Ken -
You posted a set of fair questions. I'm going to take a stab at responding to them one at a time.
>>1. Increase in ZIP units, but decrease in revenues. How can this turn around without increase in advertising? By magic?<<
Iomega market research has shown that there is significant demand elasticity at the 99 dollar price point. Now we're going to find out for sure.
>>2. Disks sales increased about 50% over Q4 1997. Where is the contribution to the bottom line? revenues?<<
A lot of different things affect the bottom line in any quarter. I believe that losses in other areas offset some of the net profits from disks.
>>3. What will be the driver that will increase tie ratios? Advertising was tried last year, and failed. What will work now?<<
I notice that Iomega's advertising has become much more directed and should be more effective in giving people ideas about how to use disks. There may also be a benefit from demand elasticity due to the fact that single disks are now selling for 10 bucks. Again, we shall see.
>>4. Jaz revs - even with strong Q4, still down year over year. What will stop this slide?<<
I think Jaz will continue to be more of a niche product. But again, pricing actions may help, particularly with respect to media. I would also expect to see other products from Iomega in this niche.
>>5. High margin products: ORB beats Iomega hands down vs. ZIP250 and JAZ. Brand is the only thing it has going for it. Is it enough?<<
Orb beats Jaz and Zip250 on paper. But it still isn't shipping in volume, nor is media yet available. Will the drive be reliable in the long run? Will Castlewood even be able to survive? These questions are far from being answered.
The other question is whether Iomega will respond to Orb with some sort of new product. Is there some reason to assume that they won't?
>>6. Low cost PC squeeze: How can OEMs EVER include a ZIP in all PCs? This cannot occur unless ZIP = $18 OEM. Look at where the unit volume is.. All in non-ZIP PC price class. For those who say they don't need all PCs: how can you say that? The data shows that the current strategy is resulting in sliding revenues.<<
The data does not necessarily show that. It's faulty logic to assume a cause and effect relationship there. The strategy is only one factor out of many which affect the sales data. Iomega has had a number of different problems which have affected their top and bottom lines. They have been solving those problems.
Their current strategy is to increase the penetration of Zips in PCs, and to sell after-market drives to people who don't buy them built in. OEM inclusion continues to increase, albeit slowly. Why do they have to be in ALL PCs to succeed? If they end up with only thirty or forty percent inclusion, that will still mean a huge increase over current revenue levels.
>>7. CLIK: No person can fool themselves into believing that this will be OEM'd into consumer class (high volume) devices. What will drive people to buy it? Increase in SG&A? but earnings will collapse.<<
I don't think there's much use arguing about this point, since you have already decided that there's no point to Clik!. I personally think that the price advantages of Clik! media over flash will be compelling for many buyers. You don't. I think that Clik! drives will add less to the cost of OEM devices than you think they will.
>>8. Why sell Ditto for $3M? What was the real reason?<<
The fact that the Ditto line was losing money. This is part of the answer to your Question #2. Tape drives have never done very well with consumers, and Iomega themselves helped destroy the market for them when they introduced Zip and Jaz. It makes sense to get something for the Ditto line now, instead of letting it continue to be a drag on the bottom line and getting nothing for it later.
Those are my views on these issues. I've looked at the available data and come up with a different opinion about it. In deciding whether or not to hold a position in IOM, or in any stock, one has to deal with the fact that the most important data is not available. That is, the sales and profit data for the future. We shall see.
- Allen |
