IOM missed its number by 8c (40% earnings shortfall)!
Here's the reasoning:
The consensus (bulls') estimate on this thread was that IOM would have realized about 0.19 in Q4 (remember, for example, a projection of Dale), but that this number would probably being 'massaged' down to an actually reported 0.15-0.17 by using conservative accounting.
I believe that this is what was also on the minds of the professional analysts. And that's what happened in earlier quarters as well.
In my opinion, what really happened was that real earnings in the quarter were about 0.11, which were brought to 0.13 by using more aggressive accounting to close the gap relative to expectations.
As an investor, who is given relatively little guidance / information by the company, I am interested in the real business numbers and not by the numbers that are reported, which are subject to the use of the leeway that accounting rules provide.
And my feeling is that 'in the real marketplace' (not their books) they realized a number of around 0.11 versus an expected 0.19. And that's my real concern.
That's especially disappointing in a quarter-to-quarter comparison. IOM earned 0.11 last quarter with conservative accounting (e.g., accounting for some Q4 expenses in Q3). Under my assumption, they earned 0.11 this quarter with 'neutral' accounting. So EPS is flat at best quarter-to-quarter and that in the supposedly best quarter of the year. Concerns me.
Some of you may argue, and rightly so, that I can provide very little evidence. That's a result of having little information provided by IOM. And I am not worried about a cent more or less in a quarter, anyway. What disturbs me is the underlying trend that seems to move in the wrong direction.
I have forgotten most of the nitty-gritty details from my accounting class, but two general themes I have learned:
1. Earnings statements do usually not reflect the whole story, especially in turbulent times, and companies can within some fairly wide limits and for some time present a false picture.
2. More important: WATCH OUT FOR RED FLAGS. You are usually not given sufficient information by the company, but you can check reports for concerning changes or question marks.
I think IOM has provided several red flags on Thursday:
1. Accounting seems to be less conservative.
2. Inventory built-up.
3. Constant inability to meet new-product shipment dates. This is less concerning for BUZ where potential buyers will just wait and revenues are just postponed, but a real killer for JAZ2, because Syquest is aeting IOM's lunch.
4. No net margin improvement due to out-of-whack SG&A. (See below.)
5. Decling growth rates.
6. Future earnings more 'risky' (i.e., less predictable), which leads smart investors to apply higher discount rates for calculating a 'fair' stock price, which, in turn, leads to a lower stock price.
7. Where's all the R&D spending going? Since the launch of ZIP and JAZ (2 / 3 years ago) only incremental improvements have been made and no real new product has hit the market. The first (if ever) positive earnings effect from click! can be expected in the second half of next year (that's another 18 months!).
8. Add to that my concern about the (hidden) earnings shortfall of this supposed-to-be blow-out quarter.
While I like to see the gross margin improve over time, I would like to make two cautionary notes:
1. I am concerned that it's attributable less to operational improvements and more to (arbitrary and non-controllable) currency fluctuations. (This might reverse when we need it the least.)
2. The drop of COGS seems to be partly bought by increasing SG&A spending. More and more promotion, advertising, etc. is needed to sell an incremental unit (which drives SG&A percentage up), while this incremental unit--via economies of scale--is lowering COGS and improving the gross margin. So, you ought to carefully follow both numbers and not just look at them separately.
As it stands, I am really concerned that IOM might show a LOSS this quarter if the advertising drive is not showing major effects quickly (now I am really getting flamed):
1. Q1 traditionally slow on the revenue side.
2. 1/3 of the quarter is over and no BUZ and no JAZ2 on the shelves (i.e., very little help from incremental revenues from new products).
3. Share of OEM drives will increase (lower margin, lower tie ratio).
4. Fixed costs will remain at their high levels (I consider R&D and SG&A as mostly fixed costs).
5. Incremental advertising will add to already high levels of SG&A. If 1.3m per 30-sec spot for the super bowl is correct, for 4 spots that would mean $5m pre-tax off the bottom line (or about .01 per share after tax) right here and that's only the beginning.
I am not saying that overall 1998 will be a bad year for IOM, I am just arguing that Q1 will be 'challenging' (haven't we heard that word before?).
These comments are not meant to trash IOM, but to spur discussion / thinking, and to contibute to a more careful stance vis-a-vis the company and its performance.
I HOPE I'M JUST PLAIN WRONG. |
