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Tuesday, March 17, 1998 Monday, Iomega closed $7 1/8, down $1 1/2 (-17.39%). TODAY'S RECAP: Today, Iomega pre-warned about disappointing 1Q 1998 earnings, sparking a significant nose-dive in the stock price and a mighty disgruntled message board. Before the announcement, a past poster's thoughts on the company were shared (see post from ~D Turkey~), but the overwhelming subject of debate, dissatisfaction and disbelief was that of potentially flat earnings this quarter compared to 1Q 1997 (or 4Q 1997 -- two announcements conflicted). Enjoy (if you can). 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++ Sunraydoc reports on Zip promos at Best Buy (local report).
Recap written and posts compiled by TMF
Weekly. _______________________________ And now, the Best of the Board...Started 9:00pm ET 3/15/98. 1+++++++++++++++++++++++++++
Subject: Re: Retro-Built-In Zips & Clik! To Capture&Store (Was
Re: Craig Crossman's Show) Novw quotes Jonathon Graham, IOM public relations manager: << "right now for $99 you can go to Best Buy and have them add a Zip drive to your new PC". It came across very well. >> Checked out the two Best Buys in my area yesterday, where the only Zip built-in OEM unit is the Compaq 4550. However, the $99 Zip retrofit promo was announced every 4 feet or so along the whole computer shelf, and the guys in both Computer Upgrade departments indicated that it was a great deal at the price, since their normal price for a Zip install alone was $49.99, and the drive usually sells for $149.99, a $100 savings over what it would normally cost to have a Zip installed. Actually, this was a little poetic license on their part, since they don't carry ATAPI Zips on the shelf, and they probably wouldn't sell for $150 if they did.... Interestingly, when I asked whether it was worthwhile to get a Zip retrofit, both guys were very knowledgable about the advantages of Zip. Overall, very encouraging. 2+++++++++++++++++++++++++++
Subject: My Take (Ben Lipman) From the keyboard of Benjamin Lipman What's Wrong With Iomega? The Product Line: Zip is great. Mine is still humming along after three years of loyal service. Jaz2 may even be great if it ever ships more than 100 drives. Ditto is practically irrelevant, but arguably worthwhile. RecordIt and Buz, however, seem to be questionable at best. What's wrong with these two products? Nothing. Really. The question is, why is Iomega bothering with them? Sure, the old arguement that these products will spark disk sales (RecordIt for Zip and Buz for Jaz) has been batted around. The logic, however, holds no water. Not a drop. Products that spur disk sales are good. No doubt about it. The question is, should Iomega be in a business just to spark disk sales? I can imagine more than 20 different products/catagories that spur disk sales, from digital cameras to Internet "cache" programs to MP3 files. The question becomes, why should Iomega spend capital and resources to develop/purchase/market these products? RecordIt seems awfully similar to A2B or MP3 or any of the other programs/software that compresses audio and attempts to retain the majority of the sound quality. If the market for this software is there, it will sell disks, whether Iomega has a product in the space or not. It is like believing that without an Iomega branded digital camera, digital photography won't spur disk sales. Wrong. Iomega is wasting precious capital and other resources on products that are designed purely to DRIVE sales to other products. Fine, in theory, but why bother when OTHERS are already doing that FOR YOU? Why not let them drive the market for consumer level digital video or digital audio compression or whatever? Why not let them take the risk, spend the capital, expend the resources on building the market while you sit back and reap the rewards from the increased need for mid-level/high-level removable storage? In terms of Clik!, nothing real can be said. People can claim it is the holy grail or destined to utter failure but the fact is, no one really knows and guesses are even worth less at this point because no one has any real idea of when the product will actually be for sale. Oh, sure, announced ship dates have hit the public domain, but these aren't worth much when you view the historical record. It can easily be argued that launch date is directly correlated to chances for success. Zip two years later wouldn't have been such a big deal, would it? WHEN Clik is introduced is extremely important and even those who pretend to know so much don't have any real clue when Clik will hit shelves. I doubt Iomega knows. The Operations: Iomega has been constantly plagued by operational problems. From European distribution to Zip production line shut-downs to disk recalls to delayed product introductions, these operational screw-ups have cost Iomega money and credibility. One is easier than the other to recoup. There are those who like the convienent excuse that suppliers have been responsible for some of these errors and therefore, Iomega is not responsible. The answer is, Iomega's revenue and earnings and name are attached to the final product. If the suppliers are not trustworthy, then get new suppliers. If certain parts are mission-critical and drives cannot be shipped without them, second-source. Inventory management is an intregal part of operations. Dell is the single greatest example of a company that excels is this area. Apple fails miserably. Operational excellence means production lines running as close to perfect as possible. It means strong supplier relationships. It means inventory management to reduce holding costs while balancing with the cost of missing parts. It means never shutting down a line due to supply problems. The Corporate Financial Structure: Iomega has practically no debt and almost $200 million in cash and marketable securities. This equals over 10% of annual sales. Companies rarely need hold more than 1% of sales in cash -- to meet obligations and correct for timing differences between inflows and outflows. Any cash beyond 1% -- or even 2% to be generous -- should not be considered operational but a financial asset. This means that Iomega has more financial assets than it does financial liabilities. This is the same as having negative leverage. Not exactly the smartest move as debt carries a tax shield. (also remember, Iomega is FCF positive, which means, for those who trumpet that like a star, that growth is less than profitablity, ie., this ain't a high-growth company anymore, especially when you look at WHAT that profitability is -- net margins aren't exactly stellar) To consider what the effect of negative leverage is, think of your own portfolio. Imagine you have $100 in assets, $90 in stocks and $10 in cash. If your stocks are returning 20% per year and your cash returns 5% per year, your total return on your portfolio is (90*1.2)+(10*1.05) of 18.5%. That cash acts as a drag on your total return. (consider the 20% your RNOA and $90 your net operating assets or NOA). Now consider your portfolio, but this time, you have $50 in debt that you have borrowed and invested in the stocks. You now have $150, all in stocks, returning the same 20% (it can be argued that the more projects one undertakes, the lower the return, but we are assuming that Iomega has similar NPV projects it could undertake). You also need to pay 5% on your debt, or $2.50 in interest payments. You now make $27.5 in profits on the year instead of $18.50. As well, that interest payment is tax deductable. Leverage, of course, can work both ways, but if a company has a return on its Net Operating Assets (NOA) that exceeds its cost of capital, leverage can be a huge bonus. Consider the above example. If the return on the stocks was under 5%, our cost of capital in the above example, the leverage would work against us. Not only does leverage help increase the return on shareholders equity, but it also helps a company in two ways: (1) the tax shield; as interest payments are subsidised in part by Uncle Sam (2) debt is cheaper than equity and by issuing debt, we lower a company's weighted average cost of capital (WACC). A lower WACC, or cost of capital, means the company can undertake projects it might not otherwise be able to undertake. Consider the same above example. If our stock return was indeed only 4% and our loan rate (cost of capital) was 5%, we wouldn't invest in the stocks. However, if we could lower our cost of capital to 3%, then we would have a project that would make sense. Debt lowers the weighted average cost of capital and permits a company to undertake projects that otherwise would not make sense. If debt is so good, one might ask, then why not leverage all the way? You have just have hit on a leveraged buy-out which also points out a problem with debt: too much and the company's EBIT flow will be all gobbled up by massive interest payments. It is like making $5,000 a month but then having to pay $5,000/month in rent. Not much left over for food or other fun stuff. Worst case, of course, is that your "income" falls below $5,000 and you can't make your "rent" payments. Default. Living in the street. Nasty. I am not suggesting Iomega leverage itself to the hilt. One way to consider the relative "safety" of a certain level of debt is to consider a coverage ratio. For example, if one did make $5,000/month, how much of that should go to "rent"? A coverage ratio of 3 is relatively conservative -- that means, the EBIT stream can cover the interest payment three times over. For example, an EBIT of about $150m annually means Iomega could afford $50m in interest payments per year and still have a relatively large cushion of "safety." Actually, EBIT would have to drop by 66% before Iomega hit trouble. Ignoring taxes (not cost of debt) and assuming a corporate borrowing rate of 9%, Iomega would be able to borrow over $500 million. More when you get more specific. Just keeping things simple. I am not even suggesting that Iomega borrow $500m. I do believe that the current state of negative leverage (or minimal leverage depending on how one catagorizes the cash and MS) is only hurting shareholders. With interest rates so low, Iomega looks pretty stupid sitting there with negative leverage. Before I get bombed, I do know there are lots of companies that sit on piles and piles of cash and have no debt (Microsoft and Walgreens spring to mind immediately). That doesn't make them smart. Microsoft has such a high return on net operating assets (RNOA) that the huge negative leverage doesn't even bring MSFT's return on common equity (ROCE) down to that of "normal" companies. In otherwords, MSFT does even better than they show because they have a "drag" on their performance due to the billions in cash earning much less than the operating assets earn. Debt. Now. The Management: This company has accomplished some wonderful things. Taking a $150 million revenue company to $2 billion is an incredible accomplishment in anyone's book. However, getting from $2 billion to $10 billion is, argueably, a somewhat different set of skills. Iomega has shown itself to be lacking in its ability to talk with Wall Street (Edwards' reported comment bashing business schools is somewhat emblamatic of the attitude that makes me cringe). Does this matter? Well, selling debt costs you and it will cost you MORE if Wall Street doesn't like you. That is a DIRECT and FINANCIAL reprocussion of Iomega's inability to deal with Wall Street and one that should be considered in light of the negative leverage Iomega currently carries. There are other less direct effects, including lack of equity analyst coverage (which also impinges directly on the cost of capital). That aside, I do not wish to take ANYTHING away from current management re their accomplishments to date. However, I question, due to all of the above, whether the current management team, without some augmentation/replacement, is capable of taking Iomega to the "next level." In my opinion, Iomega is sorely in need of a COO who can bring even just 25% of Dell's operational ability to the game. Iomega is in need of both a CFO and a treasurer who understand Wall Street and understand the negative leverage for ALL of 1997 only HURT shareholders and the return on common equity (ROCE). Iomega is in need of new and specific guidelines in relation to shareholders and management. I have previously suggested that Edwards and top management sell a portion of their stock EVERY window to reduce the signaling effect (it would also have avoided much of the "case" in the current class-action lawsuits) instead of the current lack-of-policy where management sell large portions of holdings and leave shareholders and Wall Street guessing. I have suggested that Iomega disclose to shareholders that information with is MATERIAL and in no way discloses trade secrets. Again, Iomega management has accomplished some wonderful things IN SPITE of the errors they have made. That does not diminish the value of the accomplishments. Nor does it absolve them from blame going forward. The world of technology does not sit still. Evolution can pass one by. The window of opportunity will not be open forever and costly errors just may keep Iomega from further accomplishments on par with what they have done the past three years. The next level. Who will get them there? I believe the board may need a change. The Conclusion: I have not discussed the inherent risks, such as Nomai's infringement on Iomega's intellectual property, or various and several touted competitive products. While I believe these risks to be substantial -- and, in the case of Zip/Jaz disk knock-offs, more real than at any time in Iomega's recent history -- I consider them hazards of the business and somewhat out of management's control. Those are mainly EXTERNAL factors rather than factors internal to the company. Make no mistake, however, I do believe that consideration of those risks is important, especially the IP issue. In the end, though, Iomega has the most control over its own product lines, operational systems, corporate financial structure, and management teams. I know there are those who believe Iomega to be perfect, or those willing to overlook the "flaws" in light of the possibilities. Frankly, I find that to be an "ostrich" attitude. Iomega, through errors in product line, operations, corporate financial structure, and management, is costing shareholders. Thankfully, as I said, these are INTERNAL problems and thus more easily fixed than others. That makes it all the worse that these mistakes CONSTANTLY occur. for example, cash and cash equivilents increased 68% in 1997. Increasing the negative leverage? What sense does that make? This was not meant to be a balanced opinion, so please, spare me the rosey tirades, the "vision" thing, and the rest of the Utah love-in. There ARE problems with Iomega. The press, short-sellers, and whatever other conspiracies the PARANOID can dream up are NOT responsible for Iomega's choice of product line, for their financial structure, or the delay in product introductions that have become the norm rather than the exception. Those are IOMEGA'S FAULTS, IOMEGA'S PROBLEMS. Which makes them all the worse. They should be fixed. They should not be tolerated or excused away or explained with "well, they want to get the product RIGHT so they should delay it." Then don't announce it, dummy. Anything constructive can be emailed to bel4@columbia.edu. The rest, including the usual flames from the usual morons, will be sent to the garbage. Unread. The Ides of March, 1998 (C) 3+++++++++++++++++++++++++++
Subject: Q1 earnings warning Just released on CNBC, Iomega has issued an earnings warning for the first quarter, saying it will be lower than Q1 1997. Looks like they're expecting to post a loss. This is an amazing turn of events for a company that has never before commented on analyst's estimates. I have to think all these class action suits had some bearing on this change of attitude. Not a happy day for we shareholders. 4+++++++++++++++++++++++++++
Subject: Re: Ah, the King!
Well, since my Zip has left me
Oh, I benn so stupid, baby
The stores were always crowded
Oh, I benn so stupid, baby 5+++++++++++++++++++++++++++
Subject: No "I Told You So" Here Folks, the ugliest thing on a bloody day is some moron coming onto these boards and saying "I told you so." Could I do that? Well, yes, but I come not to bury Caesar, instead to console him... To all you longs who haven't been planning on holding this stock well into the millenium: I'm sorry about your loss. I've been there, over and again with this baby. If you are still a holder, or a trader, or an investor-to-be in Iomega I think you can begin to ask some tough questions now about the future: 1) Why does the internal Zip have such poor penetration at retail? The new Fry's in Sunnyvale -- a mega-store's mega-store -- has one Zipped machined on display, the Compaq 4550 (I believe). The new Sony's all have no Zip drives built in (at least the three new models at Fry's). I know, I know you're all gonna mention the Best Buy thing, which is nice... But it still requires the consumer to pro-active seek the Zip drive and be willing to wait for aninstall thereof. Despite the great, great success of Zip to date, it has not become de rigeur among the retail computer shopper. As for the corporate shopper, the recent addition of the Zip as an option in Dell's corporate line and the long-time similar offering for HP's corporate line is good, but what are the penetration levels there. This is a "cross the chasm"-type year for Zip and you really ought to want to know if the Zip is crossing the chasm. So far, the information is sketchy. And disappointing Q1 numbers in worldwide aftermarket sales aren't exciting... which leads to... 2) What is going on in the aftermarket? We can assume that in markets where SyQuest has presence, Jaz sales have continued to be highly disappointing. The lack of Jaz2 on the shelves (still none at Fry's by the way) is not helping at all, but Jaz 1 is still pricey and -- remarkably -- there is nothing on stores shelves explaining to consumers why they should pay 3x per cartridge what SyQuest charges. As for the rest of the aftermarket, I dunno... I feel like external Zip is still selling well but that the price cuts are leading to some of the revenue shortfalls at Iomega. The mix of Zip and Zip Plus is obviously skewed massively toward Zip, especially when Zip Plus looks unattractive -- again -- when compared to SyQuest products. Keep in mind, I believe stealth price cuts went in on Zip sometime in Q4, which is what allows you to see $99retail pricing. The "official" Zip price is $149, but the wholesale price is set to allow something much lower -- while still maintaining normal margins at retail. One gets the feeling, too, that tape-drive sales aren't picking up and may be declining. This does not help matters, obviously. 3) Whither the ad campaign? In my mind, the ad campaign is pretty good in print, pretty mediocre on TV, but some action is necessary... The question is: When do you pull the plug? I have assumed that the vast majority of these extra expenditures are going to the U.S. market -- not Europe or Asia. It would interesting to know this... More fundamentally, however, the question is: How and when do you measure the ROI of the campaign? The core of the campaign is designed to push retail sales and obviously, based on the pre-announce, that hasn't happened enough so far. So what, I say... It was gonna take at least 3 months (not 2 1/2) to even begin to see the results... Sadly for shareholders, that means you'll see the expenses continuing through much or all of Q2... Somewhere along the way, Iomega will do a return-on-investment calculation to figure out whethere thecontribution margin generated by incremental retail sales meaningfully exceeds the costs of the ads (or something generally like that). If so, the brand-building and move towards Zip as standard are gravy. If not, it's time to pull the plug. 4) What is the corporate focus today? I would think Iomega would still be single-mindedly working toward replacing the floppy with the Zip. We have seen the math: Doing this would make all shareholders very happy over the next decade. Instead, as Ben and others have noted, we see strage initiatives which are targeted at increasing consumption of drive space and/or Iomega disks. I am of the opinion that there are literally a thousand things Iomegacould do to help us all need to save more stuff. But so what? That isn't their friggin' business. Their business is getting the Zip to replace the floppy. If $10 million were spent on R&D for things like RecordIt and Buz and whatnot, that $10 million could be used to directly lower the wholesale price of the Zip drive by about $1. Now, that in and of itself isn't exciting, but I gotta believe that with the $1,000 PC sweeping retail, Iomega needs to get the Zip drive price down further and much faster. All R&D initiatives not devoted toreducing Zip and Jaz product cost right now seem questionable to me (obviously, you do want some long-term initiatives that won't pay off soon, however). Iomega is already running the Jaz business like a cash cow, without a big enough installed base to make that as shrewd as one might like. I am mystified there has been no Jaz cartridge price cut to accompany the drive price cut. If you are using Jaz drives internally and are less concerned about moving the cartridges or mailing them or whatever, it's almost foolhardy to buy Jaz right now. There are entire hard drives routinely available for 4 cents/MB. These drives are faster than Jaz, more reliable than Jaz (carts are inherently a risky way to store data vs. fixed drives), etc. If you needed to move data around a lot, you'd need Jaz, but I always thought the Jaz market was much more: It was supposed to be a cost-effective means for people to work with large files because adding drives was less efficient for that. What's the average Jaz tie ratio? Let's say for fun its 5 (+ the 1 people get for free). That makes 6GB cost about $800. 6GB of hard drive costs $240 at retail. If I needed both space and performance and portability, I'd buy the hard drive and the Jaz drive (to get the one cartridge) and never buy a cartridge again. Jaz cartridges are, in a word, a ripoff. And the situation will get worse unless Iomega cuts prices a lot here. I don't think Jazis being positioned to cross the chasm. The price cut was done in response to sales drying up (I can prove this with the catalogs from MicroWarehouse, etc. -- even 45 days before they cut the price of Jaz 1, they didn't know they were going to do it). They haven't gone far enough here. By the way, what is Buz? Why would I buy it? In all honesty, I don't really understand the answer to that question... This kind of line extension is not a demonstration of a focus on a core competency. 5) When is is time to "increase shareholder value?" Let's assume for arguments sake that Iomega believes it will return to profitability in the second quarter. If so, a $200 million bond offering would seem to be more than ripe for the picking. Instead of using the money for "general corporate purposes", I'd put every single penny into a share buyback. You could take out more than 10% of the shares today with that move and that would be apowerful signal. The interest payments, as Ben notes, act as a tax shield to help preserve future earnings. There may be a case for an even larger bond offering but I'm less comfortable on that without a picture of future earnings. The $200mm would cost $30mm annually in principal and interest, which should be less than one-third of annual earnings. Side note: If the "analysts" downgrade the stock here, it almost certainly means the bottom is near or has passed. If the analysts are silent, I'd be worry the stock will fall further still... They seem to be a highly contrary indicator in situations like these. 6) Is this the right management team to take things to the next level? Others have asked this already and I've got very little to add. One thing is clear: Len Purkis has done a great job to date. He must now move on. This company is apparently too big and too complicated for him to manage effectively its financial affairs. That is a sad but true fact. I am a bit dry right now, but may come up with more later. Again, to the longs: Sorry. To the shorts: All of you here are too arrogant and obnoxious to be worthy of any congratulations. 6+++++++++++++++++++++++++++
Subject: Re: MicroZip http://www.microtech-pc.com./english/products_microzip.html A picture and info on the MicroZip. Sharp looking. Nice industrial design. _______________________________
End Report. Posts covered through 9:00pm ET 3/16/98.
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