Long CC report
If you've been shaken by all the news re: competition recently, listen to the conference call. If the removeable storage market is anywhere near what's been estimated, there is room for more than one company. Having now listened to my first conference call, I feel confident that our team is leading the way. KE demonstrated ease in responding to questions--I was impressed not only by the substance of his answers but by his tone and straightforwardness. Our guys know the market; they are well aware of the competition; and they are prepared to meet it.
Most importantly, it seems to me, they are not being distracted from implementing their plan.
I am sure others will report on the CC, and I've developed carpal tunnel (Sheila!!) from writing notes, but here are a few of the items:
NOTE: These are my notes and although I did my best, I make no warranty, express or implied, as to their accuracy.
Original Zip taken off MAP (minimum advertised price) and response has been $99 retail zips. Both CompUSA and Best Buy reported excellent sell through.
Currently shipping Zip+, which will remain on MAP, giving the retailers better margins while allowing them to advertise original Zip at any price to build retail traffic. Zip disks are on MAP.
15mm laptop Zip to ship in November; Comdex to see working prototype of 12.7 drive.
The TV ads are going to run in the top 7 PC use markets (not necessarily top 7 TV markets)
Jaz2--expect to ship this quarter.
Buz delayed due to discovery that not all computers that say they adhere to a standard (didn't get all the technical stuff and there isn't a pause button) adhere to that standard. As a result, Buz doesn't work with all PC boxes and, "because it's our product," IOM has to figure out how to make it work universally. As reported elsewhere, KE doesn't see it as a big problem in any event as the product is "tactical," and designed to increase disk usage.
Ditto 7 gig to ship later this month; Ditto 10 shipping in November. Tape in general being supplanted, KE said, due to Zip and Jaz.
n.hand--product significantly different than 1996 Comdex due to product development and design with customers. Later: Significant changes based on feedback from OEM and users. KE: What we have today is "much more valuable than what we had a year ago." Says they are looking at Q2 '98 for shipping. (Didn't say shipping what, i.e., n.hand drives to be integrated into actual products).
Nomai: the blind independent lab tests show that Nomai disks are not 100% compatible; performed poorly in drop test; saw damage to recording heads. A couple of other points where I can't read my writing. In Q&A, KE didn't seemed concerned at all. January 1999 is trial in Syquest suit. When in Q&A an analyst asked what the worst case scenario would be, KE said "No point in speculating because vigorously will enforce intellectual property rights." (may have missed a word or two)
The backlog (I thought it was Zip and Jaz combined, but it must be Zip only because he referred to the chip problem) went from $183 mil in Q2 to $379 mil in Q3. Resulted from two problems: (1) chip shortage and (2) giving priority to OEMs over retail. Later KE commented that IOM is doing everything possible to insulate the OEMs from shortages--they have to deliver and they have been (my comment). Re: backlog, KE says he's not sure that it's truly accurate because they figure that it's being pumped up by some factor by vendors wanting to get product on any allocation.
KE also referred to unspecified "supplier quality problems". Also: the transition in Q3 from IDE to ATAPI slowed them down in the short run but will enable a lower cost and greater integration going forward. Anticipates IDEs through Q1 '98 because of OEM qualification cycles. ATAPI is higher yield/lower cost than IDE. The new chip is "readily available". Improved yields beyond startup. Didn't say who's supplying the chips. ATAPI is definitely lower cost drive. Have been ramping throughout Q3. The more the shift to ATAPI, the better the margin will be.
Gross margin % flat for Zip drives and disks (this is what I believe I heard). Margin increase was in Jaz--drive costs went down and tie ratios went way up, in part due to the recall.
Zip and Jaz were shut down due to "plastic and metal parts."
Record # of drives shipped in September--everything is up and running. To assure quality control, IOM employees are working at vendors.
Zip demand remains strong; priority will continue to be OEMs. Q4 beginning with strong sell through and production.
The Q&A featured lots of congratulations by the analysts. INTERESTING IOM ANALYST MARKETING NOTE: one of the analysts thanked KE for "hosting in Penang" to which KE responded "thanks for coming over."
The backlog is primarily at the retail level, again, due to OEM diversion.
Jaz was shut down in Q3 for "close to 3 weeks." Attributes this to why Jaz drives were flat from Q2. Zip was down for "a week to a week and a half." "Believe the problem is behind us."
OEMs: top five (I think I got this right): Apple; Dell; Gateway; Micron; and Compaq. (This was the order he gave; don't know whether this is 1-5 in volume; 1-5 semi-alphabetically; or 1-5 in KE's mind.)
KE noted OEM going into "tertiary" "OEMs", "Mom&Pops" that he views not so significantly in volume as what it represents to acceptance.
Expects tie ratio for OEMs to be a 2 to 1 difference from retail/aftermarket drives.
Bad debt reserve went down from $12 mil to $11 mil qtr to qtr. The reduction is a reflection of the portfolio getting better.
Annual capacity now is 14 mil Zip drives. Jaz: a couple of million. Issue is component availability. The transition from IDE to ATAPI is major. Combine to result in additional chip availability. Hard to determine what could have been shipped if they didn't have the chip shortage; KE estimated a min of $50 mil and a max $100 mil demand IOM was unable to fill. Biggest issue in Q2-3: chips. Now: have two chip suppliers (again, didn't say who). The new one is much more able and desireous of shipping us chips.
There's more, but now I have bilateral carpal tunnel. I'll try more later. Good reading.
d-fndr
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