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Wednesday, January 28, 1998 Tuesday, Iomega closed at $8 1/8, down $3/8 (-4.41%). TODAY'S RECAP: Despite a continuosly slipping stock price, the Iomega message board posters proceeded to debate issues such as advertising, jobs, earnings, support, commercial ideas and more. In addition, the post from ~D Turkey~ is a forwarding of thoughts on IOM's 4Q earnings report by a former board participant. 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++ Janovsky1 proposes a new Iomega commercial and song (with lyrics).
Recap written and posts compiled by TMF Weekly. _______________________________ And now, the Best of the Board...Started 9:00pm ET 1/26/98. 1+++++++++++++++++++++++++++
Subject: His drive went Zip Zip Zip Here is the ad I want to see!!! Does anybody remember the song "Beep Beep", circa 1950's? About the Nash Rambler and the Caddy? "Beep Beep, Beep Beep, his horn went Beep Beep Beep". And so on. Anyway, I think the most addictive ad possible for Iomega would be to license this song and rewrite it for "Zip Zip". I've written some proposed lyrics below- tell me what you think! Here's why I like my idea: 1) It says ZIP a million and a half times 2) It's not just catchy, the song is ADDICTIVE!! Everybody I know loves the song "Beep Beep", from 10 year olds to 100 year olds. The song is fun to listen to and sticks in your head. People would TRY to learn all of the new lyrics and would actually HOPE for the ad to come on! (Or maybe it's just me & my odd taste in music and humor???) 3) It tells in a fun way why the floppy sucks and the Zip is great, and that they are new and cool and organize your life 4) Tells about durable disks for anybody considering the SparQ OK, here goes. If you remember the original song, it starts off really S L O W (like the floppy), and moves very FAST towards the end (as we learn about the Zip). Enjoy.
One day Jim bought a new PC, zip zip, zip zip, he thought his machine had zip.
So now he's doing downloads, zip zip, zip zip, the floppy had no zip!
He had his games his kids had stuff zip zip, zip zip, the old drive has no zip!
So then Jim heard I-O-Mega Zip Zip, Zip Zip, he asked about the Zip!
The salesman said Zip is real fast Zip Zip, Zip Zip, Jim bought himself a Zip!
He put his stuff on new Zip disks, Zip Zip, Zip Zip, this new drive sure had Zip!
Well Jim he loved his drive so much (remember the last verse has a slightly different tune) So what do y'all think? Wouldn't something like this appeal to the mass audience? Techies and otherwise. Playing off the Intel theme of using catchy music to get consumers into your BRAND AND PRODUCT, not one or the other like IOM has been doing thus far. Thanks for any input. 2+++++++++++++++++++++++++++
Subject: Clik! Job Fair Visit I was in the area so I paid a visit to the employment open house IOM's new "Mobile Storage Division" held at a hotel in San Diego today. My impressions: This division is expanding very fast. From what I could gather, IOM is looking to fill 35 technical (i.e. engineering) positions in this current round of hiring. They hope to add 100 new people this year and 600 in the next two years. The "Mobile Storage Division" has begun (this week) to move into a new building which is up the street from their current location. Actually, the building is not "new" (judging from the plantings around the building) but looks like it has been completely changed in the inside (judging from the construction activity and a peak inside). Perhaps this type of expenditure is "normal" when a company is starting a new division, but I can't help but feel that this is a lot of hiring and building for a division that has yet to sign its first OEM or sell its first drive. I hope it means that management is extremely confident about the clik! business. 3+++++++++++++++++++++++++++
Subject: Re: Remember Norton Zip Rescue and Zip being bootable makes the Zip Drive more of a whole product. It becomes a better and more complete solution to the corporate buyer. This is the type of value added that the market leader is supposed to supply. The ads will take time for some. There are millions out there who own PC's who don't know what a Zip drive does... hard as that is to believe for the diehards here. Others will recognize Zip right away; some will buy disks. Others will eventually buy a new PC and see the Zip Built In as adding value from a new company of substance. The Super Bowl isn't just a Football game. It is the place where Corporate America rewards its stars; schmoozes its customers... People fly in from all over... and watch the game on TV's in a Hospitality Tent outside the freekin stadium. Iomega's presence there should open minds to the Iomega brand and products... follow through over the next weeks is crucial. On another note; I have seen too many people deride Iomega's products as "commodity disk drives" First, commodity products aren't always bad. If you are early enough in the life cycle of product. If Iomega begins to replace the floppy with Zip, we have a long profitable way to go. Secondly, if the company services its installed base with disks... I still don't want to blame Purkis... I don't have the evidence... and I know he hadn't planned on holding Jaz2 back. He has managed earnings through operations disappointments before. I think he and KE got blindsided at the end of the Q. I think KE was embarrassed to show up at the CC short EPS when he thought he had a winner 90 days before. I do want somebodies head. Whoever blew the Jaz2 intro. Whoever is still futzing with Buz (how many of those are sitting in inventory?) Whoever can't seem to put a link to the Laptops on the web page. Lost sales and lost opportunity. Still no permanent replacement for Tim Hill (who is now beating the drum for AGS); yet a 100M ad campaign that is gonna be treated like the bastard stepchild by the new person if it isn't 100% a winner. How many people would want to be responsible for ads they didn't chose? I think the field just narrowed to those in the biz with no ego..... ummmmm.... anyone? 4+++++++++++++++++++++++++++
Subject: Re: IOM=DOG As you know, I have on several occations chastised you for what I perceive to be frivolous posts. I don't know what your motive is but nonetheless, at present I empathize with your frustrations. Frankly, the bragging of how you did as a trader dosn't sit well, as most amateur traders win a few and lose more than if they were to just pick a company that they feel is undervalued, with a great upside potential, and stick with it through thick and thin unless the fundamentals change. Do you really think that the potential of IOM is less than when you first began investing in it? If you do then get rid of it and go on to something else. For myself, this is an unusual company that fear, greed , anger, and hope, permiate the background of investors far in excess to most stocks. They have a strong balance sheet, unlike when it was initially hyped up to unrealistic levels, and when the bubble burst the results were devastating to many who were caught up in the madness. The times have changed materially for the company, and now it is a real growth company with excellent earnings and positive cash flow that does suffer growing pains. Each time it trips on one of these errors, the skeptics and those that were previously injured are waiting in the wings to try to drive it back down with " I told you so" negative furvor. People get spooked and give up, and as I stated on an earlier post " Accentuate the Negative, Eliminate the Positive" ( for those of you younger than me, this is a twist of a WW 2 song), and right now has been driven down on frivolous negative interpretation of missing their analysts concenses even though they did this by misguided choice ( they didn't have to miss, and underestimated the fallout IMO) when in reality the Year and the quarter were excellent for IOM. Not to harp on the point, but I too feel that KE didn't live up to his prior excellent CC presentation he demonstrated in the 3rd quarter presentation, my guess he was unprepared for all of the negative reaction on the slight miss, when the report was otherwise quite good. Bottom line, The future looks very bright, they must strive to eliminate the errors in managing new products and production. The competition will always be overly accentuated by skeptics, so learn to live with it. I just wish that all of my shares were purchased at present levels, as IMO it is a tremendous buying opportunity, even if it goes down a point or two from here, the possibility of it not, and of taking off higher seems greater to me. Bernard Baruch was acclaimed to be the Wizzard of Wall Street,and was quoted to have never bought at the absolute bottom or sold at the top,( hear this Tokyo Mex, and you CSnyder?) and yet he was extreemly successful! What started out to be a short E-mail to CSnyder alone, turned out to be a lengthy post on the board, and I appologize to all, but guess I had to get it off my chest. I don't have spell checker on AOL so hope I didn't make too many mistakes. 5+++++++++++++++++++++++++++
Subject: Clik article in Popular Mechanics Don't know if this was posted already but here is a link to a Clik article in the 2/98 edition of Popular Mechanics. FWIW.
http://www.popularscience.com/ 6+++++++++++++++++++++++++++
Subject: My Take (Benjamin Lipman) This is in two main parts. The first is a look at Q4 by the numbers and execution. The second is a look into the future and what 1998 holds, including valuation issues. THE FOURTH QUARTER NUMBERS: The Candy Doesn't Taste So Sweet Iomega's operational problems continue to plague the company. I have frequently in the past called into question exactly when Iomega would execute even to within 80% of ideal. Every quarter there is usually an operational problem that left, in Iomega's own admission, revenue on the table. This quarter was no different and componant shortages were blamed for Zip Plus not shipping in quantity. I recall Edwards' comments last quarter that problems had been hammered out. I also recall my skepticism. It seems it was not misplaced. Top End: No surprises here. Iomega was shy, not because of the mythical "Asian" problem -- which continues to call into question Iomega's relationship with its shareholders as it has frequently dispensed excuses that make little sense -- but because of the premature Jaz2 announcement, delay of other products, lack of production quantity with Zip plus and laptop Zip, and general softness in the growth rate in Americas sales. Revenue growth was rescued by Europe which had, for many firms, an exceptional quarter overall. Gross Margin: Gross margin of 33% was barely 50 basis points above the Q3 level. I think the light gross margin came as a surprise to Iomega which seemed to be expecting a greater increase quarter over quarter. However, Zip Plus, Jaz2, and laptop Zip, all of which carry higher gross margins than the "mature" products (Zip and Jaz) did not ship in quantity or at all last quarter. This must have had a dragging effect on gross margins. The comment about OEM tie rates disappointing is comical considering OEM sales are the general goal here as aftermarket cannot sustain Iomega forever (to wit, how many after-market 3.5" floppy drives have sold in the past 5 years?). SG&A: Again, Iomega seems to have missed its mark. While Iomega did "warn" -- and for those who claim Iomega gives no "guidance", take note -- last quarter that SG&A would increase, the 200+ basis point increase, or an extra $12 million or so over Q3 percentage of sales levels, seems to have hurt Iomega quite badly. I suspect that legal fees ate a larger percentage of that $12 million mistake than advertising did, but that is based purely on empircal evidence. In any case, Iomega's bloated SG&A definately cost them dearly ($.02 for those doing the math). However, blaming a $1.4 billion market cap loss soley on the SG&A is silly. Iomega expected an increase in SG&A in Q4, but perhaps they also expected an off-setting increase in gross margins. Beyond the Numbers: Beyond the numbers, Iomega didn't exactly perform so well. First, I would have to say that the conference call was less than inspiring, not so much as for what was said, but how it was said. Clearly, Edwards should have given more detail on the $100 million ad campaign. It definately sounded like a hail mary pass to me. Not exactly confidence inspiring. However, this brings up a more important point, one I have tried to voice for almost three years: Iomega's relationship with Wall Street, including its retail investors. Iomega has, in my opinion, never dealt with Wall Street in a manner befitting its newfound "mid-cap" status. First, the continual use of transparent excuses -- such as Asia -- only kills whatever shred -- small shred -- of credibility Iomega ever had. Second, Iomega's inability to communicate effectively, such as presenting the $100 million ad campaign as a last-minute reaction rather than as a well-thought out, in-the-works for months plan is just inexcusable. Third, Iomega should be treating both its analysts -- the few it has -- and its investors better in terms of information. What was the tie ratio last quarter? The "corporate secret" excuse doesn't even come close to cutting it anymore -- as witnessed by the practical admission of Zip sales last quarter. The lack of guidance to analysts and investors is childish. Iomega does give guidance, just not very well. Bottom line, Iomega had better learn how to handle Wall Street and its investors better. Wall Street decides valuation and right now that valuation speaks for itself. The take-down of numbers due to the ad campaign also speaks VOLUMES about how much credibility Edwards has with the few analysts even willing to care at this point. See my analysis below. Summary on the Quarter: All in all, the blame rests SOLEY on Iomega. Marketing never should have been given the go-ahead to announce a product before it was ready. Iomega has YET to successfully introduce a product. Jaz, Jaz2, Buz, laptop Zip, and Ditto Max have all be botched in some way or another. Zip Plus was an unannounced intro, but the lack of componants also puts that one in the "failure to execute" pile. Pitiful. The gross margin lack of increase -- even in the face of favorable interest rates -- is the fault of Iomega and their product introductions. Period. In terms of SG&A, Iomega may have indicated to the analysts earlier -- say November, but they probably did not because of issues relating to Edwards' sale of stock -- that SG&A would not be compensated for by the margin increase. Numbers would have been lowered, as has been done previously. Again, I suspect Iomega was extra cautious due to Edwards' sale. Consider that. Operational the quarter wasn't a disaster, just the usual batch of mistakes that puts Iomega at maybe a 70% operational level. however, in terms of communication and accountability, Iomega fell flat on its face. Blaming Asia and OEM tie rates is just plain hubris. The small amount of accountability taken in the conference call does not come close. Iomega killed any relationship it had with those few analysts willing to stick their necks out. I'm sure all the others have taken notice. Iomega had best learn how to communicate with Wall Street. Its CFO and IR department don't seem to have a clue and Edwards' presentation of the ad campaign proves he should stick to running the company and letting others talk about the strategic direction shifts. The only one who can kill Barnes is Barnes and boy is he doing a damn good job of it too. THE FUTURE: the $100 million Ad Campaign Iomega gave some guidance in the conference call relating to the business mix, saying gross margin should be in the high 20s to low 30s, SG&A between 15% and 20%, and R&D in the usual 3% to 5% range. The huge bomb, however, was the $100 million ad campaign. How one interprets Iomega's guidance is paramount, however, to figuring in the $100m. First off, SG&A is proportional to revenue. Any increase in revenue will demand a marginal increase in SG&A no matter the source. In otherwords, there is a general and administrative cost that increases as well. My estimation of how to figure in the $100 million works in the following way and relies heavily not only on Iomega stated guidance but assumptions about those figures as well. 1997 gross margin was around 31%. While Q4 gross margin exceeded that by two full percentage points, I believe that gross margin may be impacted the "other" way as Asian currencies rebound somewhat. There is the assumption that new product introductions, namely Jaz2 and quantityt shipments of Zip Plus and Laptop Zip, will offset these currency impacts. However, I do not fully believe Iomega that price cuts will not occur going forward. The Superbowl commercials showed a Zip disk price of $12 something, a significant drop for current MAP. Therefore, I consider a 1998 average gross margin of 31% to be more than reasonable and, given Iomega's inability to execute to the point where economies generate significant savings, I expect 31% gross margin to be very close to the actual results. 1997 SG&A was slightly under 17% on the year. However, the trend for the past 4 quarters has been up (Q4 1996 SG&A was under 15%). I believe Iomega ineffeciencies would lead to a 17% SG&A level without the additional advertising. I therefore believe that an SG&A figure of 20% could include the additional advertising as outlined by Edwards. For example, at top line estimate of $2.35 billion for 1998, the difference between a 17% SG&A level and a 20% SG&A level equals over $70 million. This leads me to believe that using an SG&A of 20% should reasonably include any incremental increase in advertising. With R&D at 4%, we can get a pretty good idea of Iomega net margin this year. A 31% gross margin, a 20% SG&A, and a 4% R&D level, gives us a 7% EBIT margin (subtract 20% and 4% from the gross margin). After-tax net margin would then be 7%*(1-t) and the tax rate has held steady at 35% so we get 4.55% net margin. To put that 4.55% net margin in perspective, 1996 average net was 4.7% and 1997 average net was 6.6%. As well, the same computation using a 17% SG&A level -- which is lower than Q4 levels and what I expect is the usual pre-massive ad campaign average level -- would get us a 6.5% net margin The expected decrease in net margin, however, is not a negative in unto itself. If the average net margin decrease is offset by a top line increase such that the net result is higher earnings. Essentially, by calling SG&A at 20% rather than 17% -- which would only account for an extra $70 million in SG&A spending by 1998 current revenue estimates -- we give up 2 full percentage points of net margin. In order to generate the same net earnings from a base of $2.35 billion in revenue, Iomega would need to increase revenue by $1 billion in 1998 to around $3.3 billion. A 6.5% net on $2.35 billion -- which is the 17% SG&A net figure -- would yield $152 million in net. To generate that same amount with only a 4.55% net margin needs an extra $1 billion or so in revenue. Taking it quarter by quarter, Iomega would have a hard time generating an extra $250 million oer quarter. (math explanation is that current estimates of revenue divided by 4 equals $587m per quarter. It would take $830 million per quarter to generate the same $38 million in net income as would be generated with a net margin of 6.5% versus 4.55%) If Iomega needed to increase annualized quarters by 40% in order to make an increase in SG&A from 17% to 20% pay off, I would be quite scared. However, the ad campaign, even as poorly presented by Edwards, seems to indicate a core goal of increasing the tie ratio. While current supply (20 million divided by 4 equals supply of 5 million Zips per quarter) seems to exceed demand, as measured by sales of 3 million Zips, merely increasing demand by 2 million Zips per quarter would not generate the extra $250 million neccessary to pay for the SG&A increase. Increased disk sales, however, could have a substantial impact. For example, an increase in Zips sold per quarter as well as a proportionally larger increase in disk sales would increase both the units of Zips sold as well as the overall tie. This increase in tie would have a positive gross margin impact. For example, a 1 point increase in gross margin, to 32%, would reduce the needed extra top line growth neccessary to pay for the SG&A increase from $250 million in incremental additional revenue per quarter to $150 million. A large difference. A GM increase of 1.5% -- the maximum I would feel comfortable even suggesting Iomega could eek out with their current operational malaise -- would demand a $100 million quarterly increase in revenue over current annualized estimates. Of course, bottom line is that merely increasing top line to the point where the ad campaign is paid for doesn't offer any real financial benefit -- although the strategic benefits of icnreasing the rate of installed base growth is tangible. For thos curious, $2.35 billion in revenue and a net margin of 6.5% (31% gross, 17% SG&A, 4% R&D, and 35% tax rate) as well as $2.76 million in revenue and a net margin of 5.5% (32.5% gross, 20% SG&A, 4% R&D, 35% tax rate) both net around $152 million or $0.52/ share. This would be a 24% increase in EPS year over year and would change those stupid PEG calculations drastically. Point is, the ad campaign means Iomega is going to have to do at least $100 million more a quarter (annualized so don't look for it next quarter but expect seasonality) in revenue above the annualized estimated quarterly number of $587 million just to PAY FOR the ad campaign. If Iomega wants to derive economic benefit and actually INCREASE net income, it had best not only increase gross margin above the 32% mark, but it must also show more top line growth than that. Can Iomega book an extra $400 million or more in revenue due to a $100 million ad campaign? Can each ad dollar generate $4 more marginal revenue dollars? Good question. The market gave its answer and continues to, although I suspect that is more due to the lousy, superficial, and extremely lackidasical presentation of the "plan" rather than the economics itself. No matter the answer, Iomega had best learn to deal with operations and product introductions. Mistakes such as lack products, componant availability, and lack of ramp are unexcusable QUARTER AFTER QUARTER AFTER QUARTER. As well, Iomega had best learn to communicate more effectively. The Asian and OEM tie excuses were pathetic and embarassing. I was on the phone with TMF ETurkey as the results came out and the Asian mention in the press release made me laugh. The lack of official guidance is dumb, the handling of the analysts is absolutely crimminal, and the constant FUD to its OWN SHAREHOLDERS is absolutely intolerable. I say Iomega hires Morgan Stanley or Goldman Sachs in order to "help find ways to increase shareholder value." Now THOSE investment banking fees would be money well spent. I bet they wouldn't suggest splitting the stock for ANY dumb-ass reason, let alone the moronic one Dunn gave out. Laughable. If Iomega wants to be a real player they need some management help at the top. The current chairman of the board reminds me of Apple's board. Maybe that founder has the best of intentions but get out of the damn way already and make way for some compentant people. Maybe th ad campaign will pay off. I liked the "family" ad and I believe that co-op advertising to the box makers, where they get $$ in exchange for using the Zip Built-in logo on their commercials, could do wonders. We'll see. Its all moot if Iomega continues to execute more like Apple rather than like Dell. The market's reaction, at least the way I did the numbers above, seems more of a lack of faith in management than anything else. Not that I blame the market. Poor communication and lousy execution coupled with transparent excuses doesn't exactly breed confidence. The only one that can kill Barnes is Barnes. Benjamin Lipman P.S. Since I no longer have an AOL account due to the false and paranoid accusations of another AOL member, this will be my last quarterly take on Iomega. I can be emailed at bel4@columbia.edu This work may ONLY be reprinted in total (including P.S. and this copyright notice) and remains copyright 1998 Benjamin Lipman. Permission for reprint in any form, including compilation, must be requested in advance. The posting or reprinting of this work in any form does not preclude or nullify this copyright. _______________________________ End Report. Posts covered through 10:30pm ET 1/27/98. _______________________________
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