Anyone seen this? BTW, Happy St. Patrick's Day to All of You!
Bear Hunt: Iomega's Long Journey from Stardom
By Eric Moskowitz
Staff Reporter
3/17/98 5:51 PM ET
Click-click-click.
If you were at last year's Comdex in Las Vegas, then you remember that sound. Iomega's (IOM:NYSE) yellow-shirted brigade of marketers handed out thousands upon thousands of these little yellow clicking devices that people could make sounds with -- and promote the company's new clik! drive. "People couldn't keep their hands off of them," said one attendee from San Jose. "They made quite a racket, it was like there were crickets storming Las Vegas."
To say that Iomega had a ubiquitous presence at the monster conference last November would be an understatement. The company was everywhere: On the back of cabs, on billboards and in the press tent. Its salespeople were not only cocky but also dismissive when asked about its competition's new one-gig drive. Typical response: What competition?
At the end of 1997, the company had zipped up 87% of the low-end data-storage market and 62% of the high-end, according to Bob Amatruda, senior analyst of tape and removable storage for International Data. The company was just starting a glitzy $100-plus million advertising campaign that included four spots during the Super Bowl to advertise its next generation Jaz2 and clik! products.
Even with all that upside, the data-storage company now tells its eager band of followers that business will soon turn unprofitable, with a loss of $10 million to $25 million expected in the current quarter. Investors who loudly jumped on the bandwagon three years ago have quietly jumped off during the past few months. After Comdex -- and Iomega's on-site marketing blitz -- ended on Nov. 21, 1997, the stock hit a high of 15 7/8. After Monday's preannouncement, Iomega's stock fell 1 1/2 to close at 7 1/8, chopping 55% off of the company's market value since Las Vegas.
For a company with little competition and tremendous growth prospects, the last four months have been rather perplexing. In January, the company missed fourth-quarter estimates by two cents, citing weakened Asian demand and delays in its new product launches. That's understandable, and the handful of analysts went out and lowered their 1998 earnings numbers from 61 cents to 50 cents, according to First Call. But the fourth quarter's bump has turned into a sinkhole of trouble.
"I don't think Iomega management can now turn its ship around until the next fiscal year," says one money manager who requested anonymity. Worst of all, Iomega said that it would probably have negative cash flow in its March quarter. Currently, the company has a cash flow-to-earnings ratio of 1.2. On this news, Hambrecht & Quist's Todd Bakar downgraded the stock to a hold and lowered his 1998 earnings estimates from 50 cents all the way down to 10 cents. (His firm did participate in Iomega's public offering.)
How could this happen? Even by the standards of the information age -- in which business cycles run at warp speed -- the quick reversal in the company's fortunes has been dramatic. Its phoenix-like rise to prominence stemmed from what TSC columnist Herb Greenberg called a one-hit wonder: the Zip drive.
But like so many 1970s rock groups, Iomega couldn't come up with a second hot disc. And Iomega's obsession with marketing -- $7 million in the last three months of 1997, according to Competitive Media Reporting, an ad research firm, and another $100 million in 1998 -- gave the entire teetering affair a kind of New Kids on the Block flavor. Well-dressed and marketed, but the lyrical content was starting to fall flat.
They really dug themselves into a hole with their ad budget," says the money manager, who sold his stake in Iomega in December. Iomega CEO Kim Edwards admitted as much in Monday's preannouncement: "The shortfall in sales combined with over $20 million in incremental marketing expenses appear to be the main factors contributing to our expected loss."
The company has been hit not only by slackened Asian demand, but by the same kind of inventory channel problems that box maker Compaq (CPQ:NYSE) is having. "Analysts who cover Iomega expect to always have robust demand," says Glenn Hanus, an analyst with Needham. (His firm did not participate in Iomega's public offering.) Hanus, who cut his rating on the stock to a hold in December, says Iomega's international unit is dropping the ball. "I don't think they have a clue why Iomega's sales are soft in Europe."
Iomega is also seeing some renewed competition in the high-end arena, forcing the company to rely more heavily on its low-end "killer app" for a large portion of its existing business. "Iomega is still cranking along with its Zip drives, and that still accounts for over 75% of the company's sales," says International Data's Amatruda.
While growth rates for the low-end will continue to be robust in 1998 -- 53% versus 60% in 1997, estimates Amatruda -- the higher end is still struggling. Amatruda says his firm only sees 20% growth for higher-end products.
Interestingly, its high-end sales are being compromised by its main competitor, Syquest Technology (SYQT:Nasdaq). While Iomega still dominates the low-end, it still doesn't have a stranglehold on the high-end, which has traditionally been Syquest's domain. "Our new one-gig SparQ drive holds 10 times the capacity of the Zip drive," says Ed Marinaro, chairman of Syquest Technology. "Our price points are magic." The SparQ sells for $199, around the same price as Iomega's 100-megabyte external Zip plus.
Howard Rosencrans, an analyst with HD Brous, says that Syquest's high-end SparQ and SyJet products are eroding Iomega's business. "Syquest is building excellent momentum in its SparQ and taking some sales from Iomega," says Rosencrans, who lowered his ratings on Iomega from a strong buy to accumulate in January. "After selling 38,000 units in its December quarter, I see them selling 200,000 units this year." (His firm did not participate in Syquest's or Iomega's public offering.) The early success of the SparQ has forced Iomega to lower its prices on its comparable product, the one-gig Jaz, from $399 to $299.
Some of these problems -- a glut in demand, product delays, renewed competition -- are hard to avoid. But why did Iomega embark on such a large ad campaign when it already knew the Asian contagion was coming? Iomega, who didn't return our calls, seemed intent on furthering its brand recognition at the expense of an earnings shortfall.
Iomega still dominates the low-end data-storage market with the Zip drive and the Zip Plus. But as it tries to expand into the high-end, customers seem less willing to make the same transition. After all, a newbie PC user can buy a one-gigabyte hard drive for less than $1,000. "That's got to put a crimp on sales," says Rosencrans.
Another thing that has put a crimp in revenues is its woeful product release record of late. The two-gigabyte Jaz2 drive, which was supposed to come out in the fourth quarter, didn't come out until this month. And even though it's for sale on the company's Web site, its main re-seller, PC Connection, says that it's still waiting for it. "Iomega does this a lot," says one PC Connection's telephone sales staffer, who requested anonymity. "They put all that promotion out there, and then ..." What? "Well, then nothing, that's the problem."
That seems to be what happened with Iomega's clik! device, which was promoted so heavily at Comdex back in November. Iomega now says the clik! device, which can store digital data such as photographs, will be launched in the company's upcoming fourth quarter, about a year after promotions for the product began. Let the advertising begin.
BIG HOLDERS OF IOMEGA STOCKINSTITUTIONSRANKNAMENO. OF SHARES
(in millions)SIZE OF STAKE1Fidelity Management15.96.11%2State Street Research & Management 9.83.81%3Zweig Dimenna Associates5.32.05%4Barclays Global U.S.4.951.91%5Vinik Asset Mgmt4.831.86%MUTUAL FUNDSRANKNAMENO. OF SHARES
(in millions)SIZE OF STAKE1Fidelity Growth Company Fund3.91.51%2AIM Constellation Fund 31.15%3Oppenheimer Global Fund2.61%4College Retirement Stock Account1.760.68%5Columbia Special 1.60.62%Data from Technimetrics as of 12/31/97 for institutions; 9/30/97 to 11/30/97 for funds. Technology stocks such as Iomega are extremely volatile and some of these managers may have changed their stake in this stock since Technimetrics last updated this data.
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