Ken,
Here are my projections for Iomega covering the years 1999 and 2000.
No drum roll required. *g*
Before I begin though, I want to direct your attention to the
following recent analyst's consensus estimates. The reason for showing
these estimates is I feel that big analysts have been, by and large,
closer to the mark over the last few years than just about everyone.
These estimates were recently posted on the AOL Motley Fool board and
as you can see were updated just prior to the recent "downgrade" by
Emerald research. I don't recall if these estimates are from First
Call or Zachs and I also don't know if Emerald Research is among the
three analysts included, but I doubt if they are.
IOMEGA CORP
(Last Updated: 03/22/99)
Wall Street Recommendations
Current Average Recommendation: 1.3
Last week's Average Recommendation: 1.8
(1.0 = Str.Buy 5.0 = Str.Sell)
Number of brokers recommending as:
2 Strong Buy
1 Moderate Buy
0 Hold
0 Moderate Sell
0 Strong Sell
Change in average : -0.5
This company is ranked 2 out of 28 companies in industry,
COMP-STORAGE DV .
Research Analysts' Earnings Estimates and Actuals
------------------------------------------------------------------------
Consensus estimate for current fiscal year ( 12/99 ) : $ 0.33 per share
Consensus estimate for next fiscal year ( 12/0 ) : $ 0.37 per share
Consensus estimate for current quarter ( /99) : $ 0.01 per share
Last quarter's actual earnings :$ 0.07 per share
Last quarter's EPS Surprise: 40 %
The next thing I want to do is take a brief look at the past. Here are
Iomega's actual numbers for 1997.
1997:
Quarters Revenue $ Net Erng $ Net Net Shrs Outsdg
Ending (X 1,000) (X 1,000) Erng % EPS $ (X 1,000)
Mar 361,344 23,014 6.37% 0.08 271,406
Jun 400,162 26,209 6.55% 0.10 272,904
Sep 431,700 30,008 6.95% 0.11 283,469
Dec 546,766 36,121 6.61% 0.13 283,469
Total 1,739,972 115,352 6.63% 0.42 282,401
Comments:
1. To me, the important thing to note here is the overall 6.6% net
earnings figure that was generated in 1997 at a time when external Zip
drives were selling for much higher prices and less profitable
internal OEM drives were only starting to become a significant
percentage of overall Zip units shipped.
2. Another thing worth noting is the fact that Iomega was constantly
behind the demand curve and suffered (per Kim Edwards) through the end
of 1997 from component shortages. In this mode of "get it out the door
at any cost" it is my opinion that quality probably suffered somewhat
and it's possible that Iomega could have achieved even better net
margins under more controlled circumstances.
3. I feel that things started to catch up with Iomega by the third
quarter of 1997 and they were beginning to feel the strain of running
a comparatively large and increasingly inefficient operation. These
inefficiencies can often afflict businesses that are simply not
equipped to deal with exponentially increasing manufacturing and sales
volumes. This mode in 1997 yielded good net returns only because of
the relatively high retail prices that Iomega could still command for
their products. Scott Flaig was brought to Iomega from Dell in the
fall of 1997 to start dealing with the runaway internal operating
costs and excessive inventories, symptoms that often accompany
excessive growth without measures in place to contain them.
4. Bottom line.....it's not difficult to make "good" net margins when
demand is high and profits per unit are high, but such a situation can
tend to "mask" costly underlying internal operating cost problems.
Now let's take a look at a disastrous 1998.
1998:
Quarters Revenue $ Net Erng $ Net Net Shrs Outsdg
Ending (X 1,000) (X 1,000) Erng % EPS $ (X 1,000)
Mar 407,500 (18,576) -4.56% (0.07) 262,238
Jun 393,831 (39,910) -10.13% (0.15) 266,920
Sep 391,766 (14,777) -3.77% (0.06) 266,920
Dec 501,288 19,041 3.80% 0.07 281,227
Total 1,694,385 (54,222) -3.20% (0.20) 265,286
Comments:
1. We all got a big surprise from the Q4 1997 earnings conference
call when Iomega announced they missed the consensus estimates by only
1 cent, resulting in the stock tanking $4 per share in after hours
trading that evening. Kim Edwards, being a marketing guy, possibly
didn't have a full appreciation for Scott Flaig's potential or
importance and, instead, announced Iomega was going to increase their
marketing spending for 1998 by $100 million to "educate" potential
users on the value of Zip drives. The analysts even argued with Kim
Edwards during the conference call, asking him why Iomega didn't
simply lower their prices on Zip drives and create a greater demand
for them. I believe Kim Edward's response was "we have a unique
strategy of making money on our drives", or something to that effect,
which may have been a "dig" at Syquest. The announced additional
spending for advertising was viewed by some as a "hail Mary"
maneuver and the stock price proceeded to steadily decline during the
first three quarters of 1998, further aggravated by a very volatile
overall declining market that didn't start to recover until a
sickening low was reached in the first week of October 1998.
2. Also, some rather large unusual "one-time" charges were incurred
in 1998, including brief 30 second or 1 minute ads costing $1.3
million a pop during the Super Bowl, a $10 million charge for Oracle
software (for Scott Flaig's "virtual enterprise" model) in Q1 of 1998,
a buyout of Nomai and other special charges associated with Iomega's
ongoing cost reduction initiatives. Incidentally, it's easy for
someone to look in a rear view mirror and criticize the big marketing
expenditures now, but had Kim Edward's strategy been successful he
would probably still be there. At the very least, he should be given
credit for having the vision to force Iomega to develop and market a
production version of their Zip drive, without which Iomega would
likely still be a very small niche company that most people never
heard of.
3. This 1998 Iomega situation is a good example of a company with
excellent products and big revenues but can't make any money. The
lesson here is clear…..if a business can't control it's operating
costs it will soon be out of business. Boeing is another good example
of this phenomenon. Orders for their commercial aircraft increased so
dramatically that, like Iomega, they became a victim of their own
success with the result being a reported loss for the first time,
I believe, in company history. They are just now starting to get a
handle on things and, in time, I expect them to become quite
profitable again. It simply takes time to develop internal mechanisms
that will eliminate excesses and lead to consistent profitability.
Now let's take a look at 1999.
In the Q4 1998 earnings conference call Jodie Glore said Q1 1999 net
earnings would be "flat" (plus or minus $0.02 per share), so let's
assume they are "flat". Jodie also said he expected net profits to be
in the mid-single digits for all of 1999. Now, let's further assume he
is right in that prediction and Iomega has revenues of, say, $1.8
billion or so for 1999. Then, let's say their net earnings are 5% of
that number. That means that their profit will be $90 million for all
of 1999. With about 281 million fully diluted shares out there that
would translate to about $0.32 per share net earnings for 1999.
Despite the analyst's consensus estimates and Jodie Glore's remarks,
here are my predictions for 1999:
1999:
Quarters Revenue $ Net Erng $ Net Net Shrs Outsdg
Ending (X 1,000) (X 1,000) Erng % EPS $ (X 1,000)
Mar 370,953 0 0.00% 0.00 281,227
Jun 412,167 19,784 4.80% 0.07 281,227
Sep 444,651 25,345 5.70% 0.09 281,227
Dec 563,169 36,043 6.40% 0.13 289,301
Total 1,790,940 81,172 4.53% 0.29 284,000
Comments:
1. For Q1 1999 revenues I used 74% of Q4 1998 revenues. This is
somewhat consistent with relationships in past years, plus Jodie Glore
said they would have component shortage problems associated with Zip
media and Clik! Drives, along with the effects of a seasonally slow
first quarter. Further, a one-time $9.5 million charge for the
purchase of all the U.S. assets and intellectual property from Syquest
should come from Q1 1999. Also, they are buying Syquest's assets in
Malaysia but Iomega never said what that dollar figure would be. I'm
no accountant but I also suppose a $3 million credit will be recorded
from the sale of the Ditto line, and that will offset some of the
charges related to the Syquest purchase. I'm guessing that Iomega will
throw every charge possible, including the kitchen sink, into Q1 1999
and be happy to get it behind them.
2. For Q2 - Q4 1999 revenues, I applied a 3% increase across the
board to the equivalent periods in 1997 in order to work from a more
reliable trend than 1998. I used only 3% due to price reductions for
both the Zip and Jaz product lines and am not confident that Clik!
revenues will contribute significantly to sales for the majority of
1999. On the plus side, the sale of the Ditto line should eliminate
that product's drag on net earnings. If anything, I may be
conservative in my Q2 - Q4 1999 revenue projections.
3. In February of this year Scott Flaig said in another conference
call that he was about half way through a two year process required
for the development of his virtual enterprise model that should
readily contain internal operating costs, reduce inventory levels and
increase inventory turns….as already reported in previous conference
calls. Looking at the Q4 1998 net return of only 3.8% I "guessed" that
Q2 1999 net earning percentages will still not be up to par with full
implementation of Scott's model, but I do show improving net margins
for the rest of 1999 as various modules of Scott Flaig's model start
"kicking in". As you can see, I show a 4.5% net margin for all of
1999. Strictly speaking, this is in direct conflict with Jodie Glore's
"mid single digits net earnings" statement in the Q4 1998 earnings
conference call which I interpret to mean as 5% or higher..
Now for the year 2000. Here are my predictions.
2000:
Quarters Revenue $ Net Erng $ Net Net Shrs Outsdg
Ending (X 1,000) (X 1,000) Erng % EPS $ (X 1,000)
Mar 439,272 28,113 6.40% 0.10 289,301
Jun 453,384 29,923 6.60% 0.10 289,301
Sep 489,116 34,727 7.10% 0.12 289,301
Dec 619,486 41,506 6.70% 0.14 297,401
Total 2,001,258 134,270 6.71% 0.46 292,300
Comments:
1. For Q1 2000 revenues I used 75% of Q4 1999 revenues. For Q2 - Q4
2000 revenues, I applied a 10% increase across the board to the
equivalent periods in 1999. I used 10% to reflect a hopefully
increasing Zip and Jaz unit sales picture due to price reductions,
with rather meaningful Clik! sales starting to materialize in the
last quarter of 1999 and continuing to increase throughout 2000. I
also assume there will be other new products introduced in 1999 with
meaningful sales starting to materialize during 2000. I don't believe
a 10% increase in yearly revenues is too much to expect from a
healthy, viable, growing enterprise. I know this and Iomega has got to
know this in order to maintain their domination of this market
segment.
2. By late 1999, Scott Flaig's model should be ready for prime time,
so for year 2000 net margin percentages, I used nearly the same
margins experienced in 1997. If, however, Scott Flaig's model reduces
operating costs to a greater degree than I think it will, net margin
percentages for 2000 could be somewhat higher than I'm showing.
Therefore, it's possible that am being a little conservative in my net
earnings projections for 2000.
Well, that's it for my projections. As you can see, I used a
completely different method for determining my numbers than used by
both Michael Coley and you. While both of you obviously have a lot
detail plugged into your models, I am making my predictions based on
trends I see in the past, coupled with the application of all other
information that I'm aware of. Let's face it....we are all just
guessing at these numbers no matter how you look at it.
I'll follow up sometime later with another post comparing Michael
Coley's, yours and my projections in a summary format so we can see
all of our data side by side for easy comparisons.
Dave
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