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Monday, December 09, 1996 Iomega was down $1/4 Friday, closing at $23 1/2 (-1.05%). TODAY'S RECAP: Judging from the mood in our forum, Iomega shareholders seemed generally pleased with the behavior of Iomega's stock in Friday's trading. Despite the extreme volatility in the markets following those now-famous remarks by Fed Chairman Alan Greenspan, IOM shares finished down only $1/4 for the day. Not so bad, considering the way things looked Friday morning in the first hour of trading. On the OEM front, it seems that an Australian division of Cisco Systems has adopted Zip drives for its Micro Webserver, a stand-alone internet box priced near $1,000. Details on this product are still sketchy; we'll be sure to report more as information emerges. Favorite topics over the weekend in TMF's Mighty Iomega Folder included Christmas advertising, Zip disk sales, and patent protection. So dig in, Fools... we've cherry-picked the best for you below! 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++PKeeler estimates Zip disk sales. As always, the following posts represent the thoughts of our contributors, not those of the Motley Fool. And now, the Best of the Board...Started 3 am ET 12/6/96.
1++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Zip disks or cash cow? Date: 96-12-06 23:02:15 EST From: PKeeler
Anyone remember this important article about Zip tie ratios? I had almost forgotten...
From May 06, 1996, Issue: 682 of Computer Reseller News, Titled "MEDIA IS THE MESSAGE: Push to make Zip Drive standard -- Iomega Zooms In On VAR Channel Approach" by William Terdoslavich:
<snip>
Repeated sales studies show the user "buys an average of five to six disks with the drive," Collins [Michael Collins, Iomega's director of channel marketing] said. "Then 64 percent of the people purchase more media in the first eight weeks of owning the drive. . . . They buy another six disks," he said. Of that portion, three-fifths of those repeat buyers purchase their disks within four weeks of buying the drive. This can add up, as Iomega sells six-packs of its Zip Drive disks for $99.95. The Zip Drive, in comparison, is priced around the $200 mark.
"The media is going to be the story," Collins said. But it is not yet known how Iomega will generate disk sales through VARs, whether it means offering free software or a carrying case to a repeat purchase made through the channel.
<snip>
For the full text hit, http://www.techweb.com/se/directlink.cgi?CRN19960506S0153
Using this info from Mr. Collins and the following assumptions:
* 4.5 million Zips sold in 1996 * 1.4 million Zips sold in 4th quarter 1996 * 7.5 million Zips sold in 1997 (A 65% market share based on Disktrend study) * Nobody buys any disks after 8 weeks of purchasing the drive
I can build this chart:
Initial Repeat Month Drives Sold Disks Sold Disks Sold Nov-96 450,000 Dec-96 492,000 Jan-97 527,000 2,898,500 1,350,144 Feb-97 542,810 2,985,455 1,889,280 Mar-97 564,522 3,104,873 2,023,680 Apr-97 584,281 3,213,544 2,084,390 May-97 595,966 3,277,815 2,167,766 Jun-97 613,845 3,376,149 2,243,638 Jul-97 619,984 3,409,911 2,288,511 Aug-97 626,184 3,444,010 2,357,166 Sep-97 658,745 3,623,098 2,380,738 Oct-97 678,507 3,731,791 2,404,545 Nov-97 705,648 3,881,063 2,529,581 Dec-97 747,987 4,113,927 4,328,830 Totals 41,060,135 28,048,268
(Note: I use the 3/5 in 4 weeks data to reduce 1/97 amount and boost 12/97)
From these calculations:
Total Disks Sold = 69,108,403
Average Wholesale Price = $8.50
Total Zip Disk Revenue = $587,421,425
Net Margin (18%) = $105,735,856
Shares = 150,000,000
Zip Disk EPS = $0.70
I previously showed how I arrive at Zip disk margins somewhere around 18% (I actually showed 20%). Average wholesale price is based on theoretical target of $99.50 for a ten pack. Shares outstanding at the end of 1997 is pure guesswork.
I arrived at $0.70 in Zip disk earnings alone. Current analyst estimates for Iomega's entire business range from $0.77 to $0.90. In case your wondering, using the above method on 1996 gives 40 million Zip disks sold.
PKeeler Patrick Keeler 2++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: LS-120 here they come Date: 96-12-07 00:03:25 EST From: YellowSt
I own a little stock in Imation which makes the disks for the LS-120 drive. Sorry to hear the first drives to wash ashore look like the winners of an anonymous box competition. On the Imation board an analyst has been filling us in on the company and the LS-120. It sounds like the Zip drive is hands down a superior product in every respect. Iomega has the products, the branding, the marketing and the production to go forward and prosper. I still have no idea what is going to happen with regard to the winner of the replacement of the floppy disk drive derby. Clearly the 1.44 MB 3.25 inch disk is a dinosaur. Will Zips replace it? Maybe.
Imation is a nice play because the company does 2 billion in sales without the LS-120 disks, so regardless of the ramp rate your not looking at a total disaster if the LS-120 isn't very popular. Imation's management is pursuing new business opportunities in a variety of areas as "spin offs" do when liberated from their parent (3M). Anyway, the LS-120 is going to be mass produced like wigets by a couple of gigantic Asian companies who don't mind selling product in mass for tiny margins. It may be Apple versus the PC or the BetaMax versus the VHS but it may be the LS-120 versus the Zip. No need to put all your eggs in one basket. Imation stock is still cheap (15X next year's earnBD reports that 20th Century Ultra made a new purchase of Iomega, 5.6MM shares. It is in the mutual fund section of the paper, page B2. Of course, we don't know when they bought these shares because sometimes these datings), so buy some and help me out here. I've really traded horribly this year and I'm seriously underperforma tables show older info.
FWIW, Karen 5++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: PKeeler Projections Date: 96-12-07 16:43:14 EST From: MF ETurkey
Pat,
While I understand the difficulty in coming up with numbers given iomega's habit of being informationally challenged when it comes to any type of data flow to analysts, I was wondering why you did not cut back on sale of Zip drives for summer 1997 in your chart, to reflect seasonality again. I did see that the growth rate that you used had dropped, but perhaps in Q3 iing the market. But seriously Imation is an interesting company that will profit, to some degree, from the LSt may be a drop in raw totals for Zip drives shipped also.
Can you share with us how you came up with the rates as they relate to f seasonality? Thanks.
Eric 6++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Today's Top Ten Date: 96-12-07 17:10:24 EST From: JonTara
<<From: Arentz65
<<<<From: JonTara
<<F-120 invasion. 3++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Financial World Mag Date: 96-12-rom: IAmErgoSum
Top ten reasons why the LS-120 comes in a plain cardboard box:>>
1. Floppy drives come in a plain cardboard box.
For us ignorants would you please explain your thinking? what exactly is the tie bet07 13:31:24 EST From: JonDavidL
This week's Financial World Magazine listed Iomega as one of five companies to SHORT in 1997. They give a target price of $6. They say the problem lies in Iomega's $50 rebate. The company only expects 50% or less of customers to redeem their coupons, but what if it is closer to 75-100%? A lot of redemptions could hurt the bottom line, says the article. What makes Iomega so sure that half the people purchasing their product will be willing to throw away 50 free dollars? 4++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Accumulation Date: 96-12-07 15:20:10 EST From: MF KarenK
<<My guess is, some major brokerage house is accumulating, and once finished, will come out with a positive statement.>>
Today's Iween the two?>>
The LS-120 is being positioned as a high-volume "white box" commodity item.
They do not need fancy packaging. Their marketing targets are computer manufacturers and the local computer stores (like Datel, mentioned earlier) that "build their own" computers from components. The packaging just ads extra cost.
They don't care about brand ID. They want people to ask for "one of those super high density floppy thingies". And the clerk will NOT reach for a Zip drive, but instead point you to a bin, and show you where the 50-packs of disks are. 7++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: LS-120 boxes Date: 96-12-07 20:16:10 EST From: Kevinfurr
>> The LS-120 is being positioned as a high-volume "white box" commodity item.
They do not need fancy packaging. Their marketing targets are computer manufacturers and the local computer stores (like Datel, mentioned earlier) that "build their own" computers from components. The packaging just ads extra cost. <<<<
The thought crossed my mind, but it's not convincing yet for a couple of reasons. White box packaging is fine for a $15 commodity floppy drive. But the a:drive is a $225 product, new and unknown, and OR is the only brand available now retail, far as I know.
OR may intend for LS-120 to be available for computer makers, but so far Compaq is the only OEM of any size to use them. The drives are obviously available now, they've been available to some degree for 9 months or so, why doesn't someone out there offer it, at least as an option on some high-end machine? None of the small-time computer builders in San Diego advertise it. Furthermore, now that I've had a chance to investigate around town and pore over the ads, the previously mentioned Datel still seems to be the only store in town selling the drives, and that 2-week old shipment is collecting dust still today, and they're already "on sale".
Ocean Radio and MKE can "position" this thing all they want, but where's the demand? Where are the users? Motorola has just canceled their PDA products due to lack of interest. It takes more than big companies having the urge to build stuff, there has to be end-users somewhere.
And I'm not much convinced by the Imation crowd's argument that the LS-120 will become a dirt-cheap commodity as MKE etc rush to build a million a month. What are they going to do with the 100's of thousands of drives they make enroute to that goal? Dump them in the ocean? There has to be some demand; where is it? 8++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Jaz&things Date: 96-12-07 20:18:40 EST From: PAUCLAIR
Brief channel checks in MD: Best Buys in Laurel, tonight had just two external Jaz drives left. "Zips also selling extremely well." While there a customer asked me if I knew if Zip disks work with the 3.5" drive. Price Club in Beltsville has the external Jaz for $549 and 3-pak cartridges for $249. Service Merchandise catalog has Zip drives. Computer City, Staples and Office Depot all say Zip selling very well.
As for the boxes, a few models in some of these stores but not as impressive as I thought possible 6 months ago. However, I remember last Christmas how hard it was to find Zip drives or disks - quite a change. I'm still most interested in the related issues of bootability, volume of IDE drives available for the large OEM's and the smaller, local shops, and the Dream Team announcement. I still think that what is holding back the OEM's is either lack of sufficient capacity to manufacture the IDE drives or the unwillingness for the OEM's to build them in until they are easily bootable in PC's. This would explain why Gateway offers only the external and why most of the smaller assemblers here have them. Obviously many folks to not yet know they need the 100mB capacity but my sense is that there is more to it than that. If the bootability issue changes things in early 1997, then we are back to the issue of software on Zips that was so often a thread (Kevinfurr?) many months ago. Will OEM's readily or reluctantly offer machines with only CD players and bootable Zips? If readily, how will users install the smaller programs that don't come on CD's or will that not be an issue? I feel that for laptops it will not be because of the modularity of the floppy and Zips but this is not true in towers. 9++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Jaz&things Date: 96-12-07 20:43:16 EST From: Kevinfurr
>> Will OEM's readily or reluctantly offer machines with only CD players and bootable Zips? If readily, how will users install the smaller programs that don't come on CD's or will that not be an issue? <<
Next time I buy a computer (which may not be awhile, since I'm an upgrader) I fully intend to demand one without a floppy drive (assuming Zip bootability pans out). Will I be the first? Maybe I'm just extreme but 1.44 MB floppies are dead (though some don't know it) for 3 reasons: Zip, CD-ROMs, and 32-bit software.
All software of any importance is distributed on CD's. Yeah, strictly speaking maybe you can find a copy of Lotus SmartSuite available on 82 Floppy disks but that's getting more rare by the day. What's significant is that even device drivers are shipping on CD's. That's because ALL computers ship with CD-ROM's; and they all ship with Win95 or other 32-bit OS's. You can't pick your nose in 32-bits without exceeding the limitations of 2 or 3 floppies. And as we all know, Microsoft doesn't mess with mere floppies anymore.
A case in point: I bought a video card 18 months ago, the drivers came on floppies. I upgraded to the same brand of card this week, and the drivers came on CD.
I believe the forthcoming BIOS chips recognizing Zip & other ATAPI drives upon booting will be the final nail in the coffin for floppies.
Are software developers and stores going to go out of their way to accommodate people with 16-bit OS's and no CD-Drives? Ha! Go into a store and ask for something as innocent as a VL-bus card, and they look at you as if you're demanding a new monitor for your Apple IIe.
The ubiquity of CD's means that software likely won't ship on Zips. That's not what I'm looking for. But 1.44 is dead. If anyone dares to hand me a floppy in the future, I'll angrily tell them to get a clue and quit wasting my time. 10++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:PKeeler Projections Date: 96-12-07 22:49:43 EST From: PKeeler
>>> Can you share with us how you came up with the rates as they relate to f seasonality? <<<
I have no reason to believe that unit sales of Zip drives fell between 2Q96 and 3Q96. The rate of growth in revenues slowed but I don't see how revenues could have increased, with a $25 cost reduction on Zips and $100 on Jaz, $30 MM without unit shipments increasing.
That said, I really was focused more on 7.5 million total drives in 1997 than in the actual month to month numbers. I was shooting for a steady increase monthly but did try to make the largest increases happen in the seasonally strong months (Jan, Mar, Sep, Dec). Adjusting drives sold by a hundred thousand here and there would not effect the model significantly.
If Iomega maintains its current market share, and DiskTrend's analysts are even close to correct at 11 MM large capacity floppies shipping in 1997, Iomega would be shipping ~100 MM Zip disks next year (11 MM x 9.34 tie ratio). At $8 wholesale and a net margin of 0.18; Iomega would earn $144 MM or over $1.00/share at current shares outstanding.
All speculation of course.
PKeeler Patrick Keeler
P.S. All these EPS calculations, and maybe Iomega's business plan ;-), hinge on the following:
51% gross margin on Zip disk (Joe Besecker on Dow Jones net, I belive) - 16% SG&A (current) - 4% R&D (Iomega target from 2Q conf. call) ------- 31% operating margin on Zip disk - 13% Taxes (39% tax rate) ____
18% Net Margin 11++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Bad service Date: 96-12-08 11:13:23 EST From: MonirM
Iomega seems to be generating tremendous amounts of bad-will with its shoddy response to the rebate offer on the Zips. This will be a major factor dragging down the company in years to come, as old customers look to other suppliers for removable cartridge products.
And anyone who believe that Iomega can prop up prices on its Zip disks for long is nuts. All it will take is one company producing Zip-compatible disks without a license at $5 a pop for this company's entire business model to crash. And if another company produces a Zip-compatible drive without a license, which is bound to happen sooner or later, then those $6 a share projections will seem downright optimistic.
There are already at least ten or fifteen large 3.5" floppy producers. Some of these have the capability to leverage their skills into making Zip-compatible disks without Iomega permission.
Every single long on this board is counting on Iomega retaining a legal monopoly over the sale and licensing of its products and accessories. If this monopoly is broken, kiss this stock goodbye. All you will be left with is a company with a terrible reputation for poor customer service and a non-exclusive right to manufacture its own products. It will sink into the sub $1 billion zone within a quarter in that scenario. That's a meltdown of $8 a share or less.
Monir
ps. Now you Iomega zombies can scream at me. 12++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Monir's dream sequence Date: 96-12-08 14:27:22 EST From: StoneFreee
<< Even if the company achieves its goal of making the Zip a standard, it is still largely unclear how much of the Zip drive and accessory profits this company will be able to appropriate for itself.>>
What a truly ridiculous statement. BAM!!--all your credibility is gone. Into the credibility dumpster with you--you'll find Chi and DC and several more there to keep you company. It's been said before, and I'll say it again: A ZIP STANDARD WILL BE A LICENSE FOR IOMEGA TO PRINT MONEY. Do you honestly think that one day when the champagne is flowing in the corridors at Iomega, with lots of back-slapping and laughter, one Iomega lawyer will turn to the other and say, "Wait a minute! I thought YOU secured the patents! I told you to do it! Oh, nooo!" 13++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Monir's dream sequence Date: 96-12-08 15:30:39 EST From: OLAmerican
Subj: Re:Monir's dream sequence Date: 96-12-08 15:12:03 EST From: MonirM
Patents cover two basic categories of intellectual property. There are "design" patents which cover decorative or visual, esthetic aspects of an item, and there are "function" or "utility" patents to cover mechanical designs or functions, especially in regard to new inventions.
A patent protects you from having another company create an exact duplicate of your product and profit from it. But no patent will protect you if someone else designs a product that is functionally equivalent to yours, but which incorporates a different mechanism for the delivery of that function.
That's why Intel can patent all the chips it wants, but why Cyrix and AMD can go ahead and design Intel compatible chips and sell them. As long as the circuitry is not an exact copy of Intel's transistor layout, i.e. if the product was made by engineers who did not look at the original Intel design, tFinancial World Magazine listed Iomega as one of five companies to SHORT in 1997. They give a target price of $6. They say the problem lies in Iomega's $50 rebate. The company only expects 50% or less of customers to rhen the functionality can be copied without incurring any sort of legal liability. And that's why Apple faileedeem their coupons, but what if it is closer to 75-100%? A lot of redemptions could hurt the bottom line, says the article. What makes Iomega so sure that half the people purchasing their product will be willing to throw away 50 free dollars?>>
Financial World Magazine has really embarrassed itself. Even if you don't like the Gardner's investment style you have to agree with them about the financial press. What makes Iomega think only 50% will redeem? How about the fact that ONLY 50% REDEEM! For three months Iomega counted redemptions. This isn't projection by Iomega, its empirical fact. Throw in the fact that Epson's also counted redemptions sd in its lawsuit which tried to bar Microsoft from selling a Mac-like graphical user interface in the Windowsince June along with Fuji and Maxell since July.
Even if it increased to 100% that's only $25 per Zip drive. That's at most $30 MM dollars in a quarter where they might do $400 MM. Hardly worth taking $2.5 Billion of market cap off the stock.
The Gardner's are very good at remembering this type of drivel. They should file this away. When they go on CNBC in July 1997 to announce their public offering, they can trot this one out as platform.
Patents can be interpreted broadly or narrowly, but they generally only provide air-tight protection against the unauthorized duplication of one particular >implementation< of a technology, not the overall technology itself. Ideas themselves cannot be patented. Iomega did not invent the floppy drive concept, for example. It developed a particular implementation of that concept. And it would not be difficult for another firm to copy the functionality of the Zip disk while simultaneously changing enough of the cosmetic appearance and physical structure of the disk plate inside the casing to successfully defend against legal challenges.
That's why I can confidently say that the future is not written in stone as regards the legal defensibility of Iomega's patent claims. To claim otherwise directly contradicts the history of patent law.
Monir>>>>
First of all, there are three main types of patents, not two, i.e., [1] utility, [2] design, and [3] plant; each of the three are designed to protect different types of inventions. This protection is available for nearly all items made by man excepting things such as [a] principles of science, [b] laws of nature, [c] methods of doing business, [d] computer algorithms that do not operate on any external device, and [e] advertising schemes.Utility patents are what most people think of when they think of a patent. Most patent applications filed are for utility patents. Utility patents protect processes, machines, articles of manufacture, or compositions of matter. These general classifications are extremely broad and cover "nearly anything under the sun that is made by man." Legal challenges may be made to anything, they are a dime as dozen; just as anyone may file a law suit, the filing does not make it the winner. So far, all you've done is shmear some words around a question that you raised without making a reasonable or legitimate case to support you desire to unnerve others. To the contrary, all the evidence from public records, company filings, and the historical record in terms of any challenge to the claim of patent leaves no doubt that the patents protecting Iomega's position where it counts is doing just fine. Now say something substantively correct or contribute something accurate and true so that the rest of us do not continue to view your stuff with humor. 14++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Financial World Mag Date: 96-12-08 17:11:48 EST From: PKeeler
<< This week's why they've been so successful. :)
PKeeler Patrick Keeler
P.S. What if the holiday shoppers don't take the time to pick up the coupon, get the receipt and take off the barcode? What if redemptions drop to 25%? That's $15 MM the other way... 15++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Pure Speculation Date: 96-12-08 20:25:07 EST From: Waverunner
Iomega Ads seem to be a no show this holiday season. I have a lot of respect for IOM management. I can not imagine any reason for them not to take advantage of the season to build broader consumer awareness of their products UNLESS they already have COMPLETE confidence in consumer and OEM acceptance. Huibs and I both were attempting to get the real audio interview with the Tribune where the Iomega exec. said that "most SKUs' will ship with Zip in 97". Does anyone know exactly what was said?
If Iomega is already selling and has orders for all the Zip drives they can manufacture, and they know what the OEM's have planned, then the money that would have been spent for TV advertising can go right to the bottom line. If they are not selling their capacity right now, and they are saving cash and buying back their shares, then I will have to reevaluate my faith in KE.
Dave PS How many ads for Nintendo64 do you see? How many ads for Ford Expedition? Both have demand that exceeds supply. 16++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Pure Speculation Date: 96-12-08 21:15:31 EST From: MF DrJimbo
We had a big discussion about this around Thanksgiving. Iomega ads were much less prominent than I expected. Its true that their position is great in every computer store I visit, but the circulars are now pushing Ditto more than Zip or Jaz. And the rebate offer is always prominent in the ads, never in the store.
Its turning out to be a good retail season. The stores were crowded today.
My take is that Iomega is selling everything they can make. They don't need advertising to push product. Iomega has one of the hottest computer peripherals in one of the best retail seasons in years. It could be they're loosing sales that could have been made with more product and more advertising.
On the other hand, others have said that Iomega must have sufficient manufacturing capacity by now. Maybe the marketers at Iomega believe that demand can't be juiced up anymore by advertising. Somehow I doubt this.
To me the big question is whether limited supply is stopping the OEMs from adding Zip to more models or shipping the Zip models. 17++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Keeler's projection - PT I Date: 96-12-08 21:43:20 EST From: HYPEMENOT
A little over a week ago, I wrote a very strongly-worded response to a 1997 earnings projection posted by PKeeler on 11/26. I subsequently posted a message apologizing to him for the harshness of my initial response, but which maintained the substance of my earlier criticism of his Model. In essence, my critique of his work centered on the fact that, while he provided a list of assumptions that underpinned his Model, he essentially reached conclusions about a host of items (e.g. unit sales of Zip & Jaz drives, disk tie ratios, and final after-tax profit margins for every one of IOs principal products) that, IMO, represented nothing more than a stream of undocumented guesses. I concluded by saying that projections such as his, that deal largely with estimates of items that Iomega has never disclosed information about, are extremely TENUOUS, and that this should be clearly underscored by the author.
Well, two nights ago PKeeler was back at it again, only this time with a narrower exercise aimed at projecting the 1997 earnings IO could realize from the sale of Zip disks alone. This narrower Model was apparently stimulated by an article (which Keeler says he had almost forgotten) published in May in the Computer Reseller News, which contained quotes from Michael Collins, Director of channel marketing at IO, that focused on the matter of follow-up sales of Zip disks. Basically, drawing upon IOs experience at that time (this was shortly after the Company made its initial disclosure re having shipped 1 million Zip drives and 10 million disks) Collins stated sales studies show the user "buys an average of five to six disks with the drive," adding that "Then 64 percent of the people purchase more media in the first eight weeks of owning the drive. . . . They buy another six disks," he said.
Using this information from Mr. Collins, Keeler then made the following assumptions:
* 4.5 million Zips sold in 1996 * 1.4 million Zips sold in 4th quarter 1996 * 7.5 million Zips sold in 1997 (A 65% market share based on Disktrend study) * Nobody buys any disks after 8 weeks of purchasing the drive
Without going into the month-by-month projection which he then presented (anyone wishing to see all the detail can look up his post of 12/6 entitled: Zip disks or cash cow?) he reached the following conclusions:
Total Disks Sold = 69,108,403 Average Wholesale Price = $8.50 Total Zip Disk Revenue = $587,421,425 Net Margin (18%) = $105,735,856 Shares = 150,000,000 Zip Disk EPS = $0.70
Amazingly, with regard to the above, the only real qualification Keeler offered, was an admission that his assumption on shares outstanding at the end of 1997 << is pure guesswork >>. Well, as will be discussed in detail in Part II, several of these conclusions differ dramatically from those published by Keeler JUST 10 DAYS earlier in his broader-based model of 1997 earnings. IMO this proves that these so-called projections reflect nothing more than Keelers own fickle, undocumented, and ever-changing guesses.
Are Keelers assertions really fickle and without solid foundation ? Judge for yourself.
First, in the Model posted on 11/26 Keeler projects 1997 Zip drive sales at 5.5 million units (including 1 million sold by MCI under license from IO), but TEN DAYS later he says Zip drive sales in 1997 will total 7.5 million units, AN INCREASE OF MORE THAN 36% !! Maybe I missed some dramatic new announcement from IO that would account for this HUGE upward revision, but if there was some event that inspired this new level of optimism, Keeler didnt even attempt to share it with us. In fact, he apparently doesnt think it noteworthy enough to even INFORM the reader that, in fact, this latest Zip drive projection differs MARKEDLY from the number he used just TEN DAYS earlier. I guess that when, in my apology to Keeler, I suggested people other than professional analysts were quite capable of producing worthwhile financial analysis, he took that to mean that people like himself have no RESPONSIBILITY to provide readers with a rational EXPLANATION for sudden/substantial changes in their assertions.
Second, Keeler now projects total 1997 Zip disk sales at 69.1million versus ONLY 44 million on 11/26, an UPWARD REVISION in excess of 57% !! Of course, 37% of this traces to his unexplained upward revision in Zip drive sales, but the rest obviously results from a significant upward revision in the disk tie ratio from, again, that which he thought was appropriate just TEN DAYS earlier. Once again, Keeler fails to even alert the reader that he has made a material upward revision from an assumption he (presumably) felt was credible on 11/26. I guess were supposed to assume that his rereading of this May article in CRN is the reason he substantially revised the tie ratio. Others have commented in this forum (and I agree) it is logical to assume that, as sales of Zip drives expand to an audience of buyers whose storage needs are less urgent (which is why they werent early buyer) disk tie ratios are likely to DECLINE. Apparently, Keeler does not agree with this line of reasoning (or maybe it just gets in the way of a conclusion he is determined to reach). But then again, since he says little about the thought process behind most of his assumptions, who really knows?
Finally (and here we have a downward change), Keeler now assumes an after-tax Net Margin on Zip disk sales of 18%, whereas in his 11/26 Model he used 22% !! I guess this might be considered nit-picking on my part since it represents a revision of ONLY 18%. Then again, if you revise your margin expectations once every 90 days (let alone every 10 days) by this magnitude, pretty soon your talking about some really serious impacts. Now, in fairness to Keeler, he does say the following: << I previously showed how I arrive at Zip disk margins somewhere around 18% (I actually showed 20%). >> Two comments. First, even his explanation is inaccurate, because he ACTUALLY used 22% (rather than the 20% he cites). Second, and far more interesting, why did he feel it important to comment on this modest revision from his earlier Model (remember, he mistakenly thought the margin change was only from 20% to 18%) but UNNECESSARY to enlighten readers about the far more substantial revisions re: # of drives sold; # of disks sold; and the disk tie ratio?
While I continue to believe that worthwhile financial analyses can be generated by anyone who undertakes the task objectively and logically, IMO Keelers approach doesnt even come close to qualifying. His appetite for making substantial, largely unexplained revisions to key assumptions (at least as demonstrated in these recent projections) is totally inconsistent with rational, fact-based analysis.
HYPEMENOT 18++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Pure Speculation Date: 96-12-08 21:51:11 EST From: MF Ben
<<<Iomega Ads seem to be a no show this holiday season. I have a lot of respect for IOM management. I can not imagine any reason for them not to take advantage of the season to build broader consumer awareness of their products UNLESS they already have COMPLETE confidence in consumer and OEM acceptance.>>>
I don't know if Iomega has "complete confidence in consumer and OEM acceptance" but I'd be willing to go out on a limb and say that Intel does. Seen their ads recently? I have. Even if Iomega did have the kind of confidence Intel does (as Intel deserves to), I'm unsure if THAT would explain the dearth of television advertising as compared to expectations.
<<<If Iomega is already selling and has orders for all the Zip drives they can manufacture, and they know what the OEM's have planned, then the money that would have been spent for TV advertising can go right to the bottom line.>>>
They do sell all they make. Eventually. How do I know? Write-offs. Haven't seen 'em. However, we do not know if production is running at or above capacity. Might be pure semantics, but I find the distinction important.
<<<If they are not selling their capacity right now, and they are saving cash and buying back their shares, then I will have to reevaluate my faith in KE.>>>
I would too, but I don't think stock buybacks are in the future for Iomega. Growth companies have better returns for their capital. The $14 buyback was an anomaly that served two purposes: took advantage of a discounted stock price and helped re-confirm management faith in the company.
<<<PS How many ads for Nintendo64 do you see? How many ads for Ford Expedition? Both have demand that exceeds supply.>>>
Excellent observation. Marketing is not always about selling product but can also be instrumental in building brand equity, a brand equity that can be leveraged into all kinds of future cash flow streams.
Cheers,
Benjamin 19++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Pure Speculation Date: 96-12-08 22:06:02 EST From: MF Ben
<<<My take is that Iomega is selling everything they can make. They don't need advertising to push product. Iomega has one of the hottest computer peripherals in one of the best retail seasons in years. It could be they're loosing sales that could have been made with more product and more advertising.>>>
Doc,
Nothing personal, but this is a REALLY basic function of advertising that completely ignores the other sometimes more important facets. As Waverunner so astutely pointed out with specific examples, companies often advertise unavailable products -- though I haven't seen many tickle me Elmo ads around! <G> -- for specific reasons. Selling product NOW may only be one reason.
If Iomega IS serious about OEM inclusion, ensuring a high "Q" rating (to steal a metric), will help the process along. Why not spend some money during the holiday season and get that brand name recognition up there? Would it HURT Jaz sales? Ditto sales?
<<<To me the big question is whether limited supply is stopping the OEMs from adding Zip to more models or shipping the Zip models. >>>
My question on this is: how many internal Zips do you think the OEMs would NEED to add more models? 100,00? Iomega has repeatedly said that OEM inclusion is one of their highest priorities. I would guess that Iomega has the ability to SHIFT manufacturing from external models to internal IDE models to sufficient levels in the past 5 months.
How many Zips has Iomega made in the past 5 months? Would it take 5 months to shift capacity so that 20% of Zips are IDE internal models (reminder: conference call said 10% revenue from OEM)? How about 15%, assuming that some are internal SCSI (PowerComputing)? I remain confident that Iomega would be capable of such nimble manufacturing shifts and thus don't buy the argument that NOW, in DECEMBER, it is supply that is constraining new SKU announcements. I believe other reasons recently offered, such as new product roll-out seasons, could be a factor, but not supply.
If it were supply, I would need to seriously question Iomega's abilities to:
a) forecast model demand -- as Apple has often screwed up badly b) ability to shift production to "important models" (such as IDE internals to sign up as many SKUs as possible) in a reasonable time frame, such as half a year.
My problem with phrases like: "Iomega is selling everything they can make" is that it doesn't take into account the production level and it doesn't really tell me what I want to know as a shareholder.
Unlike other products, I have confidence that Iomega productions will turn-over, I just question the RATE of turn-over. Shelf-life is more important to me just as production level is.
I do recall that Zip manufacturing IS under-going a plant shift. Are they at 100%?
Sorry if this is somewhat scattered. Caught the AM flight back from LA and I'm working on 3 hours sleep.
Cheers,
Benjamin 20++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Keeler -Part II Date: 96-12-08 22:45:42 EST From: PKeeler
Again, I must have documented my assumptions pretty good for you to come up with a 2 post response. ;-)
I never said that either of these models were linked in any way. The Wise analysts you hold in high esteem aren't always consistent either. JPM went from $0.15/share for 3Q96 in March to $0.12 in June (?) to $0.08 in September. SoundView went from $17/share on Micron technology to what, $3; in under five months I believe.
Its not the actual numbers that I'm concerned with. Its analyzing the effect on Iomega's revenue and earnings growth. The first model demonstrated how the MCI licensing would boost net margin even if they sold as few as 1 million drives. The second model was to demonstrate how I view earnings growing as the installed base grows.
I disagree that tie ratios will fall as less "needy" buyers of Zip drives enter the equation. I believe this because MCI will sell Zip drives that need Iomega Zip disks. Tie ratios should rise in 1997, as they've done since the article I used in my analysis (according to KE in 3Q conf. call). I changed the net margin on Zip disk variable only to be conservative. The only datum I believe is one of the exalted analysts stating Gross Margin over 50%. So anything above 18% fits that datum.
You are welcome to criticize my posts. At least someone is reading them besides ETurkey :) Should I take the fact that your only criticism is my deviation from the prior hypothetical model to mean you endorse the idea that Iomega will sell many disks in 1997? ;-)
Out of curiosity, what would you project as Zip drive (all brands) sales and Zip disk sales for 1997? In fact I would love to see everyone's guess if it can be explained. I'll start with 7-8 million Zip drives and 68-74 million Zip disks. I think DiskTrend is slightly high in their projections. That OEMs take 6-12 months to make their complete decisions. That Europe and Asia just don't download as much from the internet as the USA. That Apple will not ship significant quantities of Zips until 7/97. That Compaq will not offer Zips until 1998.
PKeeler Patrick Keeler
End Report. Posts covered through 3 am ET 12/9/96. _______________________________
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