Mary, I did address Jazz indirectly by addressing the MF Chiros analysis. I pointed out in my anlysis that MF Chiros' numbers concerning shares outstanding and SGA and R&D were clearly wrong. Further I believe his gross margin contribution assumptions from zip disks were far too high (although I am rethinking this in light of my misunderstanding regarding how much disks sell for). Since MF Chiros includes Jazz revenue in his projection, I am addressing it.
Specifically, I have stated that shares outstanding are unequivocally 143 mm and will likely be 150 mm in 1997. MF Chiros throughout his analysis uses 130 mm. MF Chiros states that R&D and SGA for 1997 will be 240 mm. I may be wrong about how fast zip becomes the standard, but I assure you that 240 mm is way too low. It represents only 6.3% to 8% of his 1997 revenue projection. Despite practically spending no money on R&D, Iomega's SGA and R&D were 18% of Revenues in the 3/96 quarter. Now I understand that this percentage will come down as revenues will grow, but most good companies spend 5% to 10% on R&D alone, and my guess is SGA will be hard pressed to come down below 10% of Revenues. Thus if Gross Profit is 860 mm in 1997 as Chiros states and SGA and R&D are 450 mm, not 240 mm, Income before taxes will be 410 mm. With a 39% tax rate and 150 mm shares outstanding net income will be $1.67. If Chiros' gross profit number is wrong by say 150 mm, EPS will be less than a $1.00. My initial premise was that Chiros's numbers were wildly optimistic and still provided very little upside. My flaw may be that these numbers are not so wildly optimistic.
In terms of the 5mm capacity issue. I spoke to Howard in Investor relations, and the number clearly only relates to Zip capacity. The Zip capacity does, however, relate to Iomega and all partners. If this number is indeed true, it seems to me that there could be a revenue disappointment. My god, Chiros' analysis--which seems to be the bible of the bulls--assumes 560 mm revenue for the December 96 quarter.
My last point is that the bulk of Iomega's business still comes from drive sales, and these sales are not very profitable and never will be. Thus they to do not deserve the multiple to sales being thrown around. |
