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Wednesday, April 22, 1998 Tuesday, Iomega closed at $8 7/16, up $15/16 (+12.50%) TODAY'S RECAP: A very active message board awaited posters to the Iomega board yesterday... and the large jump in the stock price surely was no coincidence -- though I'm unwilling to say which is cause, which effect. "Iomega announced a letter of intent signed with NEC Corporation of Japan that, if finalized in a binding agreement, would grant NEC non-exclusive worldwide rights to manufacture and market Clik! mobile storage drives to worldwide retail channels and original equipment manufacturers (OEMs)" -- yes, that's straight from the press release -- but this news generated almost no discussion. Instead, posters focused on earnings, the "proper" way to establish or analyze growth, the new ATAPI drive and on how to become a standard. 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++ Janovsky1 on IOM growth -- bearish and bullish
Recap written and posts compiled by TMF
Weekly. _______________________________ And now, the Best of the Board...Started 9:00pm ET 4/20/98. 1+++++++++++++++++++++++++++
Subject: Re: OEM % of BUSINESS Increasing << Sorry Mark; Comparing unit shipments from one quarter to the next in the Computer business is an incorrect method of calculating whether business is growing or slowing. >> Sorry, KLinder, but Mark is absolutely right. Our goal here is to GROW OEM ZIP SALES! If we wanted to remain stagnant, at 5% or whatever the attach ratio is, then we would expect significant seasonality. If the Zip is going to become standard equipment on every computer, then I'm personally looking for OEM Zip shipments to be growing by at least 15% sequentially- every quarter, regardless of the market's seasonality. If management does their job, which is to convince people they need a Zip, then 15% growth sequentially in OEM Zips will be easy. Retail (external) Zips are a different story. It is reasonable that the market for an add on device such as the Zip has matured, and should therefore be seeing seasonality. The problem here is that retail Zip sales fell by something like 50%!!! Obviously the entire PC market didn't fall off by 50% last quarter. What does this mean altogether? Bullish (at least not as bearish)- they are having major inventory problems and are getting Zips stuck in the channel. Actually we already know this, but not the extent of the problem. If IOM shipped hundreds of thousands of more Zips in Q4 than they had to, it would make Q4 numbers high and Q1 numbers low. We know they have plenty of inventory, so supplying Zips was not the problem. Basic point of this theory is that they DID have growth in OEM Zips and less of a drop in retail Zips, but because of their accounting procedures, they recognized the revenue in Q4, not Q1. Bearish- they sold the correct (or about correct) number of Zips in Q4, and then there was a huge dropoff in demand (or demand growth) in Q1. This is undeniably bad. OEM Zips should be growing 15% sequentially (another 150,000 should have been sold) and retail should be down maybe 15% (max) for the seasonality of the computer market (300,000 drop, not 1 million). So they should have sold an extra 850,000 drives last Q. Actually, 150,000 OEM Zipsx$30+ 700,000 retail Zipsx$60= $46.5 Million, and there's a good part of what they missed original revenue estimates by. Both of these theories suggest a major problem. One is that demand is growing, but IOM is having a hard time forecasting it. That can be fixed by the programs they are now implementing. The other is that demand is not growing or actually dropped like a rock (for retail) in Q1. This is a major problem and will take a lot of work to fix. Either way it's a problem and it's wrong for anybody to believe a 50% drop in retail, or a 0% growth in OEM, regardless of what quarter we're in, is healthy if we're going to replace the floppy. 2+++++++++++++++++++++++++++
Subject: Re: OEM % of BUSINESS Increasing In article <1998042021284000.RAA23688@ladder01.news.aol.com>, klinder180@aol.com (KLinder180) writes: << Comparing unit shipments from one quarter to the next in the Computer business is an incorrect method of calculating whether business is growing or slowing. >> For a company that is attempting to replace the floppy and has very little OEM penetration comparing quarter over quarter is a better gage of current growth toward the goal than year over year. Use whatever method you want. Q over Q in this case is a more accurate indicator of growth than Year over Year data. It's very easy. If they have very little penetration into the OEM's why would you expect it to be a good thing if sales to OEM's were flat Q over Q? They have the production capacity, computers are still selling at a rate many times greater than the current Zip inclusion rate. Why wouldn't anyone that thought Zip was going to be the next standard expect Q over Q shipments to OEM's to increase? If Zip inclusion rate was say 80% then we might be able to argue your Year over Year numbers but only if the inclusion rate had been that high during both quarters of the years in question. You speak as if the market for Zip OEM is saturated. Look at the room for growth. It's basically the same from the 4th to the 1st quarter. Why didn't or couldn't IOM sell more drives? OEM growth 4th to 1st stopped. No growth quarter over quarter. 3+++++++++++++++++++++++++++
Subject: Re: OEM % of BUSINESS Increasing Its meaningless to compare the first quarter to the fourth quarter. The only reason any would do so is to show things as being worst than they are. Its also a little silly to use DELL's sales as a proxy for PC sales growth. DELL is rapidly growing but not because PC sales are rapidly growing. How about we use CPQ: 1Q97....$4.8 BB 2Q97....$5.0 BB 3Q97....$6.5 BB 4Q97....$7.3 BB 1Q98....$5.7 BB CPQ had revenues relatively flat with 2Q97 and so did Iomega ($408 vs. $410). CPQ's year over year revenues were +18%, not far from IOM's +13%. Total shipments to OEMs were flat with the fourth quarter. But as you can see, the biggest PC maker had revenues 22% lower from the fourth quarter. I think flat with the fourth quarter is fine, in the reality that is a slowdown in PC sales in the first 3 months of 1998. OEM unit sales for IOM were not only flat with the fourth quarter but they were higher than the first 6 months of 1997, almost double if my memory serves me. If IOM can continue to ship OEM Zip drives at a rate that doubles the combined rate of 6-12 months ago there will soon be Zip drives everywhere. Not saying they can do it, but just showing how far IOM is from this time last year in terms of OEM shipments. Again, comparing sequential anything between the 1Q and 4Q will only show things worse than they are. It is obvious that very few expected Sales over $400 MM from IOM. Things are better than was thought just two weeks ago. If IOM can continue grow revenues, even only 15-25%, through 1999, and meet their goal of returning to their previous business model in terms of expense ratios, that is about $0.40 to $0.50 in EPS at the end of FY99. Give that the a current market (S&P 500) multiple of 20-25 and you have a $8-$12.5 stock price. Anything from Clik and your talking higher revenues and EPS. 4+++++++++++++++++++++++++++
Subject: Re: OEM % of BUSINESS Increasing << Its meaningless to compare the first quarter to the fourth quarter. The only reason any would do so is to show things as being worst than they are. >> Watch this, Patrick. It's meaningless to compare first quarter to first quarter. The only reason any would do so is to show things as being better than they are. Actually, I don't believe either of the above, but I wrote it to show how you writing a declarative statement with your latest conspiracy theory is equivalently meaningless to whatever I write. In fact, almost everyone else who posted agree: A fast growing company uses quarter-over-quarter sales figures, not meaningless year-over-year figures. And, if we went your way, we'd still be looking at anemic 13% revenue growth for Iomega. << Its also a little silly to use DELL's sales as a proxy for PC sales growth. DELL is rapidly growing but not because PC sales are rapidly growing. >> PC sales are rapidly growing -- in units, the commodity Iomega shold care about it -- and using Dell in discussions of "fast growing" Iomega certainly seems fair << How about we use CPQ: 1Q97....$4.8 BB 2Q97....$5.0 BB 3Q97....$6.5 BB 4Q97....$7.3 BB 1Q98....$5.7 BB CPQ had revenues relatively flat with 2Q97 and so did Iomega ($408 vs. $410). CPQ's year over year revenues were +18%, not far from IOM's +13%. >> Compaq's average selling prices also fell by hundreds of dollars per unit. Compaq also makes a mature product that everyone has one of. Iomega makes a product that Compaq could've sold 5 million more of last year. << Total shipments to OEMs were flat with the fourth quarter. But as you can see, the biggest PC maker had revenues 22% lower from the fourth quarter. I think flat with the fourth quarter is fine, in the reality that is a slowdown in PC sales in the first 3 months of 1998. >> Believe what you want. The OEM Zip has little to no momentum. It has plateaued. << OEM unit sales for IOM were not only flat with the fourth quarter but they were higher than the first 6 months of 1997, almost double if my memory serves me. If IOM can continue to ship OEM Zip drives at a rate that doubles the combined rate of 6-12 months ago there will soon be Zip drives everywhere. Not saying they can do it, but just showing how far IOM is from this time last year in terms of OEM shipments. >> And how they've made no progress in the past quarter. <<Again, comparing sequential anything between the 1Q and 4Q will only show things worse than they are. It is obvious that very few expected Sales over $400 MM from IOM. Things are better than was thought just two weeks ago. >> Really? How so? It is apparent to me that the new management team is as willing to obfuscate, shift blame on irrelevant factors (Asian economies), fail to recognize that price and only price will get Iomega on the go again... I am displeased. << If IOM can continue grow revenues, even only 15-25%, through 1999, and meet their goal of returning to their previous business model in terms of expense ratios, that is about $0.40 to $0.50 in EPS at the end of FY99. >> Wow, so they'll fall about 15% short of my 1998 EPS target -- which I believed reachable just 3 months ago -- and they'll do that in 1999?!?!?? Yuck. That's a ccompany growing EPS at <10% year from 1997-1999. At a P/E of 15 (a 50% premimum to the growth rate you are suggesting on the high end), the stock will end up at $7.50 in 21 months.... Ooohhhh! << Give that the a current market (S&P 500) multiple of 20-25 and you have a $8-$12.5 stock price. Anything from Clik and your talking higher revenues and EPS. >> Why would something growing so slowly and so unreliably get the market multiple? Intel has the near monopoly and has proved that everybody does want their products (90% share) and they only trade at 22.5. Iomega surely would deserve no better under your scenario than Intel. I would rather see a lot less earnings, actually, through 1999 and a lot more unit/revenue growth. That would prove that the Zip was on its way to becoming the standard and would make the Iomega franchise a lot more valuable in the first decade of the 21st century. The boring, not-even-methodical, slow growth you are looking for would get almost no one interested in the stock from here and would further depress the share price. And surely, even in the wildest dreams of this board, at most 1 million clik drives would be sold next year, the vast majority OEM and only some built by Iomega. I don't see how even the best-of-all-possible-worlds $200 million in clik revenues (all totaled) next year could make too much of a difference... Zip is it. Make it the standard. Then the stock gets exciting again. At sub 10% EPS growth it drifts on an inevitable road to nowhere. 5+++++++++++++++++++++++++++
Subject: Adequate Choice (Re: Novice Sub-$1000 PC Users?) HRPlbg posted in "Re: Novice Sub-$1000 PC Users?": << ... I'm not saying that the drive will not be a success but that it will require additional support above and beyond the normal incremental support required for each additional PP Zip drive. ... >> HRPlbg may have pointed out and made me think of the beauty of the marketing wisdom (intentional or not) associated with the retail version of ATAPI Zips. People who for no reason are scared of opening the computer box and can't ever be convinced otherwise may stick with the external Zips for their existing computers; For most people who consider buying a new computer: if they incline to buy one with a Zip drive built-in (OEM Zip), and if all other features (or prices) of those computers that they consider buying, either with or without Zip standard or option, are equal or similar, they will choose the one with the Zip built-in. And for some people who are not afraid of opening the box, they may buy the new retail version of ATAPI Zips for their existing PCs. And they may also buy that ATAPI Zip together with a new system if the new computer that they choose (perhaps due to price or special sales at retail stores or some features) is not from a build-to-order house like Dell and if it didn't already have a Zip built-in. You see, the ones who are choosing to buy the RETAIL internal ATAPI Zips may be more computer hardware capable or at least consider themselves as such to start with. The ones who are NOW choosing external Zips may be less computer hardware capable or consider themselves as such. Before, there was no choice. Everyone, computer hardware capable or not, was forced to buy the external Zips at retail (Most of the early Zip buyers would be likely hardware capable though). And supposedly the retail Zips may have saturated among this core group of early adoptors who have been enthusiastic Zip owners and users (but they may still be using only one external Zip among 2 or 3 PCs). Now they find a reason to buy more Zip drives. In this way, the new RETAIL version of ATAPI Zips may not cannibalize that much (there will be undoubtedly some) on the external Zip sales. There may be enough people who for no reason are scared of opening the computer box and can't ever be convinced otherwise that may keep buying the external Zips for their existing computers or new computers without Zip already built-in. The sales of new RETAIL version of ATAPI Zips may be mostly or largely additional. And that is the beauty of it. Back to the point of Customer Support. If the more computer hardware capable customers are buying retail ATAPI Zips, and less computer hardware capable customers are buying external Zips, I don't see a DRASTICAL increase of the need for Customer Support per additional drive. You may have optimized the usage of Customer Support and appropriately matching customers to products. I do see some increased need for Customer Support regardless of my own arguement. But let's scare Iomega and tell them that there may be a DRASTICAL increase of the need for Customer Support. And let them be prepared. If there is indeed a drastical increase, let's see how good Mr. Quality and Customer Support, Sierk, the new/interim CEO and his new team are. Better customer support may generate tremendous good will and fantastic word of mouth advertising anyway. 6+++++++++++++++++++++++++++
Subject: Re: OEM % of BUSINESS Increasing Iomega has production capability to become standard??? I suggest you look at International Data Groups's predictions of PC unit shipents for the calendar year 1998. IDG estimates computer shipments will equal 93 million units. Iomega at best can produce 12-15 million Zip drives per year. Licensees at year end will be able to produce 125-150,000 zips per month. If you think Syquest can become the standard then you should run the math to see what their losses would be at producing 1 million units per month. The Iomega Zip is the only product that has anywhere near the production to start to become the standard. They are a long way away from becoming the standard. Meanwhile their sales will be influenced by seasonality factors. Sales in 1st Quarter 97 were $361 million sales in 1st Quarter 98 were $408 million. Not exactly a sales decline. Shark, ORB, Swan are all probably to late to market to become a standard. They will serve to keep prices going down; reduce profitablity for all; and deter new entrants to the removable storage market. The end of this war will probably come te way most disk drive wars end --- acquisitions of one or more of the major players. Who do you think is going to be bought. Syquest with all the debt and possible dilution? My felling is with the new management we will see a buyout offer very soon to the only long term viable candidate there is IOMEGA. _______________________________
End Report. Posts covered through 9:00pm ET 4/21/98
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