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Monday, April 20, 1998 Friday, Iomega closed at $7 1/16, down $1/16 (-0.88%). THIS WEEKEND'S RECAP: Iomega's Thursday evening earnings report and conference call certainly dominated message board discussion over the weekend as posters chimed in with recaps, reaction, and forward-looking thoughts. Some posters debated while other agreed; still others found news to share: the "release" of a new Zip drive for commercial sale. 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++ HYPEMENOT comments on Iomega's cash position
Recap written and posts compiled by TMF
Weekly. _______________________________ And now, the Best of the Board...Started 9:00pm ET 4/16/98. 1+++++++++++++++++++++++++++
Subject: Re: Quick thoughts... I concur with virtually all of the points MarkRogo made in his quick summary. I especially agree with the concern he voiced about the decline in IOM's cash position. When the company pre-announced an expected operating loss between $10 - $25 million, it was obvious that cash flow would be negative, but I doubt that anyone in this forum thought the number would be anywhere near as large as $145 million. Management said in the conference call that they expect cash flow (cumulatively) for the remainder of the year to be positive in the aggregate, but that does not preclude the possibility/likelihood that it might continue to be negative over the next two quarters (which may be one of the reasons Mark suggested the new management team are "masters of doublespeak"). Careful attention will have to be paid to cash flow over these next two quarters. While Iomega finished March with cash and temporary investments of $80.5 million (down from $196 million on 12/31/97) that number would have been $50.5 million if not for the fact that the company drew down $30 million from its credit facility. A couple of consecutive quarters of negative cash flow in the magnitude of $50 million or more (not to be taken as a prediction on my part) could raise important questions about IO's financial capacity and flexibility. FWIW, while I think the market reaction to IO's results will be negative (as was already the case in after-hours trading) my guess is that the stock will not pierce the lows reached during the previous week. Again, its purely subjective, but in my opinion the biggest issue for investors in IOM at this point in time is that the stock could be relatively stagnant until the Fall. For those here who have real conviction about the success of Iomega over the longterm, that shouldn't be any real impediment to maintaining their investment. 2+++++++++++++++++++++++++++
Subject: Re: Best News << The most positive news from the first quarter is that Zip shipments to OEMs were four times what they were in the same quarter a year ago. If I were an owner of Imation or Syquest stock, I would be troubled by that increase. That is the sort of increase that is needed to make the Zip a standard item. >> And they were flat to slightly down vs. Q4, which has to hearten Imation and Sony and Swan and whomever. They were up a lot over a useless number from four quarters earlier when Zip shipments to OEMs were relatively tiny. Who cares? I would say this: At 1M OEM Zips per quarter, Iomega is below 5% of the PC market for inclusion. I'd be looking for that number to somehow grow massively or else I'd be less convinced than ever that the Zip will replace the floppy. The momentum on that front has slowed dramatically. Iomega had better figure out how to start it up again soon. 3+++++++++++++++++++++++++++
Subject: My Conf Call Thoughts My conf call thoughts... as usual, I won't pull any punches, so if you don't like to read negative thoughts on a company you hold stock in, you might as well move on: Purkis continues to use doublespeak: While talking about Zip drive sales, and the sequential decline from Q4 to Q1, he claimed (twice) that there was an "expected seasonal decline". Yeah right. If this was an "expected" seasonal decline, why did raw materials in inventory rise from 180M at the end of Q4 to 246M at the end of Q1? He said, only when Rocker asked him, that this was "predominantly Zip". If the decline in aftermarket Zips was foreseen they wouldn't be stuck with all those raw materials, now would they? If some slob like me can see that, what are the pros seeing? We got Doublespeak. Not what I want to hear when the company should be saying..."Our operations are a mess from the very rapid growth we had previously experienced. This resulted in inefficiencies. We want to drive every penny of cost out of the Zip and improve its quality to drive sales both in aftermarket and OEM. That is our objective. And these are the steps we have already undertaken and are going to undertake in the future.....that is why we hired Flaig and he will tell us about that..." I'm tired of Purkis. I want straight talk, not mumbo jumbo. Let us hope the new CEO brings in a new CFO, or that Sierk takes care of the problem himself. Asia had 20M in sales. 20 crummy million. Last Q they not only did 49M, but claimed that the weakness in company sales was due to the fact they expected to do an additional 50M...meaning they thought they would do 100M in Q4, and they actually did 20M in Q1. Who is the person in charge of forecasting? Fire him/her. Sierk claims that this is a world class management team. I would feel better if he said they were in the process of building a world class management team, not that they already had one. I want to hear about reorganization in progress. I want to hear about change. Not stagnicity, if that is a word. He sees a 10% change in direction. I would hope for more. He gets no more than a "C" for those comments, and I am being charitable because he is new. A world class management team without a CEO? Licensees are expected to make 150,000 units/mo by end of year. Oops. Weren't they supposed to be doing that now? Query: Why would they make any at all if Iomega has 20M capacity and can't sell what they can make? Taylor, the new marketing genius, is, according to Sierk, already fully engaged. How fully engaged one can be when they are brand new is a fine question to ask. Oh well. Not blaming Taylor for that. I expect him to trash those ill conceived, widely panned, and completely directionless cargo plane and family ads we have seen. At one point in the cc during the questions, someone commented that "Marketing will be closer to the channel, closer to the customer. Ahhh, direction. I like that. Flaig is the new COO, and said immediately that the inventory build-up was the result of lower than expected sales the last two quarters...something that Purkis just couldn't seem to say. No, Purkis was stuck in "expected seasonal decline" mode. One says "expected" and th other says "unexpected". Going back to the issue of direction, Flaig showed he had actual plans...a man with a plan, I like that...some of his comments: - increased flexibility from suppliers - sales forecasting being improved - weekly inventory watch meeting to review - title transfer with suppliers changing from supplier to IOM dock - Oracle just brought on line in Feb in Penang - change from build to stock to build to order model key hires and consultants now in place - Inventory management, inventory managment, inventory management Oh yeah...revenues were higher than expected...their saving grace. If you are investing in IOM, it might be better to see this as a turn-around situation...at least that is how I hope management sees the problems. 4+++++++++++++++++++++++++++
Subject: Better than I expected I was pleasantly surprised, and maybe Iomega was too, that they did $408 MM in revenue. I was looking for something closer to $350 MM. They got Jaz2 out the door and it sold pretty well at the end of March. No Jaz2 sales in Europe or Asia which was part of the reason those regions were so weak (but not the only reason). Revenue up and Zip units shipped up over the year ago quarter. Through all this inventory quagmire people are still buying Zips at retail or in new computers in numbers that dwarf anything else out there. Zip installed base is near 14 million and one has to assume the worst case is 20 million installed by the end of 1998. Any pick up in sales off this seasonally slow quarter and you could see the installed base closer to 25 million by the end of 1998. Inventory and cash flow are a problem. Much of the conference call was dedicated to inventory and Iomega's focus on it. They spent a lot of money this quarter on new computer systems ($20 MM of SG&A if I heard correctly) to better track inventory. Iomega is putting in place, like the entire industry, a build to order system. Should be completed by the end of the year. Much of the cash flow drain and inventory number is from a $50 MM parts shipment Iomega had to accept this quarter. The parts will be used so its not a problem, except that it hurt cash flow this quarter tremendously. Finished goods inventory is about even, slightly up over 4Q. That is not great since sales dropped, but its not a runaway train yet. In fact, inventory of all products outside of Zip drives fell over the quarter in all regions. Iomega will target a 15-16% SG&A going forward. They won't get there overnight and it sounds like they will reduce the ad blitz in the 3rd and 4th quarters too. I believe that KE mistook a general PC industry inventory glut for a problem with Zip demand. The advertising blitz was a complete over reaction. Iomega will have a good handle on how well the blitz has worked in the next couple of months and rethink then. OEM shipments were 1 million units up from about 100-200K a year ago. That is impressive. I haven't seen the latest data on PC sales but its possible that flat OEM shipments combined with down PC sales from 4Q means Iomega upped its attach rate (OEM Zips per PC sold). But it wouldn't be much and certainly nothing to really crow about ;-) Tie ratios were up from the dismal 4Q but down from year ago. All those OEM drives reduce the tie ratio. However, I think 4Q disk sales can now be better viewed as having been caused by the lack of retail Zip sales due to component shortages last Summer. Jaz tie ratios are flat even though the new Jaz 2GB comes with twice the room per cartridge. Intel and Compaq thought they would work through their inventory mess by the 3rd quarter. Iomega thinks by the 4th quarter. If Iomega continues to grow revenues and can do so every quarter 10-20% then they will exit 1998 with about $2,000 MM in revenues. If they can grow revenues a further 20% in 1999 (Clik! becomes an important willd card) and scrape together a 6% net margin then were looking at $0.45-$0.55 in EPS and a forward PE of ~14. The above paragraph is sort of the story I will have in mind as Iomega losses most of its trailing EPS in 1998. Iomega will be a story stock and I think 20% growth is doable in revenues for the next two years. IOM is currently about 1.1X trailing sales. I still believe IOM should be valued even with CREAF's 1.5X trailing sales. I don't believe the hot money is going to want to own IOM unless some exciting new news comes. But I don't see the end of the company in this quarter's report. 5+++++++++++++++++++++++++++
Subject: Atapi Zip News Item Excerpt: << Iomega will announce a new low-price storage drive Monday for the retail market, hoping to capitalize on the low-cost PC craze and move past recent setbacks involving some of its older products. The Zip Internal ATAPI, to be released later this month, will enable lower-end PCs to incorporate the 100MB internal Zip drive that was previously only available with a pricier interface technology. The drive will be offered for $99.95. >>
http://www.news.com/Investor/NewsItem/0,213,0~0 6+++++++++++++++++++++++++++
Subject: Re: Atapi Zip News Item GMoney0214 posts: << Iomega will announce a new low-price storage drive Monday for the retail market, hoping to capitalize on the low-cost PC craze and move past recent setbacks involving some of its older products. The Zip Internal ATAPI, to be released later this month, will enable lower-end PCs to incorporate the 100MB internal Zip drive that was previously only available with a pricier interface technology. The drive will be offered for $99.95. >> The ATAPI Zip is already for sale at CompUSA (White Plains NY) for $99. The box very much resembles the Parallel port Zip box, except that the cover picture is that of an internal drive. Zip drives were everywhere at CompUSA, and you could buy a Zip at any of following price points: Free - With the purchase of a 7 Gig (?) Western Digital hard drive. $79 - Mismarked External SCSI/ Parallel Zip ($129) with $50 CompUSA rebate. $84 - Refurbished Parallel Zip $99 - ATAPI Internal Zip $99 - Correctly marked External Zip ($149) with $50 CompUSA rebate. $129 - Mismarked External Zip w/o rebate. $149 - Correctly marked External Zip w/o rebate. $199 - Zip Plus Take your pick! Zips were in plentiful supply... as well as a standing pallet of refurbished Internal SCSI Jaz for $179. Why the fact that retail ATAPI Zip was already available was not mentioned in the conference call is a mystery to me. The 1st quarter results and conference call were better than I had expected. Worldwide standards are forged in the U.S., and investors should watch those numbers and not be misled by the poor performance in Europe and Asia. Those regions may add to the bottom line, but are not the critical factor in determining the next FDD standard. U.S. sales were solid, with OEM Zip now constituting over 50% of drives sold. Margins are being squeezed by the OEM growth, and tie ratios are suffering slightly from it also. However, this is the road to standard and if successful the payoff will be worth it. SGA needs some drastic reduction, it does look out of control even allowing for the increased advertising expense. I welcome the new management, KE had to go (and Purkis too after a new CEO takes the helm). I believe the key to replacing the floppy is price, not advertising. If you can make the drive cheap enough, the OEMs will include it and the consumers will then demand it. This is a critical year for Zip, and if manangement has decided to forego short term profits in order to establish a new standard, I am all for it. The profits will follow soon after. Syquest, Imation still pose no threat at all in my view. It is naive to expect IOM to own 100% of the removeable storage market, 90% will be plenty good enough for me. ;-) As for Sony and Swan, it is smoke and mirrors until the product is on the shelf. Sony will have to beat IOM on price at the OEM level and they are in for a rude awakening if they believe that the public will pay extra for a larger disk or backwards compatibility. Neither of these features are as important as price. I am looking forward to watching Wall Street hail the great turnaround story of Iomega over the course of the next year, celebrating how the old management needed to be replaced before Iomega could be a "great" company. They write the history, so trying to argue is spitting in the wind. Skipping lunch, as I always do.... _______________________________
End Report. Posts covered through 9:00pm ET 4/19/98
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