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Thursday, December 05, 1996 Iomega was up $5/8 Wednesday, closing at $24 1/8 (+2.66%). TODAY'S RECAP: Another day, another roller coaster ride. Wednesday saw a lot more of the volatility that Iomega's move to the NYSE exchange was supposed to quell. Prices rose... prices fell... and by the time the tug-of-war between buyers and sellers had ended, IOM shares were up $5/8. Today's collection of posts is a pencil-chewer's dream come true. Large-brained Fools ~MF Ben~ and ~RB61~ dug out their pocket calculators and started rifling through Iomega's ledgers with crazed abandon. You know how wild these spreadsheet guys can get when the numbers catch their imaginations: the mad expressions, the frenzied calculations, the faint burning odor of a smoking slide rule... Fools, it just don't get no better than this! In order to present the Ben/Robert discussion in its entirety, we've made today's report a two-parter. SHAMELESS PLUG: Say, have you been looking for somebody to sit down and tell you the entire Iomega saga from start to finish? Then why not check out MF BudFox's amazing Iomega Retrospective? This is an in-depth report that recounts the epic journey of a poor, unknown removable storage manufacturer from Darkest Utah on its way to The Big Time. 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++RB61 considers Iomega's deferred revenue from the third quarter and treatment
for their excess inventory in the channel. And now, the Best of the Board...Started 3 am ET 12/4/96.
1++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:3rd qtr deferred rev. Date: 96-12-04 16:34:21 EST From: RB61
DISCLAIMER: I have not contacted IOM to determine their actual accounting treatment for their excess inventory in the channel. The following is my understanding from ARB43 and FAS48 as well as discussions with a manager with KPMG Peat Marwick as to how to properly treat deferred revenue as has been reported by IOM. So take it for what it is worth.
For this discussion, I offer IOM's statement in their notes to the financials for their 3rd qtr 10Q:
<<Revenue Recognition - Revenue is recognized when units are shipped to customers. However, revenue is DEFERRED (my emphasis) on shipments to customers with right of return privileges, whose inventory is in excess of estimated normal customer's inventory requirements. The gross margin associated with the deferral of sales in excess of normal customer's inventory requirements totaled $11,141,000 and $3,207,000 at September 29, 1996 and December 31, 1995, respectively, and is included in other accrued liabilities in the accompanying condensed consolidated balance sheets.>>
IOM indicated that revenue is recognized when units are shipped. However, revenue recognition is deferred when there is excess inventory in the channel. For purposes of my example, I will use IOM's gross margin of 26.335%, which was their actual gross margin percentage for the 3rd qtr. Actual gross margin for the qtr was $81,661 so the $11,141,000 gross margin which was deferred represented $42,304,000 in sales ($11,141,000 / .26335). Cost of sales then amounted to $31,163,000 ($42,304,000 - 11,141,000).
The first two entries are the normal entries recorded when sales are made. I will use the above extrapolated numbers for my exercise.
Sales are made and recorded:
1) Accounts Receivable Dr. $42,304,000 Sales Revenue Cr. $42,304,000
Cost of sales are recorded:
2) Cost of Goods Sold Dr. $31,163,000 Inventory Cr. $31,163,000
We have now determined that the above sales represent excess inventory in the channel. The following entries are then made:
Reverse Sales Revenue:
3) Sales Revenue Dr. $42,304,000 Other Accrd Liab. - Defrd Rev Cr. $42,304,000
Reverse Cost of Sales:
4) Other Accrd Liab. - Defrd CGS Dr. $31,163,000 Cost of Goods Sold Cr. $31,163,000
The net effect to Other Accrued Liabilities is: Dr. $31,163,000
Cr. $42,304,000
-------------------------
Cr. $11,141,000
When IOM no longer needs to reserve for excess inventory in the channel, they would simply reverse entries #3 and #4. So therefore, Sales Revenue and Cost of Sales would each increase in the preceding period if no longer needed.
You will notice that Inventory and A/R are not effected by this sequence of entries. Only if the inventory were actually returned would these accounts be effected. Remember, if IOM's excess inventory in the channel increases this qtr, so would the reserve. Likewise, if it decreases, Sales Revenue and Cost of Sales will increase proportionately.
Fool On,
Robert 2++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:3rd qtr deferred rev. Date: 96-12-04 17:00:30 EST From: MF Ben
<<<You will notice that Inventory and A/R are not effected by this sequence of entries. Only if the inventory were actually returned would these accounts be effected. Remember, if IOM's excess inventory in the channel increases this qtr, so would the reserve. Likewise, if it decreases, Sales Revenue and Cost of Sales will increase proportionately.>>>
<<<However, revenue is DEFERRED (my emphasis) on shipments to customers with right of return privileges, whose inventory is in excess of estimated normal customer's inventory requirements. >>>
Robert,
The question then becomes, on the deferred revenue recognition, whether it is actually calculated (which would then become, "how?" do THEY decide what is "excess normal customer inventory" or do their customers?) or, as I suspect, is it merely some percentage of sales based on historical return rates from customers (as the warranty expense is calculated on historical returns from end-users).
If it IS merely a percentage of sales per quarter (or maybe based on days on customer's inventory?), adjusted somewhat, I imagine, to account somehow for changes in customer's inventory, then while the $42 million in sales will be "booked" to R/E in Q4, as will the associated COGS to the other side of R/E, we will have another deferred revenue account reflecting sales in Q4 (which would then be booked in Q1 '97).
My question is, even if "excess inventory" doesn't increase this quarter, wouldn't you expect the deferred revenue account (contra-asset or liability?) to rise ANYWAY? After all, they don't contact every customer and ask their customer whether they BELIEVE they have too many IOM products in inventory, do they? What about seasonality or marketing pushes? Seems a fixed percentage of sales, adjusted for seasonality plus other factors would virtually ensure that the deferred revenue T account goes UP this quarter, regardless whether inventories actually rise in Q4.
I could imagine three scenarios: 1) deferred revenue T account declines on both a dollar basis and as a % of sales because the balance is a "snapshot" as of 12/31/96 and customer inventory was practically all sold and new shipments had yet to go out. I wouldn't like that. I prefer customers have product. 2) Deferred revenue as a percentage of sales remains the same but goes up on a dollar basis reflecting the "conservatism" of accounting. 3) Deferred revenue as a % of sales (or COGS or A/R or whatever, let's pick one) AND on a dollar basis goes up reflecting too much product in the channels.
Comments? My mistakes?
Cheers,
Benjamin (NOT an accountant!) :-) 3++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: 18th SKU confirmed! (By Me) Date: 96-12-04 18:54:58 EST From: IAmErgoSum
I called USA FLEX today (1-800-333-4515) and confirmed that one of their "Flex Systems" models, the "New Year Classic", comes with the Zip 100 as standard. The New Year Classic comes with a 133 MHz Pentium, 16MB of RAM, a 1.6 MB hard drive, an 8x CD-Rom and 15" monitor all for $1,997.
The ad in PC magazine actually states (for the New Year Classic) that it comes with a "210 Drive", but when I questioned the salesperson about it he didn't know what I was talking about and said that this model comes with the Iomega Zip Drive.
Regards,
Bill Polk 4++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:3rd qtr deferred rev. #1 Date: 96-12-04 22:10:09 EST From: RB61
MF Ben,
<<Robert, The question then becomes, on the deferred revenue recognition, whether it is actually calculated (which would then become, "how?" do THEY decide what is "excess normal customer inventory" or do their customers?) or, as I suspect, is it merely some percentage of sales based on historical return rates from customers (as the warranty expense is calculated on historical returns from end-users).>>
Excellent question Benjamin. To answer, I went to IOM's 10Q's from qtr ending 3/95 through 9/96. In their notes to the financials up until 12/95 qtr end, IOM's explanatory note read *...revenue recognition is deferred on shipments to DISTRIBUTORS*...(emphasis added). From 12/95 qtr end onward, the explanatory note read, *...revenue recognition is deferred on shipments to CUSTOMERS*... I think this was a big change. Up through 9/95, IOM had right of return agreements with distributors, with maybe just a few large customers thrown in as well. After that period, more customers had right of return privileges. However, I will present evidence below which indicate that the right of return agreement is only extended to a select few customers (probably distributors and large dealers), not to all buyers of IOM products.
The following are the sales, deferred revenue reserve numbers, and the % of that qtrs sales that were deferred. You will see that IOM has not used a set number, such as a uniform accrual would suggest. These numbers suggest very strongly to me that IOM actually checks with those who have a right of return privilege for their inventory numbers. Remember, IOM has sales people who are trying to get these dealers/distributors to buy product. They would know how much these people have ordered, and their sell through. Using this information, it would be very easy to determine how many days worth of inventory each of these buyers have on hand, making the deferred revenue number very accurate.
Qtr ending 3/95 6/95 9/95 12/95 3/96 6/96 9/96 Sales 40,112 52,594 84,721 148,798 221,988 283,638 310,085 Revenue Reserve 1,296 1,523 1,610 3,207 6,613 11,548 11,141 % of Sales Reserved 3.231% 2.222% 1.9% 2.155% 2.979% 4.071% 3.593%
As you can see, IOM does not use a set accrual. In fact, from this example, you can clearly see that IOM screwed up in the 6/96 qtr. They had way too much inventory in the channel that had to be reversed. Now for the 3rd qtr 1996, this was a planned build up of inventory. Better to keep the product on your customer's shelves where they can be seen and bought, than in your warehouse.
<<If it IS merely a percentage of sales per quarter (or maybe based on days on customer's inventory?), adjusted somewhat, I imagine, to account somehow for changes in customer's inventory, then while the $42 million in sales will be "booked" to R/E in Q4, as will the associated COGS to the other side of R/E, we will have another deferred revenue account reflecting sales in Q4 (which would then be booked in Q1 '97). >>
Benjamin,
The $42m reserved for the 3rd qtr will show up as Sales Revenue and a corresponding $31m entry for Cost of Goods Sold. This will show in the main portion of the Profit/Loss. Nothing hits Retained Earnings, at least not until all revenue and expense accounts are closed at the end of the year. The Other Accrued Liability account nets out to $0. Then the process begins all over. IOM will determine how much needs to be reserved, and they will make that entry.
Part 2 to follow.
Fool On,
Robert 5++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:3rd qtr deferred rev. #1 Date: 96-12-04 22:42:00 EST From: MF Ben
<<<The $42m reserved for the 3rd qtr will show up as Sales Revenue and a corresponding $31m entry for Cost of Goods Sold. This will show in the main portion of the Profit/Loss. Nothing hits Retained Earnings, at least not until all revenue and expense accounts are closed at the end of the year.>>>
Don't they just do Q4 and the annual at the same time, therefore, the revenue and COGS would hit R/E end of the quarter, no?
<<<As you can see, IOM does not use a set accrual. In fact, from this example, you can clearly see that IOM screwed up in the 6/96 qtr. They had way too much inventory in the channel that had to be reversed. Now for the 3rd qtr 1996, this was a planned build up of inventory. Better to keep the product on your customer's shelves where they can be seen and bought, than in your warehouse.>>>
By not using a set accrual (i.e. a percentage of sales), don't you agree it would be prudent for shareholders to keep their eye on the reserve. Just as 6/96 quarter shows, the reserve is a reasonable indication if there is a problem. Of course, one cannot JUST look at the revenue reserve, but it is something to keep on the checklist and watch out for each quarter. In other words, if the sale reserve suddenly jumps above 5%, it could be construed as a warning sign given historical reserve levels of ~2% to ~4%.
<<<These numbers suggest very strongly to me that IOM actually checks with those who have a right of return privilege for their inventory numbers. Remember, IOM has sales people who are trying to get these dealers/distributors to buy product. They would know how much these people have ordered, and their sell through. Using this information, it would be very easy to determine how many days worth of inventory each of these buyers have on hand, making the deferred revenue number very accurate.>>>
The days is, of course, based on historical sales, correct? I imagine that the IOM sales people would need to adjust their "judgements" for other factors, for example seasonal up and down swings such as Q3/Q4 and Q2. I question their accuracy.
I was under the impression that accountants used methods that didn't rely on sales peoples' judgements -- for obvious reasons. How many CPAs trust the marketing guys or vice versa? Mutual skepticism and a healthy one!
Could you perhaps clear up how such a system NOT based on an accrual (% of sales) might work in terms of places where there could be possible abuse or mistakes (such as the one you point to in Q2) or other significant factors?
I'm sure many a Fool could learn a thing or two!
Cheers,
Benjamin 6++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Jaz and ingram Date: 96-12-04 23:01:46 EST From: CayugaDan
I wrote: <<<Jaz cartridges are still out of stock at Ingram on 7 of 8 SKUs My friendly Ingram representative told me that there were cartridges in transit from iomega. She also said that the amount being received will not cover the few thousand backordered. >>>
MFETurkey wrote: <<<That is not joyful news. If the merchant doesn't have it, it can't be sold. >>>>>
It is true that one possible explanation for the shortage at certain distributors is production problems, another is bad forecasting.
However, I also have to add that, its also possible that production is doing well, but huge unexpected orders have come in. In fact its possible that a lot of stores ordered extra Jaz cartridges so that they would be sure to have them in. If that's the case, then cartridges are already in the retail channel. I have heard no reports of consumers having a problem finding them.
I believe that we don't know yet if there is a problem, and if that possible problem is a good problem or a bad problem. But I certainly agree this is something to keep our Foolish eyes on.
Dan Rapaport Cayuga Computers 7++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:3rd qtr deferred rev. #2 Date: 96-12-04 23:06:14 EST From: RB61
MF Ben,
<<My question is, even if "excess inventory" doesn't increase this quarter, wouldn't you expect the deferred revenue account (contra-asset or liability?) to rise ANYWAY? After all, they don't contact every customer and ask their customer whether they BELIEVE they have too many IOM products in inventory, do they? What about seasonality or marketing pushes? Seems a fixed percentage of sales, adjusted for seasonality plus other factors would virtually ensure that the deferred revenue T account goes UP this quarter, regardless whether inventories actually rise in Q4.>>
As I indicated in part #1 of my post, the evidence points towards IOM doing just that, contacting their customers to determine their inventory level. This is very easy since this is already done on an ongoing basis. IOM's sales people are in constant contact with their distributors and large customers to obtain sales orders and to check on inventory levels. The company I work for does this on a regular basis, so I have to believe that IOM is doing the same. IOM's 10Q indicates that only the customers with right of return privileges are reserved (large customers and distributors). Also, from my chart below of IOM's sales and revenue reserve figures for the past year and a half clearly indicate that this reserve figure is influence by seasonality, only to the point where sales management is not as effective. Inventory is only partly responsible, to the extent that customers were ordering more than required due to IOM's past history of not being able to provide all the product that the customers desired in earlier qtrs. Also, it is clear that if IOM indicated that they had problems in Europe, it certainly showed up in their 3rd qtr reserve balance.
Qtr ending 3/95 6/95 9/95 12/95 3/96 6/96 9/96 Sales 40,112 52,594 84,721 148,798 221,988 283,638 310,085 Revenue Reserve 1,296 1,523 1,610 3,207 6,613 11,548 11,141 % of Sales Reserved 3.231% 2.222% 1.9% 2.155% 2.979% 4.071% 3.593%
Now if IOM does a better job of channel management this qtr, it is very conceivable that they could get their reserve number down to 2%. This would have the effect of freeing up $21m in sales revenue for the 4th qtr that is currently in reserve. 2% is pretty much the level IOM had after the 4th qtr last year.
What even made me think along these lines was the dearth of advertising I saw around Thanksgiving and CayugaDan's report of Ingram being out of all SKU's of Jaz except single packs. I was afraid that IOM had underestimated sales potential for this qtr. If this is true, and IOM can not keep up with demand, then the revenue reserve could go down. How much, I don't know. But we are talking about a $42m reserve. That is alot of sales.
Hope this sheds a little more light on my thoughts and reasons for my post.
Again, thanks for the great series of questions.
Fool On,
Robert
8++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:3rd qtr deferred rev. #1 Date: 96-12-04 23:54:02 EST From: RB61
MF Ben,
<<Don't they just do Q4 and the annual at the same time, therefore, the revenue and COGS would hit R/E end of the quarter, no?>>
Yes and No. (how's that?) :>). The reserve is located in Other Accrued Liabilities, a balance sheet account. Balance Sheet accounts are never closed. In this account we have Deferred Cost of Sales and Deferred Sales Revenue. Now these accounts are adjusted each qtr based on actual results. So the balance in these accounts are the net effect of bringing the accounts in line with what is needed for a reserve at the end of the current qtr. If the reserve is higher, then these accounts would need to be increased (decreasing Sales Revenue and Cost of Sales). Conversely, if the reserve at the end of the qtr needs to be decreased, Sales Revenue and Cost of Sales would increase.
<<By not using a set accrual (i.e. a percentage of sales), don't you agree it would be prudent for shareholders to keep their eye on the reserve. Just as 6/96 quarter shows, the reserve is a reasonable indication if there is a problem. Of course, one cannot JUST look at the revenue reserve, but it is something to keep on the checklist and watch out for each quarter. In other words, if the sale reserve suddenly jumps above 5%, it could be construed as a warning sign given historical reserve levels of ~2% to ~4%.>>
I couldn't agree more. As you know, I was a pretty frustrated individual after the 2nd qtr because I couldn't get my hands on IOM's 10Q. It took forever for it to get posted by EDGAR. Since IOM doesn't give out much in the way of information, it is imperative to look closely at their 10Q's. Sales channel management is clearly, one area, I as an investor, would be interested in following. Again, I don't want the reserve number to get below 2%, because then you are talking potential lost sales, but conversely, I certainly don't want it getting to 5%, unless there is a pretty good reason. 3rd qtr reserve of 3.5% is very acceptable, due to IOM's stated interest to build up their inventory for the 4th qtr. This is by far the preferable method of building up inventory. Why? Because the clock is ticking for the customer to make payment, and also, the goods are at the customers, where a potential sale can be made.
<<The days is, of course, based on historical sales, correct? I imagine that the IOM sales people would need to adjust their "judgements" for other factors, for example seasonal up and down swings such as Q3/Q4 and Q2. I question their accuracy.>>
Sales people are excellent at what they do, but accountants they are not :>). I would assume that IOM has a pretty well oiled computer reporting system. If it is a client server system, the customer can input directly into IOM's computer, their sales/orders. Just like CayugaDan can access Ingrams computer to determine the level of inventory on hand, IOM, I would bet has a similar type of system, in that they are able to determine inventory on hand. Then IOM's accounting dept (I'm guessing here, using my own company as an example) gets together on a monthly basis to determine sales by dealer, and inventory by dealer. This information would be the basis for helping to determine the proper inventory level for each customer taking into consideration factors such as seasonality, promotions planned, orders received after month end, etc. All of these are used together by the finance department in their judgements.
<<I was under the impression that accountants used methods that didn't rely on sales peoples' judgements -- for obvious reasons. How many CPAs trust the marketing guys or vice versa? Mutual skepticism and a healthy one! >>
Have you ever seen a sales person's expense report? Phew!!! This is an accountants worst nightmare :>). I hope my answer to the previous question shed some light on this.
Fool On,
Robert 9++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:3rd qtr deferred rev. #2 Date: 96-12-05 00:47:58 EST From: MF Ben
Robert,
First, I hope I don't try your patience too much, thanks for hanging in there with me on this one. :-)
Second, on to my questions... <G>
<<<Now if IOM does a better job of channel management this qtr, it is very conceivable that they could get their reserve number down to 2%. This would have the effect of freeing up $21m in sales revenue for the 4th qtr that is currently in reserve. 2% is pretty much the level IOM had after the 4th qtr last year. >>>
What revenue number is this based on? Follow me on this one 'cause I may be in left field here. It's happened before, it'll happen again.
Freeing up $21 m in sales REVENUE is equal to freeing up ~$5.5 m in reserve (26% gm). With the reserve currently at ~$11 m, that would put Q4 reserve at $5.5 million. The problem is, $5.5/.02 = $275 million in revenue, a crazy number.
Considering that revenue should be substantially higher than last quarter, any revenue number over $550 would mean that a 2% reserve (of sales) would mean the reserve would RISE, not FALL (11 million/.02).
<<< If this is true, and IOM can not keep up with demand, then the revenue reserve could go down. How much, I don't know. But we are talking about a $42m reserve. That is alot of sales.>>>
I thought it was a $11M reserve (divided by 26% gross margin to get $42 million in sales). Yes?
<<< The reserve is located in Other Accrued Liabilities, a balance sheet account. >>>
Answers my initial question about whether it is a liability or a contra-asset account! :-)
<<<Have you ever seen a sales person's expense report? Phew!!! This is an accountants worst nightmare :>). I hope my answer to the previous question shed some light on this.>>>>
:-)
Thanks for all the help, Robert.
<<<I couldn't agree more. As you know, I was a pretty frustrated individual after the 2nd qtr because I couldn't get my hands on IOM's 10Q. It took forever for it to get posted by EDGAR. Since IOM doesn't give out much in the way of information, it is imperative to look closely at their 10Q's. >>>
Quick plug. For all those we feel they could use a little help going over the 10Q for the finer points that often indicate either trouble or nirvana ahead (and who among us doesn't need such help!, drop on by the Reading Financials Folder. An excellent Foolish resource if there ever were one.
Cheers,
Benjamin 10++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:AOL Lead Date: 96-12-05 01:03:33 EST From: MF Ben
<<<If an analyst's job is to find stocks to recommend that will help brokers get clients in and out of stocks with a fundamentally upward trend (that latter point may be stretching it, but could certainly be held out as an ideal), then a volatile stock like Iomega with upward potential would seem like a natural. Moreover, starting at close to double the 52-week low would hardly be bottom fishing.>>>
BDKliewer,
Actually, I think it is an interesting question. What IS an equity analyst's job (sell side, buy side is easy -- make money for the firm).
I'm a little skeptical of your belief. Many corporations get coverage from doing business with the firm -- as did Iomega with H&Q and the convertible deal. An IPO, a secondary, or any other investment banker fee deal pretty much ensures positive coverage for a certain period of time -- why else would they take the business? Not just the fee? NAAAW! :-)
However, when firms aren't the lead on a deal or to the right, why DO they initiate coverage and what ARE their motives?
I would say that the old standby "glory" is certainly one of them. These guys LIKE being right -- who doesn't -- and covering a big name that gives you great guidance and makes you look good always helps come Christmas bonus time. This probably works AGAINST IOM as it is highly volatile (makes price targets tough) and scares the heck out of most analysts who worship low betas.
Of course, impressing clients is also important, but remember, there is significant risk in coming out with ANY recommendation on IOM (sell, buy, or hold), as in the short-term one could easily be proven wrong, as so many who have made short-term price projections here can attest. Do you think these guys will spend more time on a single stock than many HERE do and no one has been even close to being consistently right in their short-term price predictions. NO ONE.
The firm has to have a decent high tech equity analyst department (many claim too but don't) who understands the storage industry and how Iomega is changing it. As many here believe, including me, there aren't that many people out there who "get it."
I was calling for analyst coverage in the summer of '95 but I also understood that it wasn't going to come until Iomega either a) did a deal with an investment bank or b) came out with enough quarters of solid EPS and revenue growth to ease the analysts fears.
Obviously, a has occurred but b has yet to happen. I believe that eventually more firms will cover Iomega, but I'm not going to hold my breath or pretend it is around the corner. This quarter's results may be instrumental in convincing some analysts departments that they can ignore IOM no longer and the risk is worth understanding IOM early in the game. Companies also do reward those early analysts with greater "access." I'm bet Microsoft is still paying off a "debt" or two.
I admit, I like your version better, but I must say I just don't think the larger equity analyst divisions think like that. Emerald, Red Chip, Brous, etc., they can afford the risk. Goldman Sachs, Merril Lynch, and Morgan Stanley aren't likely to stick their neck until until they are DAMN sure they won't be embarrassed (see Cowen and the Motorola upgrade last quarter -- UGH!).
Cheers,
Benjamin 11++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:More Revenue Reserve ?'s Date: 96-12-05 01:32:58 EST From: RB61
RB61, <<<Now if IOM does a better job of channel management this qtr, it is very conceivable that they could get their reserve number down to 2%. This would have the effect of freeing up $21m in sales revenue for the 4th qtr that is currently in reserve. 2% is pretty much the level IOM had after the 4th qtr last year. >>>
MF Ben, <<What revenue number is this based on? Follow me on this one 'cause I may be in left field here. It's happened before, it'll happen again.
Freeing up $21 m in sales REVENUE is equal to freeing up ~$5.5 m in reserve (26% gm). With the reserve currently at ~$11 m, that would put Q4 reserve at $5.5 million. The problem is, $5.5/.02 = $275 million in revenue, a crazy number.
Considering that revenue should be substantially higher than last quarter, any revenue number over $550 would mean that a 2% reserve (of sales) would mean the reserve would RISE, not FALL (11million/.02).>>
Benjamin,
$550m in revenue for the 4th qtr? From you, the most conservative MF in Fooldom? hehehe. But you are right on with this. Let's use your $550m figure. Currently the reserve stands at $11,140,000 which represents $42m in deferred sales revenue at 3.5% deferral. Remember, the deferred revenue is a function of sales ONLY to the extent the sales have not sold through the channel. So whether the sales were $300m or $500m it doesn't matter. What matters is how much of the stuff is in excess of distributors/dealers inventory needs. Lets say the deferred sales revenue number stays at $42m and the gross margin stays constant at 26.335%. This would leave the net Other Accrued Liabilities (which represent the deferred gross margin on those sales) at $11,141,000. This would then represent 2.02% of the current qtr sales ($11,141,000 / $550m). So you are correct in indicating that with an increase in sales revenues, chances of an increase in deferred sales revenue is more likely than a decrease. Remember, I don't want to go below 2% for a reserve. But, IOM had better have the stuff to sell if we're going to hit your $550m :>). RB61, <<< If this is true, and IOM can not keep up with demand, then the revenue reserve could go down. How much, I don't know. But we are talking about a $42m reserve. That is alot of sales.>>>
MF Ben, <<I thought it was a $11M reserve (divided by 26% gross margin to get $42 million in sales). Yes?>>
Semantics. The $11m is the amount of gross margin that is included in Other Accrued Liabilities. The deferred Sales Revenue is a component of that account, just like Deferred Cost of Goods Sold at $31m is a component of that account. If everything were sold that was in the channel, the $42m would show up as Sales Revenue, while the $31m would show up as Cost of Goods Sold. Other Accrued Liabilities would then show as $0. Not at all likely, but that would be the result.
Thanks for the dialogue Benjamin. I haven't had to think this much since my wife asked me if I wanted to drive to New York to see the Rockettes :>). P.S. I hate driving to NYC.
Fool On,
Robert 12++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:More Revenue Reserve ?'s Date: 96-12-05 02:02:01 EST From: MF Ben
<<<This would then represent 2.02% of the current qtr sales ($11,141,000 / $550m). So you are correct in indicating that with an increase in sales revenues, chances of an increase in deferred sales revenue is more likely than a decrease. Remember, I don't want to go below 2% for a reserve. But, IOM had better have the stuff to sell if we're going to hit your $550m :>).>>>
Robert,
Thanks for clearing that up. I was confused about your comment to expect some reserve to be freed up this quarter, especially given the amount (half of the reserve).
For the record, the $550 million in revenue is NOT my prediction! :-)
My only point was that with your hopeful estimate of 2% reserve (optimistic but plausible), any revenue above $550 would mean an increase rather than a decrease in the actual dollar reserve number. Heck, at 3%, not completely out of this world given the historical numbers you posted, Iomega need ONLY -- yes, I used the word only -- tally up $370 million in sales in order to increase rather than decrease the reserve. Based on that, I think the reserve number is bound to go up, and with good reason.
Do you really believe we will see a decrease in the reserve on Q4?
Enquiring minds what to know! <G>
Cheers,
Benjamin (NOT a rockette)
End Report. Posts covered through 3 am ET 12/5/96. _______________________________
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