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Monday, February 09, 1998 Friday, Iomega closed at $10 3/16, down $1/8 (-1.21%). THIS WEEKEND'S RECAP: Without a doubt, the most significant contribution to the IOM board this weekend was a series of posts from ~Janovsky1~ who attempted to model the ideal floppy replacement company. His posts generated a slew of responses -- questioning and praising as well as tweaking. Other posters addressed Iomega's advertising campaign, investing in general, the conference call and a new MicroZip drive to be showcased at this week's Retail XChange show. Today's weekend recap report also inaugurates the inclusion of The Motley Fool's Iomega web board (www.fool.com). We hope you enjoy this expanded version of IOM in (all of) Fooldom. 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++ IraS1 posts a URL for the revised conference call transcript.
Recap written and posts compiled by TMF Weekly. _______________________________ And now, the Best of the Board...Started 11:00pm ET 2/5/98.
1+++++++++++++++++++++++++++
Subject: Iomega Q4 Conference Call A revised transcript of the CC is now posted at: Iomega Fourth Quarter 1997 Conference Call Tr... http://www.cayugacomputers.com/iom/iomega-4.htm There were numerous errors in the transcript posted by Michael Coley on the SI board. 2+++++++++++++++++++++++++++
Subject: Re: Disclosure and TheStreet << Why would anyone who knows so damn much about the market choose to journalize to thousands, or even millions... and exclude themselves from an area they have such expertise in? I mean... if I knew as much as the Greenberg types claim to, why bother with the masses? Oh... maybe he is answering a higher call to serve humanity. >> Blackmarlin, perhaps its because he has realized that there is more to life than money. Perhaps he does enjoy writing about the market and the folly involved therewith. Who are you to judge? Perhaps he makes a great living doing something he enjoys, and contrary to popular belief, there are darn few individuals out there that are mimicing the performance of the Fool portfolio, and as some here have seen, with the market fortunes made are often lost overnight. In other words, it is darn hard to make a living in the market even with a fair bit of expertise. One lesson I've learned reading this folder and reading about the way this stock has affected the LIVES of some of the shareholders here is that there is more to life than proving one is right. I have the feeling that some of you will on your deathbed be claiming your crowning achievement was that you bought IOM at 1 and watched it rise to 55. The fact that this was just dumb luck has seemed to escape some here. Black, I'm not addressing this to you personally, BTW. If the choice of IOM involved any kind of skill, it should have been clear that the stock was markedly overvalued and should have been sold, without question. What is seen in this folder is a classic example of people looking for the 'big kill' the one investment that will lead from rags to riches. Its kind of a Holy Grail thing, that will be found by few (if any) here...When the 'heck' will they devalue the Ringit again. 3+++++++++++++++++++++++++++
Subject: KW: Risk TMF Turk posts a nice segue into a point about IOM and risk. << She appropriately cites concerns about the risk inherant in such a large ad campaign, which is exactly what Edwards talked about in the conference call. >> Currently, there are a least 2 risk factors that could potentially hurt Iomega's future earnings. The first concerns Nomai, and the second, the ad campagin. The recent Nomai news is good. There are 2 ways to look at it. If you believe Iomega will lose this fight, then the longer it takes for the fight to end, the more time Iomega has to create brand awareness and increase the installed base. If the base is large enough and continues to grow, Nomai will not have sufficient capacity to impact Iomega's sales. If you believe Iomega will prevail in court, then obviously the continued injuctions against Nomai show Iomega to be in the right, thus far. As one who vociferously called for more advertising, I cannot help but feel a little guilty (it's a Jewish thing ;) that the street has reacted negativley to the news. $100mm is a lot of money, but if you view it as an investment, you will see a potentially large payoff. There are a lot of machines out there that could use a Zip, especially the $1000 boxes (which I believe to soon be the $800 boxes.) If Iomega does the most advertising, then competitors' ads will benefit Iomega. For example, the small SYQT ad will evoke from consumers a "Hey, that drive is just like a Zip drive." If a large competitor comes along, they will most likely choose a parity approach to their ad budget. In this scenario, 2 large campaigns will educate the population about the removable storage segment. By starting a large ad campaign now, Iomega is setting the bar high enough to create a barrier to entry into this market. They also have the benefit of becomming a lot more familiar with the segment before the competition does. The ad campaign is risky, but I see it as a necessity. Business is about educated risks. As these and other risks panout or payoff, Iomega should be viewed as less risky by the street. Combine that with increasing sales, and IOM should do well. 4+++++++++++++++++++++++++++
Subject: Re: Zip replacing 31/4 Floppy Drive wreader wrote: << 1. I do not see any demand (zero demand ) for Zip Drive in Corporate America ( at least the corporate America that I have seen). Most companies can live without Zip Drives. We don't have Zip Drives in my Company. We transfer files using the network 2. I connect to work & transfer files using PCANYWHERE. The point being - for the work I do, I do not need a Zip. I have a tape drive for backup. I see hundreds of thousands of professionals in the computer industry in a similar situation. I can see some of them( like myself) buying a Zip when they buy a new computer( as an add on). The only way a Zip can be sold to the others is a "Built In Zip". >> I've had a very different experience. I see the Zip drive in corporate America all of the time. My company uses Zip for small backup jobs that need to be kept separately for convenience sake, but don't need a whole tape. (No need to install a backup/restore program and install a tape drive, just use the portable Zip driver, copy the files, and go.) My company also uses them for transferring large files and directories to the client sites. And I use them to transfer files to home. (I could use RAS or PC Anywhere, but transferring 100MB over a phone line VERY slow.) I've seen no shortage of uses for Zip disks in corporate America. << DEMAND: The OEMs ( except MICRON ) do not want to include it - The reason being NO DEMAND. Not everyone needs a Zip drive. 3 ¼ is enough for most. PERFORMANCE IMPROVEMENT: The performance my computer is not greatly enhanced if I have a Zip. Zip definitely improves performance for people who deal with large files and traveling consultants etc. But not for people like me, who I believe are a majority of computer users. COST: The demand and the performance issues do not justify an extra $100 from the OEM view. The OEMS will replace the Floppy Drive with a Zip, only when the price difference between the Floppy Drive and Zip Drive is insignificant ( say $10 to $20 ). The cut throat price competitive nature of the business is such. >> I strongly disagree. Most OEM's offer it. Often at less than $100. Micron (I believe) is the only one offering Zip as a bootable drive, but I think almost all OEM's offer Zip as an option. And many have Zip as standard in their high-end offerings. And I think that OEM's will continue to do so. Although price difference between a floppy and Zip is significant, the feature sets are very different. Saying that OEM's will not include Zips because they are more expensive than floppies is like saying that OEM's will not include hard drives because they are more expensive than floppies. << My questions : 1. How difficult is it to reach the ~$50 price point and maintain margins? 2. Is the 3¼ about $20 to $30 (OEM price)? 3. Has the Zip penetrated the West and the North East Corporate America? 4. Do you all see the Zip replacing the floppy drive if the price is not reduced further? >> 1. Very difficult. OEM's are offering the Zip for around $80 now, which means that IOM is probably not receiving more than $50. But it HAS hurt margins and was a big part of the earnings disappointment. 2. The 3.5" floppy drive (I've never heard of a 3.25" drive.) is cheaper than $20. 3. That's a matter of opinion. In my opinion, you can't sell 12 mm Zip drives (and a million more every month) without penetrating corporate America. 4. That's also a matter of opinion. In my opinion, yes. I feel that Zip has reached a critical mass of users that means that it will be standard for removable storage in the 100-250 MB range. (Whether Jaz will dominate the large removable storage arena is another story.) 5+++++++++++++++++++++++++++
Subject: PC Connection The new PC Connection catalog (volume 196) has an offer on the inside cover - free installation of Zip drive with any system in catalog having the Zip Built-In logo for $99.95 ATAPI insider or $139.95 SCSI insider. Free disk with ZipTools included. Systems with logo included Compaq 4500 series (2 models) and Deskpro 4000 series (11 models) , IBM 300 series (17 configurations listed) , and AcerPower (12 configurations listed). I believe this to be a very effective approach. Interesting that Zip was not offered for the HP Brio models given today's news item. 6+++++++++++++++++++++++++++
Subject: FRP- Index of Posts First off, for history's sake, I want to say that even though AOL decided to say these posts were made around 9:30 am on May 4, they were actually posted at around 9:30 pm on February 6, 1998. The closing price for Iomega was 10 3/16, on volume of 5,080,500, with 259,300,000 shares outstanding. Anyway, here is an index of this series of posts for easier access in the future. I hope you enjoy them- Rob
Here it is, the FRP - My mini intro to the
intro
FRP- An Intro - What the FRP is and why I came up with it
FRP- How to Calculate it - Gives the basic formula for the FRP
FRP- Ct- What it is and how to get it - Discusses Ct, and suggests a value
for it
FRP- P^1.25 - Tells of calculating probabilities and what they will be used
for
FRP- Competition- The Pretenders - Discusses the competitors not likely to
become the floppy replacement
FRP- Competition- The Contenders - Discusses the competitors with a realistic
chance of replacing the floppy
FRP- IOM's fair value - Puts everything together and pegs a price for Iomega
FRP- Its Faults - Discusses the problems with a ratio like
this
FRP- The Future - Tells what can be done to remedy the problems in the previous
post 7+++++++++++++++++++++++++++
Subject: Re: FRP- The Future From BB MD: <<What are the chances of zip replacing the floppy? ....how the hell do I know.. how the hell do you know... how the hell does ANYBODY know!>> Frankly, think Rob's posts deserve a little better than this. First, take the math with a speculative grain of salt as Rob certainly suggests. Second, seperate the math from the reasoning, which is particularly strong with regard to the potential cumulative effect "the many versus the one". I recently posted about a graphic artist I worked with who DID BUY an EZ Flyer based on her perception that cost and performance exceeded the ZIP. She found a rude awakening when she tried to use her Flyer disks in the modern photo-prep world: a market dominated by Zip JUST as Rob described. But the point is that people DO read reviews and will buy based on a perception of "value". If enough of them choose something other than the Zip, and do not have a particularly compelling reason to change (i.e., a compelling reason to share files with a broad spectrum of other machines) these will represent permanently lost sales of the Zip. Finally, make your own decisions about the value of the Ditto and Jaz lines, the potential of Clik!, the value of Iomega branding, etc., again as Rob prescribed. My only real disagreement with Rob is the light consideration he seemingly gives to the Laptop Zip, a market which he apparently cedes to Sony if their disk really ever materializes. I have maintained for some time that the laptop Zip will drive desktop sales and vice versa as this is an obvious and real scenario for swapping Zip disks between machines, as well as for a higher-than-standard tie ratio. Pure speculation: if it were possible to create a Zip/Clik interface this would create an even stronger case for the Zip as the "center of the removeable universe" if not the floppy replacement. He's holding his shares; so am I. Replacing the floppy got the train moving, but it has many other stops to make, IMHO. 8+++++++++++++++++++++++++++
Subject: Re: FRP- The Future BB MD writes: << The trouble is, after all of your thinking, and all of your math calculations, we are left with having to "guess" on the percent chance of zip replacing the floppy. You came up with 40%. I bet alot of people would come up with 50%. >> Correct. And, of course, those who "guess" this number most correctly will have the best estimate of IOM's value. Moreover, any individual's "guess" can -- and should -- change as time goes by and the individual's assessment of the underlying probabilities changes. That in no way invalidates Janovsky1's tool. To the contrary, it validates his tool. What Janovsky1 has proposed is a method for estimating expected value -- nothing more nor less, and in that sense this tool is simply a minor variation on planning tools that are used every day in most businesses. No one thinks, or even pretends, that the number that comes out of the end of the model is a real estimate of (in this case) IOM's value. Especially not on the first use of the model (no matter how carefully done). What the tool does tell us, however, is how much variance occurs in the outcome (the estimate of value) with variations in different inputs. Simply, some of those inputs are going to have huge effects on the value; some will have small effects. In Janovsky1's model, for example, I would anticipate that the total number of computers sold per year, which is a component of his Ct value, doesn't have a strong effect on the stock value, until you begin to see large changes in the total number of computers sold per year. That's an insight that is not immediately obvious from just thinking about the company and its business. But the model, by organizing the assumptions in an orderly fashion, allows that kind of information to be analyzed and tested. I'm not sure whether I think the FRP tool is a decent model for analyzing IOM's business and value, or not. But I don't think we can discard it because it requires guesses. All models are guesses. Heck, what are the earnings estimates for IOM next quarter? GUESS. But models do have value if they help you understand WHICH of your "sub-guesses" are the key to your ultimate decision -- and the FRP looks to have decent value in that regard, because it attempts to comprehensively organize those guesses and relate them one to the other. All IMHO. Sorry if I came on too strong in any of this. My date stood me up tonite and I'm feelin' kinda low. 9+++++++++++++++++++++++++++
Subject: Re: FRP- Index of Posts Patrick wrote: <<The number of licensees, drives sold, disks sold, disk prices, drive prices, etc. all goes into the income statement, gets chewed up, and spat out as Net Margin. Janovsky used a Net Margin of 10% which I think is fine. This number is greatly influenced by Iomega management and their long term plans for advertising and R&D. It is also influenced by other Iomega products among a hundred factors. Trying to guess all these factors then come up with assumptions for them all seems just too hard. >> Patrick, What you say is very true. However, you are discussing the actual plans of iomega and not the theoretical floppy replacement company. Recall that Rob is suggesting that SG&A as well as R&D would be very limited once the replacement is achieved. However, we all know that iomega has plans to pursue many more products than just Zip. Thus, the iomega market cap is based on much more than just Zip's chances at replacing the floppy. Anyway, my model enhancement was meant to more accurately reflect the blade/razor model. In 1997, approximately 8 million razors (Zip drives) were sold. The blades (zip disks) were sold to support an installed base of 12 million razors (zip drives). Thus, the installed base was only 50% larger than the year's razor sales. Yet in this environment we achieved 6.76% Net Margin. If floppy replacement was 100% achieved in 1998 then the razor sales would be 98 million and the blade sales would be to support an installed base of 300 million. Thus, the installed base would be 3 times larger than the single year razor sales. In that enviroment, the Net Margin from the theoretical floppy replacement company would be greater than 20%. Do the math using any of your very detailed product mix spreadsheets. I have a great deal of respect for your detailed spreadsheet product mix models. Eliminate everything except Zip, use 98 million drives, 1050 million disks, and let me know what kind of gross margin you would project. I get 49%. This is the magic of the blade/razor business model. iomega projects 18-25% for SG&A + R&D. Then applying taxes we get a Net Margin of 15 - 20%. As Rob correctly suggests, the SG&A and R&D of the floppy replacement part of the business would be much less than the SG&A and R&D required for other parts of the busness. Therefore, I believe the theoretical floppy replacement company can achieve Net margins greater than 20%! Remember this is a blade/razor business that has not come close to achieving an installed base that is even twice the yearly razor sales! The best is yet to come! 10++++++++++++++++++++++++++
Subject: Re: Here it is, the FRP Thanks Rob for an interesting way to view the Zip franchise value. Everyone can put in different ratios and make personal assumptions about your model. #1 I personally think that the chance of floppy replacement success is much larger than 40%. I think they have reached probable status, up from possible status. #2 I also think that the number of disks sold will be more than 3.5 per unit. Remember as each year progresses the old drives will continue to use new disks and therefore the current years tie ratio will be higher than the ratio of current drives sold to disks per drive sold. #3 The last point I would like to make is that the Gross margin and net margin WILL INCREASE when the Zip battle is won. Only an investment in other products (R&D as well as SG&A) will mask this fact, which I believe in fact is what is confusing the analysts at this juncture in time(Clik!,Buz,Jaz 2GB) Thanks for your analysis, 11++++++++++++++++++++++++++
Subject: MicroZip... From Computer Retail Weekly... << MicroZip, due to ship in early March. "It is the smallest Zip drive on the market," said Mariam Maynard, sales manager for Microtech. The product fits into a shirt pocket and has a transfer rate of up to 3.3M bps. The MicroZip weighs 11 ounces and measures 4 x 6 x 0.7 inches; its SRP is $349. At XChange, Microtech will also exhibit the MicroCD 20x Max PC card/parallel portable CD-ROM drive, as well as the PortableDock and the ZipXpress, for connecting a hard drive and Zip drive, respectively, to notebook computers. >> _______________________________ End Report. Posts covered through 9:00pm ET 2/8/98/ _______________________________
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