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Friday, December 13, 1996 Iomega was down $2 1/8 Thursday, closing at $20 (-9.60%). TODAY'S RECAP: Take a 2 cent fourth-quarter earnings downgrade from J.P. Morgan. Toss it into a 98-point Dow Jones collapse. Shake well. What you get is a very nasty day for Iomega shareholders. On Thursday, J.P. Morgan announced its downward revision of estimates for Iomega's 1996 fourth quarter from $0.19 to $0.17, citing slowing sales in the retail PC market. In spite of these reduced expectations, JPM maintained its "Buy" rating for IOM, and held its price target for the company steady at $38 per share. Unfortunately for investors, those reassurances weren't enough to inspire confidence on the trading floor, and share values plunged nearly 10%. The resulting mood in our Iomega folder ran the gamut from anger to whimsy. In other news, reports are surfacing -- most notably in Herb Greenberg's San Francisco Chronicle "Bizinsider" column -- that Iomega's Jaz disk production arrangements with Seagate will terminate in January. Bears are claiming that the relationship is ending due to poor Jaz sales, while Bulls are pointing to the third quarter conference call in which Iomega CEO Kim Edwards outlined plans to shift much of Iomega's production capacity to the new Penang facility in Southeast Asia. Today's very busy ~Iomega in Fooldom Today~ report is coming to you in two parts, and we will focus on the earnings revisions and the late-breaking developments involving Seagate. P.S. Those interested in the significance of the JPM earnings revisions might want to read Thursday's insightful Fool Portfolio wrap-up by MF BudFox. 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++Cynicalguy quotes from the J.P. Morgan earnings revision
statement.
And now, the Best of the Board...Started 3 am ET 12/12/96. 1++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Highlights from Kunstler Date: 96-12-12 12:57:50 EST From: Cynicalguy
Please excuse the formatting and spelling. This is a scan that was OCRed. I cleaned up what I saw.
<<
We are lowering our 4Q/96 EPS estimate on Iomega to $0.17 from $0.19 previously. We are maintaining our 1997 EPS targets of $0.82, as well our BUY rating and $38 target.
Further, with Iomega's help, retailers can meet whatever demand materializes without incurring inventory risk. Indeed, Iomega has promised very quick delivery should retailers need to reorder, so why bother cramming the shelves since the likelihood of lost Zip sales for lack of inventory is low?
Our channel checks to date could allow us to portray resellers to the corporate and VAR markets who are meeting their goals with the Iomega product, and are bullish for the quarter and longer target prospects for both Zip and Jaz. However, this is from the perspective of distributors who are not dealing with the Intel- inspired vagaries of the home computing market.
As a result of the circumstances that appear to be playing out this season in the retail market, we have lowered our assumption on Zip sales in the aftermarket from 1.373 to I million units.
While we have updated some of the inner workings of our revenue model for 1997, next year's revenue and earnings forecast is unchanged; the doldrums in the retail PC market have been caused by deferrals in turn induced by the expectation of imminent new technologies, not a wholesale souring of the market. Further, our projections have several elements of conservatism, particularly with regard to retail selling prices of Iomega's hardware products and media in the year ahead, which we have assumed to be to subject to sharp declines. Our financial model also has prudent margin assumptions in light of the emphasis Iomega has placed on manufacturing costs, and of a gradual slant toward more higher margin media sales in the revenue mix.
We should also point out that Iomega has maintained a large competitive lead over contenders to its market, and is poised to introduce significant enhancements to its products. The result of Iomega's outlook for next year is earnings growth still well in excess of 50% for 1997.
As the installed base of Zip and Jaz expands, and with it the opportunity for the media and of the business, the prolongation of the high earnings growth becomes loan dependent on hardware sales. Accordingly, we are retaining our BUY rating and $38 target.
>> 2++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Seagate/Howard Kalt Date: 96-12-12 14:35:19 EST From: RonaldM348
I talked with Howard Kalt yesterday concerning is knowledge of recent filings regarding David Dunn. I then asked him about Seagate and Jaz drives. He was very emphatic that Seagate was now heavily involved in the production of Jaz disks and was actually producing same since 3rd. qtr. announcement.
He played down all insider sales as first opportunity for profit taking and of course stock is basically a huge part of their primary pay. Then he mentioned that IO apparently had windows for insider selling that were even more restrictive than the SEC's rules.(I was unaware of this.) At any rate the recent sales were first opportunity to bring home some real bacon for past 12 months-which coincides with the majority opinion on this board. ( I believe Jeanie or someone else may have reported from Kalt on this. I am just reiterating as that belief has not changed.
Since Kalt has been on board for more than one year I am going to share this story with you. I was probably the first shareholder to call him. I called as soon as IO released the news announcing their retention. I went away from that conversation a little concerned that these "guys" (Kalt's firm) were a little paranoid in regards to IO. I really thought IO could and should have done better. I thought Mr. Kalt was a little too talkative in regards to negative aspects regarding risk in owning this stock. I remember comment such as I wouldn't buy any of this for my grandma. ( I guess in hindsight most of us here get very defensive when we hear negative talk about our company. Hey-why can't everyone see the light at the end of the tunnel-right! Well I guess thats what makes a stock market!)
Let me assure you Mr. Kalt's conversation this time around was very upbeat, bullish if you will, and I think he is very proud to represent IO. Mr. Kalt was at Comdex which I know had to add to his "Iomega glow". At any rate I believe his firm represents Iomega quite well; and, I wish the Kalt firm a very merry Christmas!
Ron Mason 3++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: The No Guidance Baloney Date: 96-12-12 17:44:23 EST From: EBLUESTONE
Is the H&Q(last week) and JPM(today) downgrade of IOM earnings just informed opinion, or are they working with information that is not available to the rest of us, shareholders included. Our understanding is that Kim Edwards is not providing any guidance. I think IOM owes us an explanation, one way or the other.
IMHO, this no guidance business has to stop. Either you know how to run a business or you dont. You set targets that you know you can meet. Any surprises should be to the upside. The way the business is run now, it seems that KE is using a variant on the plug and pray method of running a business. You set targets, and if they are not met - blame airplane crashes, monsoons, vendors, Arnold Schwarzenneger, European economy, leftover employees from the old Iomega in Europe, and weak sales of PCs during the Christmas season.
If I am not mistaken Intel is also in the PC business. How come their business is not effected. Come on, Mr. Edwards. Get off your arrogant horse and grow up, fast. Get some real marketing and sales people. Tim Hill is not the answer. It seems like he made a windfall bonus in 1995 sales. Does it mean that if he doesnt make his targets in 1996, he is going to give something back to the company?
FWIW, I am an investor and not a trader. I buy carefully and sell very reluctantly. Today I sold off 6% of my Iomega holdings, the first time I have sold any shares in Iomega.
Sincerely,
Mary Cluney 4++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:The No Guidance Baloney Date: 96-12-12 17:53:41 EST From: MF ETurkey
EBLUESTONE writes:
<<<Come on, Mr. Edwards. Get off your arrogant horse and grow up, fast. Get some real marketing and sales people. Tim Hill is not the answer. >>>
Mary,
I respectfully disagree. While your point about iomega having very strict non-disclosure policies (a subject HYPEMENOT will agree with completely) is clearly understood, I would not say Tim Hill is responsible for that, but Edwards.
I think Hill has done an outstanding job taking a nobody company and promoting the heck out of. Having seen him in action a couple of times, I have no qualms about having him in charge for years to come.
The decision on non-disclosure most surely originates higher up in the corporate structure.
Agreeing or disagreeing with Edwards on non-disclosure is certainly a valid issue, but I would not castigate Hill for that decision.
Eric 5++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re: JP Morgan Date: 96-12-12 19:00:32 EST From: Foolshdog
>>>J.P. Morgan estimates that Zip sales in the ''aftermarket'' will be 1 million units, compared with its previous assumption of nearly 1.4 million. <<<<<<
This is an unbelievable % reduction. Is this their 4Q estimate for non-OEM Zips? PKeeler or anyone, what do you make of this? <<<<<<<<<<< -Dave(Runngmoose)
Dave, I have to agree with you. Something seems funny about JPM's reasoning first of all and then their calculations for sure. I don't have any special insights into the health of the computer retail season but as you pointed out consumers delaying PC purchases shouldn't translate into weak Zip sales. The unit decrease of ~400k Zips(373k according to C-guy's later post) would seem to have a much greater negative impact than just two cents. I assume they have not only subtracted earnings derived from a lower drive count but a lower disk count as well(they didn't mention a change in tie ratio). If I made the same change to my estimates it would drop the EPS 6 or 7 cents.
Anyway I'm still thinking about all this and I will probably have a follow up post.
Jim Arden(Foolshdog) 6++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: 0.17/1 MM Zips/channel check Date: 96-12-12 19:22:08 EST From: PKeeler
I posted this this morning:
>>> Date: 96-12-12 08:21:53 EST
At least 15 hours without a single TA post has got to mean something? :) A sign of the Apocalypse? >>>
I guess it was. Interesting that we get thousands of TA posts as the stock moves sideways for 4 weeks. Than one day they stop and the stock drops 5%. :)
As for JPM lowering estimates I would think they had to. IMO, Iomega can't get to $0.19. They only did $0.09 last quarter. Iomega has doubled earnings sequentially only once between the 3Q95 and 4Q95 ($0.08 vs. $0.02). But that was due to the ramp up of Seiko-Epson. No new products this quarter just seasonal factors. $0.17 would still be tremendous, almost double the 3Q and more than double this quarter last year. You can't ask more than to double last year's quarter can you?
Following excerpts from the JPM report as scanned by c-guy: >>> we have lowered our assumption on Zip sales in the aftermarket from 1.373 to I [1] million units. <<<
Take this with a grain of salt unless you think Iomega gives THEM the unit sales. Secondly, they must assume higher margins for Zip drives than I do as I can't seem to get past $0.14-$0.16 for this quarter in my spreadsheets with 1-1.4 million Zips.
AFAIK they thought 700K Zips would be sold total last quarter. Now they are thinking 1000K + Zips (+ is the non-aftermarket Zips, i.e. IDE insiders). So they are comfortable predicting at least 57% Zip unit sales growth from the 3Q. That is tremendous growth for a product that's been available at retail for almost two years. BTW, Zips still sells at retail for $199.95; that has to be a computer peripheral record.
>>> Our financial model also has prudent margin assumptions in light of the emphasis Iomega has placed on manufacturing costs, and of a gradual slant toward more higher margin media sales in the revenue mix. >>>
In between Hypemenot screaming at me this is what I was trying to portray. Rising margins and disk sales relative to drive sales. I have to agree with Skichang that the Wise do not believe in Iomega. The stock could not be sitting at $20 if the street thought $0.82/share was doable in 1997.
A channel check:
I've visited the CompUSA in Edison that I've chronicled on this board the last three days this week. After hitting an inventory low of 43 Zip drives on Tuesday a shipment from Epson then a huge shipment from Iomega came in. As of Wednesday at 5:00 PM there were 133 Zip drives in the store (normal inventory levels used to go between 120-90). When I stopped by today at 5:00 PM there were 92 Zip drives in the store. They sold 41 Zip drives in the last 24 hours. In September/October Iomega was selling 40-50 drives per WEEK at this store.
Also they just restocked sold out inventory of P-Bell 755's. Got some internal Jaz drives (they've been sold out of externals for awhile). They also got a new Zip included computer, the NEC Ready Office 1675. We know the retailers are seeing bad PC sales. What does it say that a retailer would change the shelf space to include another IDE Zip Insider computer this close to Christmas? Could it be that the P-Bell 755's success led NEC and/or CompUSA to bring in another Zip computer SKU?
PKeeler Patrick Keeler 7++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Tim Hill's Sale Date: 96-12-12 19:55:18 EST From: EGranet
Well, I guess the answer to why Tim Hill sold 98% of his holdings last month is no longer a question. I guess he didn't want to sell at 16. No flames please.
I have been one of the biggest bulls on IO since I bought this stock about 7 months ago only to see my entire net worth turn negative. I got stopped out today at 19 3/4.
This is my final post on the old IO board. I don't blame anyone but me for allowing myself to get sucked into the hype of this board. I kept buying more when the stock fell only to see it fall further. As I read the posts tonight, I am amazed at how similar they all sound. Only the names have changed from months ago. When the stock crashed that awful day in July from 37 to 26. I'm sure many will never forget that day. I hung in there , my faith strengthened by the bulls on this board only to be wrecked again when the stock fell from 28 to 12 5/8 (intraday) after KE's announcement of a CHALLENGING quarter. I still held because of my faith in the old IO and this board. I learned a very valuable and costly lesson.
I am finally out and can now get on with my life. I don't want to sound like a soap opera here but I am sure there are others out there that are tired of the gut wrenching and also let this thing consume their lives only to make their lives worse. I finally realized it ain't worth it folks.
My advise to anyone that still owns Iomega. I wish you the best. I hope you all make a lot of money but always try to look at things with your head on straight. Don't let other people tell you it's gonna be ok if your gut is telling you otherwise. Follow your instinct.
Good Luck and Merry Christmas
Brett A. Granet 8++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: JPMorgan revision 1 Date: 96-12-12 22:18:21 EST From: MF Ben
<<<As a result of the circumstances that appear to be playing out this season in the retail market, we have lowered our assumption on Zip sales in the aftermarket from 1.373 to I million units. >>>
My Quick Look at the Downgrade in EPS:
I must say, I found the J.P. Morgan EPS downgrade to be somewhat interesting. It was just lack week that I posted a few lessons I was glad to have learned, one of which was that Iomega does not exist in a vacuum and that general retail health, and specifically PC retail health, can have a direct and substantial impact on revenue and earnings.
I then gave my general conclusion on my research of how the holiday season had been shaping up, as reported by various agencies, including the ICSC. It was that the holiday retail season looked good but that PC strength did not seem to be sharing the great wealth. In fact, I just posted about the ICSC poll where the first week of holiday '95 and the first week of holiday '96 had the exact same percentage of respondents saying they HAD purchased computer hardware in the past 7 days (4%).
Interesting side note: the percentages don't vary much (3% and 4%) as the weeks progress towards Christmas in the holiday '95 comparison numbers.
I find it interesting that J.P. Morgan used a soft PC retail holiday season as the reason to drop the EPS estimate by $.02 (or around $2.5 million in net income or, at a 4% net margin, around $63 million in revenue). Why?
I'm curious how much of their INITIAL estimate included a great PC holiday retail season? Why?
First, analysts are, by nature, usually somewhat conservative. This holiday season was never forecasted to be an astounding one -- consumer debt levels have been broadcast on every TV station from here to Des Moines -- so why would JP Morgan numbers count on one?
Second, the Intel MMX, probably what most analysts think is keeping consumers from buying NOW rather than later, was announced LONG ago and is not a recent factor at all.
Third, aftermarket sales of Iomega products should, in my estimation, probably be STRONGER if consumers are delaying new PC purchases for a few more months, not weaker. The report, as posted by Cynicalguy (the post I used to cut and paste), specifically says that their AFTERMARKET numbers are expected to be lower.
WHAT DO I MAKE OF ALL THIS?
First, the EPS cut is an EPS cut. It is going to hurt the stock. Period. I believe that JP Morgan lowered the estimate for fear that Iomega would not meet their previous $.19 estimate.
Do I buy the reason? Nope.
Iomega could easily make 1 million Zips this quarter. I don't think there are many arguments about that considering that they have sold, according to their own press release, 1 million Zips in a previous 3 month period. Even if OEMs are 15% (up from 10%) this quarter, that extra 176,000 drives should not be too much trouble, should it? (1.176 million...15% of total drives is OEM)
My previous estimate, as posted to the board, was that Iomega should be able to produce 1.4 million Zips this quarter. Not too far off from the original above. if JP Morgan IS correct that only 1 million aftermarket Zips will be sold, and production capacity is 1.4 million, then either 29% of all Zips will be OEM -- HIGHLY unlikely, see PC weakness above plus lack of new SKU growth -- or Iomega cuts back on production, or inventory builds, or products sit longer on shelves, or more than one of the above.
IS THIS TROUBLING?
The old waffle: yes and no. Yes, if I believed J.P.Morgan, but an EPS cut may mean much more than a revenue cut. It could, as KayS222 pointed out, be due to some increased expense, like advertising -- though this board has pretty much stated flat out that Iomega hasn't done much expensive advertising this quarter, certainly not $4.1 million more than last quarter (tax effect).
It could be due to other expenses, though R&D has remained steady and R&D cannot be capitalized, it must be expensed when done, so all n.hand R&D cannot be put on one quarter, for example, but has shown up in previous quarter's expenses.
RIGHT & WRONG
I think JP Morgan may be right on the EPS. Seems to be in line with the other analysts. However, I believe they are wrong on the REASON. If they do believe that retail PC weakness will hurt Zip AFTERMARKET sales substantially -- around 29% reduction in Zips sold -- then I think they made a mistake.
WHAT DO I THINK?
I think they wanted to lower EPS for some reason. Whatever it is. They came up with the old standby -- retail weakness. We shall see in the weeks ahead how general retail strength and PC retail holds up as we go into Christmas countdown. IO just wish they gave a better explanation. Kinda hard to swallow the one they gave.
Cheers,
Benjamin
P.S. Guess I can rule out JP Morgan as the analyst whose "internal" estimates have been beaten. I'm still curious who it is but Bill won't tell me. Don't see why not. Big secret I guess. Maybe a few more downgrades would tell me but I'd hate to find out that way. Maybe that analyst should just upgrade? :-) 9++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:JPMorgan revision Date: 96-12-12 23:20:35 EST From: Foolshdog
Ben, good post. This is an awfully strange revision. There is no way that 370,000 Zip drives on the margin only translates to two cents of EPS. Therefore, we have to assume that this was just a line of bs that JPM decided to attach to their revision in order to increase their credibility. I think it has backfired. The only other explanation is that their analysis is really just that bad and they haven't a clue.
In any case, the earnings revision itself(disregarding the explanation) is not a big deal. It was on the high end of estimates and this just brings them in line with other folks. In fact when this happened last quarter the market reacted positively because they felt a floor was in place where earnings would not fall below the .06/.07 range that the analysts were at. They were correct. All that is missing now is H&Q coming in with new Q4 estimates in the .16/.17 area to confirm this floor. I would not be surprised to see this happen in the next few days. Then the street analysts would all be in the same area and one would expect the # to be beaten just like last quarter. Remember JPM and H&Q want their estimates to be beaten. So it didn't come as a surprise to me that JPM lowered their # to a place they felt IOM could beat. I probably would have suspected that they received guidance from the company but with that bs explanation I tend to doubt that possibility.
In case I haven't made myself clear, I think this is an excellent opportunity to go long this stock and I would suspect the stock to rebound in fairly short order.
Best of luck to all,
Jim Arden(Foolshdog) 10++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:JPMorgan revision Date: 96-12-12 23:58:10 EST From: MF Ben
<<<Ben, good post. This is an awfully strange revision. There is no way that 370,000 Zip drives on the margin only translates to two cents of EPS. Therefore, we have to assume that this was just a line of bs that JPM decided to attach to their revision in order to increase their credibility. I think it has backfired. The only other explanation is that their analysis is really just that bad and they haven't a clue.>>>
Foolshdog,
I NEVER said that $.02 EPS can't translate into the number of Zips (373,000) that they lowered their estimate by. Actually, I think it fits quite nicely. What I did say is that I believe their REASON stinks.
$.02 EPS is roughly $2.5 million in net income or $63 million in revenue with a net margin of 4%.
Take that $63 million in revenue and divide by the number of Zips they cut their estimate by and one gets ($63 million/373,000) =
$169 / Zip
Viola!
About the price I would think Iomega would get for a Zip.
The fishy part? Tie ratios. If Iomega sells 373,000 LESS Zips than they expected, then one would expect that the revenue and EPS number would be LOWER than JUST the opportunity cost lost on the Zip DRIVES but on DISKS TOO!
Where are the disks in these numbers? No where to be found. Only the drive reduction seems to be accounted for. Try and fit a tie ratio of even 3 into that net income number WITH the 373,000 Zip reduction and things get funky. Works fine with just the drives.
Sloppy logic on JP Morgans fault -- and yes, they are coming to interview at CBS next month but for some reason, I don't think I'll get invited. Oh well.
The mystery of the downgraded EPS continues...
Cheers,
Benjamin 11++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: 370K drives Date: 96-12-13 00:02:36 EST From: MonirM
Someone a few posts back was saying that it was "bs" and unbelievable that 370,000 drives would turn into only 2 cents on Iomega's per share earnings.
This makes sense if you do the math. There are something like 130,000,000 shares of IOM outstanding. If each of those drives creates $10 profit for IOM that's $10 x 370,000, or $3.7 million divided over 130,000,000. That works out to 2.8 cents, actually. So 2 cents may be a bit generous.
Before you start talking about how ridiculous earning are and how cheap this stock is, remember that there are 130,000,000 shares outstanding. At $20 a pop, that's $2.6 billion.You could buy a space shuttle with change left over with all the IOM stock outstanding. How cheap do you think this company is?
The fact is, Zip will not become a standard until Zip disks fall to $2/disk or less. Don't give me cost/megabyte justifications for how cheap Zip disks really are. Until these disks fall to $2 apiece or less, people will always be afraid to lend their friend a Zip disk. Until the Zip media falls in price, we will keep our 3.5" disk drives, and Zip will not be universal.
If Zip does not become universal within the next year, it will be superceded by rewritable DVD drives in 1998. So unless the disks fall from $12 apiece to $2 apiece in this timeframe, dreams of an Iomega standard will be in vain. Rewritable CD drive media already costs about the same as a Zip drive, only with 5 times the storage. And it only took about two years for CD-ROMs to fall in price enough to become standard equipment on all desktops. We are likely to see the same sort of transformation for the rewritable CDs, only faster, because the technology exists, and because multiple companies are competing to provide these drives at ever cheaper prices. Iomega, on the other hand, is the megafloppy monopoly company that is still milking this product line for all it's worth. That's fine, but at some point, they will be forced to drop margins on their disks significantly in order to compete. What will that do to their bottom line?
The fact is that Iomega is not investment grade material. It is a risky stock with an uncertain future. The company will probably remain profitable, since it is blessed with a competent and creative management team. But its ability to maintain and grow a $2.6 billion market cap, given its position as a computer peripheral maker, is hardly assured. 12++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:ZIP in the corporate worl Date: 96-12-13 00:16:57 EST From: CayugaDan
<<<The fact is, Zip will not become a standard until Zip disks fall to $2/disk or less.>>>>
Sorry, it is already a standard. It may not be universal yet, but it is a standard. Already this is wrong.
<<<<<< Don't give me cost/megabyte justifications for how cheap Zip disks really are. Until these disks fall to $2 apiece or less, people will always be afraid to lend their friend a Zip disk. Until the Zip media falls in price, we will keep our 3.5" disk drives, and Zip will not be universal. ">>>>
Don't give me logic, you're saying. I believe when Zip becomes universal, Zip disks will be around $8. Remember, Zips can't be universal yet. Production has to keep on ramping up for that. When can we do that.... production wise? 13++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:JPMorgan revision Date: 96-12-13 01:22:45 EST From: Foolshdog
>>I NEVER said that $.02 EPS can't translate into the number of Zips (373,000) that they lowered their estimate by. Actually, I think it fits quite nicely. What I did say is that I believe their REASON stinks.
$.02 EPS is roughly $2.5 million in net income or $63 million in revenue with a net margin of 4%.
Take that $63 million in revenue and divide by the number of Zips they cut their estimate by and one gets ($63 million/373,000) =
$169 / Zip
Viola!
About the price I would think Iomega would get for a Zip.
The fishy part? Tie ratios. If Iomega sells 373,000 LESS Zips than they expected, then one would expect that the revenue and EPS number would be LOWER than JUST the opportunity cost lost on the Zip DRIVES but on DISKS TOO!
Where are the disks in these numbers? No where to be found. Only the drive reduction seems to be accounted for. Try and fit a tie ratio of even 3 into that net income number WITH the 373,000 Zip reduction and things get funky. Works fine with just the drives.
Sloppy logic on JP Morgans fault -- and yes, they are coming to interview at CBS next month but for some reason, I don't think I'll get invited. Oh well.
The mystery of the downgraded EPS continues...
Cheers,
Benjamin <<<<<<<
Ben, I guess I shouldn't of started my post with 'Ben, Good post.' as my post wasn't about your opinions, it was about mine. Sorry for the confusion. Speaking of confusion, I'm still unclear about your position on this matter. In the first part of the above post you state that the 373k drives 'fits quite nicely' with the revision of 2 cents. By the end of the post you are asking 'where are the disks in these numbers?'. So does it make sense to you or not?
Maybe I can help you further your analysis. First I think it is absurd to think that JPM believes that IOM is going to sell the same number of disks wether they sell 1.373M Zips or 1M Zips. I mean we have to assume that disk sales will be hurt by a similar factor or that the tie ratio is not going to change drastically wether IOM sells 1.373M or just 1M zips. If JPM doesn't even understand this basic function of IOM business then their analysis is even more worthless than I was thinking. Don't you agree?
So we must figure the combined earnings lost of both the 373k drives along with the associated # of disks attached to those drives. The only way this is not true is if JPM not only drastically changed their drive estimate but also drastically changed their tie ratio estimate. They didn't mention tie ratio in the revision so I don't believe that to be the case.
Now you come up with $169/Zip. The only assumption you use that I don't agree with is the 4% net margin. I think the net margin will be higher and so do JPM and H&Q if I remember correctly since they are saying IOM will about double EPS but they are not projecting doubling of revenue(from Q3). Therefore they agree net margin for Q4 should be higher than Q3 which was about 4%. I think if you will just take their(JPM, HQ) projected net income divided by their projected revenue, you will get a number north of 5% so even being conservative, I see no reason to use anything less then 5% for this exercise. So the calculation should go like this:
2.5/.05/.373=$134/Zip drive and assoc. disks
Now does it make sense that IOM only gets $134 of revenue for each Zip drive and all associated disks with that drive{which in my book = rev(z)+TR*rev(d)}. I think this is more than 40% off(I am netting out rebates) and therefore I feel comfortable repeating 'there is no way that 370,000 Zip drives on the margin only translates to two cent EPS'. Of course this isn't the way I actually arrived at my conclusion earlier. I used my own earnings model which was far more accurate then this thumbnail calculation. In fact this calculation is very conservative as it doesn't take into account that 1) Zips are the most profitable part of IOM and 2) on the margin these 370k Zips should even be more profitable.
Anyway, I hope I haven't lost everybody. If anyone can share with us the magic of the JPM calculations I would be most interested.
-Jim 14++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:Herb Blurb Date: 96-12-13 02:16:56 EST From: JohnKess
>>>Capnwilly. So far, the alleged cancellation of the SEG-IOM deal to make Jaz disks is but a rumor that was first planted in the SYQT board, and it migrated to this board. I "taped" it on my Zip. The poster (no profile) hasn't shown up again. Greenberg probably picked it up in the rumor mill. But who knows? How important is it if SEG doesn't make a single Jaz disk? <<<
I imagine one of Herb's fabled "sources" put him onto it. In this nervous market, rumors have been moving the market both as a whole and in specific stocks. CSCC, for example, got clobbered earlier this week on a rumor (then bounced back). This has happened a lot in recent days. Now with the earnings reduction by JPM, and the downward market action, it's a great time for Herb's friendly short-seller to feed him a tip. Herb is more than happy to bash IOM. Recall last winter for the same game.
Anyway, from the 3rd quarter earnings release remarks attributed to KE: "...the opening of the Company's new Penang facility has led the Company to reevaluate its contract manufacturing relationships and that the company intends to move a substantial portion of its Zip, Jaz, and Ditto drive production to this new facility. In connection with this shift, the Company recently took over from Seiko Epson control of a subcontractor producing Zip drives in the Philippines and is negotiating the transfer of Jaz drive production from Sequel."
Comments also made in conference call that the Penang facility had come up so fast and so well that they were reevaluating their total manufacturing strategy and reviewing all contract manufacturing relationships sooner than expected.
The Seagate relationship may no longer be necessary because of increased internal capacity. But keep in mind that IOM has already stated that Jaz disk to drive ration was not as high as expected.
End Report. Posts covered through 3 am ET 12/13/96. _______________________________
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