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Thursday, February 12, 1998 Wednesday, Iomega closed at $9 5/8, down $1/16 (-0.65%). TODAY'S RECAP: Although the pending lawsuit against Iomega (for possible misleading information and perhaps fraud during the 4Q) dominated the message board again today, other topics were able to come to the stage as well, including SyQuest's own quarterly earnings report (and what it means for IOM) as well as the pros and cons of comparing America Online to Iomega. 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++ PaulL73 reacts to the ideas behind the lawsuit against Iomega.
Recap written and posts compiled by TMF Weekly. _______________________________ And now, the Best of the Board...Started 9:00pm ET 2/10/98. 1+++++++++++++++++++++++++++
Subject: Re: Legal Defense and other posts Outstanding post. Legal Defense. Absolutely outstanding, from one of the best Iomega contrarians we have. Let's all step back for a moment and consider: Is Iomega, in the past three years, not the MOST KNOWN company in America? At least by stockholders who give a damn about what they've invested their money in? How could anyone who reads this board or who has heard about all the supposed ``hype'' on this board and ducked in for a day's read not come away with the certainty that Iomega's every product and every move is discussed to the point of overkill, pro and con? The impotent characterization of this board as nothing but hype for the company is utter nonsense. How could anyone who has read the nearly relentless denigration of Iomega and its stockholders in the ``mainstream'' press over the last couple of years possibly have been deluded as to the worth or the prospects of the company? How in hell? Iomega itself has been consistently open about its problems. Some people seem to want hand-delivered letters apprising them of every pimple on the face of the company, or e-mail telling them of every last bloody little problem that crops up in advance of an earnings report -- Gasp! A Penny off! Egad, where WAS the guidance! -- but don't seem to remember that even when Iomega BEATS earnings by a penny or two that that same market rarely if ever rewards Iomega. The market is intractably skeptical of Iomega and will probably remain so for a long time. -----A penny off is NOT worth an advance warning. It is NOT a sucker punch to hold that back. It is not fraud and it does not warrant a lawsuit no matter how ``the street works.''------ What other company on the Motley Fool or elsewhere gets dissected as completely as Iomega? Candidates, please. I would love to start visiting those boards. Those shareholders surely know what the hell they're talking about. 2+++++++++++++++++++++++++++
Subject: More Legal Stuff Harry Roberts writes: << Eric isn't it possible that the case is not being built upon the lack of disclosure about Jaz2 but the lack of disclosure about Jaz1 sales? >> Yes. Though with all that blubber about sueing because of the advertising budget, you would never know it. Looks like they just threw everything into the press releases (and the suit) and knew they would figure out a theory later. Jaz1 is not mentioned in the release (though I am sure it will be added once they actually listen to the conference call). A few other points: Both Harry and MarkRogo did a great job of laying out the plaintiff's case, so I did the other. I was not trying to be objective for that post, but was playing advocate for IOM. MF Equity wrote: << According to your theory of securities fraud, the company has free rein as long as some publications on the internet cast doubts on the CEO's bullish forecasts. >> No. One of the sources I cited was the Q3 conference call held in October. It was obvious then that no meaningful production of Jaz2 would occur. Moreover, any person could have gone into any computer store, or picked up the phone to call any one of the computer catalogue companies and found out that Jaz2 wasn't shipping. By January 1, it was clear Jaz2 had not shipped at all during the quarter. As late as January 21 folks still could havd sold their stock at 13. Returning now to the impact of Jaz2 on Jaz1, I posted a note , while the market was still open before earnings were announced on Janauary 22, that there was a possible effect on Jaz1 as a consequence of the Jaz2 anncouncement. I made the analogy to the falloff in computer sales after MMX was announced and folks were waiting for the "newer, better" item to come out. So a shortfall of revenue (and earnings) was very predictable based on readily available information. Perhaps one reason it was not a more important topic here is that so many people choose to engage in or wishful thinking instead of critical thinking, which then gets buried. To the detriment of all. 3+++++++++++++++++++++++++++
Subject: Re: AOL & IOM (COMPARISON) << It appears that what IOM and AOL do not have in common, is that IOM must be seen as a "fad" product which will be replaced by competition and/or new products. AOL must be viewed as having a customer and installation base that will be impossible to unseat from the top of the hill. >> Jim, I understand your point, but how can Zip be considered a "fad" product when there are 12 million out there and growing at a rate of 1 million/month (and that's only Zip drive sales). Once IOM's other products are released, IOM will not be considered a 1 product company anymore by Wall Street. Jaz sales were down this quarter because everyone was waiting for Jaz 2. How about disk sales? I don't think IOM will lose the battle with Nomai in any country (except maybe France). France will not even extradite Ira Einhorn, a convicted killer, so what can you expect from the French courts? IOM should make it top priority to ship France Zip drives that will only read Iomega disks, rendering the Nomai disks useless. Let's face it, there have been delays in shipping new products, but if the IOM's delays are because they want to make the best possible products, then I applaud them. I also think the time is right to release Zip 2 (200mb) drive (if it's ready). This would kill the "so-called" Zip killer vaporware from Sony. With all the products IOM will release in the near future, I feel IOM has great potential, and will create huge revenues and earnings in the years to come. On the other hand, AOL does seem to be at the top of the hill right now, but there are a lot of internet providers out there. Every day on television, I see more and more small companies (and many large companies) providing internet access. Let's face it, with AOL's announcement of a price increase, many of these other internet providers may start to look more appealing. As the competition increases, this will create pricing pressure and eventually the internet access fees will come down. Everybody wants to get on the web, but AOL is not the only way to get there. I think AOL has much more competition than IOM has. 4+++++++++++++++++++++++++++
Subject: SyQuest Kamikazi Attack and Its Fate I just looked at SyQuest earnings report. It had revenue of $32.1 millions with a loss of $39.0 millions. There are two things in the report worth mentioning. Good news: it had a sequential revenue growth over 3rd quarter 1997. But look further: $32.1/$25.9 = 1.23, a 23% increase, while for Iomega: $547/$432=1.27, a 27% increase. In other words, a small company like SyQuest has had slower growth than its 17-times-bigger “competitor” in the past quarter. With a hot product (SparQ) as many have claimed and cutting prices on SyJet and whatever, I would expect at least a 100% sequential growth. Bad news: it had a loss of $39.0 millions over a $32.1 million revenue. But look deeper: it had $40.6 millions for “Cost of Sales.” In other words, they are sell everything below cost (at least at current production level). This is even WORSE than bad! Conclusions: 1. SyQuest is no threat. 2. With $12 million cash to burn at rate of $20 million per quarter, it will soon out of the market. Warning: the "leading Kamikazi of removable storage solutions" is coming at attack. Run for a hide! 5+++++++++++++++++++++++++++
Subject: SyQuest is worthy of an appearance... ... aside from a brief comment on the lawsuit (thanks for the nice words Turk) and a question to the incomprehensible Cliff Snyder, I've been gone from these boards for a couple of weeks.... I make an appearance to comment on this quarter's SyQuest release and what it means to Iomega. Many of you know that I believe the continued presence of lower-priced SyQuest products in the market hurts Iomega sales, mostly of the Jaz drive. The fact that SyQuest is a money-losing outfit doesn't prevent it from making those sales, however. This first fiscal 1998 quarter, however, does suggest that the new SyQuest is still very far from having developed a sustainable business model. Were it not for the fact there are a lot of warrants outstanding with which SyQuest can raise cash, there would again be a question as to whether the company would survive the next quarter or two (I think there are enough warrants that $120 million can be raised even here if SyQuest can induce the warrantholders to exercise; that may be tricky but they have done it so far when the financial condition was arguably far, far worse). SyQuest saw revenues rise from $25.9 million in Q4 to $32.1 million in Q1. This increase was somewhere near 24%, which is a healthy rise. Already, it has been noted this rise is not as healthy as Iomega's quarter-over-quarter revenue growth, which I believe was 27%. This lack of better-than-Iomega growth rates is certainly disappointing for SyQuest, especially because Iomega appears to have retarded its own growth due to failure to ship products. Much more disappointing, however, is the tremendously negative gross margin percentage of -25%. Q1 of FY98 was marked by some signifcant events at SyQuest. It appears that limited production capacity has caused the company to essentially discontinue its older 44/88/200 line, which despite miniscule sales was almost certainly contributing much to margins (I say this with affirmativeness only in hindsight). For reasons beyond comprehension, the company still appears to have been building the EZFlyer (filling backorders they could've unilaterally canceled?) which is now doubtless a money loser due to price cuts without cost savings. But the scary thing is that in total, the gross margin percentage fell from a miniscue positive in Q4 to a huge negative. This despite what the company calls "a successful product launch of our exciting new SparQ drive, as well as strengthened sales of the SyJet." Revenue for the compay has been split lately, about 50-50 with drives and cartridges. All totaled, the company probably shipped fewer than 100,000 drives (if the average wholesale price was $160, this would be 100K drives at 50% of revenues... I suspect the mix toward SyJet makes the average wholesale higher), a total that is probably well below total Jaz shipments for the quarter -- a bad quarter for Jaz, to be sure. It is dwarfed, obviously, by the 3 million Zips shipped in the quarter, but that's somewhat immaterial. Those drives, if it was 100K total, cost well over $200 each to build, but sold for about $160. Remember, we know they make money on the cartridges, so the drives gross margins are so negative they are wiping out all the gains from cartridge sales! Now, some might say this is just the ramp up and volumes will bail out SyQuest. But the evidence is shaky on that. You do not, as the old saw goes, lose money on every sale but make up for it in volume. You do not sell more cartridges than people need just because they are relatively cheap. In other words, SparQ owners aren't gonna buy 10 gigs worth of carts if they only need 2, despite the low price. I would guess that if revenue doubled in Q2 for SyQuest, margins would still be negative based on this performance. It appears, for example, that SparQ costs more to make than they sell it for. In the SparQ-free Q4, gross margins were positive. SparQ, ironically, didn't need to be sold so cheaply to make its presence felt, in my opinion. Jaz externals are twice the price of SparQ externals; surely there was room for a price gap of less than 50%? Furthermore, to generate the revenue growth over Q4, SG&A soared by $9.7 million. Like Iomega, I think we can say that much of the increment went to advertising... If that's true, each $1 of advertising appears to have resulted in less than $1 in incremental sales! Again, there is a ramp here, but let's get serious. [Also, SyQuest's legal bills must be a major burden with lawsuits against Iomega and Castlewood.] The net loss of $39 million would wipe out all cash and all receivables if duplicated in Q2, but the company's release suggests they don't fear an immediate bankruptcy. That must mean sales and margins are rapidly improving -- maybe but how much? -- or they are going to get more cash from their investors or lenders. Still, short-term borrowings are already at the level of receivables and payables are almost the total of cash and receivables. This is a company once again on the brink without additional finacncing. The one calculation that is totally meaningless is earnings per share. Another poster on this board notes that the loss has "narrowed" from $.86 to $.57 per share. Well, what magic? The number of shares is up five-fold!!! If the company had made money, earnings per share would have hardly grown at all due to this newfound shareholder base. This is ugly. With such a constrained financial condition, the one thing that seems most unlikely is that production capacity will grow much if at all. I think an optimistic target might be 200,000 drives total this quarter, a doubling, and I'd not put much faith in that. Inventories are high, and we don't know how much of that is parts, WIP or finished goods. If it's parts, then they could possibly hit the goal. If it's finished goods, that means even more trouble for SyQuest (finished goods would be SyJet and carts, not SparQ, which did sell out whatever production they could muster -- maybe 30k?). The reason Iomega is not lowering Jaz prices much to meet the SyQuest threat, I feel, is that SyQuest can satisfy such a small portion of market demand that Iomega doesn't want to get dragged into a price war. Remember, the war hurts the small fry, with his lower volumes, less than the big fry in absolute dollars. [Note, I believe Jaz1 wholesale pricing was lowered by Iomega in January, although I don't yet know how much.] Certainly, Iomega sees no threat to Zip, which could be produced in quantities of 5 million this quarter, vs. an all-SparQ-SyQuest's 200K drives. Of course, SyQuest isn't all SparQ. I still believe, however, that due to volumes SyQuest is targeting Jaz, not Zip, and that Iomega is going to foreclose the Zip-sized market once prices unambiguously fall to $99... Sony claims they'll say HiFD for the same price as Zip, but that seems really unlikely given their track record (look at MD, for example). I am far less impressed by SyQuest's results than even my most negative interpretations would've been. I believe that buyers don't largely care a whit about this, nor do computer journalists, nor do retail-store employees. They see interesting SyQuest products at low prices and like them. But the lack of volumes and the possibility of another company-threatening fiscal crisis make the SyQuest threat seem kinda paltry. Unless the company is taken over this quarter and/or gets an additional $20 million in financings, it again will face delisting by next quarter. Without $60-80 million, it appears unlikely to survive the year and especially unlikely to expand production capacity. Iomega has many big problems right now. It still faces SyQuest as a Jaz competitor. But the two companys remain headed in very different directions... One is growing earnings rapidly and growing gross margins as well. The other is facing more and more red ink, and is letting margins slip to levels not seen since the desparate intro of the EZ135. If history is repeating itself for SyQuest, and it feels that way, then trouble is afoot. Neither long nor short either stock. _______________________________ End Report. Posts covered through 9:00pm ET 2/11/98. _______________________________
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