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Tuesday, October 22, 1996 Iomega was down $13/16 Monday, closing at $23 1/4 (-3.38%). TODAY'S RECAP: Another small piece of the puzzle fell into place for Iomega Monday: a news release from Apple unveiled Apple's new line of PowerBook 1400 laptop computers. According to Apple, these computers will feature a versatile new expansion bay that will allow the user to choose from a variety of storage options, from a standard 1.4MB floppy drive, to a CD-ROM device, to... Iomega's Zip. This is the first time that Apple has made any special accommodation for an Iomega drive in any of its products. The fact that Apple is making room in its PowerBook laptops for a Zip drive lends credence to the argument that Zip's acceptance as the standard in high-capacity removable storage is growing. This laptop version of the Zip drive, developed by VST Technologies, Inc. with Iomega, will be available in the first quarter of 1997, according to the Apple statement. America Online members can review the press release in full at Keyword: Market News. Meanwhile, one of our periodic storms of trash talk and puerile squabbling is raging in our pages; however, several contributors (both bull and bear) bravely persist in their efforts to conduct an intelligent discussion of this company's prospects. We have sifted through the endless heaps o' drek and have saved the best of the board for your perusal. Aren't you glad you read IOMG in Fooldom Today? 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++Foolshdog continues the discussion of Iomega's rebates and margins. And now, the Best of the Board...Started 3 a.m. 10/21/96.
1+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:rebates/AParks Q Date: 96-10-21 03:04:59 EDT From: Foolshdog
RB61 thanks for reposting that Econ 202 post from BriLeo87 as well as your thoughts on the subject. It certainly seems to generate a lot of misconceptions.
>>Seems that the bears did not do their homework adequately. They were really caught off guard. They are scared. <<<<<<<<<<<<
Keep in mind that not only the bears are unprepared but I think the bulls too. As with many other bear arguments, I don't know for sure if they truly understand and are just deliberately trying to manipulate the stock down or they really believe IOMG is practicing 'voodoo accounting'. Either way, my point is that folks like AParksherb shouldn't be lumped in with our usual cast of short manipulators and bears that frequent this board. He/she asks a good question and voices legitiment concerns.
Here's the way I look at the rebate situation as far as the accounting goes. I'm not a CPA or a fly on LP's wall but FWIW this would be my understanding. Every Zip that is shipped that is eligible for a rebate would not only have an associated accounts receivable(AR) entry(say $140 currently) but it would also have a corresponding entry made in a reserve to AR(say $25, which would =50% pickup on $50 rebate). This would make for Revenue of $115 for that Zip drive. Now every time a check is issued for a customer rebate a charge against that reserve is made. So for our example let's say IOMG has only shipped two such drives. They have Revenue of $230, Gross Receivables of $280, Accounts Receivable or Net Receivables of $230, and the Reserve to AR would be $50. Now when the rebate check of $50 is issued the Reserve goes down to $0 and AR goes back up to $280 which is appropriate because IOMG will collect that $280 from Circuit City or whoever. Now instead of two drives it has been several hundred thousand and they not only have reserves for rebates but for price protection and bad debt and they haven't told us how many of those $50 checks they have sent out. I think one can see that to derive much information from the additional $16M reserved in Q3 is dubious at best. Of course the # went way up because last quarters # was only a conservative estimate of what they would be liable for, for product in the channel. Now they have been shipping more product all quarter, they have a better idea of pickup and most importantly of all they have PAID some rebates(which lowers that reserve #).
As to the question, 'what would the earnings have been in Q3 if the Zip had been priced at $149'? I agree with the folks that have said this is kinda like asking McDonalds what their earnings would be if they only charged 25c for their Big Macs. It's irrelevant. KE has said many many times that prices will be lowered concurrently with costs. This ride may be bumpy at times but generally they plan to keep those margins the same. So far he has done that and IMO he can and will continue to do it. If you think he is going to be compelled to do otherwise, then by all means sell your shares. I think everyone should run the numbers themselves and decide. And the answer to the question is probably .03.
Jim Arden(Foolshdog) 2+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Zip/Jaz in the workplace Date: 96-10-21 11:15:04 EDT From: MF Jeanie
Amazing the things you learn when your kid decides to have a real conversation with you :)
My son has been working in tech support for Lincoln Labs at M.I.T. for the past four months and only today has shared this information, FWIW:
Zip drives are ubiquitous throughout Lincoln Labs... both externals and internals. Many of the built in drives are in Gateways and Dells. The Jaz is now becoming even more popular. He says they have dual Jaz drives built into Gateways.
Lincoln Labs is owned/operated by the Federal Government and my son works in the communications division which is a high security area. (Cards needed to get in the bldg; cards needed to get into the computers). Due to the security situation, he says that many of these Gateways have no internal hard drive(?) because they don't want anything stored on the hard drives. They are booted from Jaz diskettes, which are then locked away every night.
He says the protocol file (auto exec.bat?) looks for the OS only on the Jaz. I have no idea if any of this is helpful or even interesting... but thought I'd pass it on in case it triggers any follow up questions you want me to ask him.
And if it's all old news... then my apologies for taking up folder space. But I thought it refuted Monmir's contention that LAN's would render Zip/Jaz useful to only 1% of large corporations, because Lincoln Labs has a huge network, not only with the government, but also with M.I.T. and they do *not* use the network as storage for their work.
Jeanie 3+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: 3rd Qtr - response to MF Ben Date: 96-10-21 17:27:56 EDT From: HYPEMENOT
MF Ben
Perhaps the problem in my earlier post on this subject is that I did not state my points clearly enough. My first point about the rebates was NOT that IO may have under-reserved (in fact I tried to make it clear that I dont think this was the case). Rather,my point was that with a 50% exercise rate for the rebates, the EFFECTIVE selling price for the Zip was, on average, $175. When I look at this in the context of KEs announced goal of eventually reducing the price of the Zip to $99.95 retail, it suggests that the company may have a difficult time in reaching this price point without keeping a lid on what are already low margins (or worse, driving them even lower).
Neither I, or anyone else on this board can really know, with confidence, that chip integration (the dream team effect) and the movement of production to Panang are going to allow IO to absorb a further $75 decline in the retail price of the Zip - even over an extended period of time. I am not saying it isnt possible, merely underscoring that it appears to be a formidable task. Keep in mind, as I pointed out in my earlier post that, despite a more than doubling in total revenue between Q4 1995 and the quarter just ended, IOs ratio of after-tax earnings to revenues fell sharply from 6.6% to only 4.1%, although the comparison is a little unfair because 4Q 95 earnings were partially tax sheltered. For that reason IOs gross margin, which fell from 30.7% to 26.3% over the same interval is probably a better barometer of the Companys weakening rate of profitability. Remember, in most companies (even rapidly growing ones) exactly the opposite is supposed to occur as unit sales expand. Remember also, that KE said in Thursdays conference call that both advertising and R&D expenditures were lower in Q3 than in Q2, a pattern which is expected to reverse going forward.
The second point I made -- that IOs thin level of profitability was far below its NEGATIVE cash flow in the Sept. quarter was in NO WAY intended to indicate that the Companys cash position is inadequate. I agree that, at present, IOs cash position is more than ample to support continued growth.. But that doesnt change the fact, as Len Purkis stated, that the Company (excluding events like the Panang transaction and the stock repurchase) is burning cash at the rate of $10-$15mm per month. While it is true that most rapidly growing companies are unable to finance their growth solely from internal sources, I would suggest that most do, in fact, generate a HIGHER portion of their cash needs INTERNALLY than does IO. That is one of the very real (adverse) impacts of IOs current low level of profitability. And it is something which any serious analyst must take into account, particularly given that the Company is in the process of moving significant amounts of manufacturing in-house which, hopefully, will improve PROFITABLY, but will also increase its RISK EXPOSURE.
I have no doubt, given we are now in a period of seasonal strength, that IOs profitability ratios will show improvement when 4th quarter results are published in January. But the real test will be whether the Company can sustain this improvement as next year unfolds. As stated earlier, IMO with respect to profitability ratios, the record of what many here refer to as the NEW Iomega, has thus far not been very encouraging. While I dont preclude IOs ability to rise to the challenge through various means (chip integration, manufacturing in Panang, product licensing and higher disk tie ratios to name a few), and improve its profit ratios from the low levels of Q3, the recent history of the Company suggests that a favorable result is far from guaranteed.
HYPEMENOT 4+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:3rd Qtr - response to MF Date: 96-10-21 18:07:26 EDT From: MATTKEEFER
Hypemenot.....Excellent post. You see the trees....now let me help you with the forest:)
Iomega is willing to sacrifice their gross margins now to insure that they will become the standard and then the little disk annuity kicks in and makes all the shareholders rich for the next 10 years or so. During this time (the ten years we are all getting rich), they go on to develop and very successfully market many unique storage solutions.
Certainly there is a large risk in that strategy. And if it works, then they are the Intel of storage. Thats what I am betting on at this point. I view it as worthy of the risk. But then again I am not your typical conservative Wall Street analyst. I hope you can at least see why we have made this investment. We are not stupid.....maybe just a bit more tolerant of risk than you are. MAK 5+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: H & Q Spot report update Date: 96-10-21 22:51:28 EDT From: LRFuels
H & Q Spot Report dated Oct 18. Hope someone has not already posted this. I stopped reading all the post after about file 123. ;-)
Todd D. Bakar leaves his long term recommendation at Buy and does not change projected numbers. Revs estimated at 420M and EPS at .16 / share for the fourth Q. He states something to the effect of the upcoming Q is still hard to predict and the range of results are board at this time. (I read this to mean he doesnt have enough data at this time in order to make the changes necessary)
He is VERY upbeat about the latest Qs numbers and conference call. I have read carefully and see no new information in the 3 page report that us Fools have not already uncovered on the board.
Back to lurking mode for another Quarter......... 6+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re: Q3 Response Date: 96-10-21 23:20:07 EDT From: MF Ben
<<<Perhaps the problem in my earlier post on this subject is that I did not state my points clearly enough. My first point about the rebates was NOT that IO may have under-reserved (in fact I tried to make it clear that I dont think this was the case). Rather,my point was that with a 50% exercise rate for the rebates, the EFFECTIVE selling price for the Zip was, on average, $175.>>>
My mistake. I did miss the point. Sorry. :)
<<<When I look at this in the context of KEs announced goal of eventually reducing the price of the Zip to $99.95 retail, it suggests that the company may have a difficult time in reaching this price point without keeping a lid on what are already low margins (or worse, driving them even lower). >>>
Yes and no. Obviously the $99 price point comes from a combination of the marketing and manufacturing group.
<<<Neither I, or anyone else on this board can really know, with confidence, that chip integration (the dream team effect) and the movement of production to Panang are going to allow IO to absorb a further $75 decline in the retail price of the Zip - even over an extended period of time. I am not saying it isnt possible, merely underscoring that it appears to be a formidable task.>>>
I completely agree. We don't know. We can't know. As you say, it DOES appear to be a formidable task. I believe that Iomega has plenty of work ahead of them.
That said, I believe the "dream team" will lower costs. By how much, I don't pretend to know. I do believe that the $99 price point is possible. I do partly base that on my opinion of Edwards. I have yet to find Edwards to break his "word" and believe that Iomega must have some sort of cost structure pro forma in place that leads to the $99 external blue box. We shall see. That uncertainty IS what makes the market. :)
<<<Keep in mind, as I pointed out in my earlier post that, despite a more than doubling in total revenue between Q4 1995 and the quarter just ended, IOs ratio of after-tax earnings to revenues fell sharply from 6.6% to only 4.1%, although the comparison is a little unfair because 4Q 95 earnings were partially tax sheltered. For that reason IOs gross margin, which fell from 30.7% to 26.3% over the same interval is probably a better barometer of the Companys weakening rate of profitability.>>>
As I said, we have a different product mix. I expect gross margins to rise as MCI takes over internal production and OEM inclusion rates rise. With the low margin drives being hefted more and more on MCI's shoulders, Iomega should have a greater percentage of disk to drive sales than before which should lead to an increase in gross margins.
<<<I agree that, at present, IOs cash position is more than ample to support continued growth.. (SNIP)...While it is true that most rapidly growing companies are unable to finance their growth solely from internal sources, I would suggest that most do, in fact, generate a HIGHER portion of their cash needs INTERNALLY than does IO. That is one of the very real (adverse) impacts of IOs current low level of profitability.>>>
This goes right back to the gross/net margin argument. I do see cash cow status (BCG) for Iomega at some point in the future.
<<<And it is something which any serious analyst must take into account, particularly given that the Company is in the process of moving significant amounts of manufacturing in-house which, hopefully, will improve PROFITABLY, but will also increase its RISK EXPOSURE.>>>
Again, yes and no. Iomega is shifting the lower margin internal production to MCI, it seems, leaving the higher margin external market to themselves as well as the disks. Yes, there is an inherent risk by taking over Epson manufacturing. I also agree it should improve profitability which again goes back to the gross/net margin discussion.
<<<I have no doubt, given we are now in a period of seasonal strength, that IOs profitability ratios will show improvement when 4th quarter results are published in January. But the real test will be whether the Company can sustain this improvement as next year unfolds.>>>
Agreed. I believe the next 4 quarters, not just Q1 or Q2 in '97 will be the real test. The swing into manufacturing in Q1 will, no doubt, be somewhat error prone, as all ramp-ups are, so I expect gross and net to dip for Q1 and Q2. I actually see Q3 '97 as a very critical quarter (looking far forward) as by then net should be above 5% and Iomega should have a reasonable marketing strategy for overcoming the strong seasonality factor.
<<<As stated earlier, IMO with respect to profitability ratios, the record of what many here refer to as the NEW Iomega, has thus far not been very encouraging. While I dont preclude IOs ability to rise to the challenge through various means (chip integration, manufacturing in Panang, product licensing and higher disk tie ratios to name a few), and improve its profit ratios from the low levels of Q3, the recent history of the Company suggests that a favorable result is far from guaranteed.>>>
Nothing is guaranteed. Mistakes can and most probably will be made. I will be closely watching management and how they handle their new "large" status. The shift from a $200 million company to a $2 billion one is not easy and it is the rare management team that is capable of handling the new responsibilities. Management must grow with revenue.
However, I disagree about how the "new" Iomega looks. The profitability ratios are lower than optimal, but I still believe that Iomega is in a stage where sacrificing short-term margins for long-term stability and profits is the smart move. They are not assured of winning the standard war and to diminish their capability to compete for the sake of short term margins would be, IMO foolish (little f). Once they have achieved their goals with Zip, THEN I believe they can focus on profit maximization.
I'm glad they understand the importance of their current position and the need to maximize the installed base, even at the expense of profits. I wouldn't have it any other way. However, their balance sheet, beyond the net/gross, looks strong.
Your trepidation seems to come from the lack of short-term profitability rather than a concern over overall financial health or product lines. Frankly I'm surprised that you suggest Iomega should concentrate on such fleeting goals, especially in light of the huge rewards if they are indeed successful. They have a hard road ahead, no doubts, but at least they have the correct goals in mind.
Moo
Benjamin :-) 7+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: New computer Line with Zip? Date: 96-10-22 02:31:26 EDT From: Taxman99
The back cover of the Costco/Price Club Christmas catalog features two computers. The Nexar 4078 and the Nexar 9049. The Nexar 9049 features a Pentium 200 Mhz CPU, 3.4 GB hard drive, 1.44 3.5" floppy, 2 MB PCI Diamond 3-D graphics, 100 MB Zip Drive, 12X CD-ROM, 17" SVGA, 32 MB EDO RAM, etc.
On the lower right corner of the cover you have the intel inside symbol, the windows 95 symbol, the plug and play symbol and what else but the Iomega symbol. Great to see the Iomega symbol next to these other symbols. The back cover doesn't explicitly say that the Zip drive is internal but I'm pretty sure that it is.
I had never heard of Nexar before this. The text also mentions "NEXAR's product line is equipped with the highest-quality, industry standard components". NEXAR-The next step.
I guess NEXAR considers the Zip drive an industry standard and a must for a top of the line computer system. 8+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Not Deja Vu Date: 96-10-22 03:02:12 EDT From: Ken1Marcus
I have a totally different feeling now than when we were at 40+.
1. The PE is much lower with lower stock price and more earnings on the table.
2. We don't have a seasonally bad quarter to look forward to, we have a seasonally great quarter to anticipate, and another seasonally good quarter after that.
3. Those are still holding have endured the mother of all corrections. I don't think we have near as many weak hands now as we had at the ~40 levels.
4. Short term we have comdex and possible announcements to look forward to.
5. In Q1 we will start to see the intel/mot/ti integrated chips in iomega products, this means lower costs
6. In Q1 or Q2 we will see the notebook zip.
7. We don't have the unknown effects of the rebates on the profit margin. We know the effects and so does iomega. They know exactly how many people will send in the rebates: all they have to do is look at how many people who bought in the first month of the rebate have sent them in. If they haven't sent them in yet, they won't. This means that we know iomega can make money with the rebate in place.
8. If I recall correctly, during the last advertising blitz, we had a large increase in the stock price. There were other factors, but, I do think that advertising does interest new buyers in the stock.
9. Emerald and Navalier have both increased their "rating" iomega.
So, iomg now has a lower PE, less weak hands due to the shakeout, much better "season" for selling, and the story (MCI, Dream team, more SKU's) that was then only anticipated is now more nearly here.
Ken
End Report. Posts covered through 3 a.m. 10/22/96. _______________________________
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