Dileep, Emerald Research's report (LONG), from their web site emeraldresearch.com (some formatting has been changed because I could not get it right):
* Estimates in italics
Price (October 17, 1996) 22 7/8
52-week Range 3 5/16 - 55 1/8
Dividend none
Yield nil
Market Cap $2,888 MM
Book Value $2.24
Trading Data
Shares Outstanding 137.0 MM
Avg. Daily Vol. 8,564,000
Earnings * FY95 FY96 FY97
Q1 - March ($0.01) $0.08 -
Q2 - June (0.02) 0.11 -
Q3 - September 0.02 0.09 -
Q4 - December 0.08 - -
Full-Year EPS $0.07 *** ***
Price/Earnings Ratio *** ***
Revenue ($MM) $326.2 *** ***
*** To be provided in upcoming report
Emerald Opinion
Iomega's record September quarter revenues of $310.1 million and an EPS of 9› both exceeded street expectations. The primary driver for these results was a higher-than-anticipated Zip tie ratio.
We are now approaching the first Christmas that Zip production capacity will enable Iomega to benefit from the highest consumer buying period of the year. Emerald is very optimistic that Iomega has prepared the groundwork to create high demand, and to satisfy that demand. We have maintained our long term buy recommendation during a full quarter where positive announcements have had little effect on Iomega's stock price. With the recent resumption of predictability and increased optimism for 4Q96 and FY97, we are restoring our short term buy recommendation.
Third Quarter Highlights
Following are our observations of Iomega's September quarter:
- Revenues of $310.1 million were up 9% from last quarter and 266% from last year.
Revenue exceeded street expectations by $40-50 million. Despite a seasonally soft market for consumer technology in both the US and in Europe, Iomega's aggressive marketing efforts produced quarter-to-quarter revenue increases for Zip, Jaz and Ditto.
- EPS of 9› compare with 11› last quarter and 2› last year. EPS exceeded the street expectations of 6-7›.
- Gross margin of 26.3% compares with 26.9% last quarter. Product cost reductions and a higher-than-expected Zip tie ratio offset the negative effects of the Zip rebate program, Jaz price reduction and lower-than-planned Jaz tie ratio. Iomega reported that the Zip tie ratio continues to trend upwards.
- OEMs accounted for 10% of Zip shipments during the September quarter vs. <5% in the previous quarter. This is a strong indication that OEMs signed during the past several quarters are now ramping up demand in preparation for the Christmas season.
- Production of Jaz and Ditto began at Iomega's recently acquired Penang facility in September. Iomega is impressed with the facility's early performance and has revised its global manufacturing strategy to expand production there.
As part of this change, Iomega has taken over Seiko Epson's agreement with Zip contract manufacturer EAI in the Philippines. During 1997, Iomega will transfer this production to Penang. The company is also negotiating with Sequel (Jaz contact manufacturer in California) to transfer additional Jaz production to Penang.
- Iomega spent $4.4 million to buy back 300,000 shares of common stock during the quarter.
- The $50 Zip rebate program enables retailers to legally advertise a $149 price, and is successfully increasing sell-through in the channel. Based on consultant recommendations and experience from early rebate returns, Iomega is accumulating reserves assuming Zip rebate requests of a percentage closer to 50% than 100% will be submitted. Iomega's reserve (after paying previously submitted rebates) accounted
for over $23 million, up from $7 million at the end of the June quarter.
- Inventories of $178 million compare with $146 million last quarter. This increase was due to: 1) replacing its European distributor in Germany by one in the Netherlands; 2) production setup in Penang; and 3) increased readiness to respond to upside demand in the December quarter.
- SG&A grew to 16.2% of revenue due to costs associated European-focused programs, and with early marketing and sales costs associated with developing demand during the Christmas period.
- Iomega intends to transfer the listing of its stock from NASDAQ to NYSE during the next several weeks.
December Quarter Outlook and Conclusions
Emerald Research has previously communicated the importance of the Christmas period on Iomega's long term outlook and we are encouraged by actions taken during the September quarter. Following a soft market in July and August, we believe Iomega's strong September will springboard the company to an outstanding fourth quarter.
A key to stimulating future demand is advertising, and Iomega is preparing a major end user campaign. Describing this campaign, CEO Kim Edwards stated "you are going to see a very strong presence of Iomega product throughout every major retailer in the US." The normally restrained Edwards added, "We will have one of the loudest voices, at retail in the computer market, of anybody even close to us in size." After completing the challenging summer quarter better than expected, we are more optimistic about both the December quarter and FY97. We plan to issue our full report with 4Q96 and FY97 estimates during the week of October 21, 1996.
Recommendation
Short Term buy
Long Term buy
Key Points
Better than expected revenues and EPS for September quarter
Actions taken to take advantage of Christmas buying season
Restoring our short term buy recommendation
Cost reductions and a higher-than-expected Zip tie ratio offset the
effects of the Zip rebate program OEMs accounted for 10% of Zip
shipments Iomega has taken over Seiko Epson's agreement with Zip
contract manufacturer EAI in the Philippines
Following a soft market in July and August, we believe Iomega's strong September will springboard the company to an outstanding fourth quarter |
