Ira... with all considerations, I wouldn't expect too much from Q4/98, as we are still somewhat early in a recovery cycle. I think it will be reassuring... possibly even beating expectations marginally... but not blockbuster.
Tom,
As far as I'm concerned, well said. I will be happy to just see Iomega back to profitability in Q4 and, perhaps cash flow positive. For quite a while, I mentally thought about $0.04 EPS as being "resonable" and achievable but since SSB initiated coverage with a buy recommendation, and H&Q revised their Q4 estimate to $0.05, who am I to argue?
We've all been through an extremely frustrating year and it appears that the characteristics of a "new beginning" are starting to surface.
Looking back, I just can't help trying to understand what happened to cause us to be here in the first place. Here are some of my thoughts:
o Prior to the invention of the Zip drive, Iomega was just a sleepy little company in Roy, Utah that had great products but most people never heard of them. IMHO, their best product back in the late 1980's was the bernoulli drive. At the same time, Syquest was the king of removable storage....charging whatever they wanted for their products in a near monopolistic atmosphere. As I understand it, they were also not known for reliability, but what could the buying public do?
o In early 1987, I worked for McDonnell Douglas and was assigned to a highly classified "special access" program. We were bidding, at the time, for the development of a new plane that was so secret that the Navy would deny the very existence of the project. At the time, I had an IBM AT 8 Mz computer that (back then) was the "cat's pajamas" of computers and Compaq was just starting to develop a good reputation in the IBM "clone" world. When I tried to bring my computer into this "black" program, security made me take my hard drive out and replaced it with a 5 1/4" "removable" hard drive made by some outfit in Kansas City. At night we had to lock up the the rather thick disks in big safes. One day I saw a guy drop his disk about two feet onto a desk. When he tried to access the data, it was gone!! Months of data simply vanished in one instant. Those drives/disks were very quirky and, obviously not very reliable. Not long after that, some IS person showed up at my desk and asked me (since some considered me the biggest "power" user on the project) if I would like to "try out" a new product for data storage. I said, hell yes....bring it in here. It was an Iomega "dual" bernoulli drive that could store 20 Mb on one disk, and required the installation of a card in IBM AT with lots of available slots. After about a week, I was simply entranced by the "slickness" of this drive. It was every bit as fast as my previous hard drive (that was as big as a football) and held the same amount of data! What a deal! I always booted from the left hand drive, and could literally "Xerox" a whole disk to another disk (for back up purposes) in the right hand drive in 2 1/2 minutes. Also, I could literally throw a bernoulli disk against a wall (I really did this) and it would still perform perfectly. At the time, I found out that the drive cost $1,200 and each disk cost $100. I was so pleased that, later on, over 200 "single" drives were purchased for the rest of us, along with a sprinkling of "dual" drives. I can tell you that I was in heaven, and over a four year period filled up 15 disks (an overwhelming amount of data at the time) and never lost any data!
o Also, back then the bernouilli drive was being touted as the future replacement for hard drives and Iomega stock ran up to, I believe, $20 per share, further "hyped" by news releases from the then company president. As you probably know, the bernoulli drive was a great product but it just was too $%#@ expensive for the masses....hence it was relegated to being a (some like the notorious shorter David Rocker would say "fad") niche product for only a select few (mostly government funded projects). The stock collapsed to less than $1 and a big lawsuit commenced. Shareholders were "rewarded" with a bunch of additional Iomega shares and came away with a very bitter taste in their mouths. Furthermore, David Dunn (chairman of Iomega and an influential member of Idanta Partners, the source of "seed" money for Iomega) never forgot it and kept a muzzle on Kim Edwards with respect to forward looking statements. The shorters never forgot this fiasco either, probably wrongly characterizing Iomega (in their minds) as ALWAYS developing "fad" or niche products! <---- This is a very important part of this story!
o Along came Kim Edwards in early 1994, who looked at Iomega's expensive, ingenious engineering marvels and, as I understand it, literally said to them "You're baby's ugly and you don't even know it!" Since he had a free reign from the board of directors, Kim Edwards promptly spent a rather large sum of Iomega's money to shut down quite a few existing products in R&D and, based on Marketing surveys, forced the engineers to develop the Zip drive in a "controlled chaos" atmosphere....culminating with them taking 20 prototype Zip drives to the Nov. 1994 Comdex show in Las Vegas. What a feat!, developing a product that sophisticated and reliable in 11 months! The drives had a $199.95 target price and 100 Mb disks were to be priced at $20 each...not $100 for 20 Mb like just 6 years before! At the time, Iomega figured they could sell 100,000 drives per year....not anticipating the explosive demand that likely started with delivery of the first production quantities to retailers in March of 1995. By the way, because of Iomega's bernoulli drive experience, I don't believe, at the time, any other company had the expertise required to develop a drive such as the Zip. Sometime in 1996, Dan Dorfman (the spit monster) came on CNBC and said Zip was old technology....what an idiot!
o By May of 1995 I read about the Iomega story on the Motley Fool's AOL site. Because of my experience with the reliability of bernoulli drives I started piling into (for me) Iomega stock.
o As said previously, Iomega was just a sleepy little company, looking to sell 100,000 drives per year. At the time, for them, that would have been a tall order to fill. When all hell broke loose and they were overwhelmed by demand, Iomega was simply not prepared or equipped for the logistics nightmare that comes with such high volumes, and struggled constantly to keep up with demand...experiencing component shortages all the way through the end of 1997. Because of my back round, I'm quite familiar with the overwhelming amount of information and processes associated with developing one airplane from a "paper" design specification, and have further experienced not being able deliver airplanes in a high volume production mode because of one lousy part. When Iomega got "behind the curve" they were in a reactive mode...."putting out fires" on a daily basis just to keep up with demand. They were, literally, suffering from their own success. Being in this mode is very difficult to overcome, and probably forced them to over order components to "be sure" they had enough to fulfill the unbelievable foreseeable demand. I can tell you, this is a very inefficient and costly mode to be in. Also, in this mode they were just doing "whatever it took" to get the product out the door, with product quality suffering as a result (probably why the "click of death" seems to only afflict some drives manufactured in late 1996 - late 1997). Thanks to the high-margin disks and the profitable external drives, they stayed profitable through 1997.
o The hiring of Scott Flaig in the fall of 1997 was the first day of Iomega beginning the change over to a proactive mode. He began developing an extremely cost efficient "virtual enterprise" business model to control and track engineering changes, supplier changes, component deliveries, QC processes and manufacturing processes that will result in far higher-quality products, accelerated inventory turns, along with "just in time" delivery of components. Implementing this model is not a small task and takes a lot of time. One of the signs that they were serious is a special charge of $10 million in Q1 1998 for Oracle software that would facilitate this dramatic turn around.
o Being a marketing guy I don't think Kim Edwards had any appreciation for what Scott Flaig was doing, and honestly thought he could solve Iomega's demand problems by spending, among other things, $1.3 million for silly 30 second TV commercials during the 1998 Super Bowl that appeared amateurish to me and did not convey (in my opinion) to anyone why they should buy a Zip drive. I don't think Iomega's board wanted to overrule his desire to break the bank spending ad money in view of the fact that Kim Edwards was definitely responsible for Iomega's resounding success to date at the time. I know if I was a board member I wouldn't have voted against him.
o Thankfully, Jim Sierk took over the helm after Kim Edward's departure. In view of Jim Sierk's QC (quality) back round, he likely had a full appreciation for what Scott Flaig was doing, and probably did what he had to do to help Flaig's endeavors. According to the Q3 1998 earnings conference call, customer complaints (quality) had been reduced dramatically, and inventory turns were increasing on a fairly consistent basis....and improving by the month. These are signs of the beginning of a "lean and mean" efficient, low cost operation that will ultimately be able to squeeze every last possible penny of cost out of their products....resulting in vastly improved profit margins and enabling Iomega to methodically reduce prices going forward to keep the competition at bay.
o Iomega is a completely different company now when contrasted with the sleepy little company in the late 1980's. They appear to be all grown up (business wise), have learned a lot of valuable lessons and also appear to have a top management team in place. We just may be on the cusp of an extremely profitable future for both Iomega and it's shareholders.
In summary, all of this is just my humble opinion and I'm still sticking with my $0.05 EPS estimate for Q4 1998.
Dave
p.s. Sorry if some fell asleep reading this, I just felt like putting it all down on paper. |
