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Thursday, October 24, 1996 Iomega was up 1 1/4 Wednesday, closing at $23 3/8 (+5.65%). TODAY'S RECAP: One day it's down, next day it's up... anyone who wants to try to make sense of the whims of the market is welcome to the attempt, because we're sure stumped here at IOMG in Fooldom Today. It's not fun being confused... then again, we don't remember anyone promising us that short-term moves on Wall Street would make sense... good thing we Fools are long-term investors. After dropping earlier in the week, Iomega shares rebounded sharply Wednesday on no news. As usual, the move up cheered the longs, addled the shorts, and drew yawns from long-termers who have seen it all before. While no single topic dominated the discussion in the Iomega Folder, much of the commentary focused on Iomega's prospective competition, from the LS-120 to the Olympus Sys.230 to the various manifestations of writable CD drives. NETSURFER'S ALERT: ~TokyoMex~ reports that Emerald Research's new report on Iomega can be reviewed at www.emeraldresearch.com 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++MarkRogo offers his opinions Iomega's 3rd quarter and the threat of
CD-RW. And now, the Best of the Board...Started 3 a.m. 10/23/96.
1+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: 3rd quarter, CD-RW, etc. Date: 96-10-23 03:52:35 EDT From: MarkRogo
1) Who's been coming up with the braindead idea that Iomega had a bad 3rd quarter. The company grew revenue nearly 10% over Q2 despite being retail heavy in what is the weakest retail quarter of the year. As for ludicrous comparisons to Intel's good quarter, Intel sells chips and boards to Compaq and Dell ahead of demand for machines. They book sales in Q3 that show up as Q4 computers. Intel had a great quarter, yes, as did Iomega, it seems to me.
What Iomega didn't have was an unreal quarter. But the good news continues unabated, including progress on the OEM front (10% of Zip shipments).
In the meantime, Zip has no competitors. By year end, the Zip base will be above 4 million, probably pushing 5 million. It is the the replacement for the floppy drive...
2) The CD-RW is not such a replacement. It has not commitment from anyone, even those who are building it. It is not out. But the best part is that when trying to sell you one, the salesman gets to mention: Oh, by the way, the disks won't work in your present CD-ROM drive. Or your friend's. Or your friend's friend's drive. Holy boondoggle Batman.
And I'm sure this drive is gonna get real notice above the roar of DVD, due out just before CD-RW. At about the same price. Offering a real benefit to a lot of people.
CD-R will beat CD-RW for archiving, because CD-R drives will be around $300 by then, less than half the price. And CD-R disks can be read in CD-ROM players.
CD-RW is going to be about half the speed of Jaz. And Jaz II, which I'd guess is about a year away, will be even faster and even larger capacity. Jaz is well on its way to dominating the digital audio, digital video, and multimedia markets. It's becoming a must have, slowly but surely. When it does, the disk sales are going to go through the roof.
3) In the meantime, the growing Zip base guarantees more and more disk sales. The average installed base of Zip drives in 1997 will be 6 million or so (that's the average number of drives in use throughout the year).
It may be higher, but I'll use 6 million. Assuming a conservative ratio of 3 disks purchased for drive out there (some will buy none, my graphic artist friends will buy 15-20 per drive). That's 18 million disks sold at an average gross margin to Iomega of what $7 per disk? That's $125 million in gross margin on Zip disks! That's a conservative number it seems to me. That's just a piece of the gross margin puzzle for 1997. It seems like this year is yielding about $40 million in net profits. It seems next year could easily yield twice that.
The year after? Who knows. With an average of 10 million Zip drives, 3 disks, and $5 per disk, Zip gross margins are $150 million, a theoretical 20% growth rate on Zip disk margins alone. Of course, I believe the Zip drive count will be closer to 20 million in 1998... I think 100% profit growth is on tap for 1997 and 1998 for the company as a whole, based on trends like this...
Folks, this stock seems really cheap to me. Estimates call for 80 cents next year, which I have great comfort with based on calculations like the Zip gross margins I showed above. That's going to be growth of 80+%. The forward multiple is 27-28ish right now. The trailing multiple is mid-50s. Seems to me the stock would be more fairly valued in the mid-30s. It may take the big Xmas quarter to get it there, but get there it will.
Iomega is a billion-dollar enterprise headed for 2 billion in 1997. In the year 2000, a world with 100 million Zip drives, replacing the floppy forever, will bring Iomega 600 million in Zip disk gross profits alone (100 million drives, 3 disks, $2 per disk). Profits that year could be close to $500 million for the company, with 5-year growth at better than 40% compounded. That'd probably get about $15 billion in market cap, somewhere around 5-6 more than now. How many stocks are going to quintuple over the next 3-4 years? Name them, please.
Cheers, Mark 2+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: LS-120: Kaifa Date: 96-10-23 09:21:42 EDT From: MF Ben
<<<Production will begin in the second quarter of 1997 with volumes reaching 10,000 units per day within 60 days -- establishing OR Technology as the leading supplier of slim-line LS-120 floppy disk drives>>>
Someone emailed me the Kaifa/LS-120 release from earnings day and wondered why I hadn't commented on it. Honestly, it slipped my mind. I read it, did some quick math, and moved on.
While, unlike others, do I not believe that Iomega's future is certain or assured, I do fail to see a truly competitive product currently out, emphasis on currently as high tech moves very fast and waiting around the corner can be just about anything. I was a large detractor of the PD drive, a clumsy hybred of technologies, while remaining a fan of DVD. I have been, and remain to be, unimpressed by the LS-120, mostly due to the complexities of its design.
A toaster/fax machine is rarely better than a separate toaster and a separate fax machine unit.
But leaving what I consider a poor vision for the technology and inherent design complications that will make the drives expensive (they can dump but the huge trade gap with China might make that difficult), I had originally only done some quick math based on the above slice of the press release.
Let's split the difference on "second quarter" and call it April 15, a fun day for all. 60 days hence makes it June.
That means that around 1.8 million of these LS-120 drives will be produced in total in 1997 which leaves around 10 million HC drives to the other producers, according to Disk Trend numbers.
According to my calculations, Zip installed base should be around 6 million at the end of this year and perhaps 15 million at the end of 1997.
LS-120 Installed Base 12/97: around 2 million Zip installed Base 12/97: around 15 million
Looking 14 months out, a relatively large time period in the high tech industry, I still don't see how the LS-120 will eat more than a few crumbs of Iomega's lunch.
Iomega faces challenges. I am the first in line to point that out. However, I just don't see those challenges including the LS-120.
Cheers,
Benjamin 3+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: LS-120 and Syjet availability Date: 96-10-23 10:55:16 EDT From: CayugaDan
FWIW.....You can finally actually buy an LS-120 through computer dealers like me. The A: drive is in stock at Ingram Micro. There are under 100 in stock. There are two models at $210 and $230 (I believe). I couldn't tell what the difference between them are. The Syjet is still vaporware with ETA dates slipping even more. EZ135 cartridges are still unavailable, rumour is they are leaving all the EZ135 customers out to dry, since the rumour is they lose money on cartridges still. -Dan Rapaport Cayuga Computers 4+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Best Buy- Free Zip Drive Date: 96-10-23 12:38:00 EDT From: MF DrJimbo
I was stunned this morning to see that the entire front page of the Best Buy circular is taken up by an offer of a free Zip drive plus free installation with the purchase of any tower computer. Arranged around the offer are pictures of tower PCs from PB, Acer, Toshiba, Compaq, IBM and Sony. Its an internal drive, said to be a $249 value.
We've already seen this free Zip with a PC from some of the mail order dealers.
I find this incredible. This seems to be a bid to move consumers to more expensive tower models by offering the added value of a Zip drive. It also helps Best Buy differentiate itself from other resellers. Will any of the other resellers match this offer? This may be a marketing test since I haven't seen any other reports of this bundle posted here.
It would be interesting to know the details of this deal. Is Iomega giving a particularly good price to Best Buy on the internal Zips? Are they contributing to advertising? Is the additional markup on a tower computer enough to cover Best Buy's cost of the Zip.
This is also kind of an end run around the OEMs. If they won't build the SKUs with Zip, let the resellers install them in the after market.
Think of the disk sales. 5+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Olympus Sys.230 Date: 96-10-23 15:45:53 EDT From: Quiltman
The November issue of PC World magazine contains a review of the Olympus Sys.230. The review touts it as "taking on the Zip drive."
Some snippets:
"When you think removable storage, you probably think of the $199 Iomega Zip drive, which has become the de facto standard for the consumer and SOHO markets. Despite its proprietary storage techniques, it's won a lot of converts due to its low price and ease of use. But watch out for the Olympus Sys. 230."
The review says that the 230 is faster than the Zip and its storage disc cost $10 for 230mb vs. $18 for 100mb zip disk. It says that the media is more reliable than zip --"magnets can't harm your data." The drive will read "any 3.5 inch 128mb or 230 mb MO disc.
According to the review, "There is one downside to the Olympus drive: It requires a SCSI drive for best performance. Olympus has a model that plugs into the parallel port, but isn't as fast."
It lists for $299 for the internal SCSI. The external SCSI with cable is $359. The review didn't give the price of the parallel port version.
The product looks a lot like a Zip drive.
I have called the company and asked for the specifications and will post them when I receive them.
I see this as more of a copy cat of the Syquest Easyflyer 230 -- certainly the specifications and pricing are similar. I wonder how Olympus markets products like this? 6+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Fish and dogs Date: 96-10-23 17:01:28 EDT From: Bigfootmm
Ever hear of the Law of the Minimum? It is used in biology quite a bit. Let's say a bass in a pond needs 100 square feet of space during reproductive season. The fish with its mate defends that space with its life during one part of the year but pays no attention to territoriality the rest of the year. Consequently, the pond will only support a number of bass that allows each mating pair to control 100 square feet, even though the pond could hold many times that number if the bass were not so territorial.
Similarly, if a stream dries up in the late summer no amount of water the rest of the year will in the end favor a population of fish. Just one day of no water and the rest of the year, no fish.
The LS-120 reminds one of the Law of the Minimum. Nearly every consumer is going to have at least one problem with this machine. Too slow, not portable, no assurance of long-term support, not compatible with other storage machines in the consumer's universe, too expensive, or whatever. All it takes is just one objection and no purchase, especially when there are better solutions to the storage problem than the LS-120.
The same holds true of CD rewritable. Too expensive, too slow, not portable, easily scratched, not compatible, etc.
With the Zip, however, it is difficult to think of an objection other than price. And price is coming down as sure as god made little green apples. Zip is not backward compatible with the 1.44 floppy, but Iomega's research told it a long time ago that that was not critically important to consumers. Iomega could have made the Zip backward compatible, but deliberately decided not to do so because a lower price was much more desirable to consumers than eliminating the 1.44 from their lives.
With regard to the conference call, I think the most important thing said was that the primary focus was building a "strong corporate foundation." In all respects, e.g., hiring highly competent people, managing the money, marketing, correcting mistakes, turning out quality products with low returns, and on and on, this company is doing what it takes to be a contender.
Anyone who runs down this company because a chart shows a breakdown of some kind cannot be taken seriously by a serious investor. Think of such comments as dog doo on the sidewalk, offensive certainly, but not all that important and certainly not worthy of comment to your friends.
Stay loose, Bigfoot 7+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:CD ROM JUNK JUNK Date: 96-10-23 23:09:16 EDT From: JonTara
<<From: DRPEDICLE2
CD ROM IS JUNK,.,.,,,,,WHY PAY MORE WHEN YOU CAN HAVE A ZIP,,,,>>
You don't get it yet.
Why pay more, when you can have CD?
Zip media = $15, 100 MB, 15 cents/MB Jaz media = $100, 1000MB, 10 cents/MB CD-R media = $10, 650MB, 1.5 cents/MB
I can buy CD-R media for $5, but I don't want to argue. And I can't buy Zip media for $7.50 or Jaz media for $50, because there is very little discounting. Competition continues to drive CD-R media costs down. Problem with IOMG "razor blade" scenario is that it's not a very good deal for consumers to have to buy proprietary razor blades, and there will likely be consumer backlash when they find out that somebody else is selling razors that use blades that you can buy from anyone and pay 1/10 the price.
Yes, CD-R is "write once" but that is fine for a wide range of applications. In fact, it's even better than re-writable for many applications.
Also, what happens when I can add hard disk capacity for the same price as Jaz media? We are almost there. A guy at work just bought a 3+GB drive for under $400. Yes, there are applications for portability, but other than that, why would you NOT just want all your storage on-line spinning?
Zip/Jaz are one of those things that looks cheap at first, but is really a huge consumer rip-off. Consumers eventually figure this stuff out. 8+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:CD ROM JUNK JUNK Date: 96-10-24 00:18:38 EDT From: LukeCadet
>Subj: Re:CD ROM JUNK JUNK >Date: 96-10-23 23:09:16 EDT >From: JonTara > >Why pay more, when you can have CD?
>Zip/Jaz are one of those things that looks cheap at first, but is really a huge consumer rip-off. Consumers eventually >figure this stuff out.
I just have a few comments on this. Lets say that you have a three gig hard drive in your computer. You need more space so you add another one. With enhanced IDE you have a maximum of 4 drives so that is 12 gig. That would cost you $1600 at current prices. What do you do if you need more space now? I know 12 gig sounds like a lot of space but so did the 40meg hard drive I used to have. There is also the issue of taking the data with you. Do you carry around a 3 gig hard drive with you? With a Jaz drive you can just continue to add more cartridges. Also sooner or later the price on the Jaz cartridges will drop just like hard drive prices.
Ok now for CD-R. I will start by saying that I currently have one. It is good for my application which is archiving client files that have been scanned in. It currently cost me $8 per disk. I have had on about 20% of the disks unrecoverable errors. This has the bad effect of turning the CD into a frisbee. Now lets assume that I want to copy some files to take to a friends house. I transfer 100 megs of files and everything works great. It so far has cost me $8. Now I need to take 100 megs worth of other data to a different friend. I use the same cd and put them on it. Each additional session takes about 13 meg for overhead on the cd. I get to my friends house and find out that his CD does not support multi sessions. So it only reads the original 100 meg that I put on. Lets assume that it worked and I wanted to copy another 100 meg to someone else. After a little over 5 times I would need another cd. So now it cost me what one zip would cost. I could do 10 transfers for the cost of 1 zip. This is not taking into consideration that zip drives cost less than $200 and CD-R cost more than $500. Sure CD-R's will get cheaper but so will ZIP drives. What happens when one of the 10 times I transfer 100 meg a error occurs. I just got another frisbee. By the way they fly well into brick walls and if you are good it will shatter.:) With one zip I could transfer files not only 10 times but 100, 1000 who knows for sure. Last time I checked also not all computers have CD-ROM drives and I would be interested to know how many support multi sessions. On the other hand every PC I have seen has a parallel port, including laptops. If I go somewhere without a zip I just bring along a portable zip drive.
So Jon maybe you can shed more light as to why CD-R is better. Price per megabyte is subjective because of price changes and that most people would copy data many times. In the end CD-R would cost them lots of money if once they move files they don't want it anymore. I would say that the ability to write up to 100 meg of data and change it at anytime would be better in many more applications than write once and hope you got the right stuff. CD-R is great for permanent archiving but for the day to day transfer of files from home to work and back or to a friends house wouldn't the Zip drive be better suited.
Sorry if there are spelling or grammar errors in this post. It is late and I think that I got my point across.
Luke 9+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:CD ROM JUNK JUNK Date: 96-10-24 02:49:04 EDT From: JonTara
<<I just have a few comments on this. Lets say that you have a three gig hard drive in your computer. You need more space so you add another one. With enhanced IDE you have a maximum of 4 drives so that is 12 gig. That would cost you $1600 at current prices. What do you do if you need more space now? >>
Get 10GB SCSI drives. Will still be cheaper than the Jaz cartridges within 6 months to a year.
<< There is also the issue of taking the data with you. Do you carry around a 3 gig hard drive with you?>>
I have always said that there is a niche market for removable rewritable media. Most consumers do not have this need, though - some of them THINK they have this need. It is a classical marketing ploy - get people to pay more for an extra feature that most of them will never use.
I am a software engineer, and often work at home, and I don't have this need. Right now I have a 4GB SCSI drive, which is adequate for my needs. I know that when the time comes, I will just get a new SCSI drive that holds 2-4X as much data for half what I paid for this one.
I transfer files from home to work by ISDN. Other co-workers (most of them) use notebook computers. Some of them transfer files, most just do most of their work on the notebook. One of them has a Zip drive.
<<With a Jaz drive you can just continue to add more cartridges. Also sooner or later the price on the Jaz cartridges will drop just like hard drive prices.>>
I suggest that you plot the pricing history of Zip media, Jaz media, and hard drives before you come to that conclusion. Jaz cartridges USED to be much cheaper than hard drives. Hard drives are near parity with them now. The prices are about to cross-over. Do you think that they won't? Do you expect that the rate of change of hard drive prices is going to slow down, while the rate of change of Zip/Jaz media is going to accelerate? And if so, why?
End Report. Posts covered through 3 a.m. 10/24/96. _______________________________
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