Trakker:
The LS-120 was NOT announced contemporaneously with the Zip and has only been seriously marketed for the last ten months (as it was held up by production delays and typical corporate B-S within the Compaq, 3M and Matsushita consortium). The thing really didn't get launched until Imation took control of the product and the associated marketing effort. It might surprise you to know that 40 OEMs have signed up to the LS-120 program and that Imation expects that the installed base to reach 5 million by year-end. Assuming that Zips continue to ship at recent rates, then one could posit an 18mm to 20mm installed base for IOM by year-end versus. So, in one year, the LS-120 would have achieved an installed base equivalent to 25% of the Zip's despite the latter's three-year head start. Within this context, I think it is highly premature to suggest that "backward compatibility" is a non-issue.
Said another way, if the LS-120 did not exist, and its adopters had purchased Zips instead, IOM's financial outlook for FY98 might not be so difficult. I have noted that some of this thread's participants angryly view any negative commentary as short-seller propagated shilling. Such is unfortunate because not all the comments are fiction and, at a minimum, some are thought provoking. Iomega has not cured cancer and is not a religious icon, it sells a backup storage device and associated removable media. It faces competition from other makers of removable storage devices, and it faces alternative storage paradigms (i.e. network computers with no local storage to CD-R with cumbersome, albeit huge, capacity). IOM has some significant advantages. The fifteen million strong installed base will consume media for a long time. Assuming a tie-rate of 5 disks per year, this base should consume a minimum of 75mm disks during FY99. Zip disks sell for roughly $15/ea at retail. Assuming a 50% GPM to the retailer, this works at to $7.50/ea to IOM. This works out to $560mm in IOM revenue, and assuming 60% disk GPM, $335mm in gross profit. Further, assuming that the drive business is a break-even proposition (i.e. sell the razors at cost to get the follow-on razor blade sale), and allocating SG&A proportionally, suggests something between $175mm and $200mm in media-related operating income. Tax-affecting this, implies media-related income and EPS of $110mm and $0.43/shr. If my numbers are in the ball park, then IOM--at this juncture--seems to be rather fairly priced (neither particularly compelling as a long or short). Why? Well, media prices are sure to decline over time, so even assuming that IOM can reduce costs in tandem and hold margins, total GPM declines in tandem with price. This decline must be offset by new Zip placements, the rate of which has decelerated, or new products, which remain unproven to this point. There is a risk of technological change and there is no guarantee that the company will not be forced to continue selling ZIP drives at a substantial loss (cost of the machine plus marketing expenses to move the merchandise) in order to increase the installed base (i.e. that's why the company is unprofitable now). By the way, one obvious problem with the Zip 250 is that doubling the storage roughly halves the number of disks that a consumer will likely require. It's not a great evolution for the business model to increase the volume of unprofitable equipment sales at the expense of the cash cow..
The situation is not irretrievable and IOM could probably shrink itself into a lovely cash cow. But, with 260mm shares outstanding, the company needs a growth engine capable of putting up big numbers in order to sustain a much higher stock price.
Objectivity is good..
Best Regards,
Gregg |
