Joe Besecher from Emerald: Last year we purchased 100 Syquest drives and were unhappy. (Big big laughter. KE says, "Mr. Dunn says I can only exchange one Zip for an EZ per year.) If IO can get price of Zip to 99 for external, what type of growth would you anticipate.
KE: We haven't done the direct research. But we know that in other nonrelated products, a cut from 199 to 99 increases demand 4-10x. We don't know if it will
be true for Zip.
Joe asks Dunn to comment about the shorts. It is like Ed McMahon giving a setup to Johnny Carson. Dunn says, I told the board of directors yesterday that our short sellers sleep like babies. They fall asleep, sleep for an hour, wake up ... and cry.
Iomega shareholder meeting, April 23, 1996
I am at the madhouse that is the 1996 Iomega shareholders meeting. I would estimate there are more than 300 people in the audience, many of them Fools. We are all wearing our yellow, red and blue buttons saying, "i am a shareholder," "i hate capital gains taxes," or "i will die with the most toys." For the first hour, we all tried to improve second quarter revenues by buying all the Iomega shirts, hats, golf balls and pens we could fit in
our Iomega shopping bags. The good news is that Jaz externals were for sale. The better news is that every time it looked like they were about to sell out, they pulled a new set from under a table. The Fools did what they could to corner the market.
The atmosphere is joyous. Everyone learned about the 2 for 1 split. Kook Adam just announced that the price is 48-1/2. Why didn't we all buy more yesterday?
The board of directors is on the podium. David Dunn convenes the meeting by welcoming the shareholders. The only thing he wants to take credit for is hiring Kim Edwards, who hired a remarkable staff. That prompts a brief standing ovation.
Dunn explains what happened with the secondary offering. There was turmoil as a result of newspaper articles etc. Generally speaking, he says, we are not the least bit antagonistic toward short sellers. Any fast moving high growth situation will lead to differences of opinion. Responsible short sellers improve liquidity and dampen excessive fluctuations.Here however a lot of the publicity was motivated by short sellers trying to drive the price down and block the secondary. There were also misinformed positive comments on a "the internet." The company took the negative comments on acctg
practices seriously. Dunn says he asked the company to compile all the comments and asked the audit committee to investigate them. Mr. Berkowitz did that, issued a comprehensive written report and found none of the criticisms were valid and the company was squeaky clean.
At the close of biz yesterday they announced a 2 for 1 stock split. The reason is the growth in employees, they wanted to increase the no. of option shares while minimizing dilution to shareholders.
Now he introduces the individual directors.
Now Kim Edwards speaks. He tells a joke about where the meeting is. People thought IO didn't have a big enough facility in Roy.
Truth is, Roy itself isn't big enough for the company.
KE introduces the officers and some employees. He then turns the meeting over to Donald R. Sterling, v.p., corporate counsel and secretary, to conduct the formal portion of the meeting. The first motion is to elect the directors. First someone from the floor suggests they close the nominations. Sterling seems surprised since there are no other nominations. That person moves to close the nominations, it is seconded and passed. He introduces himself as Richard Ash (sp?) a shareholder from Philadelphia. Sterling doesn't want to let him speak but then says okay. Ash says he is delighted by the performance of the company but is disturbed by the composition of the board and complains that this is a coronation. All the candidates are men. He hopes this company doesn't have a glass ceiling. Dunn interrupts him. The appropriate action by a shareholder to raise this issue is to propose a nominee to the nominating committee.
He supports this man's sentiment but we have limited time. But Ash won't be quiet. Finally the audience tries to hoot him down. Dunn responds that he resents Mr. Ash. They begin to proceed with the meeting. Mr. Ash finally sits down.
Motion to ratify the selection of Arthur Anderson as company auditors made and seconded.
The polls are closed. Within about three seconds the first motion is announced passed. Then the same with the second. Network election projections are not this fast.
The formal meeting is adjourned.
KE announces that he forgot to introduce Tim Hill, head of marketing. Hill gets a nice ovation. The walls are lined with the fruits of his work and it is all tremendously impressive.
Now we get a multimedia presentation. First excerpts of tv reviews and demos of IO products from programs like Good Morning America.
"Now the man who defined the term smashing paradigms and made us all true believers, Kim Edwards."
Kim says he will give us the exact presentation from the road show, update it and give info from the recent conference call. (By the way, everyone here calls him Kim.) It is
punctuated by a computerized slide show.
"We have the industry's three hottest peripherals."
The old Iomega thought Roy was the center of the universe. They had excellent technology but Bernoulli sales were declining and the company wasn't aware of it. When KE came he had to say, "Hey, your baby is ugly and you don't know it."
He describes the new philosophy of the company in giving the customer what he wants at a price he will pay.
No longer is Roy the center of the universe. The company is now world wide.
"Smashing paradigms and creating standards." This is more than shifting paradigms. They needed to take 75% of the cost of the Bernoulli out and make it a better product and create the market for it.
To begin their effort to replace the floppy for the multimedia age they had over 1000 surveys, 150 interviews and over 50 focus groups. The consumers said this product category was boring. This created opportunity.
He describes the size of the market and how the storage industry is expanding. Removable was a tiny portion of the storage industry. This suggested the possibility of excitement going forward. The estimate now for removable is from 6 million units in 1995 to (I missed the number for 2000, but the graph goes dramatically upward).
He shows the size of programs these days that create the opportunity for storage. More exciting is the need created by the internet.
So no matter how big your hard drive is it is not big enough. Zip is like the catchers mitt.
But consumers demanded even more: cost, attractiveness, etc. Also a complete solution with a full suite of software.
So now you can take your work anywhere in the world. Also you can store and run, archive, share, collect, and save, with Iomega.
First came Ditto. He describes the product. They were excited when they began to get favorable newspaper coverage.
Then came Zip. Between March and July 1994, they talked to over 1000 consumers. They learned it absolutely had to be under $200.
Then they got mainstream coverage for Zip in the mass market. Reference to the Vogue award gets an ovation.
Finally, Jaz, aimed at a different consumer.
"And the competition doesn't get it." A slide showing the competition's downside and prices. They can all fill a niche but can't compete with Zip and Jaz.
Syquest's EZ led to a $56M loss. The LS120: KE says they still haven't seen it. IO sold the technology because too expensive. LS is slower and more expensive.
"And the stuff is well protected." A slide showing the company's patent protection and patent pending. They just had a Zip patent issued, but others are still pending.
"Creating an Organization." Graph showing old and new people. In the old days, the company was inwardly focused and had few marketing people. They added them. In 4Q 1995, 69 of 84 professionals were brand new.
R&D: Same kind of graph. Little attrition in last 12 months and added lots of people.
Manufacturing: Slight recent decline in employees and huge increase in last four quarters.
So in 4Q 1995, 60% of employees were new. Now 340 new and about 120 old.
New key management: KE, Tim Hill vp mktg, Ted Briscoe vp sales, Len Purkis cfo, Bill Kennedy vp logistics, Wayne Stewart vp operations, Reed Brown vp mfg. He describes all of their bkgrnds.
"Forming Strategic Alliances." Ingram Micro, MicroAge, Merisel, Tech Data Corp. They initially couldn't get their attention, now they do.
Next list of alliances is all the retail houses. In 4Q 95, they were the leading tape drive in 6 of top 7 retailers.
Next group: Mfg. alliances. Fuji is a fantastic partner in making the magnetic media inside the Zip. Sequel builds Jaz drives in Cal. IO builds the disks in Roy.
Branded partners, Sony, Maxell, etc. Sony is selling branded Zip disks. Etc.
Next: OEMs. Power, Glyph, MicroNet, Micron, HP, Roland, Sony.
Managing fixed costs. They used to have operating expenses of 40% of sales in early 94, to 21% at year end. By 1Q 96, they were about 18.
"Improving Margins." This is a razor and blade game.
Margins used to be high, then fell with ramp of Zip and are now increasing through 4Q '95. In Q1, the margins slipped back down because of the Jaz, the same experience as with Zip. Without the extra 7M for Jaz, margin still would have been around 30%. Improving margin as dollar amount has gone sky high lately.
"But there's still more to come: Ditto." They intend to get the price down to 499. They have 5 gig drives working in the lab.
Zip: They need to get the external to 99, the disk to 9.95. 25 meg disk: The purpose was to get an attractive price point, 4.95 to schools. The reason they are not shipping is they can sell the 100s and the cost is the same. He hints that 25s will come when it is appropriate.
They are working on a 400 meg drive.
Jaz: goal is 199 for drive and 49.99 for disk. Goal, 2 gig backward compatible with existing drive.
Now he reviews the financials. Zip Jaz and Ditto are up 11 times a year ago.
Recapitulates: The 3 hottest peripherals, expanding industries, evolving organization, strategic alliances, solid financials. It's not shifting paradigms but to smash them, and to create Zip as the replacement of the floppy.
KE turns it back to marketing.
Now they show a video of the most breakthrough advertising in the industry today. It is introduced by a New Orleans Jaz group. The musicians make fun of techno babble and are pretty funny. One of the musicians says, "It is honest tell it like it is marketing not that techno stuff." This is a great film review of IO ads.
Now the stock holder Q and A. I apologize if I got any Foolish names wrong.
MF ETurkey. The Sony deal: Has Sony decided to use the Jaz or are they just looking at it? KE reads the Sony press release. They will use not just review. How about a laptop zip? They areworking on it and believe it will come out. Nothing is impossible.
MF Chiros. What percent of revenues will satisfy you for OEMs?
KE: We just started shipping IDE evaluation drives to OEMs in December. In terms of a specific percentage going forward, we haven't thought about it that way. But it will
definitely be our intent to make it higher.
Followup Q. Epson is making drives. How much of a free hand do they have in making
them and do you get licensing?
KE: We have no licensees. We are private branding drives for them. They are a mfg partner and part of that is that we are private branding drives.
SD Trent. I missed the question. KE reiterates the Jaz and Zip sales in 1996 1Q. We shipped more Jaz sales in first three months of Jaz than 1st three of zip.
Bob the Bear. Are you pleased with declining backlog situation and if so why?
KE: We would expect that since 4Q is the biggest quarter. Also we have a better handle on the demand and our supply situation than we used to. That enables us to predict our production better than we used to and allows us to reduce the backlog.
GolfPro3: Will Jaz deliver any contribution to margins in 2Q?
KE: We have intro'd automated equipment and cost will go down. KE doesn't answer explicitly, but the implication of his answer is yes.
Don Stanhouse: Have the majority of Jaz problems been solved? KE: These are nothing more than you would expect to see when you ramp any new product.
Handsome Ed: How many inventory turns will you this year and when will you be self-financing. KE: 8-10 is the goal and the norm in the industry. That is significantly up from this year. (It is a very positive fact and suggests that their component shortages are close to being over.) Financing: It depends on growth. I hope we have to continue to finance the company.
Mr. Ash: I am an IO shareholder not Syquest. Will you answer Syquest's compoarison ad? KE: That was the best advertising in the history of the company. (Big laugh.) We don't consider Syquest a competitor.
A Fool unknown to me asks whether there are any problems with customer support because of negative articles reporting that there have been.
KE: 4Q we doubled the resources we devoted to customer support. Customer support is an ongoing goal even at the board level. One of the problems is the increasing size of the market and nonhardware questions from unsophisticated customers. He is referring to problems that have nothing to do with IO's hardware but lead to calls to IO's tech support lines. We have to deal with it and will continue to do so even if the problems are with some other suppliers, not us.
A nonFool: Re distribution with Office Max. They prefer to have door to door shipment. We cannot do that. We are looking into it. KE says he doesn't get too excited about it because we can do it from distributors.
A nonFool comment. A year ago I Bought EZ 135. We had lots of problems. That wasn't smart. What I did that was smart was buy IO stock. Ovation. KE tells the gentleman to turn his EZ into the company and they will replace it with a Zip. Bigger ovation.
Cynicalguy. Can you judge disk sales in proportion to OEM sales?
KE: We think the likelihood of tie ratio being smaller for OEM than non-OEM is pretty high. It is hard to judge the tie ratio because of the huge increase in drive sales. We are 12 to 24 months from being able to predict the tie ratio.
Followup: Do OEMs actually contribute more than 10% to Zip revenues because you can't tie disk sales to OEM? Some of the disks must have been to OEM purchasers and that would actually increase OEM sales to more than 10%. KE: Don't know but my gut says no.
Nonfool. Who is the ad agency and what is the budget for print and tv.
KE: Dahlen Smith White. The answer to the budget depends on volume. If we get an increase in sales from ads we will continue the ads, but otherwise no.
DaleVelk. Did Ditto decline?
KE: It went from 33M to 28, due to seasonality.
NSACORAF: To what extent will we see IDE production in 2Q? Is the slow rate of IDE production holding up OEM agreements?
KE. Answer to 2d q is no. We are in normal evaluation process with OEMs. Answer to 1st q depends on OEM agreements and it is our top priority. We are in discussion with all OEMs, in various stages of progress. The evaluation process generally takes about 6 months. (That would mean we should have some decisions by June.)
SMEyers: Praises Jaz ads.
A nonfool: Re durability of Jaz.
KE good. We told Macweek the disks are not quite as durable as the Zip and be a little careful. Macweek took no special care and it worked great.
A nonfool asks about protection from a hostile takeover. Both KE and Dunn say it would be difficult and be unsuccessful. It would alienate the employees who are the most valuable assets.
Nonfool: Will you do a secondary offering or private placement or what?
KE: we are evaluating all possibilities.
Joe Besecher from Emerald: Last year we purchased 100 Syquest drives and were unhappy. (Big big laughter. KE says, "Mr. Dunn says I can only exchange one Zip for an EZ per year.) If IO can get price of Zip to 99 for external, what type of growth would you anticipate.
KE: We haven't done the direct research. But we know that in other nonrelated products, a cut from 199 to 99 increases demand 4-10x. We don't know if it will
be true for Zip.
Joe asks Dunn to comment about the shorts. It is like Ed McMahon giving a setup to Johnny Carson. Dunn says, I told the board of directors yesterday that our short sellers sleep like babies. They fall asleep, sleep for an hour, wake up ... and cry.
Joe: We believe the IO story has just begun. Do you agree?
Dunn: We believe the good story has just begun.
Someone I couldn't see asked about the convertibles. KE says we netted $46.3M.
JohnE: Thanks for what IO has done for our families. He refers to what the Swan CEO said about IO's reluctance to license Zip drives.
KE: That is not true, we are eager to do it.
Nonfool: How do you intend to handle investor relations?
KE: We added someone recently, R.D. Simmmons. We have given out a lot more info every quarter, but there are some things we can't give for competitive reasons and we hope you understand.
Ricornfeld: How do you see the Swan drive as potential competition? KE. I haven't seen it, it works on a different principle than Zip, but it is hard to comment on a product when
it is not available to take apart and study.
I left out a few comments that simply praised the company.
That is it. The meeting is over. Everyone rushes out to buy Jaz drives.
Then we all had lunch, celebrated MF Eturkey's birthday and marvelled at a closing price of 51.75. Life is wonderful. This is wonderful. If I had a postcard for each Fool who didn't make the trip, I would say, "Having wonderful time. Wish you were."
Richard Cornfield (RICORNFELD) |
