case.
I am comfortable with the 50% redemption reserve, especially with the new option of a "game pack" in lieu of the $50. Further, Iomega has often been overly conservative with their reserves, I don't see why they would not be now. If the CPAs sign off on it in the end, I see no problems.
<<<I dont see how anyone can look at these results and have confidence that IO can continue to pursue price cuts on the Zip (and Jaz) and MAINTAIN, let alone EXPAND its profit ratios from the LOW level reported in the 3rd Qtr. >>>
Actually, I believe you are, for once, missing a huge change in the Iomega model. The "dream team" of Zip suppliers should bring costs down in FY '97 and when Seagate finally gets their platters compatible with Jaz (as per conference call), Iomega should see substantial cost savings with Jaz disks as well.
As it stood with IMP/Epson/IOMG, I would agree with you. Do not make the mistake of using the '96 suppliers to model your margins for '97. The effect on gross margin, however, will be somewhat more difficult to call, as I discuss later, due to a change in the product mix sell-through I expect due to MCI and growing OEM sales
<<<Keep in mind that again, according to Purkis comments, IO had a negative cash flow in the 3rd Qtr. of $73 mm ($68.6mm before the $4.4mm spent to repurchase 300m shares).>>>
I think you missed a few other items besides the share buyback. I don't think Iomega will be spending $10 million on PPE every quarter. Len Purkis said Q cash burn rate was between $10 and $15 million. We could do the math here later. Might be helpful actually since I haven't verified.
<<<Although MF Ben focused his analysis primarily on revenues, the fact that in Q3 IO brought down only 4.1% of revenues to final earnings, and that these earnings supply only a small fraction of the cash needed to sustain the companys growth, should be a source of concern to any experienced analyst. >>>
Actually, I looked at many balance sheet items and would appreciate help with any of them. With $100 million of cash and $100 million of Wells Fargo credit, they can easily last one year plus, even throwing in some capital purchases along the way. 9% of annual revenue in cash is pretty hefty. While Microsoft seems to have two core businesses, software and cash management, I'd rather Iomega stuck to what they know, storage solutions, and left the cash management business to me. :-)
Most high growth companies I look at burn more cash then they generate, creating a funding need for almost all of their high growth faze. Although Iomega's growth rate has slowed, I believe that their investments in their brand name, retail shelf space, and consumer goodwill to be a higher priority than funding growth internally.
I'm actually surprised to see you bring this one up as no one can really expect a company investing heavily in capital and their future to fund internally. I don't expect IOMG to fund their own growth until the license agreements take the substantial manufacturing and inventory burden off IO's shoulders leaving IO with the less capital intensive and higher margin disk business.
I also agree with your point that net margins of 4.1% are disappointing. I consider 5% net margin to be an adequate goal, as does Iomega.
Going forward, however, I see two places where gross and net margins should see a boost:
1) New, more experienced suppliers (Intel and Seagate are as good as it gets) will bring costs to levels well below IOMG/IMPX/Epson ever could have.
2) As MCI drives hit the OEM channel, Iomega should reap disk sales that will disproportionately grow profit over revenue, increasing margins but slowing revenue growth (as a percentage) further.
If net margin isn't above 5% by Q3 '97 I will be disappointed. Definitely something to watch for.
<<< 4Q-95 1Q-96 3Q-96 4Q-96 Total Revenues $ 149mm $ 222mm $ 284mm $ 310mm Net Income 9.9mm 10.1mm 14.1mm 12.8mm Profit Ratio 6.6% 4.5% 5.0% 4.1% >>>
Your profit ratio table is interesting, to say the least, but I actually would be MORE concerned if Iomega was slashing costs merely to float the bottom line up to previous levels. I'd rather they spend the money where it will build a brand name image worthy of Intel and Microsoft. Short term sacrifice for long term gain. Cash cow status (BCG) will, IMO, someday come. MOOO!
As well, the product mix from Q4 is different than from Q3 '96. We have a relatively new product, Jaz, in an important stage of its life cycle, with, albeit, disappointing tie ratios, and a great lesson learned: don't ignore the vertical markets . Iomega admitted going full-on to retail with Jaz and it cost them. I have never claimed IOMG's management to be perfect.
While all companies must learn to effectively deal with product mix changes going forward, Iomega's position is somewhat unique. They currently have what I would consider 2 product lines (Ditto is now very small as a % of revenue): Jaz and Zip. The effective ramp-up of what I consider to be half of their total product lines has been occurring for the past 9 months. It has, in Iomega's own words, been somewhat misdirected at retail, but it has incurred costs.
I'm NOT saying the quarter was perfect or a miracle or anything of the sort. I am saying that management did quite well with what they had.
Iomega cannot control the world. While some posters believe they perform in a vacuum, they don't. A bad holiday retail season would hurt many companies, including Iomega, if high tech doesn't sell or if retail falls flat or if or if or if.
Even what Iomega DOES control they don't always execute perfectly. Europe, a problem they don't really expect to have solved till sometime next year (conference call) is partly their fault. Sure, summer slowness, Germany, etc, but the management shifts tell another story, of mistakes made, markets left to crumble, and revenue lost.
We, the collective analysis of this company, cannot merely look at Iomega or the storage industry but must look at the general health of the PC industry and consumer spending as well. That aspect, general retail health and PC retail in particular, is rarely addressed in posts or revenue and earnings forecasts here, including mine. I will try to remember going forward that if people don't go in the stores, Iomega can't sell 'em "stuff" no matter how great it is.
That said, a soft Q3, seasonality, etc., these ARE facts of life for a company selling mainly to consumers and mainly at retail. They are partly at the whim of the retail Gods. Not even a cheerleading section can shift those winds back when they start to blow cold.
However, I think Iomega's balance sheet looks stronger than I have ever seen it. They don't look like a puny NASDAQ upstart but an NYSE, established, brand name powerhouse. Q2 and Q3 could have been better. They weren't. I agree. We do some analysis and look forward, not back.
We can argue about the merits of the 50% rebate reserve all day but all that effects is bottom line. Look at the rest of the sheet. It looks strong, cash, contrary to your belief, is fat (too high actually <G>), AP, AR, inventory levels, everything points to management doing their job.
They made mistakes, they'll make more. The retail market will shift and turn. Their product line will go through stages of maturity, new products will come, new deals will come. This company is NOT the same one it was in Q4. Comparing those numbers to these are silly. This company won't be the same as it is now in one year either. In that way Iomega is very unique.
What I like about this company is: product line strength and management ability. It will come as no surprise to many that I think of J. Welch as the strongest CEO around. KE may be a chip off the old block.
Personally, I like it that way. Anyone who wants a road rocket better hop on over to the high-flying NASDAQ 'cause this lumbering soon-to-be NYSE giant isn't a small-cap anymore.
Iomega. This ain't your father's oldsmobile. It's SLOWER. :-)
Cheers,
Benjamin 12++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Someone answer this Date: 96-10-20 14:20:30 EDT From: MF Equity
<<We know that zip rebates were allotted at 16 million for 50% therefore an additional 16 million if all zips at retail took rebate making price target at 149.00 retail. Take the 16 million off the 12 million in profits and you have a loss of 4 million GREAT Q>>
Take 20 points off the Cowboy's score and Pittsburgh is the defending Super bowl champion.
The simple fact is that IOMG DID NOT reduce the retail price to $149. Instead, they realized that a PORTION of the consumer target market would decide to buy a Zip because of the rebate. P&G has done this for years. It's marketing 101. Make a rebate available for the most price sensitive consumers. 13++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Someone answer this Date: 96-10-20 15:00:33 EDT From: DR IMBECIL
<<We know that zip rebates were allotted at 16 million for 50% therefore an additional 16 million if all zips at retail took rebate making price target at 149.00 retail. Take the 16 million off the 12 million in profits and you have a loss of 4 million GREAT Q>>
The important thing to me is that IOMG knows that Zip production costs have to come down. They announced a little while ago an agreement to examine production methods with Intel and others. The key right now is to produce those things in the most efficient way possible. And yes, I believe the techniques the engineers learn in mass production design are transferable skills that can effect the bottom line of future products if they are designed to be manufactured in as efficient manner as possible.
One portion of the news release form 9/30
<<Motorola will integrate their microcontroller technologies with Iomega custom logic and additional memory functionality on single chip products. In addition, Motorola will provide design support, manufacturing capacity, and additional silicon solutions that further enable Iomega to produce cost effective personal storage systems.>>
Marketing 101 will also tell you that as a product enters the growth cycle and well before it hits maturity, the bright companies are spending their R&D money on cost efficient designing to further increase margins and to give it an insurmountable lead through early penetration and newly realized margins resulting from production refinement. New companies wishing to penetrate the market now have to establish brand image (lS-120), format and compatibility issues in this case, and go through the high costs of gearing up for manufacture. They aren't yet at the point to refine productions costs and generally face a disadvantage in production efficiencies at the start. 14++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Econ 202 Date: 96-10-20 15:07:57 EDT From: BriLeo87
It appears that some folks have recently gone short because of their analysis that IOMG "must have" understated the effect of the rebate program and that they "must pay the piper" in the 4th quarter. Let me point out a couple of things which may, or may not, help the discussion.
First of all, the rebate program was not applicable to OEM sales. OEM sales were 10% this quarter or approx. 90,000 drives (if we use JPM's estimate of 900,000)
Second, the rebate program was available only in U.S, if I remember correctly. Not available in Asia and Europe. Someone correct me if I am wrong.
Third, for rebates presented AND PAID in 3rd quarter, no reserve was taken. The rebate was "charged" directly off of revenues. In other words revenues in the 3rd Q would have been higher but for the rebates already paid. Again, if I am mistaken please correct me.
Fourth, some percentage of rebates will not be for the $50 cash but for the "other stuff". I don't remember exactly what this is but I think it was a combo of disks and a carrying case. Whether or not the "true cost" to IOMG is $50 for this option is not clear to me.
In short, I think it is too simplistic to merely multiply the number of drives sold by $50 to project out what IOMG "should have" reserved. There are other factors to consider.
IMHO, the shorts were surprised that IOMG posted a profit at all. They had convinced themselves that because of the rebate program (and perhaps also weak Europe sales) IOMG would lose money. They were wrong. Now they forced to use the argument that IOMG must have used voodoo accounting. Strangely this reminds me of January of this year when we heard the same thing. 15++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re: Interest Expense Date: 96-10-20 17:37:21 EDT From: RB61
I have seen where some of the bears are arguing that IOMG should have had 1 cent less in EPS because of little or no interest expense for the qtr and in fact, interest income. I will again post the following qtrs results for this discussion.
<< Qtr end period 7/02/95 10/01/95 12/31/95 3/31/96 6/30/96 9/29/96
Sales 52,594 84,721 148,798 221,988 283,638 310,085 Operating Income (2,451) 2,927 14,904 19,753 25,527 20,863 Interest/other Inc/Exp (55) (230) (1,678) (2,257)* (2,373)* 71 Net Income/Loss (1,947) 2,025 9,923 10,121 14,082 12,766 Net Income per share (.017) .016 .078 .08 .11 .09 Weighted Ave Shares** 114,036 127,236 127,560 128,838 132,405 137,027
* Interest Expense isolated from other income/expense where possible. Only Interest expense shown.
** Adjusted for the January 1996 3 for 1 and the May 1996 2 for 1 stock splits. <<
I find it interesting that IOMG should not be allowed to count interest income in EPS calculations, but that they are more than welcome to count interest expense. Seems interest income adds to EPS while interest expense deducts from EPS.
Anyway, back last fall/winter, the bears were really harping that IOMG did not have enough cash. During their arguments on cash, they NEVER brought up that IOMG should have the interest expense (which lowered EPS) disallowed so that a truer picture of IOMG's results could be shown. Even though this would have added a couple of pennies to the EPS. However, it certainly is convenient that now that IOMG has cash, that the results of investing that cash, should be excluded from its EPS so that we can see a true picture of IOMG's results.
I just ask that someone, anyone, show me a reported financial statement that excludes earnings from short term investments in cash. I guess we are to expect IOMG to put their cash that is not currently being utilized, in a non-interest bearing IOU someplace. Yea, right.
Fool On,
Robert 16++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re: IOMG's Auditors Date: 96-10-20 18:04:27 EDT From: RB61
Someone earlier reported that the mainline press (NY Times ?) had printed some of the bears arguments that IOMG had in essence *cooked the books* in the 3rd qtr concerning the rebates and that IOMG would pay the price in the 4th qtr.
In all my experience, I have never seen financial statements that were as conservative as IOMG's. Remember last qtr? IOMG made a reserve for the rebate for product already in the channel. Why? It was required by standard accounting practice. Who oversaw this treatment? Arthur Anderson & Co.. Did IOMG need the extra couple of pennies last qtr this rebate accrual represented? Definitely. If they had not accrued this expense, IOMG would have met the *whisper number* that was expected. Why didn't IOMG just wait until the 3rd qtr to accrue for this expense? Arthur Anderson realizes that IOMG is one of the most actively traded stocks over the past year. They also realize that the SEC and outside investors would be scrutinizing every point of the financial statement. Therefore, to postpone this accrual would have not only been against standard accounting treatment, it would have left Arthur Anderson open for liability.
If you were Arthur Anderson, how would you treat this engagement with IOMG? With kid gloves. Leave nothing unchallenged. Investigate everything. Err on being conservative rather than leaving yourself open for the most publicized shareholder lawsuit imaginable. It flies in the face of reason to even think that Arthur Anderson would allow IOMG to under report something so critical and potentially material as the Zip rebates.
Remember, the Zip rebates were only for sales in North America. This excludes sales to Europe and Asia. $51m of the $310.1m in total sales were for Europe (no rebate here). 10% of Zip drives sold were to OEM's (no rebate here). Also, Asian sales were not broken out of the total sales. So one can only surmise what the level of Asian sales amount to (no rebate here either).
Seems that the bears did not do their homework adequately. They were really caught off guard. They are scared. 25m shares sold short. It will be very difficult for them to effect a lower share price by selling more shares short. The supply of shares available to sell short has to be reaching it's limit. Therefore, the best (and maybe only) way to bring down the stock price, is to spread fear and doubt (read lies) into the minds of uninformed investors. Those uninformed investors get scared, and sell their shares.
Think about it. When have we seen this kind of concentrated posting by the bears as well as negative articles in the media? Only when the bears really needed to offset good news that they perceived to be a threat to them. Do your own research. Then decide for yourself.
Fool On,
Robert 17++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Burn Rate Date: 96-10-20 22:06:55 EDT From: MF Ben
Due to a brain scramble, I used one set of numbers in a calculation but posted text that didn't match.
The IOM burn rate is $10 to $15 million per MONTH, not per quarter, which is how I calculated that with the $100 million in cash and another $100 million in the form of a Wells Fargo credit line, Iomega will not have a funding need for over a year, even including a little PPE purchase here and there. If Iomega had enough cash to last more than a year, I would be somewhat concerned.
As I said in reference to Microsoft, let the company do what they do and leave the cash management to me (MSFT's 2nd business is finance as they manage $7 billion in cash). Iomega may be brilliant with storage solutions but I believe I can make more off cash than they can in the bank. :-)
My point remains the same, just some text has changed: they will not need to raise cash for over a year (at current pace) and that is more than adequate.
Sorry for the brain freeze and thanks to DUHrook for the catch. :-)
Cheers,
Benjamin
End Report. Posts covered through 3 a.m. 10/21/96. _______________________________
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