It seems to be getting quite interesting again for IOM. I'm sure the
participants on this board have read the Barron's article. What do we know about the problem. Let's see, Nomai SA a down and out manufacturer in the disk drive industry has successfully cloned a Iomega Zip disk that doesn't by European standards infringe on Iomega's patents or intellectual propertyrights. Nomai SA has started shipping the disks as of Sept 11 to OEM's and VAR's in France and Germany. According to Nomai's CEO, Nomai will ramp up to ship
500,000 Zip disks a month for the amazing low price of $6.00 each.
Iomega sells Zip disks in Europe for $11.00
We know that Iomega has shipped over 8 million Zip drives since it's inception. European sales account for around 30% so maybe 2.4 million
Zips have been sold in Europe. With a Tie ratio of about 3:1 that approximates around 7.2 million Zip disks sold in Europe. If Iomega
charges $11.00 a disk this equates to $79,200,000 for European disk sales. If just 30% of European Zip owners opt out for Nomai's XHD this
would equate to a loss of 2.16 million Zip disks worth $23,760,000.
Since Iomega's disks account for *80% of pretax profits* this is a tremendous blow. The top line hit would not be that devastating to Iomega in my opinion but it's the 80% of pretax that the disks will hit, in other words the lost disk sales will come out of the bottom
line *immediately*. Keeping with this conceptual framework scenerio,
it would cost Iomega .17 on a 12 month basis or about .04 a share each quarter.
This is just from European sales remember. Of course this is more of
an conceptual abstraction, TIE ratio's might be higher but again the
loss would grow. This just gives a worse case scenerio if Iomega can not successfully stop Nomai from selling it's pirated disks. If Nomai is allowed to sell the XHD in the U.S, the above framework holds with
the bottom line losses growing exponentially. This is the negative side of my perception with some of the assumptions already being reinforced.
Insider Activity?
Insider--REl-TD-TT-Shares-Price-Holdings
Stewart MelvinCO-09/04-04/97s7,000-28.94-28.940-0
DavidDunn-D--08/28-29/97--s-375,000-25.86-26.34-11,994,288
Anton Radman-O--8/25/-27/97-s 100,000-24-24.56-548,535
How does Mr. Soros fit in to all of this?
I suspect that Iomega was part of a pairs trade by Soros Managemnet.
Mr. Soros was involved in the SouthEast Asian currency campaign. He
probably shorted the Emerging Tiger currencies, long the dollar, long
U.S. Technology companies that have most or all of their manufacturing
in one of these countries. The Malaysian ringgit has depreciated by
about 20% since the beginning of the year. Thus, Iomega's costs of production have dropped by about the same amount. Yes, Zip drives cost 20% less to make now thanx to Currency hedge funds. Mr. Soros must have been aware that Nomai SA could potentially sell pirated Zip disks. The participants on the board must remember though that Mr. Soros only owned around 1 million shares as of June 30. With the skillful traders at Soros management they could get out of this position in less than a week. I wonder what Soros Management thinks about the copyright issue.
Friday's price action:
This is the most puzzling event by far. Iomega was up about $2 to
28 5/8. Their were over 40 block buys during the trading day with one
block going off at 95,000 shares, several others of 35,000 and 30,000.
Their were not many blocks on the sell side. Could be a couple of reasons. 1. Iomega might have met with Institutional investors and
pre-announced the Jazz2, Notebook OEM's or a positive spin on the Nomai issue. 2. Short hedge funds could have bought back shares in the anticipation of being able to short at a higher price with a greater risk reward ratio.
If a recall correctly a well respected disk drive industry analyst went on record as saying if Zip disks got down to $6 or $7 bucks, the Zip drive would immediately become the standard with no questions asked. This response was several months ago and is ironic because this is exactly the price Nomai SA wishes to charge for the XHD. This analyst also said that with media so cheap the Zip would definetly become the replacement for the 1.44 floppy.
But where does this leave Iomega's profitability with Nomai SA's costs
almost 2x cheaper.......
Steve
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