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Wednesday, March 11, 1998 Tuesday, Iomega closed at $8 7/16, down $1/16 (-0.74%). TODAY'S RECAP: Time marches on while IOM shares continue to grind along at their lowest levels in many months. Oddly enough, the torpidity in the price movement has not hindered the discussion in our Iomega folder, which by now seems to stand as one of life's eternals, along with the shifting tides, continental drift, and the bull market. The best of today's conversation centers on the analysis by TMF Keeler of Iomega's value based on its price-to-sales ratio. Have fun, Fools. 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++ ~TMF Keeler~ defends his sales ratio comparison (see yesterday's IOM
Today, Post 8++).
Recap written and posts compiled by TMF
Weekly. _______________________________ And now, the Best of the Board...Started 9:00pm ET 3/9/98. 1+++++++++++++++++++++++++++++
Subject: Re: Price to Sales Tom Terf wrote: >>>Problem with this calculation is that IOM sales for 1998 will be up only 10 -15 % over 1997; profits will be flat at best with 1997 due to increased ad expenses.<<< Wow, I didn't realize you had a functioning crystal ball. Maybe you should lend it to Todd Bakar at H&Q, or Dan Kunstler at J.P. Morgan since they don't see flat profits. Maybe you could show us the predicted income statement that shows $100 million in new SG&A leading to zero profits on sales growth of 10%? $100 million is really not very much to a company doing near $2 billion in sales. Here is another exercise for the "income statement etched in stone" crowd: How many percentage points in Gross Margin % would completely cover $100 MM in SG&A (assuming IOM only grew revenues 10%)? The answer is five. If IOM can simply raise Gross Margin up to the 36-38% level then they would pretty much nullify $100 MM in extra SG&A. IOM had Gross Margins over 33% last quarter. IOM improved Gross Margin from end of 1996 to end of 1997 by 4 percentage points. 1997 had a big shortage in higher margin retail drives for 6 months. 5 percentage points might be easy. Further, any revenue growth above TomTerf's predicted 10% would mean a less percentage increase in Gross Margin would be needed to cover the "huge" advertising campaign. Anyway, since CREAF is expected to grow about 18% then the comparison still holds. IOM should at least have a 1.5 PSR on trailing revenues to give its business equal value to CREAF's. This would be a share price of $9.6. I think IOM is worth much more (at least $14) but first things first. You could argue CREAF is too high; but I think CREAF has been at these valuations for some time. >>>Kim suggested these results during the disastrous Conference Call after the Q4 earnings were announced. The Company is floundering with Sony in the wings to take some share.<<< KE gave some guidance? Wow. Where was I when KE said flat profits and little revenue growth? I thought he said they had doubled Zip production for 1998 (which seems silly if your not going to sell any more product) and were starting a big ad campaign to spur even more sales growth. Of course if the ads don't work that would mean they wasted the money. Duh. If Pepsi's ads don't work that would be bad too. I wonder why they advertise? I wonder why I see commercials at all on TV, or in newspapers, or on the radio, etc.
TMF Keeler A Fool and his money are soon partying 2+++++++++++++++++++++++++++++
Subject: $100 MM a big deal? Here are some projections to help clarify my last post. Assume ~10% revenue growth over 1997 and that $100 MM is added to normal SG&A spending. I will show the income statement at 4Q97 Gross Margin levels: Revenue............$2,000 Gross................$668 SG&A................($436) R&D..................($90) Operating Income.....$142 Interest...............$3 NIBT.................$145 Taxes................($51) Net Income............$94 EPS = $0.33 Certainly 10% revenue growth, with no cost reductions anywhere in the business would not be a good thing. In the three years I've followed this stock, I have never seen any indication Edwards and Purkis are stupid enough to do this. Here is again, the same revenue growth but with a 5 percentage point (15%) improvement in Gross Margin (Iomega improved GM 14% last year): Revenue............$2,000 Gross................$768 SG&A................($436) R&D..................($90) Operating Income.....$242 Interest...............$3 NIBT.................$245 Taxes................($86) Net Income...........$159 EPS = $0.56 So with just 10% revenue growth and a 15% cost of goods reduction, IOM clobbers present FY98 estimates. Did people think it was that easy? I didn't until I ran the numbers. Now lets say IOM reduces SG&A expenses 10% before the $100 MM additional ad spending. Now look at the income statement: Revenue............$2,000 Gross................$768 SG&A................($402) R&D..................($90) Operating Income.....$276 Interest...............$3 NIBT.................$279 Taxes................($98) Net Income...........$181 EPS = $0.64 Wow, $0.64 just by increasing revenues 10% and Gross Margin 15%; while spending an additional $100 MM on ads, and reducing non-advertising SG&A expense 10%. Now, lets look at 10% revenue growth, 5% Gross Margin growth, $100 MM in additional spending on ads, and reducing non-advertising SG&A expense 10%: Revenue............$2,000 Gross................$702 SG&A................($402) R&D..................($90) Operating Income.....$209 Interest...............$3 NIBT.................$212 Taxes................($74) Net Income...........$138 EPS = $0.49 Well, I hope I've at least shown that $100 MM is not a big deal and that the Income Statement has lots of places for KE and LP to make up the difference. I personally expect sales growth much higher than 10%. Here is 20% revenue growth, 5% Gross Margin growth, $100 MM in additional spending on ads, and reducing non-advertising SG&A expense 10%. Revenue............$2,100 Gross................$737 SG&A................($417) R&D..................($95) Operating Income.....$225 Interest...............$3 NIBT.................$228 Taxes................($80) Net Income...........$148 EPS = $0.52 Fool on :)
TMF Keeler A Fool and his money are soon partying 3+++++++++++++++++++++++++++++
Subject: Re: 200MB ZIP KILLER RELEASED!!! Dave has this argument on the ropes, with one modest variation... <<You are missing a couple of big points. First, a 25 mb disk would probably sell a lot more units (more than 8X 200mb disk). This would lead to more total revenues at a slightly reduced margin, but still a good margin.>> Let's not think in terms of SINGLE disk sales, but, rather, PACKAGES of several 25MB disks sold together at a higher margin-per-megabyte. Work with me: Suppose Iomega sells Genuine Iomega Brand 100 megabyte Zip disks in three-packs and 12-packs and Gig-O-Colors. We know that the market allows them to charge slightly more for packs formatted for Macs than they do for disks formatted for Wintel PCs (even though the disks can be re-formatted easily). We also know that the multi-colored disks bear a premium price over the classic blue ones and, obviously, that the 12-packs have a volume discount advantage over three-packs. If you constructed a table of "best prices" for each SKU represented by these packages and then figured out the cost-per-megabyte the various offers represent, you'd see that Genuine Iomega-branded Zip disks have never been priced at retail in a way that reveals much about their underlying costs. Very likely, to the extent that manufacturing costs are equivalent, Iomega makes higher margins on some SKUs and lower margins on others. Now, fast-forward to the introduction of 25MB media... If they ever announce one, it's exceedingly unlikely that Iomega will offer a 25MB Zip at retail in SINGLE-disk quantities to afford the margin comparison you suggest. Not enough Zing! at the cash register. And until something in the company's margin assumptions changes to make it otherwise, you shouldn't be able to buy a $2.25 SKU (or a $1.99 SKU or any other pricepoint we can arrive at for 25 megs by simply dividing a 100MB disk by four.) If Iomega follows classic brand management practice, every 25MB SKU will consist of multiple-disk paks, calculated to confuse easy per-megabyte price comparisons. For most other high-volume commodities, this is standard consumer marketing. (And a big reason those inner-city bodegas like to break up packs of cigarettes to sell "singles" illegally at grossly inflated per-unit prices!) But we're not likely to complain. At the supermarket, we rely on those "Unit Cost" stickers on the shelves to determine that an ounce of New Intensified Tide costs more per-ounce in the convenient GIANT sized box than it does in the SUPER JUMBO boxes. But, unlike supermarkets, merchants who sell Genuine Zip Brand Disk media don't have to tell us the Unit Pricing among the various SKUs. Obviously, there are smart shoppers here who calculate their own per-megabyte prices and know that a megabyte of "classic blue" Zip capacity is cheaper than a megabyte of "Gig-O-Color Yellow" Zip capacity, but that doesn't dissuade an awful lot of folks from buying the colored disks anyway, for convenience or vanity or whatever. This experience suggests that Iomega is able to make-up whatever differential in manufacturing costs it needs to hit to achieve a given margin objective by using tried and true packaging and pricing strategies. And unlike nearly anything else in the computer business, that's the part of the Iomega story that gets better with every new Zip drive they sell: those high-margin proprietary disks. Sorry for the windy explanation, but my point is just that the 25MB disks -- if they ever show up -- will work the same way. Don't be surprised to see them carry a 15 or 20% price differential over the per-megabyte costs of the current Zip media, since people who'd buy them are paying for convenience that isn't available in floppies or other removable formats. In hard dollar terms, if you were paying nine and a quarter cents a megabyte for 100MB Genuine Iomega Brand storage, would you pay a penny more per meg -- perhaps four or five bucks a year -- for a granularity that made it easier to swap files with friends? Bob Sutton 4+++++++++++++++++++++++++++++
Subject: Re: 200MB ZIP KILLER RELEASED!!! From rjdiv... in bold.. ALL his: <<I still fail to see why Zip 200 would that be a problem for IOM. >> There are a few issues Iomega would have to consider in order to manufacture 200 mb disks: - Cannibalization of 100 mb disk sales. IOM will realize a larger net income by selling two 100mb disks as opposed to one 200 mb disk. According to its business model, Iomega should be looking for ways to improve their tie ratios, not slim them down. - Consumer confusion. One huge mistake that the SYQT people made was to constantly change sizes. At 100mb, the Zip is sized nice and round. (Yes, this is an issue for the 25 mb size, but the benefit of granularity and fractional tie ratios outweigh that.) - Re-tooling costs. The cost to reconfigure different production lines in order to make a 200 mb disk would have to be spread over a much smaller number of disks when compared to 100 and 25 mb capacities. - Most likely, the 200mb disks would need a new drive. (... a speculative statement.) Trying to sell two types of incompatible Zip drives would suck. Let's focus on one drive for now and avoid even more of what I mentioned above. (I am also assuming that 25mEggers would fit into current Zips.) <<As far as the 25mb disks, I don't think IOM's 25mb disk would sell 8 times the amount of 200mb disks.>> They don't have to. Depending on the disks' pricing structure, maybe only 4- 5, 25 mEggers need to be sold (vs 200mb...) and they will sell a lot more than a 200mb size. Seriously, what do you even put on your Zip? Iomega is having enough trouble getting consumers to fill up their standard size Zip disks. How would it get consumers to fill up 200megs? The average file size of consumers is not that large... even if their Word files are all BOLD. If I have 20 megs of stuff to send to a friend, I only need 20% of a $15 disk. I'd much rather spend the $5-7 on a smaller sized disk. Rob, besides the "the competition is doing it" argument you've presented for a 200mb size, what other reasons do you personally have for a larger sized Zip disk? Do you keep and transfer a lot of large files? Do you burn through Gig-o-Packs on a monthly basis? I don't, but I would love to have a smaller sized, inexpensive disk for my own personal use. My arguments come from my own needs. <<Some analysts & gossip columnists feel that Sony's HiFD is better and will kill Zip...>> Aren't these the same "anal-ists" that you always rip into? If they hold no credibility with you, why use them as support for your argument? Sometimes, when everyone is pushing one way, it is better to go the other. This is how the Japanese car industry swept its way into America. Muscles cars were getting bigger... then Honda came out with the Civic (aka a rollerskate.) 200mb is too big. We need smaller sized Zips. Rob, what I'd like from you is why you personally, would like a 200mb Zip... and chill on the bold please. War- PS..<<P.S. Like I posted before, since the the R&D money has already been spent on Zip 200, WHERE THE HELL IS IT????>> The R&D is a sunk cost.. already been spent. Iomega will incur more costs to manufacture a 200mb Zip AND it will hurt the existing Zip's sales. Most likely, it is sitting safely on a shelf. 5+++++++++++++++++++++++++++++
Subject: Re: Price to Sales I am delighted to see Keeler's reasoned, sober analysis of Iomega and Creative. Both face some potential dark clouds going forward (Zip OEM adoption slows/patents not good enough/etc. vs. sound cards get eliminated in low cost PCs through integrated components). Both have used aftermarket to build brand through useful add-ons... There is some similarity. And, yes, Iomega is expected to grow more quickly that Creative. One thing I question in Patrick's analysis, though, is reliance on price-to-sales vs. price-to-earnings. I think Creative's P/E should logically be about 2x or more what is is now. Earnings are forecast to grow about 18% a year over the next five years, the company has the lowest P/E of any $1 billion-or-above market cap company that has beaten earnings estimates for 6 or more consecutive quarters, etc. etc. While I feel Creative's price-to-sales ratio is low, I feel it's price-to-earnings ratio is obscenely low. Iomega, on the other hand, has a P/E only somewhat below its 1- and 5-year growth rates. It's price-to-sales ratio seems particularly low, but is obviously affected by people's continuing association with Iomega and the disk-drive makers, who are used to trading below 1.0 price-to-sales. Iomega's P/E to growth rate, however, strikes me as somewhat reasonable right now given the company's failure to exceed earnings estimates -- and even to miss them -- in some recent quarters (again vs. Creative's run of 6+ exceeds). I think Iomega could defensibly trade at 25x earnings right now, but surely the notion of 40x earnings with forecasts where they are doesn't make sense. That's not to say Iomega won't trade at 40x earnings a year from now -- it well might! But to get there, it's going to need to show Wall Street the money. Wall Street hates Creative a lot more than it hates Iomega (Barings, for example, puts out a SELL recommendation after Creative hits its 6th consecutive estimate-beating quarter; the report contains nothing particularly negative, other than a sell -- on a stock with a P/E of 10). Disclaimer: I bought a little Creative after reading the Barings report. I figured anything Wall Street hates that much that isn't going bankrupt or committing fraud must be a good investment at a P/E of 10. I think Iomega would be a slam dunk at a P/E of 10 (if it were to fall to that price). I think at a P/E of 20, Iomega risks being dead money for awhile and if the dark clouds -- Nomai, U.S. retail sales, trouble in Asia -- produce any rain, the stock will continue to erode from here. That's why I sold after the earnings report -- at a miserable 8 3/4... I'd buy the stock again, but probably only below 7 or above 11... I'm gladly willing to forego a 25% up move for evidence that the company is on track to return to go-go EPS growth (40%+ compounded over several years). My own Iomega models call for tremendous EPS growth, but they all assume that OEM adoption continues to grow steadily and that disk prices only fall slowly (with Iomega selling all the disks). I can't account for a success by Nomai except to say it'd be really bad. As for OEM adoption, if it doesn't grow Iomega will not return to high-flyer status. The standardization -- whatever that is measured by -- on Zip-as-replacement-for-floppy, even if over a long time period, is necessary for Iomega to soar... Mark 6+++++++++++++++++++++++++++++
Subject: Re: Price to Sales MarkRogo wrote: >>>There is some similarity. And, yes, Iomega is expected to grow more quickly that Creative. One thing I question in Patrick's analysis, though, is reliance on price-to-sales vs. price-to-earnings. I think Creative's P/E should logically be about 2x or more what is is now.<<< I believe you answered your own question. IOM's PE is much higher than CREAF's because its expected to grow faster. Maybe CREAF should be higher, then IOM would also have to be higher. There is still no reason why Iomega's sales should be worth less than CREAF's sales.
TMF Keeler A Fool and his money are soon partying 7+++++++++++++++++++++++++++++
Subject: Re: Owning Iomega??? Awards in a shareholder derivative class action, if any, enure to the benefit of the corporation and the net amount may be deposited in the corporate treasury. A class action alleging fraud may mean an award is distributed among injured shareholders. HOWEVER, believe me, the street is numb to such suits and they have no long term--read days--affect on the stock price. The problem with IOM's stock price is the street's wait-and-see approach about management after the latest miscue. I think the stock is dead money or worse for at least a quarter or two absent a takeover. Capital preservation in this market leads me to believe that the path of least resistance in this stock is on the downside. _______________________________________
End Report. Posts covered through 9:00pm ET 3/10/98.
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