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Thursday, March 19, 1998 Wednesday, Iomega closed at $7 1/4, down $1/8 (-1.69%). TODAY'S RECAP: No devastating announcements hit the wires yesterday, so the Iomega message board returned to a former level of balance and analysis. Despite this, there was still an undercurrent of nervous tension, resulting in numerous lengthy posts about the nature of the company, the future of the company and hopeful projections for the Zip and other products. 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++ Clay Hagan reports that H&Q's estimate for IOM drops 40 cents.
Recap written and posts compiled by TMF
Weekly. _______________________________ And now, the Best of the Board...Started 9:00pm ET 3/17/98. 1+++++++++++++++++++++++++++
Subject: H&Q: 10 cents in 98 In "Bear Hunt: Iomega's Long Journey from Stardom" By Eric Moskowitz, 3/17/98 5:51 PM ET, Full article: SI: Any info about Iomega (IOM)? (#50478/50519) The following bombshell was found: "Hambrecht & Quist's Todd Bakar downgraded the stock to a hold and lowered his 1998 earnings estimates from 50 cents all the way down to 10 cents. (His firm did participate in Iomega's public offering.)" 2+++++++++++++++++++++++++++
Subject: A loss of how much, Iomega? In the 4th quarter of 1997, Iomega spent $128 million running its business. That figure includes two of our favorite income statement categories: 1) SG&A, selling general and administrative -- Regular folk call this overhead 2) R&D, research and development -- Regular folk call this R&D No matter what has happened to sales this quarter, we can reasonably conclude that these figures will be essentially the same this quarter as they were last quarter plus about $20 million in incremental marketing expenses (which appear in the SG&A line). That puts Iomega at $148 million in so-called operating expenses. The other part of the business, net sales, is determined by taking revenues and backing out what are called COGS, cost of goods sold, or all the dollars it takes to build Zip drives, Jaz drives, cartridges, Buz boxes, etc. etc. etc. These include materials, factories, etc. The net of sales - COGS is gross margin and it's the number from which all other expenses get calculated. In Q4 1997, Iomega had $547 million in sales and $364 million in COGS for a gross margin of $183 million. The "gross margin percentage" that is gross margin / sales equaled about 33%. Let's assume for arguments sake that number stays constant this quarter vs. last quarter. In other words, gross margin is 33% regardless of total sales volume. Iomega itself projected sales flat with Q1 of 1997, a quarter in which sales were $361 mm. If that number comes to pass, gross margin will be about $120 million this quarter. Assuming SG&A is constant, plus the $20 million, Iomega would lose at least $28 million this quarter. Obviously, all these variables could change. Improvements in gross margin -- highly unlikely -- would narrow the loss, even if sales were really $361 million and SG&A was what I am throwing out there. Similarly, if revenues were higher, the loss would shrink. On the other hand, if SG&A were even higher, the loss could be worse, perhaps as high as $40 million. Iomega intentionally projected a loss of $10-25 million, the low-end figure of which is close enough to the figure I put in bold above as to be essentially the same. Because gross margins are more likely to be worse than better -- Jaz price cuts occurred long before the higher margin Jaz 2 began trickling in, all else was probably pretty equal -- my suspicion is that sales may be somewhat better than what Iomega now sees as a worse case. It would have been insane to project $10-25 million in losses if $40 million were to be the real number, so I'll rule that out for the time being (I know, I know, some of you nowthing Iomega is a bunch of hypesters, shysters, cheaters, liars, whatever; I don't). To get the loss down to $10 million, again assuming $148 million in operating expenses, would require gross margin of $138 million... If the margin percentage were 33%, that would bring sales all the way up to about $415 million. I find that number a lot less sickening than $360 million, albeit still a bit horrifying. To get the quarter to breakeven would require $445 million in sales, which Iomega apparently has ruled out for the time being. Now, of course, they projected this loss without knowing exactly how things would turn out. For instance, a lot depends on getting Jaz 2 drives into the channel fast enough. At an average of perhaps $400 per drive, 50,000 Jaz 2 drives would account for $20 million in revenues... I suspect there are enough Jaz 2 orders(despite the drive's outrageous price) that if the drives could ship on time, Iomega could recognize all that revenue. [Note: The company is conservative on recognizing revenue. If channel inventories were to rise beyond 30 days, they wouldn't count shipped product beyond that 30-day barrier as revenue. The inventory left over after Q4 of 1997 accounts for a lot of this quarter's problem in an indirect way: Iomega had much of the product it already needed out there... Demand didn't pick up enough to draw down all that excess and require its rapid replenishment... Ahealthier sell through would've avoided all this trouble. Unfortunately, for whatever reason, demand is slackening. By the way, I'm not suggesting that the excess inventory from Q4 isn't revenue now -- most of it is -- just noting that the problems were already beginning last quarter as that inventory built up. My guess is that Jaz 1, especially cartridges, and Zip Plus -- the two most overpriced Iomega products before Jaz 2 shipped -- wereand are the bulk of the excess channel inventory. I want to credit Iomega here not for overproducing, but for at least not recognize revenue in an overstuffed channel. It took 3Com years to "get this."] Back to Jaz 2... It's also worth noting that Jaz 2 shipments will raise the overall gross margin percentage. The one nice thing about outrageous pricing is that it's usually accompanied by high margins and you can bet that both Jaz 2 drives and cartridges are right up there. Only Jaz 1 carts can hold a candle to the Jaz 2 products in the whole Iomega product line on a margin basis. [Note: Well, maybe Zip disks but I no longer believe those arequite as lucrative as has long been assumed. Very lucrative, yes, but not so much so that Iomega can sell all the Zip drives at cost nor, apparently, for Iomega to want to get all drives made by licensees.] In short, I certainly can't forecast the quarter's results better than Iomega, and I have to trust in some of their numbers right now. But it does appear that an incremental 100,000 Jaz 2 drives shipped could've corrected this quarter's shortfall by pumping well more than $40 million into the pipeline. Had Jaz 2 shipped in January, I wouldn't be stunned if thost kind of numbers were reached. But they wouldn't have gone to the more systemic issue: Overall demand for Iomega products is slackening... Not slackening in number of units, but the elasticity certainly isn't what was hoped for. Zip price cuts have not produced measurably more Zip drive revenues and the vaunted Zip disks are not selling quite fast enough to make up the difference. Iomega needs a massive increase in Zip drive sales and needs that soon. With ground being lost at NEC and Gateway to the LS-120 (touted in NEC's ads in bold print) and with Hitachi also going for a have-it-your-way approach in its laptops, increased competition could make things worse. Iomega is not using the price lever on the laptop Zip, it's using it as a margin cow, and I think that strategy is proving risky. The price advantage on the desktop is strong, to be sure, but a $45 OEM price is still way too muchfor the sub-$1,000 segment and especially for the sub-$800 segment. I don't know what Iomega can/should do here. The ads are designed to convince people that everyone needs a Zip drive. But everyone doesn't. What everyone needs is a least-common-denominator removable storage medium. Zip could be that as floppy was. But to get there Iomega needs everyone on board pushing it. That may prove to be attainable only if some of the monopoly lock is released. If I were Iomega, I'd find a way to co-opt Sony, NEC, Teac, Alps,Mitsumi, Imation, MKE, etc. and get them involved in seeing Zip succeed. A major hunk of a monopoly would appear a lot more attractive, I think, than no monopoly at all. 3+++++++++++++++++++++++++++
Subject: Whither from here? I've been buying shares over the last 6 weeks and was really shocked by this projected loss. I'm curious to know how people think the sub $1000 computer will affect zip sales. I see two things happening short term 1) 1st time computer buyers do not buy OEM zips--they do not have a use for them yet and tossing a zip on a $850 is much less likely than putting a zip in a $2850 system. Net result is lower % of computers carry OEM zips. 2) Experienced PC users buy OEM zip with their new computer (but they buy $1000+ system anyway because they want it to last at least a year before they upgrade again) b/c they know they will use it. [of course some of these users already have zips...] Many won't buy b/c not everyone needs or has a use for a zip (despite what the folks in Roy want us to think...) Longer term I see cheaper computers as a huge plus because as more people use computers, more people will find themselves using, sending, transporting, and backing up, large files. [It is my belief that files will continue to grow] More people will be using graphics (digital cameras-say sales of those cheap cameras may explode...), sound files, video clips etc. In short once there is a need to store, transport, back up, etc large files zip becomes a very affordable and compatable (i.e. standard--IOM has worked hard for this point) choice. The fact that Iomega has made the zip into a 'standard' for removable storage, is in my mind the key to Iomega's future. It is why I've invested in the company. I think one of the biggest fears for non-technical people buying computers is that something they buy will not work with what everyone else has. (Apple anyone?) This single factor (compatability) is much more important than price (as long as the price difference is small) or performance alone. Price alone--Why is Intel so big? Who wants to risk (i.e. fear--even among the technical astute) not being able to run some software at a later time to save a few percent on a new computer? Performance alone--Why is Microsoft so big? Sure the s/w is buggy and crashes and doesn't do everything you want, but it costs the same and who wants to deal with converting files and maybe losing data every time they give or get a file? Lose both price and performance together and you deserve to become a has been. At any rate IOM is facing stiff competition and dominating in the zip market.{GOOD} It looks like they are losing the price and possibly the performance on the Jaz side (NOT GOOD). However the 1 Gig drive still has not reached critical mass and IOM has time to roll up its sleeves and re-enter the fray when they see it doing so. I am confident that they will--after all they made the zip so they know how the game works... Second key thing is that they are able to effectively litigate the Naomi/knock off issue. This whole stack of cards depends on the earnings from selling the disks for proffit. In the US, I think this is a gimme for IOM -- our system is based on intellectual property (among other) rights. Internationally I'm not as certain, but hey this Naomi (do they even have annual sales figures?) we are talking about not Microsoft--Advantage big boy IOM--if nothing else IOM can afford to litigate this forever (relative to Naomi's budget). So the challenges as I see it are maintain at least price or performance over competition (do both and you win) and rely on compatability to carry the sales. Second don't let your proffits go out the window b/c you did not argue your case properly--I see this as too obvious for IOM to screw up/fumble. They would not be where they are now (I'm talking company not share price <grin>) if they were incompetent. [Finally marketing is great at IOM--lots of people want a zip (obviously lots do) but people (the rational ones anyway) will only buy it if they need it--so spend your money creating the need (ala buzz) and keeping price/performance in line. Leave the superbowl adds to the companies with $100 billion market caps... Thanks for your attention (reading this long post) and please (as if I have to ask) tell me what I'm missing, 4+++++++++++++++++++++++++++
Subject: Re: No "I Told You So" Here << From: NSACORAF "I have come to the conclusion that, in fact, the Zip drive, for me, is a fad. I own 2 of them and 2 Jaz Drives, and I find the Jaz much more useful - for backup, etc. The average person just doesn't use the Zip ENOUGH to make it necessary." Your idea of who is the average person I think is not well taken. I have used my Zip drive everyday that I have been on my desktop computer for the past 3 years. >> I agree. I use my Zip all the time. The concerns I now have with Iomega are that they are hitting a lull in sales here for a while. As I mentioned, the low hanging fruit is gone. In another year or two or three maybe we will be getting new computers and buying Zips Built In all over again. But in the meantime, it looks to me like growth will be very hard to come by. I don't blame Iomega's slowdown on LS-120, Shark or SYQT. And not on the threat of HiFD or UHC 130 (why do I care about 30 more megs?). Life will be very tough for those new players. I also have concerns about the OEM biz. The good news is that Zip gets in more & more boxes. The bad news is that if box sales slowdown, that now has a direct effect on Iomega's sales. Maybe Iomega will curtail the ads. How would that help sales? H&Q at $.10 sounds awful low for the year. But even at $.20, IOM is worth no more than $4 at this point. I doubt it will get that low. Maybe $5. I don't forsee much positive in IOM until any positive Clik announcements come in. Maybe KE needs to fire that "price cut" bullet? Who knows? 5+++++++++++++++++++++++++++
Subject: Swan Drive's swan dive I had previously posted some of these remarks on the AOL's other IOM board, but it bears paraphrasing here: There is no credible reason for anyone to believe that backward compatibility with 1.4MB floppies has ever been or ever will be a selling point for more than 1 or 2% of the market. That's the crumb which Swan (and Imation and Sony!) will be fighting over. And it's a losing battle from the start. With PC sales in general decline and sub-$1000 machines becoming widespread, a high-density Swan drive would have to cost OEMs the same -- or very, very nearly the same -- as a standard 1.4MB floppy drive in order to have a prayer of being included in new boxes. That would be... what, about $20 per internal drive mechanism? Good luck, Swan. Iomega faces the same obstacles trying to sell Zip drives to OEMS at around $50 apiece, and Iomega at least has tremendous economies of scale working in their favor. Zip first met with success because it could be added to existing systems as a portable external. Whereas, it is inconceivable that the public would ever embrace an external high-density floppy drive format that looks, from the outside, exactly like their standard internal floppy drive. Internal or external, Zip drives look "special" ... they look like added value. A Swan external would just look redundant. And only the most diehard techies would ever pry their reliable old floppy drives out their existing boxes just to start using internal high-density floppies with no track record. History and precedent are perfectly clear on this. Does no one else recall that, just five years ago, Iomega marketed its own backward-compatible 20MB "Floptical" drive and disk format? The floptical story should be an object lesson for anyone who has a vested interest in Swan. In that pre-Zip era, flopticals sure sounded like the next big thing in storage, and 20MB seemed like a veritable bottomless pit in which to transfer and back up large files. Standard floppy compatibility also seemed like a valuable selling point, considering the unpleasant alternatives -- bulky, balky and expensive Syquest carts, or those equally cumbersome Bernoulli Multidisks. I liked the idea behind flopticals so much that I bought TWO of their drives. That purchase, plus a box of five 20MB disks set me back almost $800 in 1994. And that's exactly why flopticals were a complete flop. To some extent, Iomega can take the rap for failing to market and promote the advantages of the format. IOM was also shortsighted, failing to foresee how swiftly a 20MB capacity would become irrelevant and obsolete. But the larger, inescapable problem was that the drives were way, way too expensive to manufacture, relative to standard floppies, to justify their inclusion at the OEM level. Sure, I suppose IOM could have gone with the razor/blade model and given away floptical drives below cost. Syquest is (reportedly) doing the same thing now with its SparQ drives, and I suppose Swan could do the same thing next year. Syquest may yet succeed with this strategy, but they have the advantage of strong distribution channels and name recognition, plus a slew of (inexplicably) good reviews in the trades. What does Swan have in their favor, besides its own insistence that its format is "technically superior"? If that were the single most important selling point, we'd all be watching our BetaMax VCRs and websurfing on the latest generation of Amiga computers. Perhaps the gentleman who has repeatedly boosted Swan here would care to explain in factual detail why Swan is capable of capturing more than a 1% market share -- or why it should matter to investors in the first place, since there will apparently be no IPO in our lifetimes. Meanwhile, I would describe Swan as nothing more than a curiosity verging on an annoyance, like a speck of dust on the monitor that won't blow away. 6+++++++++++++++++++++++++++
Subject: 1.44 vs. Zip (was Bonheaded advertising) << "Speak with Microsoft, Offer them ZIP disks at cost for the new Windows software. Would it hurt sales? NO, These disks will be CD roms if IOM does not ACT NOW." I would bet my portfolio that even if Iomega decided to do this (which has a zero percent chance of happening, by the way), that the disks would be CD-ROMs anyway. There is exactly NO leverage for Microsoft in moving away from the proven CD-ROM, which comes with EVERY desktop computer shipped today and most laptops, and moving to the Zip drive, which is on well under 10% of computers in use today. >> You are most correct. Also, no one is going to ship on Zip disks for two other reasons. 1) Capacity - You can't store Win '98 on 100MB. 2) Erasability - You can't erase a CD, which adds a little security to the software. Microsoft doesn't need the headache of customers calling them for replacement Zip after they (or their dog) accidentally erase the disk. Mark - in re. your remarks about posting here. Don't let the uneducated get you down. I am long, and I find your posts very informative. If I had gotten into IOM three years ago, I would have joined you in selling. However, as I am a new long, I will be holding onto IOM into the next century, at least. I don't find the ad budget to be as troubling as the vapourware problem, and missed ship dates. I feel IOM should be agressively pursuing PC vendors, and doing anything possible to get the Zip in their machines. Also, I strongly feel the IOM should be buying back shares, a good short-term move on their part. Somebody was talking about replacing the 1.44 FDD and the cost of same. Based on my sources (price lists from a variety of resellers and wholesalers, I would say that FDD's are running about $15, so that would have to be the target OEM price for IOM to get to. The problem with all of this, is that there is not anyone brave enough to just drop the 1.44 FDD from their machines. The comparison was being made about the 5¼ FDD giving way to the 3½, so whycan't the 3½ give way to the Zip? Well, one basic problem: When the 1.44 came on the scene, it replaced the 1.2 because software makers had an incentive to move (use less disks, spend less money). At the time 1.44 came to market, programs were getting more complicated, and requiring more disks to install; thus, moving to larger capacity made sense. Software makers drove the 1.44 market when they started shipping software on 1.44 disks. Consumers accepted this, depsite initial higher cost and marginal gain (about a 16% increase in space) for three reasons: 1) The 1.44 was smaller than the 1.2. There is an expectation in the computer world that everythings is *supposed* to get smaller. 2) The 1.44 was obviously more resilient than the 1.2. It was hard, and less susceptible to damage than the 1.2. 3) 1.44 did not need "sleeves", which was one less thing to keep track of. Now, let's look at the Zip situation. 1) Zip is larger than a 1.44, but the jump in capacity is 6900%. The Zip cost less on a per MB basis, roughly .13 versus .34 cents. 2) Virtually all software is shipping on CD-ROM these days, and this will not change for some time (oops, I forgot one other reason software makers like CD-ROM: It is harder to pirate than floppies). So, software makers are not driving users toward Zip as they did 1.44 drives. This leaves the job to hardware makers who are not to good at establishing any kind of standard (X2 or K56Flex? anyone?) 3) Zip has a major jump on competitors at the moment, but does not appear to be leveraging this position. Each day that goes by, they lose a little of that leverage. Anyway, to cut a long post short (too late), only the *hardware* side of this business can make Zip a standard, and only by coming up with a compelling reason for it to be there. Just my comments, FWIW _______________________________
End Report. Posts covered through 7:00pm ET 3/18/98.
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