Here's the story from the WSJ. Looks like Rosencranz is just a little pissed.
Iomega Grinds Gears In Shift To OEM
Marketing Strategy
By Anthony Palazzo
BUENA PARK, Calif. (Dow Jones)--Iomega Corp. (IOM), struggling to
shift gears as its once-furious growth slows, said it would restructure its
operations and cut 600 to 700 jobs.
The job cuts and other cost-cutting moves will result in a charge of $5
million to $10 million before taxes in the second quarter ending June 27.
While the actions are a step in the right direction, analyst Howard
Rosencrans of HD Brous & Co. said they don't go far enough. "The real
huge issue is that the business model doesn't appear to work," Rosencrans
said.
Iomega, of Roy, Utah, said it expect to post an operational loss for the
quarter of $25 million to $35 million, or 10 cents to 13 cents a share, and
said its cash flow will be in the negative $60 million to $70 million range for
the quarter. Revenue will be roughly in line with the $408 million posted in
the first quarter.
The maker of detachable computer-storage products said the expected
loss, resulting from softer-than-expected retail sales and a shift toward
lower-margin sales to PC makers, is greater than it had previously
anticipated.
"We are disappointed with our financial performance during the quarter,"
James E. Sierk, Iomega's acting president and chief executive, said in a
statement.
Analysts polled by First Call had predicted a loss of 2 cents a share for
Iomega, compared with net income of $26.2 million, or 19 cents a share, in
the second quarter of 1997. The 19-cent figure isn't comparable, though,
because Iomega completed a 2-for-1 stock split in December.
The expected loss will put Iomega in non-compliance with certain terms of
its $200 million senior credit facility, and the company said its ability to
borrow more than the $60 million already advanced under the line depends
on its successful renegotiation.
Iomega will report its earnings on July 16.
Rosencrans faulted Iomega for belatedly recognizing how seriously a
restructuring was needed, and said it should do more to cut costs, like
outsource production and consider eliminating the Jaz line, which he called
an "unmitigated disaster."
Joe Besecker, an analyst with Emerald Securities, said he thought Iomega's
moves, which will eliminate 12% to 14% of its work force, represent "a
significant attempt at restructuring."
He said acting Chief Executive Sierk, who replaced Kim Edwards in
March, "is cleaning up the ship for the new guy" who can come in and drive
the OEM business. Besecker said he met with Sierk earlier this week at
PC Expo in New York. "He led us to believe that they're down to some
final serious candidates," for a permanent chief executive.
At one time, Iomega's high-density Zip removable drives were so hot the
company had a hard time keeping up with demand. It introduced Jaz, an
even higher-density product, to great fanfare.
However, computer storage prices have receded drastically in the past
year, wreaking havoc on the disk-drive sector.
Although Iomega doesn't compete directly with these companies, the
downward trend in prices has made customers less inclined to pay for its
relatively high-price storage product off-the-shelf. Also, Jaz has had
quality-control problems, and the controversy hindered its acceptance.
In this environment, a lower-price maker of removable drives, SyQuest
Technology Inc. (SYQT), has made inroads against Iomega, and even
newer technologies are fast making their way toward the market.
Iomega is attempting to quickly get lots of Zip drives installed on computers
by the PC makers, so it can establish itself as the "standard" for removable
storage. Then it will be able to profit on the sale of the removable disks.
But in order to succeed in this lower-margin business it must lower its
underlying cost structure.
According to Rosencrans, Thursday's actions don't go nearly far enough
toward that end. "There's just a ton of things that need to be done," he said.
"The window of opportunity to establish themselves as the standard is
waning. They need to seriously address this right now."
Besecker takes a more benign view. "They still deserve a higher
(price/earnings) multiple than a Seagate or a Western Digital," he said,
mentioning disk drive makers Seagate Technology Inc. (SEG) and Western
Digital Corp. (WDC). "Here you sell a drive and you can make it up with a
disk." |
