What's Going On
To all,
Okay, I'll take my turn at musing over the state of things.
As I write, IOMG is trading at 17-something.
Some of you might recall my first post to this thread (#2779),
in which I reported that a simplistic exponential projection
of recent quarterly gross revenues yielded a figure of
$343 million for 96Q2. I also said that this was a very
optimistic number, that maturation would have to set in
some day with Iomega, and that we could know that that
was happening when the gross revenues stopped following
that simplistic exponential projection. As we all know
now, the gross revenues for 96Q2 were about $284 million,
meaning that it's time for us to consider the issue of
"maturation". I'll get back to that in a minute.
About earnings per share, you all might want to revisit
my posts #4274 and #4319. There I said that I thought
Iomega would beat the dime estimate, but probably not
be higher than twelve or maybe thirteen cents on the
outside, for 96Q2. Consequently, I wasn't very surprised
by their eleven cent figure, and that didn't disappoint
me at all, in fact.
I was disappointed by the gross revenue figures, though.
Their sales are softer than some of the more optimistic
posters here have been saying that they are. Why, though,
is a tricky question to answer. The official line from
Roy, Utah, starts with soft sales in Europe, and with
the summer doldrums, both of which are doubtless involved
here. We know for a fact that it has nothing, at least
yet, to do with the LS-120 taking away any sales, because
there were no sales of the LS-120 in 96Q2. Similarly,
the rebates shouldn't have hurt 96Q2 much, if at all,
because they only kicked in on 1 July.
IMHO, though, it's a mistake in all this to think in
unnecessarily homogeneous terms about Iomega's potential
market. What, then, is going on? It's all speculation on
our part to answer this, I suppose, but I'd like to help us
all brainstorm through this by throwing out an idea or
two. I'll reiterate the position I've taken all along
regarding the Jaz, namely, that it simply wasn't much
in the market yet in 96Q2. They only started showing
up in local stores here in upstate New York within the
past few weeks. Mail-order places like PC Connection
had a listing for them, briefly, in their catalog in
the beginning of the year, but then it disappeared
from view until very recently. Now, of course, the
Jaz is available, at least the external version. I
think that, even with the $100 reduction in the prices
for the two versions, it's still a tad pricey for the
average nerdy buyer, including yours truly (though
I'm still planning on springing for one sometime very
soon). Nonetheless, my guess is that it contributed
little to the gross revenues for 96Q2, but that it will
begin to be important for 96Q3. I'd be as pleased as
the next Iomegan if the Jaz started rendering the fixed
hard drive extinct in the PC, and maybe it will some
day, but that's really down the road, I think. What
we can expect shorter term is that this product will
completely capture the specialty video/audio-editing
niche, then become a serious player for backups. That
should sell a few million aftermarket add-on Jaz drives,
which will help gross revenues considerably. No doubt
Seagate thinks the same, because they wouldn't have
gone for the Jaz bigtime just to service the niche
editing market. And once all those gigabyte hard
drives on newer PCs fill up, there'll be a BIG new
demand for this product.
Now, what about the Zip? There are two things to
consider here. One is the heterogeneity of the market
for the Zip, and the other is the LS-120 threat. As I
see it, there are four levels of Zip consumers out there.
One is the reasonably sophisticated technical type, like me
and I suppose most of the people reading this post, who
are comfortable adding a peripheral to their computers.
Two is the ambitious but non-technical PC user. These
are the people who hector those of us in the first
category all the time to help them install things on
their PCs, to help them purchase and set up new systems,
and to help them fix PC problems. Three is the premium
buyer who wouldn't touch an add-on but will spring for
a $99 Zip option when buying a new PC. And four is
everyone else.
If we break the Zip market into those four groups, then
we can address the "maturation" question bit by bit in
each case. My guess is that Iomega is beginning to
saturate the first category (i.e., nerds like us).
We all own a Zip or two already. Yes, we'll probably
buy some more--I'm planning on buying two more, for
example--but it's not so urgent, and I'll be waiting
until I return from summer vacation and the fall
semester starts. My guess is that the slowdown we
saw in gross revenues for 96Q2 is partly because of this
saturation setting in. This is also why you can now
find a dozen or two Zips sitting on the shelves at
Circuit City or COMP-USA. The only ways Iomega can
perk this up, as I see it, would be to lower the price
or to start offering the internal IDE Zip as an aftermarket
item at a good price. (I'd buy two of those in a flash.)
I think the second category (the ambitious non-technicals)
are just coming online. I base this entirely on my own
experience. It's only been in the past six weeks or so
that I've had the usual suspects--those who call in a
pleasant voice and say "Tom, can you do me a favor?"--
approach me about adding Zips to their PCs. Some of
them are doing it for backup, and others are doing it
to add storage space to crowded machines. I think this
niche is going to add significantly to Zip sales in the
next twelve to twenty-four months, and Iomega doesn't
have to do anything beyond the current $50 rebate to
help lure them in.
The third category (the OEM option buyers) should start
to make a difference in 96Q3. KE said as much in the
conference call, where he told a questioner that OEM
Zip sales were negligible in 96Q2 but should become
significant in the following quarter. I have no idea
how large this category is, though I'm encouraged by
those rumors that a quarter of all the Micron PCs being
shipped are going out with the $99 Zip option on them.
(Does anyone have any firm evidence for this?) If it's
a reasonably big category, it could help 96Q3 substantially.
If not, well, it'll move things along toward establishing
the Zip as a commonplace on PCs, if not a standard per se.
For the fourth category, it's still too early to tell
what's going to happen there. As I've said in earlier
posts, the Compaq crowd could make a D-Day style move
to get this share of the market, dumping the LS-120
and launching a big media blitz, and that could hurt
Iomega in the next year or so if it takes at all. It's
a cinch that Compaq/Imation are going to at least make
an effort here, since they'd be crazy to have put this
many millions into the LS-120 and then simply abandon
it without even trying to market it. It will cloud
the picture in the short term, no matter what. I'm
still confident that such an initiative on their part
will fail, because the Zip is faster and can be made
much cheaper, but it's going to be a while before the
Street becomes satisfied about the outcome on this one.
If the Zip gets this category ultimately, of course,
then all of us long-termers will win big with Iomega,
even if we're currently in at an average price of
$44, as I am. If not, well, Iomega is still going
to sell millions more Zip and Jaz and Ditto drives
and will still be a $1.5-$2.0 billion company or
thereabouts, I'd bet. I'll lose something on my
current holdings, perhaps, but since I made a bundle
when I sold my IOMG in March, I'll still about break
even on this roller-coaster ride. C'est la vie.
There are also the Internet-box, game-machine,
and laptop Zip wildcards, but I'll save bandwidth
by ignoring them for now other than to say that
they won't hurt.
What does all this suggest? It could mean one of
two things, depending on how you interpret "maturation".
If you think that Iomega is never going to get beyond
selling Zips and Jazzes to the nerds and the editing
niches, then Iomega has seen its top with the Zip and
will have to drop prices dramatically and cut back
on production to stop oversupply. If you think instead,
though, that the Zip and the Jaz are going to break out
of these two categories and sell to a much larger
fraction of the world PC/Mac market, then what is
going on right now is a pause following the beginnings
of saturation of the early markets for Zips and preceding
the arrival of Jazzes in those markets and of both
Zips and Jazzes in the other markets.
Notice that I've said nothing about the current share
price. That involves all kinds of additional variables,
such as all the people caught on margin, the shorters,
the overall bear situation, and so on. I have no idea
where all that is going to go, and I'm ignoring it the
way I think Peter Lynch would. I think that, at least
ultimately, Iomega is going to break out of the current
pause in its business, sell millions more of its
current product line, and maybe even come out with
some new products. So I'm staying long.
I can afford to do so, because I never buy on margin,
I never short because of the infinite upside risk,
and I never spend any money on equities that I can't
afford to throw away without losing any sleep. I
recommend that strategy to all you currently-suffering
youngsters as an alternative to walking away from the
stock market for the rest of your life. Doing the latter
is too expensive over time because inflation and taxes
will eat your assets. Consider your current Iomega
losses, if you're forced to realize them, as tuition
to learn these lessons.
One last thing. KE gave us clear hints for what we
should do next to monitor Iomega's progress. First,
he said that the behavior of Iomega in 96Q1 and 96Q2
are far more indicative of what the company is doing
now than previous quarters are, so we should study
them. Second, he said that 96Q3 will be a "challenge."
That means that he's going to struggle to have the
gross revenues grow 28% between 96Q2 and 96Q3, as
they grew between the first and second quarters of
this year. If he makes it, then the gross revenues
for 96Q3 will be $363 million, or $0.14 a share if
you use the current % net and shares-outstanding to
do your calculations. I don't think he will. He's
going to have to sacrifice too much to the tech
slowdown, the LS-120 assault, and the saturation
of the nerd niche. I'm guessing that his gross
revenues will be the same in 96Q3 as in 96Q2,
or maybe up to about $300 million. The further
growth of this company will only happen after the
transition to truly widespread Zip and Jaz use and
the elimination of the LS-120 assault. So 1996 will
be a $1 billion to $1.3 billion year.
Just my speculations, folks.
Cheers, Tom (long IOMG) |
