For those of you thatwho aren't subscribers to TSC... Here is IOMEGA's reply to Greenberg...
Iomega's Counterpoint
An item here Monday on Iomega (IOM:NYSE) was written without comment by the company because nobody ever returned my call. However, it got back to me late yesterday. Here's the original column with Iomega's counterpoints noted in bold:
At the risk of being accused of sounding too much like a worn-out retread (OK, I confess!), let me warn you that this is yet another column that deals with updates on old stories. If that doesn't interest you, don't read another word. I won't be offended. (Bye!)
For the rest of you (thought we'd never get rid of those day traders): These old stories are like case studies. Each one has a slightly different twist, but they generally carry many of the same themes and can provide valuable lessons -- especially when the company in question is a former highflier that many investors still believe will regain its former glory.
Iomega isn't a case study -- yet. But its history certainly holds plenty of lessons, and it's the longest-running saga ever to run in this column, if not any financial column. The stock now hovers around 5. Even at that price, however, many short-sellers haven't covered, believing it's as compelling a short here as it was when it was twice or even triple that.
So, once again, we check in with Marc Cohodes of Rocker Partners, one of this column's longtime regulars. His latest obsession with Iomega was prompted by the culmination of several events, including:
The slowdown in PC sales, which are critical to Iomega's fortunes.
Iomega's response: "First-quarter PC demand is often seasonally soft. However, most industry analysts continue to predict an increase in PC unit sales for 1999. In addition, Iomega's addressable market includes the installed base of PCs that do not already have a Zip or Jaz drive attached."
The pronounced slowdown at big distributors like Ingram Micro (IM:NYSE); not good considering that in the most recent quarter Iomega had around 10 weeks of inventory with distributors.
Iomega: "Refer to the prior response."
Iomega announced on Friday that it cut the price of its staple Zip drive to $99.95 -- half of where it was a year ago. Not what you want to see at a company whose earnings are rapidly falling. One of the only reasons it posted a profit in the last quarter -- its first profit in four quarters -- was that it cut marketing expenses. That becomes a chicken-and-egg type thing, Cohodes says. If the company doesn't spend heavily on marketing, its products won't sell. And if it spends heavily, its profits will fall.
Iomega: "Getting the external Zip to $99 at retail has been part of our stated strategy for the last three years. Over the last year we have dramatically improved our operational efficiency and reduced manufacturing costs which contributed to our ability to lower the price of the drive. At $99 we feel the external Zip is a compelling value for our customers."
The recall last week of 60,000 Jaz drives because of a power supply problem. This was just the latest in a series of Jaz-related problems, which were detailed by this column while it was running in the San Francisco Chronicle.
Iomega: "We voluntarily recalled a limited number of external Jaz power supplies, not Jaz drives. We are very proud of the quality improvements we have made across our product lines. Warranty return rates are at an all-time low. Many corporate and government entities have standardized on Iomega storage solutions."
Iomega's failure to roll out any significant new products in recent years. The only exception is the long-delayed Clik! data-storage drive for devices like the digital camera. But so far, Clik! sales haven't set the company on fire. The Zip and Jaz, meanwhile, are becoming outdated by the megastorage of today's PCs, as well as by devices like readable and writable CDs and DVDs. "Iomega will be the Daisy Systems of 12 or 13 years ago," Cohodes says. Daisy's brief hot streak, driven by a PC printer that used a daisy wheel, was dashed by Hewlett-Packard's (HWP:NYSE) introduction of the laser jet printer.
Iomega: "Within the last four months we have introduced products with new interfaces (Zip USB), higher capacity and performance (Zip 250), and an entirely new product platform (Clik! drives and disks), all of which have won recent accolades from computer publications. We are currently shipping a CD-RW drive in Europe under the Nomai brand name. We also have plans for new products that will keep us in the forefront of our current market segment as well as plans to explore opportunities in other technologies."
Last July entities run by Iomega Chairman David Dunn loaned the company $40 million with a teaser rate of 8.7%. On Jan. 1, that rate rose to 12.7%. (Higher interest expenses aren't good if sales are falling.)
Iomega: "The blended rate of those notes is extremely competitive with current market rates for subordinated debt and under the terms of the notes, they are to be paid in full by March 31, 1999."
The company hasn't yet replaced its old CFO, who has been gone nearly a year.
Iomega: "Iomega has had an extremely capable acting CFO in place since the day after the departure of the former CFO. The formal search for a new CFO did not begin until late 1998, after the arrival of Jodie K. Glore as president and CEO. As of today, Iomega has not extended any offers although the company is in discussions with several qualified candidates."
Last but not least: Even with the stock's decline, Iomega still has a market value of $1.4 billion. That's almost twice the size of Maxtor (MXTR:Nasdaq) and Western Digital (WDC:NYSE) combined. It trades at roughly 4 times book. When disk-drive companies go bad, they tend to trade at book value; book on Iomega is $1.28.
What's more, Iomega trades at 18 times next year's estimate of 30 cents per share. Seagate (SEG:NYSE), the industry leader, trades at a mere 14 times next year's estimate.
Iomega: "One of Iomega's most important corporate assets is not found on its balance sheet; it is the installed base of over 24 million Zip and Jaz drives. We have the opportunity to market high-margin disks to each drive sold resulting in a valuable annuity stream to the company. Iomega's operating model is very different from the hard drive manufacturers. Removable storage is a growing market segment and no one is better positioned than Iomega to take advantage of it."
For Iomega to earn 30 cents per share, Cohodes figures it would have to do around $60 million in earnings. "If it earns $60 million in any year from operations," he says, "I will wear a dress and serve all of the executives at that company lunch in Roy, Utah," where it's based.
Hey, IO, does he have a deal?
Iomega: "We would welcome any improvement to his wardrobe!"
P.S.: Today Cohodes said, "My conviction is as high in Iomega as it is/was on HMT (HMTT:Nasdaq)." HMT Technology, the topic of numerous items here, slipped 1 5/8 to 4 3/8, its lowest ever, after BT Alex. Brown downgraded the stock to market perform and cut earnings estimates for 2000 to 25 cents per share from 70 cents.
Ciao
BBG |
