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Wednesday, October 22, 1997 Tuesday, Iomega closed at $28 3/8, up $1 7/16 (+5.34%). TODAY'S RECAP: While the Iomega message board was as busy as usual, a few particular posts made a significant impact on the day's discussion, most especially the one reprinted below from ~Benjamin70~ on valuing Iomega. The final transcripts from the 3Q conference call were also provided, and ~TMF Debit~ compiled them all together (they can be found under the Evening News section off of The Motley Fool main screen). 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++ SGOWLER ponders SyQuest's marketing and product durability.
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 10/20/97. 1+++++++++++++++++++++++++++
Subject: SyJet marketing I'm a little curious about the stated target market for the SyJet. "People whom have never purchased a peripheral drive for their PC" (Paraphrase) I have heard huibs can throw a Zip disk across the room and have it work perfectly. I've heard that Jaz Carts are fairly rugged for their type, but won't withstand a three foot drop. Why would SyJet carts stand up better than Jaz's? If the SyJet carts are fragile, why target the unsophisticated user? Won't the risk be that SyQuest will get a large amount of drive returns? I've also read that the SyQuest driver and installation software is buggy, and a bit difficult for the average PC owner.... so why target this market? Iomega has not pushed its Jaz ads into the mass consumer market and has instead concentrated on sewing up the high end, with reliability (relative to the industry), and service (Frank Forsythe VP) The professional product division of Iomega has dominated, in part, due to the failure of SyQuest to produce reliable, compatible products. Whereas Iomega can demand a premium for their products here because the products work.... they don't lose your valuable stuff. No one who got burned by SyQuest before is going to get sucked into buying a device from them "because its cheaper". Thus the campaign to target a market untouched by the stench of prior SyQuest ownership. I think SyQuest is gonna sell a lot of Syjets over the next two Q's.... I think they are gonna get a lot of 'em back. 2+++++++++++++++++++++++++++
Subject: Installed Base Valuation Installed Base Valution: October 20, 1997 I recently suggested that one method of valuing Iomega would be to consider the value of each installed base drive. The appeal of such an approach is obvious. The disk sales, which almost everyone seems to agree is the financial appeal of Zip to an investor, can be viewed as an annuity. It is these anticipated, future cash flows the astute investor is purchasing. STEP 1: THE INSTALLED BASE To start, of course, we need to have installed base figures. CHART 1 Below is a chart of IDC estimated install base (9/97 report), my original estimate of Iomega's installed base of Zip, and my revised estimate of installed base. Please note that Zip installed base contains all Zip drives, not just Iomega branded Zip drives. Also note the IDC installed base numbers are for all super-floppies, not just Iomega. (000) 1997 1998 1999 2000 INSTALLED BASE IDC 13,155 25,689 45,211 72,902 IOM 12,000 24,000 40,000 66,000 IOM (revised) 12,000 29,000 55,000 85,000 I chose to make an estimate for 2000 but with the caveat that such things are just exercises in silliness. My guess is even Iomega doesn't have close to an idea themselves. Folks seem to dislike loons so much, I'd say it be plain ducky to believe a 2000 estimate has any real value today. That includes mine. The next problem is dealing with the market capitalization -- I could use enterprise value where cash is subtracted out and debt is added back, but I'm trying to be simple, hence the round numbers, hence the market cap. CHART 2 Iomega has a market cap currently of about $3.7 billion. A few tens of million doesn't change our analysis that much so again, please don't get caught up in the details -- yet. :-) So, below is the market cap of $3.7b divided by the Iomega installed base numbers as given above. 1997 1998 1999 2000 $3.7b cap IOM $308 $128 $67 $44 What these numbers represent is the value per installed drive as of the end of the stated year. STEP 2: REFINING THE MARKET CAP NUMBER This, of course, begs the first obvious question: Should Iomega be valued on Zip alone? By dividing the whole market cap by installed base we are valuing Iomega as if there were no other revenue or earnings streams. Obviously, this is a large confounding factor but the question of how to resolve it is not so easy. I chose a relatively simple solution that does cause problems. However, I feel I can defend the decision. I estimate that Jaz will account for around 30% or revenue this year and slightly less than that in gross margin. Leaving Ditto and Other aside, I decided that I can cut 30% off of the market cap to account for revenue and earnings from other streams. The problem isn't doing that for this year and for 1998, but futher out as huge -- and I mean huge -- question marks such as n.hand begin to factor in. Will Zip account for 70% of revenue/gross margin in 1999? I don't know. I can't know. Iomega doesn't know. But for this year and next, I am comfortable with it. CHART 3 So, I take the $3.7b market cap and subtract 30% of it to leave a "Zip Market Cap." which lops about $1.1 billion off of Iomega's market cap.. A quick reality check is whether the Jaz, n.hand, Ditto, and other divisions would be worth $1.1 billion. Could they be sold for that much? I'm unsure. But it doesn't seem outrageous so I'm somewhat comfortable with it. 1997 1998 1999 2000 $2.6b cap IOM $215 $89 $47 $30 STEP 3: FINDING MEANING IN THE STARS I have a few observations, though I again caution that the assumptions, in aggregate, can affect this valuation, including installed base and the worth of Zip in relation to all other parts of the business going forward. However, I don't feel completely uncomfortable with 1997 and 1998 installed base numbers and the ~$1b price for Jaz/Ditto/and all other Iomega products besides Zip seems somewhat reasonable. I would, of course, appreciate any input on the subjects. (1) We have to understand what the numbers represent. $215 in 1997, for example, means that Iomega is currently market valued ($27/per share) at this price per the 12 million installed Zips I assumed for year's end. Literally, one can say that each installed Zip as of 12/31/97 is expected to generate $215 of future cash flow -- revenue -- for Iomega. (2) But doesn't that depend on tie ratios which no one can estimate over the entire life of a Zip drive? Yes it does. A serious problem. To compound it, Iomega expects OEM drives to have about half the tie rate of aftermarket drives. Back to that later. STEP 4: LOOKING FOR GOLD IN A BUSTBIN I'm sure some enterprising young soul is going to look at the above and yell, "look at 2000, only $30/Zip, this stock is undervalued!!!!!!!!!" Beyond the questionable use of exclamation points, there are a number of problems with such a statement. One problem is that the installed base number for 2000 is perhaps the riskiest. Ducky, loony, daffy, sneezy, doc, and whatever that bashful one was called. For example, we can view each year's installed base as having a certain probability of being within, say, 10% of estimated. Assign a 95% probability to 1997, as the year is almost over and we seem to have a good idea. For 1998, however, the probability would be lower. Say 75% and so on. Finally, for 2000, what is the probability that Iomega will have an installed base of 85 million? Well, if Iomega didn't hit its installed base in 1999, then there is an even lower chance of making it in 2000. Therefore, there is a huge uncertainty assigned to the 2000 number, less to the 1999 number, even less to the 1998 number and still less to this year's number. As the year's flow by, the certainty levels -- and the estimates no doubt, will fluctuate. This risk, this uncertainty, is what makes a market. Those who claim to know Iomega will have an installed base in excess of 85 million in the year 2000 obviously either have a time machine, don't take their medication on schedule, or just like pretending they know something when they really don't. It is just an estimate. No more. A loony one at that. I know. I made it. As well, there are further complications for those bent on grabbing whatever metric is nearest, hoisting it to the night air, and crying the shrill cry of the Iomega Bull in a Mating Call: "UNDERVALUED!!!!!!!!!!" Beyond installed base uncertainty far out, we also don't have a clue as what a disk's retail price will be, or Iomega's revenue per disk will be in the year 2000. And we still have that damn nagging problem of tie ratios. STEP 5: CASH FLOWS EXPLODED Regardless, examing the 1998 number leaves us wondering whether the expected future cash flows of disk sales off of the installed base will come close to $90. How do we know. In otherwords, if Iomega never sold another Zip drive after 12/31/98, not a single one, and all there were in the world were those 294 million installed Zips, what would each Zip be worth? These questions get more complicated when we wonder whether current installed base of Zip can be leveraged into other sales, such as Zip plus, Jaz, n.hand, etc.. However, we removed the non-Zip items from the market cap -- one problem with doing that is now highlighted. However, what about leveraging Zip installed base into say, future Zip versions? There is a danger there, in that you may just be replacing the installed base and not growing it, as well as the risk of angering your customers with too short product life cycles. However, a future version that accepts Zip100 disks is definately a possibility -- though I hope it doesn't come too soon, Sony/Fuji or not. The question is, do we merely equate this number to the future expected cash flows from Zip disks or all future expected cash flows from that customer? In otherwords, is it the Zip we should value or the Iomega owner? We get touchy here. My opinion is that only disk sales should be considered. There is enough risk, enough assumption, enough squishy, loony, sneezy, doc, and bashful type thinking around here. STEP 6: CAN WE GET A LIFETIME TIE IN OUR LIFETIMES? Can we even estimate lifetime ties? I tried and tried and tried and came up with about 20. OK, that's partly a joke, partly not. Kind of like looking for the meaning of life, finding it, and it turns out to be four. Strange, huh? Actually, no one knows. Not us, not Iomega, not anyone. This is really future stuff that depends on installed base, future technologies, world peace, whether the Rolling Stones will still be touring in 2000, as well as a host of other variables. I actually contend it doesn't matter much right now. We know it is bigger than a bread box and smaller than an elephant and probably won't matter in five years anyway as technology life cycles will have stomped this by then. STEP 7: VALUATION TODAY: THE DIRTY SECRET Can I actually say Iomega is undervalued today? It depends on how you look at the numbers and how closely you want to abide by my asumptions. I would tell you not to abide by my assumptions at all. :-) Loony. Scary. Halloween. Ooooh. We've had to make some pretty heavy assumptions to get here, including installed base numbers, market cap splits, lifetime Zip ties, and possible (and nebulious) future Zip drive versions leveraged onto the installed base. Makes one appreciate what an equity analyst might go through, right? Any change to any of these variables can have a relatively large effect on the bottom line answer. This isn't meant to sound wimpy, just that there is a significant amount of interpretation in all of this and that is exactly what I mean when I say there are no pat answers to the question of Iomega's valuation. Value/Drive 1997 1998 1999 2000 $2.6b cap IOM $215 $89 $47 $30 Let's look back at this for a moment though. Obviously, if Iomega could get to an installed base of 85 million and we knew that as a certainty right now, $30 per drive would be cheap. Right? At today's prices, that would equal about 3 disks per drive over its lifetime. Drop prices by 50% and, depending on the timing of the drop, we ain't looking at scary disk ties. But we don't know that. We hope so. But 2000 is a long way's away. Even if we did know this for a fact, just to get crazy, we don't know the tie, so we couldn't say what a fair value would be, right? Right. Am I saying there is no way to value Iomega using this method? STEP 8: REALITY CHECKS Actually, we don't need to really know the tie. We do need to keep our feet rooted on terra firma. Something some folks seems to avoid at all costs. What we need to do is estimate what we think each installed Zip is worth. However, we need to keep in mind that not all these Zips will be created equal and that we are considering the Zip after purchase, so the purchase price doesn't get included. What I mean by not all Zips are created equal is that we need to work with a weighted average of sorts. Some Zips, in 1999, will be brand new, some will be four years old. Some will be purchased unwittingly with a new PC, some will have been specifically bought in the aftermarket. No two Zips will generate the same expected future cash flows. Some will be more, some will be much less. Don't take your own, biased experience and extrapolate out. When you sell 55 million units you have exhausted the supply of "enthusiasts" and have entered the realm of "bored folks who can't change the clock time on their microwave oven let alone walk into a Comp USA and buy some Zip disks." STEP 9: DO RE ME ME ME ME ME What do I think an installed Zip will generate in future, expected cash flow to Iomega? If you have stuck it out this far, you're either as loony as me -- ducky, I mean ducky, no more posts with my name as the subject -- how boring already -- or you are a glutton for pain. Just for you, my opinions. Please, ignore them and make your own. Please. I don't know. I don't think $215 is realistic though. That doesn't mean I think Iomega is over-priced because the $215 is predicated on Iomega never selling another Zip after the last of the year. That just ain't so. I do think something on the order of $100 to $150 isn't too outrageous. But I don't know. What would that mean? It means that depending on installed base levels, I ain't short -- contrary to the reports of the mentally disabled. I'll illuminate. At $100 a Zip, the installed base of 86 million, if it ever comes to pass -- a bigger if than some folks care to admit, ackowledge, or even consider -- would be valued at $8.5 billion. Remember, that is only 70% of the market cap so we need to divide by 0.70 to get the total market cap. That gives us a market cap of around $12 billion dollars or about $87 per share, about triple from where we are now. That valuation is really only valid when we have a firmer grasp of installed base and expected future cash flow per installed drive. We'll know more next year. But here is a look at market caps and equivilent stock price with installed base worth $100/drive Value/Drive 1997 1998 1999 2000 $100 Per drive Market Cap $1.7b $4.1 $7.8 $12.1 Stock Price $13 $30 $57 $88 To show you how sensitive this is to even one variable -- a small sensitivity analysis -- here is the same chart with my high-end value per installed Zip of $150. I'm more comfortable useing $100 per drive but show how this effect isn't merely Value/Drive 1997 1998 1999 2000 $150 Per drive Market Cap $2.6b $6.2 $11.8 $18.2 Stock Price $19 $45 $86 $133 Remember, however, look forward and apply a risk factor. The market looks ahead but discounts for risk. STEP 10: BARNES STUBS HIS TOE -- REPEATEDLY I think, contrary to the enourmous amount of nasty emails -- and I'd like to thank folks for the nice emails I've gotten -- that Iomega has under-performed operationally so far this year. A disk recall and line shut-downs don't exactly sound like a Baldridge type company to me. I think Q4 '97 may give us a sign of 1998. Maybe. If they blow it, I'll scream. If they start to get it together, deal with quality suppliers -- anyone miss Intel now? -- get their act in gear, perhaps these installed base numbers may actually come to pass. Barnes has done a pretty good job of dropping stuff on his foot. Hasn't killed himself -- yet, but that toe sure is swollen. Anyone can talk about quality, but eventually you have to prove it. Iomega has to show they can do it. Period. All tha jabbering on these boards is worth nothing. Including mine. And yes, I understand both points, the first about operating at capacity and the second about Edwards saying they cleared up all problems. To answer I say, recalls and line stoppages are different than operating at peak efficiency. These are blunders, large ones. Ones large enough to merit public admission from a company that usually tells us clsoe to nothing. Second, new problems seem to pop up and not even the venerable Edwards can see the future. Also, what was the deal with the NC distribution talk? STEP 11: IF AND IF AND IF AND I own this stock partially because of this type of valuation. I'm not saying an installed-base valuation is the best choice with Iomega, but others have so many problems I figured it was worth a shot. It shows, based on my opinions and assumptions, that there may be some considerable upside if Iomega and friends can produce in a timely manner and if the Sony/Fuji product and every other challenger sure to come doesn't squeeze Iomega from the scene and if the installed base actually keeps growing to these levels. I actually think that 1998 will be extremely significant because, in all liklihood -- and by my estimates -- the installed base may grow in excess of 100% to a level I would consider relatively close to "barrier to entry." Of course, if Iomega doesn't produce 14 million Zips next year...pooof...lots of this goes out the window. However, $87 a share doesn't seem so bad to me and I like the "odds". There is a risk. Recognize it, understand it, talk about. It manifests itself in many ways, from operations to competitive to legal. Risk is what makes a market. There is no certainty. No matter how many exclamation points someone puts on the end of a sentence. STEP 12: THE END This isn't a 12 step program. See you on the flip side. Hope this has been fun. 3+++++++++++++++++++++++++++
Subject: IOM & The Future of Memory Interesting article in November Wired issue, pg 102, titled "The future of memory". They asked 4 experts to speculate about the future of the 1) The Floppy Disk 2) Solid-State vs. Magnetic Hard Disks 3) Terybyte Hard Disks for PC's 4) Holographic Storage Media. The experts are: John Celi - storage technology marketing mgr., Digital Equipment Corp. Ted Chen - vp of marketing, Storage Dimensions Al Hoagland - founder and director of The Institute for Information Storage Technology @ Santa Clara Univ. Roder Reich - technical marketing mgr., Maxtor Corp. The answers are given in the tables below in the form of "liklihood" and the year you can expect to see the event considered: Death of Floppy Solid-State replace Magnetic Hard disk Celi unlikely 2010 Chen 2001 unlikely Hoagland now unlikely Reich 2000 unlikely Terabyte Hard Disks Holographic Storage Media in Use Celi unlikely 2007 Chen 2004 2004 Hoagland 2006 2002 Reich 2015 2010 The article states that hard disk storage is selling for less than 7 cents per megabyte, as compared to $6/MB for solid-state. The article states that "In recent years, 3.5 inch disks have been pushed aside by Syquest syjets, Zip and Jaz Drives and other removable media. But when will floppies become nothing more than kitschy coasters? According to Reich, 'floptical technology or DVD-RAM will have a sufficiently low cost to replace the floppy in the next few years.' Chen agrees that DVD-RAM - today's disks can store 2.7 gigabytes of data per side - or a next-generation Zip drive will soon become the standard.'" 4+++++++++++++++++++++++++++
Subject: Re: HRPlbg's n.Hand Concerns D Turkey wrote: << ... n.hand: 20MB for $10 = $0.50/MB Zip: 100MB for $10 = $0.10/MB I can't see anyone wanting to use n.hand disks for real long term storage. ... >> There are things called convenience and time saving which are truly justifiable for the trade off of cost at certain occasions. I am not a lawyer who bills people by minutes and hours so I shouldn't talk to myself like one of those professionals. Or, I shouldn't talk to others like a high pressure salesperson either. But I have to ask here: "How much is your time worth? Does convenience mean anything to you?" Don't get me wrong. I am not one of those strike-it-rich yuppies who like to brag about how powerful and important their time become by spending money thoughtlessly. They usaully claim they have saved thier much more valuable time by spending the money. There are lots of people like that. Most of us here aren't otherwise we won't be spending time posting. Just the opposite, I consdier myself the frugal type of person. But I do spend money and spend it to achieve simple, quiet and peaceful living. I don't like TROUBLES. It may not entirely be money, not even time, not entirely. I don't like the AGONY of having to go through cumbersome procedures. I think HeyKerry has made it very clear. You can leave images on inexpensive (very inexpensive when compared to flash memory modules) n.Hand disks and can carry them around with the digital n.Hand camera for highly mobile slide show and presentation. You may avoid the TROUBLE of Having to Upload and then Download again ....the AGONY. The TROUBLE may be there when you try to "save" money by reusing n.Hand disks. Besides the possibility of showing the images on the small screen on the back of camera, some n.Hand digital cameras may have the AV or Video output connection for direct hook up to TV/monitors for viewing, hopefully. Currently, we don't know of any simple Zip drive device that has an AV or Video output that can connect directly to TV/monitor for viewing images. The whole issue here may be the balance between Cost vs. Convenience. There is an optimal, not the best or most. It seems Iomega's strategies, including n.Hand, may try to hit the optimal. Look, some new 1.44MB disks may be free or close to nothing after rebates. If you only look at Cost/MB, people should just try to collect AOL sample 1.44 disks and reuse them and shouldn't even equip their computer with a hard drive. Of course, I have exaggerated here. Let me repeat here. Users may leave images on n.Hand disks for everyday viewing like photo albums for snap shots. They may also back up images to Zip disks or Jaz disks for important and favorite shots. Very likely users may do both !!! n.Hand camera users may not want to erase good images from the n.Hand disks just to reuse the n.Hand disks. They may simply want to buy more new inexpensive n.Hand disks when they want to take more shots. As a consumer, I think the $10 n.Hand disk (hopefully slightly cheaper some day) is very reasonable. You may see people wanting to use n.hand disks for real CONVENIENT storage. ... Users who capture images on n.Hand disks may simply leave them on n.Hand disks. _______________________________ End Report. Posts covered through 9:00pm ET 10/21/97. _______________________________
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