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Friday, November 29, 1996 Iomega was up $3/8 Wednesday, closing at $22 3/8 (+1.70%). TODAY'S RECAP: With the important Thanksgiving holiday to distract Iomegans from their obsession with the most active stock folder in cyberspace, our Iomega forum has been unusually quiet these past two days. However, not even a heapin' plate o' turkey drumsticks and cranberry sauce could keep the number crunchers away from their compulsive calculations, and thus we have more than the usual offering of earnings analysis this morning from the spreadsheet-and-pocket-calculator crowd. So dig into today's report, Fool -- it's an accountant's delight! 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 IOM Today window and try again. 1++MF ETurkey questions PKeeler's assumptions in the study of 4Q earnings and revenue. 2++PKeeler responds to MF ETurkey's questions. 3++MF ETurkey wonders about the factors that will impact IOM's 4Q performance. 4++HSimons113 argues in favor of Swan, and posts information on Swan's website. 5++Skichang adds his thoughts to the analysis of Iomega's earnings prospects. 6++Arentz65 analyzes Zip inclusion rates in OEMed systems. 7++LaneAdv replies to HSimons113 re: Swan. 8++Arentz65 adds to his thoughts on Zip inclusion rates. 9++MarkM10073 comments on tie ratios. 10++MF Ricster makes a clarification on tie ratios. 11++DLoop10267 considers IDE Zips and their importance to OEM inclusion rates. 12++KarlW12733 wonders if Iomega will fail to meet its estimates for the 4Q by sacrificing its earnings in an effort to achieve long-term growth. 13++Waverunner adds some thoughts on Zip penetration.
Written by MF Cheeze, assisted by MF KarenK.
And now, the Best of the Board...Started 3 am ET 11/27/96.
1++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:1997 estimates Date: 96-11-27 09:27:44 EST From: MF ETurkey
PKeeler writes in his analysis, the following:
<<<Assumptions:
* Zip drive has 50% of DiskTrend's projected market. * Iomega makes less than $1 on every drive MCI sells. * 14% growth in Jaz drive sales over 3Q96 annualized level (est.). * 12% growth in Ditto sales over 3Q96 annualized level (actual). * 20% growth in shares outstanding over 3Q96. * Zip tie ratio (all disks ever sold/all drives ever sold) of 8.5 at end of 1997. * Jaz tie ratio (all disks ever sold/all drives ever sold) of 4.4 at end of 1997. * Bernoulli and Interest Income included in 'Other'. * 3:1:1 ratio between retail/OEM/laptop (currently 9:1:0). * 3:2 ratio between external/internal Jaz drives. * Average 50% price cut by end of 1997 for Zip and Jaz drives and Jaz disks. * Average 25% price cut by end of 1997 for Zip disks. * n.hand contributes no revenues or earnings. * No new products contribute revenues or earnings (except laptop Zip). * 4% R&D, 16% SG&A, 39% Tax rate.>>>
Patrick,
Given that the underlying philosophy of iomega is "It's the disks, stupid", let me ask you how you came to your conclusions of a Zip tie ratio of 8.5 disks and a Jaz tie ratio of 4.4.
Playing devil's advocate for the moment here, the machines going out with Zips next year are likely to have lower tie ratio's than this year, simply because those that "Really needed them" ran out to get them, and that many of the OEM sales in 1997 will be folks who say, "What? An extra $99 bucks for a Zip drive? Sure, why not, throw it in."
This would mean lower Zip tie ratios for 1997 Zips than for those Zips bought in 1995 and 1996.
Additionally, Edwards did say (I think) that Jaz tie ratios had not met their expectations (2Q conf call?).
Can you please give us your underlying assumptions on coming up with the tie ratios that you used in your analysis?
Thanks.
Eric 2++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:1997 estimates Date: 96-11-27 12:46:33 EST From: PKeeler
>>> Given that the underlying philosophy of iomega is "It's the disks, stupid", let me ask you how you came to your conclusions of a Zip tie ratio of 8.5 disks and a Jaz tie ratio of 4.4.
Playing devil's advocate for the moment here, the machines going out with Zips next year are likely to have lower tie ratio's than this year, simply because those that "Really needed them" ran out to get them, and that many of the OEM sales in 1997 will be folks who say, "What? An extra $99 bucks for a Zip drive? Sure, why not, throw it in."
This would mean lower Zip tie ratios for 1997 Zips than for those Zips bought in 1995 and 1996. <<<
I have to disagree. MCI Zip sales will make up for OEM lag. This is easier to demonstrate than explain. Let's say 6 million Zips are sold in 1997, 3 million by Iomega and 3 million by MCI. Lets say the average number of disks each new owner buys in a year (different type of ratio than the number in my post) is 4, since many people don't need too many right away. What is Iomega's tie ratio on Zips sold in 1997? 8:1 or 9:1. Iomega sold 8 or 9 disks for every Zip THEY sold. Why 9 not 8? The disk included with the MCI drive might be bought from Iomega for all I know ;-)
>>> Additionally, Edwards did say (I think) that Jaz tie ratios had not met their expectations (2Q conf call?). <<<
In the more recent CNBC interview he said tie ratios (Zip and Jaz) were up to expectations. Further, we don't know what they expect so my number could still be low or high. Cynicalguy's post on his Jaz survey showed a tie ratio much higher than 10 if I remember correctly. McConathy said, in June, he had sold 7,000 drives and 35,000 disks which is a tie ratio of 7:1.
>>> Can you please give us your underlying assumptions on coming up with the tie ratios that you used in your analysis? <<<
In the analysis, the ratio I was using was Total Disks Sold Ever / Total Drives Sold Ever. So on 12/31/97, I estimated 8.5 disks would be sold by Iomega for every drive sold, ever. I bent the number to 8-9 since the only tie ratio we ever got was the "10 million disks and 1 million drives" shipped announcement in March (9:1 or 10:1 depending on how Iomega counts that included disk in Iomega, Epson, and Reveal boxes). Some people have quoted the tie ratio as the amount of disks bought in a year or with the drive. Since KE said Zip tie ratios have expanded since that announcement, plus the fact that MCI drives will boost any ratio much higher even if OEM tie ratios tend lower or take longer to saturate. I think 8-9 is probably much lower than what Iomega will find on 12/31/97. IMO I did lowball and a number lower than 7:1 for this ratio is probably too extreme in its conservatism (maybe the Pat Buchanan lowball?).
Why didn't I use a higher rate? Because as new Zip models (laptop) come out, and the price on old models drops, you will get people who own more than 1 drive using the same stack of disks.
Jaz ratios are tougher. 4 is just lowball guess based on people I know with the drive and Cynicalguy's survey and McConathy's info. Taking into account newer buyers will probably have less free cash and less need for large numbers of Jaz disks.
PKeeler Patrick Keeler 3++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:1997 estimates Date: 96-11-27 13:19:50 EST From: MF ETurkey
<<<I bent the number to 8-9 since the only tie ratio we ever got was the "10 million disks and 1 million drives" shipped announcement in March (9:1 or 10:1 depending on how Iomega counts that included disk in Iomega, Epson, and Reveal boxes). >>>
I guess this went to the crux of the matter, what I was really driving at, the fact that iomega has never really let us know what that tie ratio is. OK, now I know where the number came from.
It seems that the two giant variables here will be:
1) How many drives will Matsushita sell?
2) What will the tie ratio *per drive* be (which I think will be way below 10:1)
Both of these are unknowns.
<<< 4 is just lowball guess based on people I know with the drive . . .>>>
I'll accept that you have made a guess. I was wondering if there was some type of industry or iomega statement that I had missed that might clue us in a bit. If not, then it is left to educated guesses. No problem with that.
I was wondering what the underpinnings were of the analysis.
Eric 4++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Swan the Sleeping Giant Date: 96-11-27 14:11:55 EST From: HSimons113
For anyone interested in knowing the truth about the Swan UHC you can go to www.swan-usa.com for the information. Yes they have an external disk and yes you will be able to purchase it for less than iomega's.Believe it or not Swan is going to be a force in the removable data market. They have the backing of Mitsumi and the capacity to manufacture these drives at an astonishing pace. Not 4 million drives in 2 years but 4 million drives in 6 months. They also have an edge in the international market with distribution channels set up through mitsumi. GOOD LUCK to iomega. 5++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: 1997 Estimate PKeeler Date: 96-11-27 15:18:49 EST From: Skichang
PKeeler
1997 Estimate
Lets make a assumption here: For gross margin some might say more, other might say lower, Let's put it down to 30%. You need 1730M to get 0.88 EPS.
Can IOM make 1730M in 1997? I dont know. We have to see 4 qtr sales to determine that.
3Q-96 FYE-97 Sales 310,085 1,730,000 Cost -228,424 -1,211,000
Gross Margin 81,661 (26.34%) 519,000 (30.00%)
GEN EXP 50,323 240,000 R&D 10,475 50,000 PRE-TAX INCOME 20,863 229,000
INTEREST EXP 71 292 INC TAX -8,168 -109,322 NET INCOME 12,766 119,970 EPS 0.09 0.88
Shares O/S 137,027 137,027 6++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Zip inclusion rates cont. Date: 96-11-27 16:01:59 EST From: Arentz65
I highlighted Zip inclusion rates last night on these three OEM's. This is about what they should ship worldwide next year: The units shipped may be off due to my extrapolating from quarterly data. If anyone has next years estimates for these companies I would like to see them. Would also like to see just North Americas estimated numbers
Packard bell 3,772,000*21%=792,120
NEC 3,749,000*25%= 787,290
HP 3,404,000*15%= 510,600
Total for PB, NEC and HP = 2,090,010
So next year we could expect these three companies to account for over 2 million Internal Zips. Much of which i think will be coming from Matsushita. These numbers also do not reflect Zip demand from any other OEM.
Assumptions made:
1. That systems worldwide have the same Zip inclusion rate as those systems found here in the US.
2. That Zip Inclusion rate does not change.
3. That Zip inclusion rate matches closely to actually units sold with zip. i.e. NEC has zip inclusion of 25% AND NEC actually ships about 25% of their computers with Zip installed. From my channel checks the Zip models are very popular and sell better than other models. So while NEC may have 25% of their models with Zip included, machines with Zip installed may make up say 35% of all NEC computers sold. Channel checks would be helpful here.
any help on the numbers or my assumptions would be appreciated
Eric 7++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Swan the Sleeping Giant Date: 96-11-27 16:08:06 EST From: LaneAdv
<<For anyone interested in knowing the truth about the Swan UHC you can go to www.swan-usa.com for the information. Yes they have an external disk and yes you will be able to purchase it for less than iomega's.>>
Thanks for the advice! Now that I've seen "The Truth" (I'm told it's out there) I have to say Swan's web site is one of the more underwhelming places I've been on the web. The links to sales information & beta test sites are both dead-ends, as were the FAQ & software driver FTP links. Where DID you find the information saying "you will be able to purchase it for less than iomega's"? (and if so WHEN?) This is an often tossed out fact by IOM bears that I find HARD TO BELIEVE unless Mitsumi is ready to take a big loss on each unit. Doesn't this thing use a fixed hard drive in addition to the removable media? Don't forget to add extra heads for floppy compatibility --who's paying for these additional parts & manufacturing costs? Is Mitsumi going to beat out Texas Instruments, Motorola, & INTEL at cost reducing, consolidating & manufacturing the chip sets? Is Mitsumi going to out-produce Matsushita? I doubt it. I'm sure weary of the argument that Swan's older brother is gonna step in & beat IOM up 'cause IOM has 4 or 5 of it's own.
And finally, I hope the photos of the external unit don't represent the final production drive -- it may be a Swan on the inside but it's one ugly duckling on the outside.
A very informative stop to see the difference in engineering & marketing --Thanks again! 8++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Zip inclusion rates cont. Date: 96-11-27 16:22:58 EST From: Arentz65
<<From: Tester tjc
Nice shot, lets refine these #'s. I do believe that the SKU percent cannot be directly related to the sales numbers however. But this is a great start!>>
I agree that you cannot take for granted that these two are directly tied. I do think that you can use the Inclusion rate as a base number. If the models that included the add on were not selling well than you would see those models dropped. Especially if it is not an add on that is being pushed by the computer Maker (like Compaq and the LS). By 'selling well' i mean at least equal to their inclusion rate. To me that would be an OEM's minimum target.
This does not say however how WELL the models with the add on are selling. It could be much greater than the Inclusion rate. This would lead to an increase in models carrying the add on. That way a maker could grap more sales due to the add on's attractiveness.
If we see the Inclusion rates going up i think it is a sure sign that actual sales are greater than the inclusion rate.
Eric 9++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:1997 estimates Date: 96-11-28 00:13:29 EST From: MarkM10073
<<In the more recent CNBC interview he said tie ratios (Zip and Jaz) were up to expectations. Further, we don't know what they expect so my number could still be low or high. Cynicalguy's post on his Jaz survey showed a tie ratio much higher than 10 if I remember correctly. McConathy said, in June, he had sold 7,000 drives and 35,000 disks which is a tie ratio of 7:1.>>
Patrick -
Unless there's a typo in the preceding, McConathy had a tie ratio of 5:1. If those 35,000 disks include the original disk which ships with the drive, then I think we would have to count the ratio as 4:1 for an apples to apples comparison. My recollection is that Iomega doesn't count the disks shipped with the drives in the tie ratio. In any event, this isn't a completely clean number since I'm sure Charles must have shipped some disks to people who bought the drive elsewhere, and many of his customers have probably picked up additional disks from other sources.
I'm following this thread with interest, thanks for getting it started. When this board gets back to its "roots" it can't be beat.
Happy Thanksgiving all,
Mark 10++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:1997 estimates Date: 96-11-28 00:47:50 EST From: MF Ricster
<<McConathy said, in June, he had sold 7,000 drives and 35,000 disks which is a tie ratio of 7:1>>
I believe that Mr. McConathy was talking about Jaz and not Zip.
MF Ricster 11++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Zip inclusion rates cont. Date: 96-11-28 02:48:26 EST From: DLoop10267
Happy Thanksgiving Bulls, Bears, Posters and Lurkers,
In discussing the zip drive inclusion rate there is a very important variable. I buy all PC's, upgrades, etc. from a local computer retailer in So. CA. I have been buying from this shop for over three years and know the parters well. Both partners attended Comdex and spoke to Iomega reps at the booth. The partner I spoke to firmly believes that zip drives will become a standard. Customers ask for zips all the time (including me). I asked if he saw the LS-120 at Comdex, he really didn't know what it was, but recalled that in the past several months ONE CUSTOMER had come in asking about the LS-120. (Only one customer is a significant because the shop is always full of customers at all times of the when day I stop by.) Asked if he saw the Swam UHC 130 at Comdex, he had never heard of it.
What I found the most interesting was his claim that the Iomega rep he spoke to at Comdex said that they are trying to get the internal IDE zips out in quantity. Before mass distribution of internal IDE zips Iomega wants the IDE zip to be bootable, as right now only the internal SCSI zip is bootable. (I do not know if this is the case, can some of the more knowledgeable of you confirm or refute this. The partner I spoke to has no reason to mislead me, he wants to sell internal zips ASAP.) Iomega intends to make the internal zips available to local PC makers when the boot issue is cleared up. This is going to be a huge market. The partner believes that the beginning with the first quarter of 1997 internal zips will be everywhere. Local PC vendors also sell millions of systems each year.
Former parter of this shop has set up his own store locally. Spoke with him just before Comdex and he is also anxious to get internal zips for the PC's they make. There is consumer demand and the small PC makers are recognizing this and want to supply what the customer asks for. It appears that zip drive manufacturing capacity has held up distribution. Hopefully that will change first quarter 1997.
DLoop 12++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: PKeeler/Numbers Date: 96-11-28 23:35:10 EST From: KarlW12733
Pkeeler:
Thanks for taking the time to post your numbers. I did a similar exercise a week ago and when I did so I had the same concerns as you do regarding "making the numbers". For IO to make the numbers, margins have got to expand, and revenues have got to leap. In my estimates I came up with higher revenue figures than you did based on the large jump in revenues other consumer peripheral and related computer companies experience. I felt that they could achieve roughly $430,000 in Revenues this quarter. This still would require significant margin expansion for them to hit .18 cents.
My concern shortterm is that they will continue to sacrifice margins to get as many drives in as many boxes as possible. This is a good long term strategy but may hurt us shortterm if they don't make numbers.
I still hold out some optimism for "blowout" revenues, although not for earnings. IO is on record last year of indicating relatively near term revenues of 2 billion. (Remember the WSJ ad for engineers that had across the top "Be a part of a $2 billion company"?). KE than reportedly indicated their goal is 3 billion in sales by 2000. To achieve this they are going to have to generate revenues of $500,000 per quarter relatively soon.( I'm hoping it's real soon.)
So at this point I am watching revenues much more closely than EPS. IF margins don't expand I will forgive them because I realize it is part of the plan. However, I doubt the street will forgive them if they miss estimates.
The rebate thing makes things cloudier for me. Apparently, the 50 bucks is taken off the top (gross revenues). So this makes this number harder for me to interpret.
It would be nice if we had some hard info on # of sales. Oh, well.
Karl 13++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Zip penetration Date: 96-11-29 00:27:05 EST From: Waverunner
>>NEC has 28 desktop systems In various series. Zip Is included in 7 = 25%
HP Pavilion 7000 models, 11 total with Zip included in 2= 18% If you add the 2 Pavilion 5000 series computers that don't include zips the percentage is 15%.
I did not count the HP business machines(no zip penetration yet).<<
Eric,
The NEC computers that target consumers are the Ready models. There are four OfficeReady machines targeted at the SOHO market. All four models include Zip. The consumer Ready series has 11 models, with two including Zip as standard. The two models that the Zip appears in seem to be two of the more compelling models. Six out of 15 models with Zip standard.
I'm not surprised Kim Edwards didn't have a "ready" answer for Mark Haines when asked how many Zip SKU's were available. I posted a while back a quote from an HP executive regarding the secretive nature of future model features. IMO Iomega is being restrained from announcing any indication of future OEM demand. Loose lips could sink the ship if Iomega indicates future plans of any of their OEM partners. Mitsushista source will allow OEM's more secrecy regarding their plans. The bottom line is that one year ago there were no Zip SKU's. Seven months ago there was one. There are now somewhere near twenty. We are definitely headed in the right direction. Increasing numbers from existing OEM's will be proof that Zip sells. Additional OEM's such as Gateway(internal), Apple, Dell, and Compaq will indicate that they need Zip to compete. The most obvious hint that we have that the future demand will be greater than current demand is the involvement of Intel and TI in Zip chips.
Dave
End Report. Posts covered through 3 am ET 11/29/96. _______________________________
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