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Wednesday, September 18, 1996 Iomega was down $1/16 Tuesday, closing at $14 3/8 (-0.43%). TODAY'S RECAP: Tuesday was another one of those days that leaves a Fool scratching his head. Analysts at JP Morgan substantially lowered their earnings expectations for Iomega's third quarter, revising their 12 cents-per-share projection downward to 7 cents. The market shrugged off this news, and IOMG shares finished the day with a negligible loss. Some of the contributers to our board suggested that this is evidence that all the bad expectations for the third quarter had already been prefigured into the stock price. Then again, maybe we have all been mysteriously transported to a Bizarro Parallel Universe where "bad" means "so what?" In any case, it is quite possible we'll have the definitive answer by close of trading today. 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 IOMG Today window and try again.)
1++DaleVelk offers information found in his techweb search. And now, the Best of the Board... Started 3 a.m. 9/17/96.
1+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: IOMG Tech Web info update Date: 96-09-17 04:55:06 EDT From: DaleVelk
Lots of IOMG info in the latest techweb online search. Basic summary below:
1. IOMG technical support lines getting 3000 to 5000 calls a day, with new pay system wait time is running under 15 minutes on average. My comment: You get some "interesting" sales figures when you project sales volumes based on the #'s of calls and assume 5-10% of the new customers need to call for support.
2. The LS120 people are projecting cutting prices from the current retail of $210 by about 35% over the next 12 months. My comment: too little, too late.
3. Acer basic is confirmed to include the Zip 100 as standard equipment, company projects 100,000 units in first year in China, Latin America and other developing markets. The basic machine is a Cyrix 586 chip, 4 megs of ram, Windows 3.1, and the Zip, it hooks up to your TV, priced at around $500 retail.
FWIW
DaleVelk@aol.com 2+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: JP Morgan Date: 96-09-17 12:04:53 EDT From: LRiley9900
Finally had a chance to rewind this morning's Squawk Box tape. Here are the changes for Q3 per David Faber:
Was Now EPS .12 .07 Zips sold 900M 700M (units) Cartridge sales 4MM 3.5MM (units) Revenues 300MM 257MM Gross margin 26.9% 26.2% Net margin 5.2 3.8 He did not break out Jaz, Ditto, or specify what kind of cartridges were sold. Doesn't look like a terrible quarter to me. Louis 3+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Earnings update Date: 96-09-17 13:32:04 EDT From: MF CapnWil
First Call, as of Sept 16, has two estimates from brokers for the 3q, presumably H&Q and JPM.
H&Q was at 9c and JPM was at 12.
HD Brouse, whose estimate is not on First Call is $285 rev and 7c EPS. That would give a 9.4M net profit at a 3.3 % net margin using 134 mil shares.
JPM's new numbers, as reported by Louis Riley, were $257 rev 3.8% net margin and $.07 EPS. That gives a $9.766 mil net profit.
With JPM bringing their estimate down to the same ballpark as H&Q and HD Brous, I am more comfortable with the numbers.
Judging by the markets action this morning I would guess that the street was looking closer at H&Q's number of 9c than JPM's number of 12c. The price action took it down to 13 7/8 where it took out some stops, then down to 13 5/8 where it probably took out the rest of the weak hands in that area, and all on pretty high volume in a relatively short period of time. Then it began to settle down at about 14 by 1pm.
What does all this mean for the stock price in the short term? I don't have a clue, but I'm certainly not upset with JPM's numbers, because I feel they are now a little more realistic.
Bill 4+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Answers from IOMG Date: 96-09-17 16:01:23 EDT From: MF CapnWil
I spoke with Howard Kalt, IO's Investor Relations today and I'll be as accurate as possible in paraphrasing what he said. But I will not be responsible for any errors or omissions or misinterpretations. For best results, make your own telephone call and get first hand information. What you're getting here is second hand information that could contain my errors.
He said that Iomega has never had a deal with Sony to manufacture the 2GB Ditto Drives. Sony is mfg the media. Therefore, there has been NO CHANGE since the Press release.
He is not aware if Sony will put a Zip or Jaz in their new computer line.
Sony is still co-branding Zip disks. No change.
Acer Basic, as previously announced, will have the Zip as Standard.
As for the "guidance to analysts" question: NO, THEY DO NOT GIVE GUIDANCE TO ANALYSTS. However, If they see someone far off the wall, they may refer them to some industry sources, but that's it. ( From that I might GUESS that JP Morgan had been referred to some industry sources. Repeating, that is only MY GUESS.)
I asked the question; for investor guidance, if you saw earnings were coming in under what the analysts had printed, would you issue a pre-announcement. He said that "they do not answer if questions." He agreed that investors should have guidance but that was about all I could get. (My feeling is that they would make an announcement at some point if the analysts were far ahead of expectations and it were getting down to the wire, because of the legal implications if they kept quiet. But again, THAT IS ONLY MY GUESS)
I would not get my hopes up about IO beating the estimate of $.07 this quarter. In my opinion, they are still trying to build this company by sticking to their business model, and the summer was slow as they had indicated in the conference call.
Bill 5+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: My take Date: 96-09-17 17:42:22 EDT From: MF 2Aruba
Fools,
I'd like to take a second to post my thoughts on IOMG at this time.
Since the last conference call, we've been focussing on the word "challenge" that KE used. In hindsight, holding this stock has been just that, a challenge. It takes a strong constitution to stay firm in your beliefs in a company as you watch your portfolio value plummet with the stock price. I would've been the last person to expect I'd be holding my shares at this level.
But the CEO said it would be a challenging quarter, and the street has had its concerns over the valuation.
I would like to point out that he also made reference to (correct me if I'm mistaken) "looking to 4th quarter." With this statement, it seems to me that the company has very optimistic sights for that time. Perhaps that is when the OEM's begin to kick in. Perhaps that is when their time frame for production/sales will have a major effect. I don't know, but when the CEO says a quarter will be challenging, and another quarter is one to "look to" it seems fitting to place equal emphasis on all statements.
I have been convinced that we will not see the stock rise until we are at the period KE referred to--4th quarter. I expect that we will be relatively stable until then, but I certainly expect the price this winter to be far above its current levels, and that is why I am simply holding on to my shares. Hey, I don't want to give anyone a chance to get hold of them--I think they have very profitable potential. And if I'm proved wrong at that time, then so be it.
It seems to me that the street is expecting so little this time as opposed to the "whisper numbers" of last quarter. This seems like a much safer position to be in compared to all of the "blow out" estimates we faced at that time.
In fact, this seems like the antithesis of last time, where being on target was a bad thing. It seems to me that just being on target this time would be a very positive achievement in the eyes of the street.
I also find it reassuring that today's downgrade caused the end result of the stock price to be down only 1/16. It seems to me that all of the bad has been figured in. In addition, is it not beneficial that we now only have to come up with .07 to meet JP's estimates instead of .12?
These are just my thoughts at this time, FWIW.
I'm MF 2Aruba... ...but I still am...
Off2Aruba 6+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:4th quarter Date: 96-09-17 19:24:26 EDT From: MF Ben
I stated not too long ago that I believe the 4th quarter to be much more important to the long-term prospects of Iomega than the third. I still believe that.
We might want to accept that Iomega is in a seasonal industry and initial growth that muted the seasonality factor has now subsided somewhat. Intel's announcement, of course, also proves that seasonality cannot be used as a blanket excuse for sequential down quarters.
While the J.P. Morgan downgrade in EPS doesn't bother me much as I have been concerned with this quarter for the past two and a half month (not just the past week as seems fashionable all of a sudden with earnings around the corner), what DOES concern me is the revenue number downgrade.
A drop in revenue can only mean one (or a combination) of three things.
1) Zip unit sales (including disks) declined in Q3 over Q2. Since revenue will not be impacted by the rebate, only earnings, if Zip sales were merely flat -- and all other revenue factors were equal -- then revenue would be flat instead of a forecasted decline. In order for revenue to decline, Zip sales must have declined...
...OR...
2) Jaz unit sales decline, flat, or only slightly up (Jaz prices declined this quarter)
3) Ditto unit sales declined
Frankly, I don't believe soft Ditto could do it so we are left with #1 or #2 as possible rationales for the J.P. Morgan revenue downgrade. Either one is an ugly prospect. However, if I had to pick one, I would rather have Jaz sales flat or down. If revenue is indeed sequentially down from Q2, Jaz sales would also be my first suspicion due to the price drop.
Call me MF Ego, MF Short, MF Whatever, but facts are facts. J.P. Morgan downgraded revenue numbers and while a growth company may take an earnings hit every one in a while due to "growing pains" and the costs of PPE and growing the business, revenue declines are never acceptable unless we now consider Iomega to be is a seasonal business with seasonal revenue an earnings. This, of course, means it is no longer the hottest growth company around, capable of leaving seasonality in the dust.
Sometimes we all have to grow up and face the truth, like it or not.
One interesting thing is that J.P. and H&Q are now pretty far apart. If H&Q doesn't revise down it will be interesting. Nothing says analysts are right, especially when they disagree like these two now do. One is going to be wrong.
I wonder who that is. I hope its J.P. Morgan.
Cheers,
MF Ego 7+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: I sold/Ben/The Future/Bottom Date: 96-09-17 19:54:03 EDT From: BurtskyH
Someone sell me on the Iomega story again. I am really rattled by this earnings downgrade, and I'll tell you why.
If anyone reads my posts, you know that I base the "great value" case on revenue growth and analysts' estimates of future earnings. Well, sure enough, Q3, which was downgraded by H&Q before, has now been lowered by JPM. What value should I place in 1997 estimates? How soon do you think it will be before those estimates come down? And when they do, it would be more fair to place a lower P/E multiple on a lower earnings estimate due to the lower growth rate.
I don't think JPM lowered estimates without guidance from Iomega on sales & margins. This is my opinion. As a previous post said, they don't just get these #s from outerspace. How do you just pick a number like "$257 million" for revenue? So I think that Kim Edwards wasn't being cute about the 3rd Q in his conference call. He was being honest. He didn't wink. All of this casts serious doubt for me on future revenue growth expectations. Think about it. If Q3 '96 was this bad, shouldn't we go ahead and lower Q3 '97? Summer is summer, after all, regardless of the year.
On a good note for the longs, I sold 1/4 of my remaining position today at 14 because of the above concerns. You know that when you get the most adamant of bulls selling, you must be marking the bottom. I am truly, very seriously, ready to "throw in the towel" as I have lost confidence in the expected future growth. As someone posted earlier, "paying now for the future earnings that may never come". I may sell the rest of my shares tomorrow. It's time for Iomega to "Show me". And if Iomega does blowout Q3 earnings, what a real disservice they will have done to me, a ,shareholder, for not guiding estimates and not forcing me to just rely on "blind faith" to hold my investment in their company. At this point, the analysts' view is the only "vision" we have to go by, so it really would be blind faith.
I haven't read all of this crap about people flaming MF Ben for whatever it is that's been going on. All I know is that that last post of his made a helluva lot of sense to me.
Like I said, someone please tell me why I should continue to be positive on Iomega. It was a good story, but why should I think they are going to start making any money?
Burt 8+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:I sold/Ben/The Future/Botto Date: 96-09-17 20:51:54 EDT From: MF DrJimbo
BurskyH-
Since I was the one who posted: "paying now for the future earnings that may never come", let me comment further. Because in that post I also said that I wasn't about to sell my shares based on one poor quarter. But I agree 100% with Ben. This is no longer the company that can sell all it can produce. They ramped up Zip production in an extraordinary way.
You need to carefully re-evaluate your investment goals with Iomega. My goal is to hold the company long term as long as the business plan is successful. The next step in the business plan was to get Zips into as many OEM boxes as possible. As the next step to having Zip be the next removable storage standard. I look ahead to the Fall of 1997. Imagine most of the computers being sold including a Zip drive. Which will result in the additional penetration of the existing PC market.
We know that mass market advertising is starting. PCs with built in Zips are appearing on the store shelves. And while there is threatened competition, the installed base is almost entirely Zip. In a market which the Storage analysts estimate to be a 25 million unit a year market in 3 years. And I don't think they are counting the potential markets that Acer and Pippin may open up for storage peripherals. There is no reason to believe that drive sales will sudden stop.
Then there are the high margin disk sales, which all belong to Iomega. All the sales in the big Q4 will generate disk sales quarter after quarter.
I've tried to maintain the attitude that Iomega is a risky investment, but one with a potentially even bigger payoff. But one needs to follow events step by step. By all means decide on your timeframe and risk tolerance. You may feel more comfortable selling now and waiting to see how this quarter turns out. Maybe you want to wait until Q4 is over and you see how the story is playing out.
But I think its been clear for a while that this quarter has largely been factored into the stock price already. As I said in my last post, I have the patience to see how the story develops. 9+++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:My take Date: 96-09-17 22:47:29 EDT From: RB61
MF 2Aruba,
<<I also find it reassuring that today's downgrade caused the end result of the stock price to be down only 1/16. It seems to me that all of the bad has been figured in. In addition, is it not beneficial that we now only have to come up with .07 to meet JP's estimates instead of .12?>>
I agree completely. BTW, H&Q also came out with a revision of IOMG. There numbers were as follows: Prior Revised 3rd qtr Rev's $290m $250m Earnings .09 .06 4th qtr Rev's $430m $410m Earnings .18 .16 1997 Rev's $2.0B $1.9B Earnings .82 .77 Let me state that I am not a client of H&Q, so I cannot provide much in the way of further information. H&Q did state that they were posting numbers lower than J.P. Morgan's because they were being more conservative.
I'll provide my feelings on all of this downward revision of earnings estimates in a follow-up post.
Fool On,
Robert 10++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:My take Date: 96-09-17 23:17:15 EDT From: RB61
Today, we had both of IOMG's mainstream analysts revise their earnings and revenues downward for the 3rd qtr. What was my initial reaction? Good news masked as bad news. Why? This stock has really been beat up. I have heard rumors that IOMG was not going to advertise this qtr because if they did, they would have a loss for the qtr. I have also heard that IOMG was going to have a loss regardless of how they ended September. These statements were not being made by anonymous bears by the park gazebo, but by people I trust.
We all know that IOMG just plain doesn't talk to anyone. Therefore, I have to place more weight on the side of the professional analysts (H&Q, JP Morgan, HD Brous, Emerald) than I do to those people who have been passing on these rumors. Even they would admit that hard facts are difficult to come by. I think we can see from the direction the stock has been taking, that the Street is not expecting anything this qtr. In fact, I would not be surprised if they had been expecting a loss.
Now, with only two weeks left in the qtr, we have both of IOMG's major analysts come out on the same day with earnings estimates for the 3rd qtr. Both downward revisions. However, both sets of numbers, to me at least, seem to be above what the street is estimating. Why do I say that? Because the stock took this *bad news* pretty much in stride. I think that most of us who took KE at his word (challenging) and saw the price of the stock (down) were really worried as to how the street would react to a bad qtr (bad in our eyes). End result? This qtr's challenging results are already built into the price.
I can't imagine either of these analysts coming out with these estimates this close to the end of the qtr without having done a tremendous amount of homework. They have to be reasonably certain that IOMG can beat these numbers. I don't think IOMG will smash these numbers, rather, I think that IOMG can and will beat these revised numbers. With the way the game is played on Wall Street, I think H&Q and JP Morgan think so as well.
Therefore, with the bad news out, I am optimistic for the future. 3rd qtr will take care of itself. It appears that it is going out quite strong. With H&Q estimating $410m for the 4th qtr, I am very much anticipating the winter months :>).
Fool On,
Robert 11++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subj: Re:JP Morgan are Jaz fans Date: 96-09-18 02:19:01 EDT From: MF Logman Posted on: America Online
<<Finally had a chance to rewind this morning's Squawk Box tape. Here are the changes for Q3 per David Faber: Was Now EPS .12 .07 Zips sold 900M 700M (units) Cartridge sales 4MM 3.5MM (units)>>
Anybody else notice the slight change in the estimated tie ratio? Old estimate was 4.4:1, while the new estimate is 5:1. Wonder what sort of insight into what the analyst was thinking we can glean from this revision? Let's see. . . .
One-half million less disks sold, and 200,000 less drives sold in the new estimates. From that we can easily see the analyst is using a 2.5:1 tie ratio on new drive sales (500,000 / 200,000). In other words, these are disks that are initially taken home with the newly purchased drive (not counting the freebie disk).
Using the 2.5 ratio, the analyst is estimating 1.75 million (exactly half) of the 3.5 million disks sold this quarter left the store in the same bag as the 700,000 drives (figuratively speaking :).
That means the analyst is estimating the remaining 1.75 million disks sold represents the annuity. Or, in other words, disks sold to folks that bought their Zip drives prior to this quarter.
So, if we had an installed base of 2.5 million drives at the end of the June quarter (which I imagine is a close guesstimate), the annuity amounts to .7 disks per drive per quarter. . . equal to a yearly annuity of 2.8 disks per installed drive. So there you have it. ;-)
No doubt the 2.8 figure will be in a constant state of flux. For instance, I've long maintained that the tie ratio would drop once OEM sales reach meaningful levels. My reasoning is that the new computer owner will have different storage needs than those of the external Zip buyer with a bulging hard drive.
Something else to think about: As the average age of the drives in the installed base grows, I would assume the annuity per drive ratio would drop for a myriad of reasons: eventual drive failures; saturation levels for needed disks being reached amongst casual users; some Zip drive owners will choose to upgrade to the Jaz; and a whole host of other reasons I could probably think of given time. ;-)
Anyhoo, thought I'd throw the annuity ratio out because the annuity is something that gets mentioned all the time, yet I don't recall ever seeing an estimate put on it.
FWIW,
Logman
PS I noticed too that the new JPM estimates show lower gross margins even with the higher Zip tie ratio. Somehow, that doesn't seem right. Must've had something to do with how he rejiggered the Jaz numbers. . . who knows?
End Report. Posts covered through 3 a.m. 9/18/96. _______________________________
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