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On-Line Investors Loyal To Iomega Despite Setbacks
By Carrie Lee
The Wall Street Journal Interactive Edition
NEW YORK (Dow Jones)--In the on-line world, Iomega Corp. (IOM) remains something like a favorite son.
The stock is limping along near its lowest level in a year, in the aftermath of a disappointing earnings report and a radical - some say potentially troubling - shift in its advertising strategy. But in the eyes of many on-line investors, Iomega still can do no wrong.
The troubles began last month, when Iomega, in a conference call that followed its fourth-quarter earnings report, shocked Wall Street with plans for an estimated tenfold increase in advertising spending this year. The $100 million campaign kicked off with four spots on one of the ad world's biggest stages: the Super Bowl.
The aggressive move, following the earnings shortfall and coupled with the company's admission that its inventory levels had climbed to unusually high levels, raised concerns on Wall Street that Iomega's sales growth may be flagging.
Iomega shares tumbled in response, falling 33% on Jan. 22 to close below 10 for the first time since July 1997. The stock dropped as low as 8 a week later, and it didn't manage to crack 10 again until this week. It closed up 3/16 to 10 5/16 in composite trading on the New York Stock Exchange Thursday.
A lot is hinging on the new advertising strategy, and analysts believe Iomega will face growing difficulties if the ads don't work as planned. The increase in spending will make a big dent in earnings if it doesn't result in a corresponding increase in business.
The Roy, Utah, company reported net income of 14 cents a basic share for the fourth quarter, a penny shy of the consensus forecast of analysts surveyed by First Call. In its conference call, the company attributed the rise in inventory levels to a delay in the release of a new product, Jaz 2GB.
The chain of events set off a flurry of activity in on-line investing forums. Some investors shared analysts' frustration at Iomega's surprise change in course, and others had some stinging critiques of the advertisements themselves. But overall, Iomega's on-line fans are staying the course.
"There is NOTHING to PANIC about with this company," writes one person on a bulletin board on the Yahoo! Web site (quote .yahoo.com). "It will move on as always..." writes a person on the Silicon Investor Web site
(www.techstocks.com). "I believe [the stock] will be back at $12-13 by December. Good for a possible 50% profit inside a year."
At the Motley Fool investment forum, co-founder David Gardner renewed his long-term backing for the stock late last week. "Despite a slight underperformance [of the stock] in the fourth quarter, 1997 was an outstanding year, and the stock neither reflects that nor the probability that 1998 will follow through with additional growth," he wrote. Motley Fool is accessible via America Online and a Web site (www.fool.com).
To be sure, Iomega has considerable room for growth. According to Disk/Trend Inc., a market research firm, industrywide roughly 8.9 million high-capacity disk drives were shipped last year. Most of those drives were manufactured by Iomega, and Disk/Trend estimates that annual shipments will climb to 26 million units by 2000.
Motley Fool's Gardner said he is taking a longer-term view of the stock than perhaps some are on Wall Street. "Anytime a company announces a great increase in a portion of its expenditures, the market doesn't like it. But for the long-term investors Iomega is succeeding in its business plan," he says.
Still, Wall Street remains decidedly cautious about Iomega's outlook. Rick Berry, an analyst at Argent Securities, says on-line investors are aiming too high. "They all think it's the greatest stock ever, the next Microsoft. A lot of people were buying the stock after earnings came out, [as the price was] dropping from 12 to the mid-8s. Obviously, it wasn't a great buying opportunity," he says. Berry rates Iomega a sell.
In the days after Iomega reported earnings and disclosed its advertising plans, many Wall Street analysts quickly reduced their 1998 earnings estimates. The consensus forecast for the year now stands at 58 cents a diluted share, down from 63 cents a share before the disclosures, according to Nelson Information Inc.
Iomega hasn't previously disclosed the level of its ad spending, but Competitive Media Reporting, a New York firm that tracks ad expenditures, estimates Iomega spent $9.6 million on advertising for the 10 months ended October 1997 - far below the new spending targets.
Previous ads from Iomega focused on getting people familiar with its Zip brand name. The Zip drive was initially sold as an add-on unit for personal computers, offering a high-capacity complement to the floppy drives already inc luded in most PCs. Zip drives have been a hit and today many Zip drives are already built into PCs. The new campaign is geared toward teaching PC owners how to use the Zip drives they already own. Iomega hopes the ads will inspire consumers to buy more Zip disks, which produce higher profit margins than the Zip drives themselves.
Robert Simmons, Iomega's vice president and treasurer, says the new campaign reflects the evolution of the company. "Two years ago [ads were] designed to build brand awareness, now we're moving into an educational campaign," he says.
But Tom Cal, an analyst at SoundView Financial Group, says: "There is uncertainty as to how successful this will be. ... Over the next six months
the campaign will be a big thing to determine upward stock movement." Cal has short-term buy and long-term hold ratings on the stock.
Others on Wall Street have maintained buy ratings on the stock, but some of them are also adopting a wait-and-see attitude. Todd D. Bakar, an analyst with Hambrecht & Quist, says that the new campaign "raises the risk profile. ... The range of possibilities [for the outcome] is quite broad."
Meanwhile, there are other risks. Iomega is facing growing competition from Syquest Technology Inc. The Fremont, Calif., company makes products that offer an alternative to the Zip drive and to Iomega's even-higher-capacity data storage product, known as Jaz. "New products seem to be gaining some acceptance," says Glenn Hanus, an analyst at Needham & Co.
"Dow Jones News Service"
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