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Monday, October 20, 1997 Friday, Iomega closed at $26 7/16, up $1 11/16 (+6.82%). THIS WEEKEND'S RECAP: Following Iomega's Thursday thrid quarter earnings announcement (.22 earnings per share vs. an expected .20), the message board launched into analysis and debate mode. The post which generated the most reaction was from ~Benjamin70~. It's first in this report. Other posters joined the discussion, focusing on the pros and cons from Iomega's conference call information. Coupled with this issue was an interest in Iomega's other, unreleased products -- specifically Buz and n.hand -- and the ability of Iomega to meet demand for the Zip drive. Enjoy! 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++ Benjamin70 with an extensive, detail breakdown of Iomega's 3Q.
Recap written by TMF Weekly; posts
compiled by TMF Weekly. 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 9:01pm ET 10/16/97. 1+++++++++++++++++++++++++++
Subject: Q3 1997 Earnings & Call Note Q3 1997 Earnings and Call Note BOTTOM LINE: A decent quarter. No more. No less. Production continues to be Iomega's main weakness. The OEM increase of 46% -- see math at end -- is good news, but the 26% Zip unit increase, Q over Q, seems light. Production problems plague this company again and again. Laptop Zip delayed, Zip Plus shipped. Irony. Don't count on 3.5 million units in Q4, maybe 2.6, but capacity does not ever seem to equal production. 7 days of off-line Zip production meant that instead of increasing Zip sales 28% quarter over quarter, they increased 26%. Imagine what Iomega could do at capacity. Don't bother. I don't expect them to produce anywhere near capacity till Q2 '98. Gross margin is excellent, revenue growth will only come with production levels. MCI and NEC are disappointments. Another solid quarter. Middling. Nothing fantastic. Problems again. Slow and steady. A more in-depth look at the numbers below but my expectations for Q4 remain unchanged, including a net bump to over 7% and a gross bump to the 34% range. Another quarter where the potential shows and Iomega does decently well but still seems to perform shy of where they could have been. I hope to see them perform better and better -- which they haven't -- but, unlike some here, I harbor no illusions that all production problems can be solved overnight. Dividing annual capacity by 4 and using that as the Q4 benchmark is outright lunacy. I would take 75% of capacity next quarter and be happy. Once again, the game is Iomega's to lose. Are they losing it or can they tighten up the ship, solve these problems and make the leap from successful aftermarket device to large-cap, monopoly monster? Obviously, production excellence is one of the main missing pieces. I'm absolutely astounded how many posts can wish away those problems every single quarter. Again, a middeling quarter saved by gross margin, OEM units, and actual honesty of problems on the conference call but hurt by production (again), laptop Zip delayed (again), and flat Europe (again). Get rid of the (again) stuff and the quarter looks great. Some residual problems Iomega must hammer out. Must. REVENUE/GROSS AND NET: First off, revenue was a little light -- due to continued production problems. I dwell on that in another section so enough here. Gross margin is up over 600 basis points year over year and over 300 basis points quarter over quarter. Of course, Iomega wants net margins to get to that 32.5% gross margin level. Net, however, is up 200 basis points over last year and while still under the 7% level, I feel confident Iomega should be able to have average net margins in excess of 7% in 1988, in no small part due licensee revenue. Solid gains here are definately helpful to the bottom line. We want to see gross margins continue to rise. One of the hallmarks of a monopolistic company is extremely high gross margins and edging up is always a good sign. INVENTORY/PRODUCTION/CAPACITY LEVELS AND LICENSEES: Here's the ugly part. First, we have inventory levels under 44% of sales for the quarter. Last Q3, the ending inventory was equivilent to over 57% of that quarter's sales. That is a pretty large difference. We aren't going in to Q4 with a large load of product. Production for the quarter also seems quite lackluster in comparison to what it could have been. With an average quarter being 91 days, according to Iomega, their Zip production lines was actually shut-down for anywhere from 7 days to 11 days. This is equal to more than 7% of the quarter. Not acceptable. Supplier problems, as well, need to be dealt with. Which brings us to the mentioned 14 million, annualized production capacity level. Two points, first, I highly doubt Iomega will achieve 3.5 million Zips in Q4. First, that would represent a quarter over quarter production increase of 75%, about triple what they have actually managed the past few quarters. Second, capacity does not mean it is used. Supplier problems, metal problems, child-care problems, whatever. The problems add up. Every quarter. Without fail. Production excellence means getting your suppliers in gear. Lining them up, qualifing them. Producing below capacity and having a huge back-order seem wrong to anyone else? Obviously, Iomega has to get their butt in gear on this stuff. Hearing about production problems on another conference call leaves me clammy. In terms of the licensees, production levels announced beginning next year don't thrill me much. PRODUCTION ONE YEAR LATER In case anyone forgot, Q3 1996 saw two major announcements. First, the IC "dream team" was announced. Intel, Motorola, TI, and Symbios Logic were to join the Iomega supplier team. Second, was the announcement that Matsushita had licensed to produce Zip drives. At that time, the backlog represented about 30% of that quarter's sales. Since that time, what has happened? How have these two announcements helped Iomega with their continued production problems? Why can't Iomega ever deliver 90% of potential? Backlog now stands at 87% of sales. MCI has yet to ship and Intel backed out of the dream team. Doubling the backlog while increasing sales by 8% doesn't make much sense to me. Leaving at least 8% of Zip production on the table due to a line shut-down is only one example of some serious production issues. Iomega has to sort these problems out or that 14 million capacity number is totally worthless. Totally. I'll take 2.6 million Zips next quarter. We'll see. EUROPE/ASIA AND THE USA Well, as a percentage of sales, Europe and Asia declined this quarter. More astounding, on a dollar basis Asia was down from last quarter. Actually, European sales were up a whole $1 million while Asian sales fell 20% quarter over quarter. Currency translations? USA carried the day, currency transactions aside. PICK A DATE NEW PRODUCT INTRODUCTION OK, I may have a thing or two wrong here, but near as I can tell, here are the latest and greatest promises for when these things hit the stores: Zip Plus Now Shipping Laptop Zip November Jaz2 "This quarter" Buz Postponed until 1998 I won't even begin to voice my frustration with Laptop Zip. Let's face it, whatever date they announce must be taken with a huge grain of salt. Period. Zip Plus shipping is good news, but, of course, this product is dependent on that on-again/off-again Zip production line which, when working, is held up by chip problems and whatever else can go wrong. Ugh. Do I sound frustrated about Zip production? I should be. This is getting to be an excuse every single quarter. Just once I'd love Iomega to say, "we produced at 104% of capacity and we're damn proud. Bonuses went out to all the assembly line workers and we sent out supplier companies huge fruit baskets." I can dream OTHER TIDBITS The advertising campaign sounds good. I defer, as always, to Jeanie on these things, but I like the concept. Worth a slight SG&A increase. Cash flow positive. What this means is profitability was larger than growth. I'll take growth, thank you. OEM percentage is good news but I don't know how Iomega does their numbers. If Zip sales were up 26% and Zip OEM went from 30% to 35%, then, on a unit basis, OEM Zips increased 46% quarter over quarter. A demonstration Q2' 97: Total Units: 100 OEM Units: 30, equalling 30% of total units Q3 '97: Total Units: 126, equalling a 26% increase OEM Units: 44, or 35% of 126 units Increase, quarter over quarter equals 14/30 or 46%. How does Iomega compute theirs? Seems like they take 30 divided by 44. Not the same concept. Benjamin 2+++++++++++++++++++++++++++
Subject: Stuff Some random thoughts that jumped out at me after listening to the call: The Good OEM Zips sold up 60% over Q2, which was up 60% over Q1. That sounds real nice. They don't anticipate chip problems in Q4 Now 2 sources for the troubemaking chips, with the new supplier a lot more anxious to meet the company's needs. 14 million/year Zip capacity. A nice jump up from the last numbers we had. The Bad laptop Zip-(in my best Annie voice) "Tommorow, tommorow.........It's always a day away......." n.hand- still a bit more than a day away. The Ugly MCI-what the hell is happening here. Maybe 100,000/month sometime in Q1? What the heck has taken so long. It'll be close to 15 months from announcement of the deal to 100,000/month. Ma Turkey could make 100,000 a month, and that's with challah & chicken soup instead of chips. MISC. For those who get all excited about declaring the Zip a standard now, Edwards mentioned the big "S" word twice by my count. First in talking about dropping the price to $99, he said it was a big step in helping the Zip become "the next standard in removable storage." He later said the Zip had taken "another big step towards becoming the removable standard" by increasing OEM sales by 60% So there you have it Standard fans. straight from the head honcho's mouth. Getting there, but not there yet. 3+++++++++++++++++++++++++++
Subject: Re: Q3 1997 Earnings & Call Note << 7 days of off-line Zip production meant that instead of increasing Zip sales 28% quarter over quarter, they increased 26%. Imagine what Iomega could do at capacity. Don't bother. I don't expect them to produce anywhere near capacity till Q2 '98. >> Come on...they left thousands in Zip sales off the books that occured in Sept. Even with that 26% sequential growth is damn impressive. Name a 3 year old tech product that is still growing an annualized 252%. Lets see, how about the V.34 modem...nope. The 16-bit soundcard, nope. The 2X CD-ROM, nope. They've had production problems but KE said they are solved. All current indications are that product is flowing freely into distributors and retailers. The reported numbers of $430/$0.22 are good enough but the numbers behind the numbers are even better. How many cents in EPS are sitting in dramatically increased R&D (151 basis point increase sequentially)? how many dollars in revenues shipped at the end of Q3 that were ignored by IOM? How many cents in EPS did Iomega defer when they expensed an entire month's prime time TV commercials and a major trade show? Taking this quarter's results on the surface and talking about the resolved problems is kind of silly. The stock will trade on future expectations and there was plenty of info in today's conference call to make Smokey charge a red cape. ;-) Iomega revealed that between them and their partners they can sell more than 20 million Zips drives in 1998. If they can sell them that will double the amount sold from 1995 through 1997 give or take a million. From the carnage I witnessed at stores this weekend selling Zips for $99, I don't doubt Iomega can fill that capacity. It is late and I can't put all my thoughts down and get some sleep tonight. I was just disappointed that the obviously bullish news and results from today were not at all up on this board. 7% net margin...32.5% gross margin. Sure, Jaz disks helped but this quarter Zip+ and laptop Zip will help. Cost improvements in the ATAPI Zip also helped that number and those will continue. Plus revenues of over $550 MM will really help net margin. I feel better about owning a lot of Iomega than I have in a long time. Patrick Keeler 4+++++++++++++++++++++++++++
Subject: Re: Q3 1997 Earnings & Call Note <<OEM percentage is good news but I don't know how Iomega does their numbers. If Zip sales were up 26% and Zip OEM went from 30% to 35%, then, on a unit basis, OEM Zips increased 46% quarter over quarter. A demonstration Q2' 97: Total Units: 100 OEM Units: 30, equalling 30% of total units Q3 '97: Total Units: 126, equalling a 26% increase OEM Units: 44, or 35% of 126 units Increase, quarter over quarter equals 14/30 or 46%. How does Iomega compute theirs? Seems like they take 30 divided by 44. Not the same concept.>> I'm actually nearly 100% certain this is how it was done. There were something like 2 million total drives shipped this quarter, with 700,000 going to OEMs... [Note: 20 million or so PCs were probably sold, so the OEM inclusion rate is on the order of 3.5%, right up there with Fast Ethernet NICs, I'd guess.] Last quarter, was about 1.6 million Zip drives sold, 30% going to OEMs or 480K (approx.). From 480K to 700K was a 46% increase in OEM drive shipments. That is pretty bullish, I think if it could be maintained for another year. To wit Q2 97: 480k Q3 97: 700k Q4 97: 1023k Q1 98: 1493k Q2 98: 2180k Q3 98: 3184k Q4 98: 4648k That final figure would be close to 20% of the PCs shipped in that quarter (15% on the downside, I'd guess). That would be 4-5x the current OEM inclusion rate in 5 quarters. I'd take that, I think.... I believe production capacity of the Zip will be well over 20 million by that time, including MCI and NEC who will open the year at 1.8mm capacity and will probably close it with at least 2x that. Iomega will open the year with 14-15mm and doubtless increase that. Folks, Iomega manufacturing now is like Intel's manufacturing back in the 286-386 days. Then, the company couldn't even make 10 million chips a year. They needed second sources and got them. Today, they are a worldwide manufacturing powerhouse -- perhaps the best in any industry. Iomega is planning to get there and is hitting bumps on the way. The current bump is a shortage of some basic, simplistic ASIC that will someday be so easy to get for a few bucks, we'll look back on this and laugh. Today, the semiconductor problems Iomega is having are a serious threat to the company's growth and to the consolidation of its dominant market position. They are serious and are keeping production well below the capacity we have heard so much about. 2.6 million for Q4 sounds right, Ben, because it would continue the linear 26% increases in shipments we've had over the past two quarters. If Iomega ships 3 million Zips in Q4, it would be a watershed of sorts and a suggestion that the future is bright. With the 8 and 9 millionth drive announcements only 4 or so weeks apart despite production problems in the quarter, I'd say things are looking pretty good. A 3 million drive is not out of the question -- if they solve the semiconductor problems. [What the hell "bad metal" means beats the crap out of me.] Revenue should grow at minimum 7% quarter over quarter and quite possibly far more than 10% given the likelihood of some shifting to the higher priced Zip Plus and the high priced Jaz II. A $500 million quarter is not completely out of the question. Kim wanted his company to be a $3 billion outfit by the year 2000? Only if sequential revenue gains drop to 5% from the 7+% they are at right now... If they hit 7.5% or so, we're looking at $4 billion in revenues by 2000. Revenue growth will slow if licensees contribute more to production, but I think we can see that won't happen too much until 1999 perhaps. If it does, all it means is "free" license revenue for Iomega, higher margins, better profit/revenue ratio. Revenue growth will someday not be key if licensees account for much of the production. My guess is that Iomega went from 5 million capacity in early 1996, to 8 millon capacity at end 1996, to 15 million (guesstimated) capacity at end 1997 with the intention of ramping capacity still more in 1998 and 1998... I'm not at all sure that's a bad thing. With Alps, Teac and Sony headed in another direction right now, it's Iomega, NEC, and MCI against the world. Not too many other drive makers out there to assist... Of course, Iomega and company could seemingly build capacity to 50 million by 2000 without much trouble. 5+++++++++++++++++++++++++++
Subject: Buz KE's explanation of the delay of Buz until next quarter seemed rather lame considering the product had been brought along to the point that it is currently advertised in mail-order catalogs. KE has characterized Buz as a "tactical" or "non-strategic" product and quickly moved on to other topics in the last two conference calls. In the Q3 call he indicates that company has no intention of getting in the business of producing this type of product. There aren't any blades to sell. While the straightforward explanation of the product delay is that Iomega underestimated the compatability problems and related hassles associated with the Buz product, other explanations are possible. Here are some thoughts that come to mind... * Bringing Buz to market was/is less important than announcing the product and a $199 price point. The primary intent of announcing the product was to shake up the this market niche and encourage the companies who are in this business to bring out products at lower prices. Ultimately this would expand the use of a group of storage hungry applications and Iomega would benefit from selling Zips, but would spared the task of providing technical support for a new type of product. * Buz may have been announced prematurely, intentionally. The product is coming but was never on track for Q4 of 1997, but Iomega want to create the impression it was coming in time for the holiday season to influence the competition in this area. Perhaps Iomega never brings Buz to market, especially if others produce similar products. * Maybe Buz was being championed by T. Hill and now that he is gone management's interest in the product has waned. They might sell it if it is sufficiently bullet-proof or maybe they'll quietly drop it. I don't know if any of these musings are true, but is does seem that Buz may be effective as a "tactical" product even if it exists only as a concept, a promise, and a threat. While this all may be a tad cynical, I did watch KE market the secondary after all. 6+++++++++++++++++++++++++++
Subject: Conf. Call Followup I called Iomega this morning to ask a couple of followup questions to what was said in the conference call yesterday. MCI has been producing and selling Zips in Japan in small quantities. The big ramp up will happen when they switch to the new facility in China. When Iomega makes their millionth Zip milestone announcements, it does not include drives sold by others such as MCI. It only refers to drives sold by Iomega. 7+++++++++++++++++++++++++++
Subject: home computing More good news on a good day... From this month's Home Office Computing magazine reviews of 11 desktop systems. ...``A pleasant surprise as we unwrapped these systems was the widespread adoption, on both [Mac and PC] platforms, of an included Zip drive, which can store up to 100MB of data on a single cartridge. This drive has received many accolades from us... and it was equipped on six of the 11 systems we reviewed.'' Paul Loop 8+++++++++++++++++++++++++++
Subject: Re: Conf. Call Followup << Can you imagine if IOM announced in September that they had component shortages and had shut down Zip and Jaz production lines for a week to 10 days? The stock would have tanked, margin calls would have been rampant, wide spread chaos, etc, well, it would have been quite an anxious time for us anyways. >> I am quite surprised that we didn't catch wind of the production shut-downs, as they could not have occurred without knowledge of the stoppages being widespread throughout the company. The entire company deserves some kudos for keeping a lid on the production problems, especially when a leak could have caused some damage to not a few portfolios. This episode underscores how sketchy things are to us... we see through a glass darkly, etc. Hence the endless arguments on this board over petty details (who cares what "shipping" means? There is no disagreement as to where the drives are, is there?). We are trying to assemble a jigsaw puzzle with half the pieces gone. Let's try to be generous with each other, and realize how hard it is to make sense of things on limited information. 9+++++++++++++++++++++++++++
Subject: nHand Surprisingly to me, the one conference call topic that hasn't been extensively discussed is n-Hand (except for one or two individuals who mentioned they expect an OEM announcement at COMDEX). Though I did not expect any contribution to the bottom line for a year or more from n-Hand, I recently had begun to wonder if the product had fizzled to a likely no-show and maybe they were condeding to flash. That was disappointing because I felt it could add a whole new dimension to the product line and compliment the Zip-Jaz lineup very positively. So during the conference call I was extremely pleased to hear KE state more than once that n-Hand would be "center stage" at COMDEX and that "major changes" have been made. Those who listened will remember KE implied that the changes are vast improvements over the product shown previously. While frankly it did not occur to me at the time he made those statements that an OEM would be announced at COMDEX, it did occur to me that this was the most positive news I had heard about the product and that once again I am anticipating it may enjoy major success. Interesting that IOM is already shifting workers from the Ditto line to n-Hand and that Fuji is (from my notes) "active with n-Hand." I recollect that KE mentioned the quarter (? Q2 98) he expected product to ship but can't find that in my notes. Anyone? 10++++++++++++++++++++++++++
Subject: Re: Press coverage of Earnings << While First Call had IOM's estimate at 20 cents per share, I understand that Zack's had it pegged at 22, which is what Iomega reported. >> This is correct. Zack's based its consensus estimate on five analysts. One was at $0.20, two were at $0.21, one at $0.22 and one at $0.25, for an average of $0.22 (or $0.218 to be precise). I believe the high estimate came from Emerald. Without that outlier, the average would have been $0.21. Incidentally, Zack's reports three five-year growth estimates. One is 40% and two each are 28%, for an average of 32%. Perhaps that can help those attempting to calculate a YPEG. 11++++++++++++++++++++++++++
Subject: Channel Checks? I would be interested in hearing from other people who have made channel checks, to see if they notice more product on the shelves. My local CompUSA (Garden City, Long Island) has had only a few external SCSI's for the last week. Very disappointing as for the first time there was a much stronger prescence of EZFlyer's and LS120's in the store. I must confess that while I am happy that Iomega was able to adequately supply OEM's with Zips, I can't help but wonder about the expense on the retail side. How many people bought Syquest or Super Flop's because they could not get a Zip drive. My experience visiting the CompUSA mentioned above twice this week was quite sobering. In the half hour or so that I stayed on Columbus Day and three days later, I saw 2 EZ Flyer's purchased and two LS120s. This was the first time in all my visits to this store that I ever saw an LS120 purchased and maybe the second time any Syquest product was bought. I specifically asked two of the buyers why they were buying what they were buying. One Syquest buyer said this was the second time he had come to the store looking for a parallel Zip and he did not want to waste anymore time. I told him that the Computer City store several blocks away had Parallel Zips but he bought the Syquest anyway. The LS120 buyer said he had heard that the LS120 was faster than the Zip. (I guess we shouldn't underestimate the influence of that misleading magazine article) and he also said that with the $100 rebate this drive was only $49. (I guess the well advertised $49 price was attractive.) I explained to him that I could only buy a Zip drive because all my business associates and friends had Zips and in order to exchange information it would be a waste for me to have anything else. He said that he was basically a home user and that sharing information was not important to him. My point is that I believe that beyond losses in revenue and earnings, supply problems can have a broader effect. As an Iomega shareholder it was very painful to see 40 EZ Flyers and about 100 LS120's prominently displayed with only 5 SCSI Zips available. Perhaps I am being skewed by one store, one week. However I would be interested in hearing other peoples channel checks and observations on Iomega's retail prescence. 12++++++++++++++++++++++++++
Subject: new syjet ad in the business section of todays kansas city star there is a 1/4 page add for the syjet. heading: cooperstown.com followed by a large photo of a kid making a diving baseaball catch. below picture: 'My kid loves baseball (in bold). Goes on to say: ''Everything baseball. He goes ont he web for hour checking out this site and that. he's downloading pictures, video, and webcasts of the games. He spent hours at the basball Hall of Fame, cooperstown.com, trying to download the whole museum. I think it's great, but between that and the three rotisserie leagues he's in, it was starting to make my hard drive feel like a squeeze play. So I bought a Syjet drive from Syquest. The thing's great. It was $299 for THREE GIGS, including the hardware. Now if he could just trade for Ken Griffey, Jr. everything would be perfect. This offer available at CompUSA, Computer City, etc. etc. Shows picture of Syjet and disks and big Syquest logo. Fine print says rebate valid through end of November. All in all, if you take time to read the ad its not bad. But until I saw the pic of the drive, I would have guessed it was an ad for the bball Hall of Fame website. _______________________________ End Report. Posts covered through 9:00pm ET 10/19/97. _______________________________
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