Gottfried and all, here is the transcript of the 3rd Qtr. Conference Call transcribed by "Vin Ordinaire" over on the Motley Fool thread and posted last week. Just in case anyone here has not seen it... here it is. Many thanks to Vin for his efforts. Mel
Repost follows:
Subject: Transcript: 3Q99 CC, with Q&A
Date: 10/22/99 4:48 PM
Author: VinOrdinaire Number: of 27987
Recommendations: 5
It took me a few days, but here it is: the transcript of Iomega's Oct. 14th, 1999, third quarter conference call.
Source:
vcall.com
For transcripts of the 1Q99 CC, see messages 20587, 20616, 20749
For transcripts of the 2Q99 CC, see messages 23643, 23722 (the "Gap"), 23637, 23643
David Dunn: Good afternoon and welcome to Iomega's third quarter 1999 earnings conference call.
This is David Dunn Chairman and CEO. I have decided to change the format of these calls. Each quarter we will highlight one or two elements of the company to give you a better feel of what we are doing. Today I have invited John Conely, Executive Vice President of Global Operations, to discuss our manufacturing cost reduction efforts, and Kerry Block, director of enterprise marketing, to go over our recent success in selling into major corporations. Also joining me on the call is Phil Husby, our CFO, Greg Bishop, our acting General Council, Dave Henry, Vice President, Product and Marketing, and Tracy Walsh, our Treasurer, will participate later in the question and answer period.
[noted problem getting material out on the wire]
Today we want to share information to help you understand our business and where we are going, so I need to open with the following statement. [reads forward-looking statement disclaimer]
Let me start with an update on our CEO search. We have retained Spencer Stuart to conduct that search, my best guess is that it will take between three and nine months, we are at the beginning stages so there is little to comment about.
I have been asked if we are going to hire a replacement for Scott Flaig. The answer is yes and we already have him, John Conely. John brings a wealth of business, marketing, and manufacturing experience and talent to Iomega by way of Alcatel (?) and GE. John has made tremendous strides in improving our manufacturing operation, and is continuing to search for ways to lower our costs. I am sure you will be impressed when he talks to you in a few minutes.
When I took over the management of Iomega in August, I initiated a review of all of our products and platforms. We had the individual managers prepare business plans for their areas and then present these plans in a discussion with the senior management group including myself. The purpose of this was to ensure that each product was contributing to profitability. We wanted to eliminate loss leaders and to correct deficiencies that might exist in pricing. As a result of these meetings, we've made a number of decisions regarding the elimination of redundant facilities and cutting off projects which had limited potential for short or intermediate term profit. The cost savings from these decisions while not overwhelming should be in the order of $5 to $10 million a year.
We made decisions to make software a much more important part of our business than it has been heretofore. We recently promoted the director of our software operations to vice president, and she is developing plans to expand our software initiatives. We are particularly interested in software that increases the functionality of our platforms for our customers.
In the area of cost reductions, we have asked each of our 200 six-sigma green, brown, and black belts to come up with a short term cost saving suggestion with documentable results by the end of October. In addition we have asked each of them to recruit five other non-belt employees to do the same. The result of this should be that we get back suggestions for cost reduction from 1200 people by the end of October. We hope that again this will have the result of making us a leaner more effective organization.
My immediate goal as I've explained to our organization is sustained four-quarter-a-year profitability with growth. I've emphasized to our people that we're not looking for static earnings, we're trying to create a profitable platform from which we can re-energize the growth of Iomega.
What are my impressions about the Iomega organization since I took over? I am frankly happier with the people that I have gotten to know here at Iomega than I expected to be. Given our recent earnings decline I was pessimistic. I don't really see any reason for pessimism at this time. I am enthusiastic myself about the growth potential of Iomega, and I believe we're seeing definite improvements in the morale of our people. I hope in the next few quarters that Iomega, with me or a new CEO, will be reporting enhanced earnings and specific strategic initiatives aimed at creating continued growth. I am also impressed by the improvements made in the quality of our products as well as the accomplishments we have made in reducing our manufacturing costs. Again, John Conely will talk more about this.
Today we announced a net loss of $78 million, which is in line with our pre-announcement of Oct. 4th. This includes restructuring charges, an increase in the valuation allowance for deferred taxes, and other non-restructuring charges. I don't want to spend much time talking about our quarterly financial numbers since Phil will explain these in more detail.
Some of our third quarter highlights include a much stronger balance sheet. At quarter end we had over $130 million in cash and a completely unutilized line of credit. Our installed Zip drive base surpassed 29 million during the quarter. The Zip product profit margin was almost $50 million in the quarter, up from $33 million last quarter. In recent quarters the Jaz platform had not been performing to expectations, but I'm pleased to say that it is once again profitable, with a product profit margin of $11 million compared with a loss of $2 million last quarter. While the Clik program is still in the ramp stage it continues to lose money, and it produced a product margin loss of $20 million, an increase from $17 million last quarter. We are looking at significant cost reductions for this product. Our newest platform, the ZipCD-RW, just began shipping in August and already has sold nearly $9 million, with a product profit margin loss of just under $3 million.
During the last three months our enterprise team has closed new deals with major corporations and has shipped thousands of drives as a result of our enterprise initiatives. In a few minutes, will tell you a bit more about our enterprise initiatives.
We are poised for success and profitability, and I have a sense of urgency in achieving this goal. We intend to have all our product lines, not just Zip, contributing to profitability. With that, I'd like to turn the call over to Phil Husby, our CFO, who will discuss our third quarter results in a bit more detail. Phil?
[9:35]
Phil Husby: Thanks David. In our release today we reported a loss of $78 million. While disappointing, I think this number masks some interesting financial indicators that I want to speak to you briefly about.
For example if we back out restructuring and other charges we've identified, we would show a pro forma pre-tax profit for the quarter of about $7 million dollars. If I do a rough apples to apples comparison with previous quarters, by similarly adjusting for such things as purchased in-process technology, restructuring and other charges incurred in 3Q98 and 2Q99, the pro forma pre-tax profit of $7 million in 3Q99 would represent a $19 million pro forma improvement year over year, and a $31 million pro forma improvement quarter over quarter.
How did we achieve this? Well, the primary drivers behind this improved profitability quarter over quarter and year over year are significant improvements in Zip and Jaz product profit margins and significant reductions in year over year and quarter over quarter common corporate expenses. Not all of these improvements fell to our third quarter bottom line because of increased spending and other charges related to the Clik, ZipCD, and other product platforms we're managing. On a year over year basis revenue declined $35 million as a result of discontinued Ditto sales and reduced Jaz sales, offset in part by new revenue from Clik and ZipCD.
3Q99 gross margin of $86 million declined only $1 million compared to the 3Q98, despite the $35 million decline in revenue. There was a significant improvement in Zip gross margins, plus a positive contribution by ZipCD. Unfortunately, these improvements were offset by gross margin declines in Jaz due to lower volumes, Clik due to product launch costs and startup manufacturing costs and other charges, and increased losses associated with Ditto and other product lines, reflecting mainly some inventory reserves taken this quarter.
On a year over year basis, operating expenses excluding restructuring charges are down by nearly $7 million, primarily due to declines in R&D expenditures, coming principally out of restructuring efforts undertaken in the second quarter of this year.
I want to comment just briefly on the company's quarter over quarter performance. Third quarter revenue of $357 million increased nearly $8 million compared with the second quarter of this year due in part to increased Clik and ZipCD sales. Gross margins of $86 million in Q3 represent an $11 million increase over 2Q99, a significant improvement in 3Q99 Zip gross margin Jaz gross margin and ZipCD gross margin was offset in part from increased materials manufacturing and other costs in excess of revenues for both the Clik and Ditto platform.
On a quarter over quarter basis excluding restructuring charges, SG&A and R&D expenses have in the aggregate decreased roughly $16 million in part as a result of the restructuring efforts undertaken in the second quarter.
Moving briefly to the balance sheet, working capital remained essentially unchanged at about $150 million on a quarter over quarter basis if you adjust for the deferred tax asset of about $48 million included in the 2Q99 balance sheet. Our cash balances constitute nearly 90% of our working capital at the end of 3Q99 compared to roughly 60% in the prior quarter. Due to our continued focus on asset management, we have successfully returned to an era where inventories are primarily financed by payables. Cash conversion days decreased from 53 days to 37 days on a quarter over quarter basis.
Cash flow from operations of just over $58 million was generated in the third quarter compared to $54 million in 2Q99. We also announced today that we recently completed negotiations with our bank group on our existing $150 million revolving line of credit. In brief we reduced the size of the facility from $150 to $75 million and amended specific covenants to better reflect our current circumstances.
In summing up it is not easy to comprehend all that is going on at Iomega. The bottom line for me is that I believe the stage is set for improved profitability and I'm optimistic about the fourth quarter and next year.
Now I'll turn the floor over to John Conely, EVP of global operations.
[14:50]
John Conely: Thanks, Phil, and good afternoon. As David mentioned, our immediate goal remains sustained profitability each and every quarter as we move forward. I'd like to speak directly to how the operation functions in supporting that goal.
The Iomega operations and engineering team have embraced a very aggressive target: that of reducing the costs of the Zip product platform by 50% by the end of the year 2000. This is a very difficult goal, and quite frankly is not without significant risk. But cost reduction is the key to expanding our market penetration, and certainly the key to obtaining our objective of sustainable profitability.
After being very successful in the consumer market, Iomega decided to enter the OEM market segment. And although our product quality was consistent with the quality requirements of the consumer marketplace, where the OEMs were concerned, it was off by a factor of 10.
At that time our product designs lacked the robustness required by the OEMs, our drawings and specifications lacked clarity, our supply chains lacked consistency, and the execution inside of our own factories was barely adequate. We implemented a program of containment, codenamed marshal law. The aim of this program was to keep all of the BS, bad stuff, inside of Iomega until we could improve the robustness of our designs, do a better job of defining our requirements to the supply base, and implement flawless execution inside of our own factories.
As you may recall, it was during this same time period, January 1998, the operations team met with the operating committee of the Board of Directors. We committed to reduce defects by 50% during calendar year 1998. Defects were defined in the broadest sense of the word, not just limited to scrap.
In order to achieve the objectives we established the metrics, we drove ourselves with a single-minded focus, and we made sure that there was accountability within the organization to achieve this goal.
The results were truly outstanding. Manufacturing conversion costs with the Zip product platform were reduced by nearly 50% in 1998, and have been reduced by another 30% this year on a YTD basis. Inventory was reduced by more than 60% from its peak in mid-Q2 of 1998, moving from $344 million down to a level of $132 million at the end of 3Q99.
Warranty return rates for Zip were reduced by more than 50% going from nearly 6.5% to down below 3%. DPPM levels, or defective parts per million, at the OEMs' factories were reduced by nearly 75% in 1998, and they have been improved by another 40% this year. And our last-place supplier rating at our OEMs rose to a point where we are consistently rated # 1 or #2 at most of our OEM customers.
The 50% cost reduction goal is approached in the same way. FMA: Focused Metrics and Accountability. The entire enterprise is engaged. The same passionate team which delivered on the 50% defect reduction goal is being turned loose on the 50% cost reduction objective, and we expect the same outstanding results.
Thank you. Now I'd like to turn the call over to Jerry Block, Director of Enterprise Marketing. Jerry?
[18:55]
Jerry Block: Thank you John. Good afternoon. David has asked me to give you an overview of Iomega's enterprise customer initiatives. I'm going to tell you about our relationships with enterprise accounts like Daimler-Chrysler, Bose, and the University of Southern California.
First off we're defining enterprise customers as Fortune 1000 companies, government agencies, and educational institutions. This is a big market opportunity for us, as all of these organizations have large numbers of PC users, and traditionally, our penetration in this market has been limited to single-user purchases and specific work groups.
My news today is that that's starting to expand. In the past year, we've spent a lot of time listening to our Enterprise customers, as well as talking to hundreds of other enterprise accounts about their pc storage needs.
Through these conversations an research, we've learned there are some important unmet needs in this area, and that Iomega has the solutions to solve those needs. The two biggest needs we've identified are first, an easy, affordable way to have pc files reliably backed up. And second, an easy way to carry and exchange today's large business and internet files. PC user files in the enterprise, in other words, the files that you and I create every day on our PCs, are by and large not backed up or protected today. This poses a substantial risk to this important intellectual property. Also user productivity is suffering because many pc users can't accomplish the everyday tasks, like exchanging large files over the network or internet, because of bandwidth constraints or e-mail file size restrictions. And all these problems are only further complicated by the ever growing number of laptop users who are often unconnected from the network for long periods of time. The bottom line is that there's been no reasonable way to solve these problems through traditional network means, and the old floppy is pretty much useless with its limited capacity.
New developments at Iomega now allow us to address these enterprise issues in a very easy, reliable, and affordable way. The first of these is the advent of Quicksync, Iomega's new software that provides automatic seamless backup for PC users
Second is the release of several new Iomega drives that address the growing mobile market. These include Zip bay tray (?)for laptops, the new slimline Zip250 USB, and the new ultra-portable Clik PC Card drive.
The third is the fact that Zip drives are now available from all major PC manufacturers including Dell, Compaq, HP, and IBM. In the first quarter we organized dedicated enterprise sales and marketing teams, charged with targeting large-scale environments,. We also have developed enterprise-focused services, including dedicated global technical support centres and an enterprise-specific website. A volume purchasing program is also coming soon.
Earlier this month we held our first enterprise customer council meeting, where we spent two full days with IT professionals from some of the top organizations in the world. They shared with us their needs and how Iomega's products fit into their organization. It was a tremendous event and it showed that we are indeed on the right track in supporting them.
While enterprise sales take longer than consumer sales, we're already beginning to see results, and we have some great wins lately. Recent customer wins we can share with you publicly include Hertz, Marriette Rousselle (?), Daimler-Chrysler, the University of Southern California, American Airlines, and Bose Corp.
In addition, a major government agency recently ordered 34,000 Zip drives built into its new PCs, and one of the nation's largest sportswear companies is in the process of installing 20,000 Zip drives in nearly every pc they purchase.
All in all we're very optimistic about our efforts with the enterprise. The market is large, our solutions fill important needs, we have the resources in place to win, and we're already seeing successes we can leverage for the future. Thank you. And now back to David Dunn.
[23:40]
[Q&A]
Dunn: Operator, at this time we'd like to answer questions.
Corker (Emerald): A couple of questions, one on the fourth quarter. We're coming up to the consumer buying season. Could someone address any promotions or programs that Iomega has in place to ensure that the fourth quarter will be a strong one.
David Henry: Well we certainly have a number of things going on in the fourth quarter. Clearly we have some new products that we are launching and ramping and supporting from an advertising standpoint. One of the first is obviously the Clik PC Card, so we have a major advertising campaign that continues through the fourth quarter, as well as promotions with all of our retail partners and catalog partners, hopefully you've seen that and are fully aware, if you travel today in an airline I'm sure you've seen our ads.
Secondly one of the big things is Y2K. Obviously with the coming millenium, we have a major ad campaign going on right now that reinforces particularly to the SOHO small office and consumer folks the need to back up and address the Y2K situation. We have media packs that are special Y2K bundles with packaged software and easy tips, we have booklets, basically a strong promotion again in the retail channel to help promote Zip media and Zip disks. Those are two of our major ones. Then clearly the other two products we have that we're strongly pushing are the new ZipCD product as well as our brand new 30-day old Zip250USB, our new sleek slimline product that we're just launching right now and it's doing very well.
David McCrory (First Montauk): Last quarter you broke down gross margin percentage by product category, can you do that, and also can you break out the percentage of 250s to 100s, and the OEM percentage for us?
Husby: I can tell you that the Zip gross margin percentage in third quarter was around 30%, the Jaz gross margin percentage was around 27%, the Clik gross margin percentage was negative, the ZipCD gross margin percentage was a little bit over 20%. I don't know that I've got readily available the percentage split between 250 and 100, so I'll have to get back to you with that information.
McCrory: What about the OEM percentage?
Husby: The OEM percentage was 63%.
Kimberley Lee (JP Morgan): Two questions. I was wondering whether or not, given the programs that you'll be putting in place to address the continuing SG&A and R&D reductions, whether or not you can give us some idea on what the coming quarter operating margin.
Dunn: I don't think that we traditionally forecast our operating margins. Again we're very optimistic that we can continue what we've been doing on the margins, and we're trying to lower for the most part the overhead costs. We have a continuing program on the reduction of manufacturing costs and I don't think there's been a quarter probably in the last two years that we haven't lowered the manufacturing cost. It's pretty hard to go beyond that, do you have anything to add, Phil?
Husby: Not at all, David.
Lee: Thanks. The second question was whether or not you can talk about where you see in the long term your strategy in addressing the digital camera market, given the repositioning of the Clik product.
Henry: It's certainly fair to say that the digital imaging marketplace for Iomega is an important segment that we are addressing in a variety of different ways. The thing that we certainly are publicly doing right now is we have a partnership going with Agfa. Agfa has released here a little over a week ago their intention to release a Clik-based camera actually later this quarter.
Dunn: We're also trying to develop interest in several camera manufacturers in a Zip camera which is similar to the Mavica that Sony has out, which uses a floppy disk. If this platform is adopted by any of these camera manufacturers, it would be our 100MB disk.
McCrory: I want to know if Taiwan had any impact on your disk shipments, I heard rumours about that, and also if it's going to affect any of your OEM drives if the boxmakers have to cut back on their end. And the second question on your Beyond PC initiatives for both Zip and Clik can anyone touch on that to give us any more news?
Conely: Actually in the case of Taiwan we were very fortunate. We have 27 different tier one and sub-tier suppliers in the Taiwan area and other than the short-term loss of power and transportation, which we had vendor managed inventory in place to take care of these inconveniences, we did not have any problems with the Taiwan earthquake. The slight impact we had was in the chip area with our Winbon supplier there, but we expect to have all of the component supplies we need for Q4. Relative to OEMs, actually the OEMs forecast is not been, so they're not having significant negative impacts from that situation either. David Henry and I were meeting with several of those guys last week.
McRory: Is there any other information you can give or any design wins or anything regarding Zip BeyondPC, or for instance, E-books for Clik, perhaps, how does that stand?
David Henry: The thing that I can share, certainly obviously the Agfa announcement's the most recent one. Within the last week we did announce that there is going to be a Kodak printer, actually manufactured by Lexmark, that will be Zip-enabled. Obviously Sega also has introduced the Dreamcast to a tremendous reception here in the United States. Sega in Japan had previously announced that there is going to be a Zip-based accessory that is going to come out some time next year and we're certainly extremely excited about that opportunity. And I guess the other thing that I'd mention is that MP3 and Clik will?it's certainly an area of extreme interest and involvement right now.
McCrory: Any comments on the E-book initiatives that we see that you're in some field tests with.
Henry: Yes, that is going very well right and suffice it to say it's one where we're supporting in. We have been selected as the Clik drive for that initiative and we're just following that one and working with them.
Michelle Rodacher (SSB): Quick question back to the component side. I know you just discussed the chip side. I know you've had some problems in the past getting enough media and some other components. Have you had any issues or do you foresee any issues should you have an uptick in demand on some of your products?
Conely: We're in good shape media-wise as you know from previous calls, the shortfall there had been a technical one by our principal media supplier. They pretty much have those issues behind them and we don't anticipate any media or cookie issues in 4Q99.
Dunn: Thank you for joining us today. I, as you may have guessed, am enthusiastic about the potential of Iomega. I really believe that we're beginning to see a definite improvement in the quality of our products and the potential for sustained four-quarter-a-year profitability and future growth. I had dinner last week with some of the members of this Enterprise Council, and I couldn't have been more pleased with the enthusiasm these people expressed for our products.
As a closing item, I'd like to read a paragraph from Mossberg's column in today's Wall St. Journal where he's talking about buying a desktop PC. Under Mass Storage, he says, "If your pc has a so-called DVD drive, which is good mainly for playing movies, that's fine. But there's not enough software on DVD to justify spending extra to get a DVD drive. Much more useful are zip drives, which are cheap and let you save and transport large files." Clearly Mossberg is a man of wisdom. Thank you very much for joining us today. I look forward to talking with you again next quarter.
[call ends]
VinOrdinaire
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