And Part 3...
Subject: Transcript, 2Q99 CC, Part 3 Date: 7/16/99 2:43 AM
Author: VinOrdinaire Number: of 23647
Transcript of 2Q99, July 15th, 1999
Part One: message 23634
Part Two: message 23637
Part Three: Q & A (this message)
(I'm spelling some of these names phonetically so apologies in advance to those whose names I've mangled)
Jim Porter: The question I had was due to the limitations you've got on the chip availability for the Zip. Are you going to be able to control (?) enough of those or what about the licensees you have will they be able to procure a sufficient quantity of those for their own production.
John Conely: Jim, I'll give you a little history on that. We look at the original introduction of Zip back in 1995, when those products were introduced the proprietary chips on those products were introduced with a sole source supplier. And we recognized that this was a vulnerable situation roughly a year ago, and set about to improve that situation by developing a second source. Unfortunately, we got caught with a timing problem before we could implement the second source and as we came into the second quarter we came into a situation where our supplier has more demand than he has production capability. So we're working with him on a daily basis to implement additional production capacity in another facility that he has and we're in the process of qualifying chips out of that facility. So as we move into the third quarter, we expect to have some constraints initially in the quarter, and by the end of the quarter we would be out of this constraint situation. But we're looking globally at the requirements, not just internally at Iomega's requirements, but we're also including the requirements from our licensee partners, and we're allocating those chips across the line, so that we will support our licensee partners, we will support our OEMs, and we will support our after-market customers. Longer term, we have developed a second source, and as we move early into next year we will have a legitimate second source for these chip sets and in fact this supplier is one of the largest fabricators in the world. So we don't anticipate the problem beyond the end of the third quarter.
Porter: OK, I had one other question on Clik, what is your outlook in the near term on any further camera maker adoptions or selling the drive on an OEM basis to camera makers.
Conely: Uh, I really can't comment on that right now, because we're in confidentiality agreements with a lot of folks. The only thing I will say is that after the introduction of PC Card Clik at PC Expo there's been a heightened awareness of the opportunities for Clik in other applications.
Stan Corker (Emerald Research): Continuing on Jim's question, relative to Clik OEMs, Iomega has made a number of announcements identifying companies that have said that they would use Clik in an OEM built-in configuration. Can you comment to us on the status of all of that, not just on the cameras but the other applications for Clik built-in.
Glore: Stan, it's really not appropriate for me to comment on what's going on with regarding each and every one of those other than the fact as I say that we are continuing to work with them, that we are still working with all of them as we have talked about before going forward and any announcement on whether or not what they're going to do is really kind of up to them, we're basically the OEM supplier to them.
Corker: OK, let me shift direction then. Can you give us your current thoughts on replacing some of the executives that have left during the last month or two here.
Glore: I will make a couple of comments on this. Number one is that we have made one announcement that we have hired a new treasurer, we made that two weeks ago. We'll have several other announcements in the next month or so in terms of hiring announcements. We've announced that John Conely who is new to this because he's a valuable addition to what we're doing. You know, when we go through a restructuring it creates change and expectations that may or may not be in line with personal objectives and career goals of everybody, but there's going to be several announcements in the near future about some other people that are being added to Iomega.
Corker: Within the next quarter do you think you'll have filled all the open slots.
Glore: I don't know about all the open slots but we'll have some significant announcements on people becoming a part of the team.
Corker: I know Jodie you've been very focused since you joined Iomega on resolving some of the internal issues and increasing profitability, probably to some degree at the expense of marketing and we've talked about this in the past. Now that you're beginning to get some of the issues resolved internally, do you have any kind of schedule for when you'll want to start moving in a growth mode and perhaps being a little bit more proactive in marketing?
Glore: Well, as you know Stan, we really don't like to speculate on top line growth and you know you've correctly stated we have been really focusing on profitability. I've used—I've given some of the exciting new products some of the solutions and some of the marketing approaches that we've taken. We do have an opportunity to spend some time and as for growing the top line not just necessarily in units, but we are looking to do some more of that, but again, we want to continue to remain focused on sustainable profitability, but you probably will see us a little more active in the marketing arena going forward than we have been in the past.
Corker: Let me just ask one more question and then I'll hand over the mike. Could you possibly ballpark the size of the lost opportunity because of the ASIC problem on Zip?
Strong: We know that on a sell-in basis the chip shortage cost us between $25 and $30 million in revenue in the second quarter. Now as you know, we recognise revenue on a sell-through basis, and not on a sell-in basis to our distribution and retail channel. So it's difficult for us to know precisely how much it cost us in top-line revenue on a sell-through basis, but we do know that on a sell-in basis we would have sold between $25 and $30 million more this quarter, sell-in, had we not had the component constraints.
Michelle Rodacher for John Dean (Salomon Smith Barney): Could you comment quickly about the competitive landscape and your posture against the LS-120 as the first question, and secondarily just wondering if you can provide a little more granularity in where you are in the closure of your San Jose facility.
Glore: First of all in talking about where we are with the LS-120 I think there's a lot of segments again as I said before we probably have shipped more products in the fourth quarter than the LS-120 has shipped in its lifetime. And we don't just like to focus on one particular product but we are in a very strong position in the marketplace with a lot of customers and we are also very excited about what's going on in the laptop area not only with our Zip product but also with our ability to have Clik be a part of that system solution. So we are comfortable with regard to what's going on with the competitive landscape right there. Fundamentally, San Jose to answer the second part of your question was closed two or three weeks ago right now we have about 20 employees left.
John Dean: I have a question. In terms of the recent announcement of CD-RW. You didn't mention it and obviously it's not much in this quarter, but can you help us out a little? Because a lot of the calls that we get are how are you going to compete over time against DVD and CD-RW and then also if there's any comment you could make back again in the tape world, because I think you've said that you want to be a full-service supplier, so any comments in those areas would be greatly appreciated.
Glore: Sure, let me start with the CD-RW. We've announced our intention to be shipping a product in the second half of this year, one of the reasons why we said second half is that we want to make sure that we have a value-added proposition that differentiates us from other people. And that's also why at the PC Expo show we talked about not only just having normal programming software but also we'd like to continue to talk about Quicksync and its ability to back up, and if people know how to use Quicksync with our products, they will be able to use Quicksync in that particular product. Because I believe differentiating ourselves is very very important. We really haven't talked about it for the second half and in quarter when we're going to ship it because we want to make sure that we can do it and with the right price link etcetera. So, it's something that we think is a good product, we think it's a good value-add for us, and when we talk about what we are looking at, we're not just talking about CD-RW, but we'd like to talk about our optical engineering design expertise, or what we're doing, our optical centre of expertise, because it does include what is going to go on with DVD-ROM and some of the other standards that are going on there. On the second part of your question in terms of tape, fundamentally, our position in tape is that we're not necessarily believe that's a long-term business for us and when we talked about Ditto and Bernoulli and those kind of things we've pretty much gotten out of those product areas. As I said in our statement before it's very important for us that all our products lines, not just Zip, be profitable.
Dave McCore: With Scott Flaig's departure, can you briefly touch on how that's going to affect the implementation of your virtual enterprise model?
Glore: That's a good question, that's why I have John here to answer it for me.
Conely: Thanks for the question. As you are aware we have had significant success over the last 18 months with implementing supply chain management through the implemention of the virtual enterprise model. If you go back, one of the key elements of the virtual enterprise model is regionalization. And we implemented a regional model in Asia in 1998. We consolidated our Philippines manufacturing operation and our Singapore PC operation into our Penang facility, and at the same time we were able to reduce our conversion costs out of Penang by more than 50%. So we have a very efficient, cost-effective, and we believe the shortest supply chain possible in Asia. During 1999, we're in the process of implementing the same regional model in North America. We've closed our facilities in San Diego and San Jose, and we've established a North American production facility here in Roy, Utah, and we will address the European situation in the year 2000. We have six facilities in Europe, and we will look at rationalizing those down to two or three. We will be doing that in a step by step basis early in the year2000.
McCore: With the reorganization of your Jaz personnel, have you shelved plans for the USB and Firewire Jaz, or are those still going to be—
Glore: I don't want to get into any specific details on the products but there's still some product development because we still believe that Jaz is a very good product. As we said, even though it's not performing to our expectations, we have done a great job in increasing gross margin on that product line number one, and number two we also have some engineering work going on, and John, why don't you comment?
Conely: As we close down our San Jose facility, we've established a product engineering group here in Roy and also established a similar capability in our facility in Penang. So this product engineering group will continue to improve the performance of the Jaz drive, and go after cost reductions with the Jaz drive and Jaz cartridges. We're going to support this business, but I do believe that we are still doing at least the USB portion of that, I don't know about the Firewire off the top of my head. We are not stopping all development in Jaz.
Bill Louis for Todd Baker: Just wanted to ask a little more about the Clik. In particular, what your sales model is for that. Say, for the PC applications with the PC Card, are we going to see OEMs with that or will that be distribution and likewise on other mobile applications of Clik, how do you see that going?
Glore: I think you're really going to see multiple applications of that both for the end user and the OEM, and there's a lot of people that are very interested in talking with us about bundling that as a part of what they're offering to customers, both at the retail, OEM, and also bit-stream model, so we believe that that's going to be a real benefit. Plus like I said before, the enterprise model that's going we're finding a lot of mobile professionals that corporations really like to see those bundled, so that's really kind of front-end that we believe a real strength in terms of how we want to market with the PC Card Clik.
Louis: In terms of other non-laptop-related applications, cameras, other portable devices.
Glore: I believe that when you start talking about, you really have to talk in terms of market segments. I really believe that what's going on in the photography market and what goes on in the gaming or some other kind of things is going to be very different. The one thing we've learned in terms of our early days of this is we need to know the segments very well and we need to some specific things to go after those segments that are really what I call a non-traditional PC market.
Louis: Now one question I have is about competitive positioning, certainly in the laptops it's very clear how that's a great plug-and-play solution in the PC Card slot. How does Clik compare in the camera environment, in the games systems, and in other non-PC environments to competing storage technologies whether it's flash or other types of technologies.
Glore: We think it competes very well because of ease of use and transportability. What happens with that is sometimes it's very difficult to go back and forth so between whether or not we're talking about memory stick or some other kind of memory card or those kind of things, but we think we have a very good model going forward in terms of how we want to go back and forth between the applications and that's so we think that is one of our strengths. And again, a lot of different products have different unique applications in specific markets and we've already got a very good approach in terms of what's going on. We also believe when you start working with the cost and certain price points etc. we have certain advantages. But then again, you'll hear that from a lot of folks and a lot of competitors, but we believe we have a very good general purpose product, it's not only for the PC portable market.
Wolfgang Schlipkin: You touched on the ZipCD, I'd like to explore this more with you and what can you see this product and similar products contributing over time to revenues and profits. The second question is related to your recent acquisition of Nomai and the intellectual property from Syquest, I was wondering how you so far were able to elaborate to Iomega's advantage.
Glore: First of all, on the question of the ZipCD, and when we're going to see, you may know, or you may not know, that we basically don't speculate on what topline growth and rank's going to be so I'm really not going to comment on that at this point in time, because we haven't even introduced the product. On the second point in terms of Nomai and Syquest, fundamentally we were very interested in terms of intellectual property and some other kind of materials associated with that, and we believe that that's a very important part of our portfolio going forward is basically the intellectual property we have, and we believe that both of those companies offered us intellectual property that we're glad to have.
Corker: To return to Clik, the loss in the quarter was fairly sizable, could you give us some idea of where you stand in terms of the manufacturing process and maybe identify what needs to be done to make that product technology profitable.
Glore: Let me answer that in two parts Stan. The first part is that the way that we basically do accounting all of our engineering and marketing for the period plans associated with that and also some of the closedowns of some of the facilities so we're going to see that as a large number but as we move out of San Diego and consolidate that magnetic sector here we expect to see a substantial reduction in those costs. With regard to the manufacturing piece, let me turn that over to John.
Conely: Stan, I think this is a perfect example of the virtual enterprise model in we've taken Iomega's IP (intellectual property) and Citizen's miniaturization capabilities and combined them together to develop a very unique product with the PC Card drive. We working together jointly with Citizen have developed a manufacturing process and we have developed a very cost-effective efficient supply chain using Citizen as our manufacturing partner on this drive. I think moving forward we're in great shape, it's just that we introduced this product in the last couple of weeks in the quarter and didn't get enough of the drives out there to recognize the revenue. We've got to get the volume going and we believe we're going to start seeing that happen as I said before we're entering the quarter with a strong backlog on the PC Card drive.
Strong: Just to reiterate, the reason the profit margin on the Clik was so negative this quarter was as Jodie said we allocated a lot of our fixed costs to Clik based on the activity in the Clik product line, but we didn't have the top-line to offset those fixed costs. As the top line grows, we'll be able to leverage those fixed costs and get Clik to a profitable business.
Corker: Can you say whether the original configuration of Clik external is profitable, or is that still at a loss.
Strong: The Clik product profit margin in total which includes the external bundle as well as the PC Card drive was unprofitable like we mentioned for the quarter, and in total Clik was unprofitable.
[Someone else]: Stan, we're not just ready to break that up at this point in time.
Corker: One more question, you talked about Citizen being your manufacturing partner. Does Citizen have license to sell that product to OEMs?
Glore: At this point in time the answer is no.
Kimberly [Mumble] for Daniel Gunsler: You may have said this already, but could you break out the margins on the product lines?
Strong: For the quarter, our gross margin on Zip was about 27%, gross margins on Jaz were just under 20%, and gross margins on Clik were negative.
Ms. Mumble: Any guidance going forward?
Strong: The guidance that we've stated in our prepared remarks is that we expect our business model to hold for the second half, which calls for mid-single-digit after tax return on sales but that business model is highly dependent on our ability to fix the shipment strength issues that we've talked about and also dependent on the success of Clik and other new products. And we also said that we expected the profitability to be heavily weighted to the fourth quarter.
------------------------------
Well, that's it, another conference call down, this time with an intriguing 10 minute audio dropout obliterating what must have been Glore's prepared statement about the challenges of the quarter. Nice touch.
Your humble scribe,
VinOrdinaire
|
