S. Bateh, Here is the whole transcript of the vcall Emerald Research conference submitted by Vin Ordinaire over on The Motley Fool thread. Quite an effort to get this done and up on the net so quickly. For those who don't have vcall capability here it is...Thanks to Vin. Mel
Subject: Transcript, Mar. 29th Emerald Date: 3/29/99 8:50 PM
Author: VinOrdinaire Number: of 19742
March 29, 1999, Radio Wall Street interview with Stan Corker, director, Technology Research, and Joe Bessecher, President of Emerald Research: Broadcast by www.vcall.com. Interviewer is CEO of Vcall. David Bowman.
Q: Stan, today you announced a downgrading to your rating of IOM based on a reduction in earnings. Can you give us a sense of what led to this revision today?
Stan: Before I answer that question directly let me say a few things about Iomega. I've been following Iomega as an analyst for nine years now, and one of the things I'd like to say about Iomega is that Iomega has done more for the removable storage industry, especially in the last three years, than any other company. It was a company that recognised the need for removable storage for the mass market, something that had been pretty much ignored by other manufacturers before Iomega introduced the Zip drive. Since that introduction, the industry has taken off and expanded beyond a lot of analysts' expectations several years ago. With about 23 million Zip drives installed now, there's a tremendous revenue annuity for selling Zip disks that's going to count for years to come, in fact, probably five years after Iomega manufactures its last zip drive, there'll be still disks being sold to people who already have drives. That's a strength that no other company has because of its ownership of the Zip drive and Zip medium.
In terms of a more negative note, you asked why we reduced our rating on Iomega today. We did this in response to our channel checks over the last month or two, and we're seeing that products are shipping through the retail channel below our previous expectations. We didn't expect a tremendous quarter for Iomega anyway, just because there's always a seasonal decline following the Christmas period. But what we're seeing is the sell through is behind what we anticipated, especially in two areas that we thought would be relatively strong for Iomega. First, we thought the Zip250, which was introduced around Christmas, would ramp up during the quarter and the Zip250 being a higher margin drive would have a positive effect on earnings. Secondly the zip disk which is the highest margin product that Iomega has, we anticipated zip disks to be fairly strong with people who bought the zip during the Xmas period buying their first disks during the March quarter. It looks to us that these two oases in all of this arena would probably give us some more positive results for Iomega and probably save what would have been a pretty bad quarter otherwise,
But those two areas just don't seem to be living up to our expectations, so we've been forced to reduce our earnings estimates for the March quarter from a 2 cent profit to a 3 cent loss. There's still time left in the quarter so it is possible that things may pick up during the latter part of the quarter, but at this point we think it was appropriate to reduce our earnings and consequently, we lowered our rating from a buy both long and short term to a neutral long and short term.
Q: Do you see this remaining a growth market; is this a short-term blip in Iomega's channel sell-through or something more fundamental?
Joe: That's one or those things that's hard to define, David, and why we felt it's important to have the call. Clearly as Stan says in his earlier statements, there's the ability because of the large installed base to really market the disks and have it grow through oem, through retail sales, but the general environment for computer peripherals, not just IOM and zip, but computer peripherals in general, it tough to really get a handle on it. Even tougher for us as research analysts to get a handle on this because when an oem machine is shipped with a zip drive in it, the person who bought the computer might have bought that as a bundle and doesn't really know how to use that zip drive or zip disk, so it may take him a little while there may be a lag time they may be experiencing that. So we're really keeping an eye on that. In general, one of the things we stated back in Nov. Dec., in the removable storage area Syquest and Nomai and others, they kind of bowed out, It's still open for Iomega to execute and perform, and don't think the story is over by a long shot. The execution has to be keen and has to be strong, and right now we're not 100 sure where that is; we're just continuing to monitor and that's why we're moving to neutral.
Q: One of the things I've seen kicked around for a time is whether the zip will become the replacement for the floppy disk. Has the latest quarter shed any more light on that, does it really matter for Iomega whether that transition happens in a major way or is it happening more slowly and going to be to their benefit in any case?
Stan: This is an argument a lot of people have and will continue to have for some time to come. Iomega definitely had that vision a couple of years ago and I think it was a very good vision for a company to have, to have a target out there that may be unattainable, but certainly it gave investors incentive to be positive on the company. I don't think as much of that exists today, but that's a different issue. The issue is can the Zip replace the floppy. The floppy has changed its role over the years, it's no longer a software distribution vehicle, it's more for just saving a few small files, and it has no better use than that. It's biggest strength is its price, it's dirt cheap. For any technology to replace the floppy especially In today's environment of constantly reducing the price of pcs, nothing's going to replace the floppy unless the price of the replacement is going to get down to the sub-$20 price of a floppy drive to the oem.
Of all the technologies that I see, Zip is definitely best positioned to replace the floppy because it's probably lower cost than anything else that's out there right now. Times are changing, and there's probably something going to come along in a few years that will change that. But for now at least within the next couple of years, I don't see anything else contending for that role as a floppy replacement. Now some people will say there's rewritable cd technology to meet the needs. Every computer has a CD these days. It's a good argument but I don't think the argument plays out for another couple of years just because the cost of adding rewritability to a CD drive is a little bit prohibitive today and probably will remain so for the next couple of years. But certainly if Zip doesn't really begin to capture that floppy market within the next couple of years it's going to see more and more competition from the CD technology, CD as well as DVD. So, to answer your question, I think it's still in the books that zip could replace the floppy, and I don't think that decision is ultimately over yet, but it's probably not going to be at the rate of one drive per system like the floppy used to be, just because more and more systems are now being introduced that don't even have a floppy.
Q: You mentioned the Zip 250; they've launched the Clik, targeting a somewhat different market. Can these new products or other products on the horizon turn around the downward trend, at least in earnings, that you've identified?
Stan: Both the new drive technologies that have been introduced are going to have a positive influence on revenue and earnings as we move forward. One thing I'd like to say is that Iomega pretty much owns its addressed segments of the industry. In the market space that has the Zip drive, it owns over 85% market share; in the professional market where Jaz plays, it owns over 90% of that market; so Iomega's woes aren't really because of competition. It's more a market issue of whether the market is expanding. When the company really owns that market, then whatever it does to improve revenues in the future for the entire market, the company will reap the benefits of. Moving forward, the company has to not so much win battles with other drive technologies or other participants in the market, but to expand the market. We're seem to be reaching a little bit a plateau in the market in that zip grew the market for removable technology when it was introduced and some of that growth is slowing down. Growth opportunities are out there that iomega has to regenerate. For the new technology, The 100 zip drive I believe is going to be kind of a bread and butter product tech that will be used to expand the market because it's priced lower and be attractive in terms of opening up the market. The zip 250 which was introduced at Christmas is a very attractive product. It has the backward compatibility so people can continue to exchange disks with neighbours and friends and business colleagues, but it brings the capacity up to something that is required today for the larger files. You tend to run out of 100 MB disk a lot sooner today than you did three and a half years ago when Zip was introduced. 250 raises the capacity and for those leading-edge early adopters its a reasonable capacity and backward compatibility, It's a higher margin product for Iomega, so as the volume grows it's going to be a positive influence on revenues and earnings.
As far as the Clik drive is concerned, that's a new market. It really is a market that doesn't have any removable magnetic technology today. It's probably too premature to judge Clik based on the products that have been introduced to date. The higher volume versions of Clik are still to come. The internal Clik drive that is integrated into cameras I would expect to see in the second half of this year. I think there's potential there. A lot of people will argue with that point that flash memory is too well entrenched in the camera market to be displaced by the Clik drive. But there's always going to be applications where something like a Clik will be more valuable than flash memory, more cost effective.
There's opportunity there, we have to wait to see whether IOM does well in terms of signing on camera manufacturers as oem customers.
There's another application to Clik in the PDA market, where the whole computer is too small to put in something like a floppy or a zip drive. Iomega has shown a pre-production version of the clik drive that goes in a pcmcia slot which most notebook computers and PDAs have, which would provide that 40 MB capacity for those kinds of applications. It's a virgin market because there's not a lot of older technology solutions that are available to meet those market demands. It's possible that if Iomega executes well and captures the right kind of customers in the right kind of applications, the Clik technology could become an equivalent-sized market to Zip over time.
Joe: There's a lot of opportunities still available to Iomega. We've just got to see and listen to the company better articulate its long-term strategy and shift the investor focus away from the short term issues. One of the things we've pointed out as others have is that this could be conceived as an internet play, people need to download this information store it somewhere, some time ago we talked about the catcher's mitt of the internet. And with digital cameras also being a growing business they're supplying the removable storage needs to two very growing businesses.
Execution is something that we've got to see. There's been a shakeup in management We've had Kim Edwards who was the founder of removeable storage “giving the customer what they want at a price they can afford,” that's gone, they moved into Jim Sierk and now Jodie Glore “quality is everything” and the products are tremendously strong in the quality area. We've just had this little recall in Jaz, but those things happen I don't think any reflection they're going with this six sigma thing. I really believe you're looking at a company that's doing a lot of things right. The flip side is that things changed along the way; we felt that when they got to the 99 price point on the drive years ago it would increase the market and I think it has increased the product I really do believe Clik will be a tremendous product it has priced well, positioned well, engineered as well as it can be. We'll keep a close eye on that going forward. There's potential there for sure.
Stan: Haven't even mentioned razor and razor-blades a lot of people have lost sight of that original concept. The strategy—I think the strategy is still a good strategy. To give you some data points, IOM shipped 9.5 million zip drives during 1998, and we're currently conservatively estimating that the numbers in 1999 will be about 11 million drives, a little bit of growth there but not as much as previous years. But on the zip disk front, we're looking for disk revenues to grow about 50% year over year just because of that installed base. So that basic concept, that foundation of Kim Edwards to build this razor razor-blade model. It's taken a few years to actually get started, and has a lot of potential to grow even further if Iomega continues to grow the Zip drive shipments to oems and into the retail channel. That's what is concerning us more than anything right now. The disk drive shipments are kind of slowing down, that is a concern. We would have liked to see the drives continue to grow at high rates for a few years, to really endorse that razor razor-blade model, but we're seeing that rate slowing down. As a consequence of that we've also lowered our earnings for FY99 to .25 There's still potential upside and also some downside to that number depending on how the company executes for the rest of the year.. But we have been faced with lowering our estimates just because of what's happening in the channel right now and our view of what's going to happen during the next few months.
Q: You've described a company which has some short-term challenges but fundamentally a very sound business and with the razor razor-blade context you both mentioned really has a very long tail of reliable “revenue annuity” based on the zip disks. With the combination of short-term challenges and long term installed base strength, does that make IOM an attractive acquisition target? How do you two see that playing out?
Stan: Iomega has a number of assets. Revenue string from zip disks which would last for five years after they build the last drive and I don't see them building the last drive tomorrow Some good high margin revenues to be had. There's a lot of potential to even expand that with new products and continued shipments of drives. That's probably a lot of value that is not really built into Iomega's stock price right now. It's an asset that could be leveraged by one of many manufacturers; other storage manufacturers could benefit from it and even outside of that computer manufacturers. So I think Iomega will always be considered to be an acquisition prospect, and we go from month to month with “rumour of the day” being another name, so definitely I think there's a lot to be had there, whether the Iomega board would be willing to be acquired would be another thing.
Joe: I think that clearly this is something—We just closed the Dow over 10000, not to date this call—my belief is that they clearly are in someone's eyes available for an interesting target for a merger or acquisition; but people have to remember too: People say the shares are 4 dollars, 4 1/2 dollars, 5 dollars, but there are 280 million shares out there so there's still a billion dollar valuation plus or minus depending on where it's trading at; its not a 5 dollar stock with 5 million shares out there. valuation is an issue, they've got to execute, continue to work on all those things we talked about earlier, market, One of those things Stan has been upset with over the past several months is that we really haven't seen a lot of marketing come from Iomega, they used to be a marketing machine, one of the reports Stan wrote one time, they were the kind of operation that could market televisions and toasters, they could market anything. They've lost a little of that, they need to get some of that back, we've been critical sometimes of the type, one time they had seven consecutive pages in the Wall St. Journal, they need to come up with a strategy to cultivate that user base. I'm solidly in the camp that believes that this story is not over, it's just in the next step. Hopefully Jodie Glore can do something to jump-start this thing he's been there a very short time to get a handle on this thing. Jury's still out, risk level is increased, that's why we went with, not the first time, with short and long term ratings, but first time with at a price at these levels. We're just backing off a little bit. We're going to find out a lot too. In the 3rd week of April we'll hear the earnings and listen to the conference call, we'll talk to Jodie, and go on from there. This company, those that want to hold it for the long term I wouldn't blame them, and those that want to go into other things, possibly dot.com companies, with a little more beta, this thing has the potential to grow 20% to 30% per year, but the Iomega of old the go-go company has certainly been over for awhile, it's in a new range now, that's why they've got a new CEO we'll see what happens.
[thanks to the two gentlemen and sign-off]
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