FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

Iomega Corporation
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1821 W. Iomega Way
Roy, UT 84067
(801) 778-1000
http://www.iomega.com

ALEXANDRIA, VA (July 17, 1997)/FOOLWIRE/ --- Iomega Corporation released their second quarter 1997 results after the market close yesterday. The company reported earnings of $26 million or $0.19 per share, in line with analyst estimates, on revenues of $400 million. First quarter sales and net income set another record. Highlights for the quarter included shipping the 10 millionth personal solution, record revenues, holding gross margin, OEM Zip drive shipments, Asia/Pacific growth, and cash management.

TEN MILLION SOLUTIONS SHIPPED. This quarter they passed through another significant growth milestone and announced today their 10 millionth personal storage solution including over 7 million Zip drives, 2 million Ditto drives, and over 1 million Jaz drives. That makes more than 10 million Iomega solutions in less than 3 years.

CATEGORY LEADERS. The shipment of the 7 millionth Zip drive validates that, in the end users minds, Zip has become the new standard in mass market removable storage drives. And they are also very pleased to state that Jaz has quickly established Iomega as the leader in the power user segment where it has created an installed base of over 1 million drives -- from the initial shipments of the first high-end removable storage drive to a million units in about 18 months. They are also pleased with their market penetration of Ditto. In 1994 they really weren't even a player. Today they are the leading brand at retail and, depending on whose data you read, they are either number one or number two in the total quick tape drive share globally.

CHANNEL INVENTORY LOW. As already mentioned, sales totalled a record $400 million, up 41% from a year ago. In the first quarter's conference call, they mentioned that higher than expected demand had left them with their in-house and channel finished goods inventory lower than desired going into Q2 and that they might not be able to recover to desired levels of inventory in the channel until late Q2. Unfortunately, as a result of two unforeseen vendor problems, their inventories never recovered, limiting their sales for the quarter.

JAZ DISK RECALL. The first problem, that most people are aware of, was their voluntary recall of approximately 75,000 Jaz disks resulting from a shipment of defective media from a vendor. The problem was not identified in their incoming inspection, but became apparent in their ongoing reliability testing. This is an accelerated test that simulates the customers usage of the Jaz drive and disks. The test drove Iomega's decision to recall the affected disks. In addition to the direct costs associated with managing the recall and replacing the affected Jaz disks, the recall also hampered their ability to ship disks and drives, which affected revenue. The direct financial impact on the quarter was approximately $0.02 per share and is fully reflected in their second quarter results. However, the recall placed them in a position of being unable to meet demand, particularly for the disks. From a sales perspective, while backend loaded, another media supplier was very responsive in filling what to them and Iomega was unplanned demand. Even though Iomega was unable to fill the demand, they did achieve 97% of their Jaz revenue plan for Q2 -- that's their own internal revenue plan. As an additional note, Jaz drive unit shipments this quarter were up 31% over Q1.

ZIP DRIVE CHIP VENDOR RENEGED ON COMMITMENT. The second and more significant problem resulted from a Zip drive chip vendor that reneged on their delivery commitments a few days before the parts were to be inserted into the PC boards. Fortunately, Iomega had already been working on the next level of integrations and their new source was able to accelerate their deliveries. Iomega was also able to buy some of the old chips from another drive manufacturer. The net of all of this is that because of the chip shortage, they were unable to meet Zip drive demand which limited them to about 92% of their Zip internal revenue plan. But, even with this, Zip drive unit shipments were up about 26% over a strong Q1.

HIGH ORDER BACKLOG. These two events have left the company with $183 million in orders backlog, which is higher than it has been in a long time. They left the quarter with a lot of shippable orders on the books and in fact had empty shelves at some of their major retailers. However, they must caution people that some of the backlog may be due to customers placing orders that are higher than actual needs to protect themselves against any allocations.

CHANNEL INVENTORIES WILL BE LOW UNTIL LATE Q3. Another fact to consider is that the company is entering the Summer doldrums which is traditionally the softest retail quarter, particularly in Europe. Going into Q3, their inventory situation remains about the same as it was going into Q2. Jaz drives and disks are now flowing about as planned, but the Zip chip problem never allowed them to rebuild their in-house and channel finished goods inventory to the desired levels. While they are doing everything possible to alleviate the problem, they will probably not be able to get channel inventories back up to desired levels before late Q3. So, in the immediate term, they will not be able to fully satisfy retail demands.

CAN MEET OEM DEMAND IN Q3. They apologize for the degree of uncertainty, but they are dealing with the problem live -- meaning that they are balancing supply and demand daily across multiple designs and channels. Barring any other surprises, they have chips available to meet OEM needs in Q3, at least as know to date. Zip drive unit shipments were up 26% over strong Q1 1996 even with the chip limitations. OEM Zip drive shipments remained strong in Q2, reaching just under 30% of total drives shipped. This represents an increase of approximately 60% over Q1 OEM Zip drive units. As a side note, Apple, Compaq, Gateway, Micron, and Dell remain the top PC customers with the US accounting for about three-fourths of OEM Zip shipments. Retail Zip drive volume was up as well, but they didn't fully satisfy demand due to their decision to protect their OEM customer requirements in Q2.

NEW SYSTEMS OFFERING ZIP DRIVES. This quarter on the Macintosh side, Apple made Zip standard in the Power Macintosh 6500 series, UMax in the Starmax S900 and 250, and Motorola with their Starmax 3000 and 4000. Sony announced the inclusion of Zip in their PPC 130 and 150 PCs and HP Grenoble announced that Zip would be offered as an option in their Vectra 5000.

NOTEBOOK ZIP DRIVES. On the notebook front, 15mm samples have now been delivered to virtually all major and second tier notebook OEMs globally. Micron and Hitachi have announced the Zip as an option and in the aftermarket, at least one vendor will be offering Zip drives for IBM, Toshiba, Compaq, and Apple notebooks. They are on plan to start shipping notebook drives in Q4.

CASH FLOW POSITIVE. For the quarter, cash flow was $57 million positive. Looking back at the quarter they are very pleased with their financial results.

BREAKDOWN OF REVENUES. Revenues of $400 million were up 41% from the second quarter last year. Geographically, the Americas were up 28% to $247 million, Europe is up 91% to $107 million, and Asia/Pacific is up 30% to $46 million. Asia/Pacific continued the strong growth by being up 66% on first quarter this year. By product group, Zip and Jaz are up 51% to $371 million and Ditto is up 2% to $29 million, Jaz being much weaker than expected across channels.

GROSS MARGIN. The gross margin reported is $170 million or 29.4% of revenue. Planted in this number is the estimated impact of the Jaz disk recall. They estimate that the incremental cost they incurred was approximately $3 million. Had this cost not been incurred, their gross margin would have been higher by $3 million to $120 million and would represent 30% grow margin as a percent of revenues. Gross margin in the first quarter was 29.7% and in the year-ago quarter was 26.9%. Overall, they are very pleased with the gross margin dollars and percent of change. The biggest contributor, strong Zip disk sales, offset the cost of the Jaz disk recall, the lower than planned Zip shipments resulting from chip shortages, the lower than planned Ditto demand, and the full impact of price decreases on all 3 product lines.

OEM MIX INCREASE. In addition, they saw the OEM mix increase to close to 30% of Zip drives from about 20% in the first quarter of 1997. Also they continue as they did in the first quarter of 1997 to drive down the costs of Zip and Jaz drives. Their advancement in operating expense continues. SG&A at $61 million is up $6 million over first quarter levels and as a percent of revenue at 15.2% versus 15% in the first quarter. Versus Q2 last year, SG&A is up $22 million from 13.8% of revenues driven by the expansion of their international operations and customer satisfaction support group and the continued investment in marketing expense. R&D at $17 million is up as a percent of revenue to 4.3% versus 4.1% in the first quarter this year. R&D headcount grew 8% during the quarter to 312 people and is up 36% from the same quarter last year.

NET INCOME. Net income at $26 million or $0.19 per share is up 86% over the same quarter last year on a 41% revenue increase and is up 14% sequentially on an 11% revenue increase. Included in the second quarter 1997 income is the Jaz disk recall whose impact is estimated at approximately $0.02 per share. Q2 EPS last year was $0.11 and Q1 1997 EPS was $0.17.

DEBT REDUCTION AND CASH MANAGEMENT. The company was $57 million cash flow positive for the quarter following Q1 cash flow positive of $15 million and fourth quarter 1996 cash flow positive of $4 million. That is $76 million cash flow positive in the last 3 quarters. They ended this quarter with $135 million in cash and cash equivalents, up $19 million over the first quarter and they reduced debt by $38 million by paying down $20 million on their revolver and the $18 million note outstanding at Quantum for purchase of the Penang facility. The key drivers in the cash flow result were continued strong DSOs of 55 days versus 57 days a year ago, a focus on inventory management at 7.5 turns versus 5.7 turns a year ago, and collection of the VAT from the Dutch tax authorities of around $17 million which also reduced other current assets by a similar amount. The key balance sheet measurements reflect their focus on strengthening the balance sheet. The current ratio is at 2.84 versus 1.87 at second quarter last year. Working capital is now at $294 million versus $245 million last year. Debt to equity ratio is up 15% versus 30% a year ago. Total equity is at $385 million versus $282 million in the second quarter last year.

RESULTS SUMMARY FOR 6-MONTH PERIOD. In summary, looking at the first six months, revenues are up 51% to $761 million. Operating income is at 10.2% versus 9%. Income before tax is at 9.9% versus 7.9%. And net income doubled to $49 million and $0.36 per share versus $0.19.

STICKING TO THE STRATEGY. The second quarter also reflects continued execution of their strategy which is the setting of aggressive price points for their products, increased penetration of OEM partners, lower product costs, and a focus on cash management, working capital, and the strengthening of their balance sheet.

QUESTION ON TIE RATIOS. The company was asked to talk about the tie ratio for Zip and Jaz and how constrained they are in terms of cartridge supply. They responded that overall the tie ratio has been relatively flat. They track tie ratios as Iomega brand versus private label brand. In Q2 1997 the tie ratio was down slightly, but over the last 6 months or thereabout, including both private brand and Iomega's, it is relatively flat for Zip. The tie ratio for Jaz has been going up. They had some pretty significant growth on the Zip drives as they highlighted. It is hard to keep your tie ratios going up as the drives are going up, so they are pleased at being relatively flat on Zip given the continued drive increases. Jaz in Q2 was down primarily because of the disk recall. While they announced a 75,000 disk recall, the real impact on the organization is that you have to start by replacing those disks with another supplier, but then you are also counting on that first supplier throughout the balance of the quarter, so you have to go back to another supplier to find those. To say the least, the Jaz disk recall was far more disruptive than just managing those 75,000 disks. They believe that the Jaz disk tie ratio would have at least been equal to Q1, and everything they have says it would have been stronger. The $0.02 impact cited was all the direct costs associated with the disks that have been returned as well as ones they expect to be returned. That included the writeoff of the labor and overhead incurred to manufacture those disks. It also includes all the estimated indirect costs associated with the recall. It does not reflect any lost sales or margin. They believe they have accounted fully for this in Q2.

ZIP AND JAZ CONTRIBUTION TO GROSS MARGIN. The company was asked for the Zip and Jaz contribution to gross margin and the reserves associated with the receivables. They responded that the contribution of Zip and Jaz combined were just under $114 million as a contribution to gross margin and gross margin was $117. The bad debt reserves at the end of the second quarter was about $12.2 million coming off of the quarter one $13 million. The reason is that the quality of the receivables is getting better in the second quarter. The other receivable reserves were about $23.6 million, down from $37.2 million in the first quarter. The reason for that decline is that included in those reserves is price protection and volume rebates and user rebates and on the price protection, predominantly on Zip, the prices were reduced from April 1 so they have been effected in the second quarter, so that reserve is down in the second quarter. On the end user rebates, again the Zip rebate program is over, so that reserve is down for that end as well. The reduction is really a paydown or payout of the reserves they accrued in the first quarter.

CUSTOMER SATISFACTION IMPROVEMENTS. The company was asked about customer service changes that have been made and how they measure any improvement there. They responded that on January 1st they created a customer service organization under Bill Kennedy. That organization today is close to 100 people now. In terms of how they measure, there are a lot of things they do measure. One is that they track promises kept. They track the number of calls coming in and letters. They continue to track the rebate programs and the number of calls and time on calls. The other key metric for this is general returns. They do analyses by product, what percentage of those returns are truly defective versus no problems found and then bore down into what the actual defects are for defective returns. There is no single thing they track, it is a lot of different metrics and they think they have to do that to really effect substantive change. They were asked to grade themselves today and responded C-. They think that first of all they have to identify the key metrics, track them, then put a plan in place so that when they find a specific problem they can identify how they will go about fixing it and can they fix it and then track that very visibly internally. They spent close to $16-17 million over the past six months on customer satisfaction and it was significantly less than that last year.

BERNOULLI REVENUES. The company was asked if there were any revenues for Bernoulli in the quarter and they responded that it was very minor.

NEW PRODUCT SCHEDULES. They were asked about schedules, market conditions, demand, and their ability to meet ongoing products -- the Zip 200, Jaz 2 gigabyte, and n.hand. They responded that they don't discuss products that have not been announced. They had n.hand product being shown to OEMs at PC Expo in June. They continue to make what they think are improvements in response to the OEMs needs on that product and expect it to be available to the OEMs either very late this year or, more likely, early 1998. In terms of overall demand, when it came to Zip drives, Jaz disks and drives, they didn't fully meet the demand in Q2. They actually had some major retailers with empty shelves out there. They don't mind having the channel in short supply but are very concerned when they have the channel in a situation where they have truly empty shelves and that was the case at the end of Q2. On the Zip side, for the most part, the OEMs haven't put pressure on them to increase the capacity of the drive and Iomega thinks it is because they aren't getting a lot of pressure to do that.

JAZ DISK PROBLEM SPECIFICS. The company was asked to talk about the specifics of the Jaz disk problem. The company stated again that, with regard to the recall, it was a voluntary recall. It was approximately 75,000 Jaz disks and it resulted from a shipment of defective media from a vendor. In terms of the Jaz in general, they stand behind the product -- the quality of every Jaz drive, just as they stand behind Zip or Ditto. They evaluate all returned drives. They monitor trends. They specifically determine exactly what the causes of every return are. These may not result in any design or manufacturing defects. It could be the particular computer the product was being used with. Their intent is to fix everything eventually. They cited a BIOS issue with one computer vendor that uses a unique BIOS. While they worked with them a long time, they were never able to get the drives to work totally properly with that BIOS. However, they continue to work with Roland and other manufacturers to overcome the issues.

ZIP CHIPSETS. They were asked about the comment they made about going back to an older chipset to fulfill some of the Zip drive demand. They responded that going forward they will still be using a combination of the new and older chips and clarified that what they meant by "older" is that the chip they were counting on for the most part in Q2 versus the one that is now better integrated. There are a few issues they have to deal with. They build a lot of different Zip drives and every OEM Zip drive is a different design meaning that they have to independently qualify that drive and the OEMs are not prone to want to have to do that frequently so Iomega has to manage each individual drive to qualify the new better integrated chip. So, they are balancing supply and demand throughout the quarter to make sure they meet all the OEM requirements.

SHARE REPURCHASE. They were asked about share buyback in the quarter and indicated that there was no further share buyback in the quarter.

LOST SALES. They were asked to quantify what the lost sales were during the quarter due to the shortages and the recall. They responded that it is not that easy to quantify. When you have an empty shelf out there like they did in Q2, there is some possibility that a consumer who was in to buy a Zip or Jaz drive spends his/her money on something else. You may have lost that consumer permanently or lost them at some other future period. When Iomega looks at their backlog of $183 million, they did qualify that they believe part of that is the possibility of customers ordering more than they need to take advantage of any allocation that occurs. However, that is by far the largest the backlog has been for some time and it, to some degree, is indicative of the level of holes that they had out there, or the fact that they didn't meet all of the demand. In very gross terms as far as order of magnitude, they think the order of magnitude of sales was $30-50 million for Zip and Jaz combined and Zip was more than half that. They also talked about the prospect that in Q3 they will be impacted by shortages. They said that the condition they enter Q3 in terms of inventories in the channel is very similar to where they were in Q2. They are much lower than desired levels. They are lower than desired levels internally at Iomega. They are still trying to catch up. While the Jaz disk problem is behind them and the recall is behind them, the Zip chip problem is just creating all sorts of consternation and they believe it is going to be the end of Q3 probably at the earliest before they catch up on the Zip chip desired inventory levels.

FURTHER COST REDUCTIONS. They were asked, once they catch up, how much further they think they can cost reduce the Zip drive. The analyst indicated that they are estimating that Iomega manufactures for $65-70 at the OEM level. They responded that, from the starting point being today, they think they can cut the cost of the drive in half and it is a 24 to 36 month timeframe because it is going to require a lot of things to happen including further integration. They were asked what they think that would do to OEM and end user demand if they were able to do it. They responded that they don't know that if they cut the price of the drive in half today if there would be a direct correlation with the volume. They don't think that by itself would get everybody to say they are going to put a Zip drive in every PC out there. They think there is still a lot of analysis of market demand on the part of the PC manufacturers. However, Iomega feels they need to continue to do two things -- generate a lot of consumer pull through advertising and education and to reduce the price to the OEMs.

LS-120. They were asked about the LS-120 and the fact that it has been eliminated as a standard SKU at Compaq. Iomega responded that Compaq was in their top 5 customer list in the quarter. Relative to where LS-120 is, they think today it is comparable to where it was 3 months ago which is comparable probably to where they were 6 months ago.

IMPROVEMENT IN OTHER INCOME. They were asked to talk about the other income line that had been trending negative and turned positive this quarter. They responded that it improved from a negative $2.9 million in Q1 to a positive $600,000 in Q2 primarily due to a swing in net interest from expense to income and also reduced bank fees and foreign currency gains. The net interest income was achieved through substantially reduced interest expense due to the cancellation of their European factory facility at the end of Q1 plus the paydown of about $38 million in debt including all the amounts outstanding under their $200 million line of credit and the note on the Penang facility which was early in the quarter. The $57 million of positive cash flow generated in the quarter enabled them to paydown debt and increase their cash balances by $19 million which increased their interest income for the quarter. As they go into Q3, two things are going to happen relative to cash flow that are potentially positive. One is that particularly toward the end of the quarter they are going to be building inventory in anticipation of the Christmas quarter. Second, there is a lot of investment that is going to start to occur on some of the product lines looking into 1998. They think it is fair to say that they cannot expect to be cash flow positive in Q3. They expect to be cash flow negative in the third quarter and the fourth quarter is really going to be a similar situation as they grow the balance sheet in that seasonal activity. The thing they continue to be comfortable with is the liquidity situation. With $135 million of cash on the balance sheet and a $200 million unutilized line of credit, they feel they have their ducks in a row to finance the growth. Their internal plans for inventory turns this quarter were a little more aggressive than the outcome, but priorities change when you get into managing the disk issues and the parts issues. Managing inventory dollars becomes less of a priority than getting product out the back door. Going forward they think they can manage all of that, but when you get these inside the quarter surprises, unfortunately all hell breaks loose. They reiterated their revenue recognition policy -- they only take the revenue sold through. So, if they ship a ton of product out on the last day of the third quarter, it will affect the inventory, it won't appear as sales, but it is going to affect inventory cash flow. They will be trying to ramp through this quarter in terms of production build, but they may not be able to recognize it as revenue.

REVENUE GROWTH FOR Q3. They were asked what they expect in terms of revenue growth for Q3. They responded that they were not going to address the specific question but wanted to indicate one big difference between this year and one year ago. As they entered Q3 in 1996, Europe was in a pretty bad state. They feel much better about the European organization going into Q3 this year versus a year ago. They saw Europe in Q3 1996 as potentially being a major disaster. As it turned out, it wasn't, but it had the potential. They are not looking at that situation going into Q3 1997.

TOP 5 CUSTOMERS. They were asked to name the other top 5 customers other than Compaq. They responded that the top 5 are Apple, Compaq, Gateway, Micron, and Dell.

WILL OEM PERCENTAGE INCREASE TO 50/50. They were asked, if they are still constrained throughout Q3 and will be prioritizing OEMs, is it possible that the 30% OEM share could rise to 50% in Q3 given the demand situation they have. They responded that they don't see a scenario that would get them to 50/50 in Q3 1997. They don't think that the chip problem could get that bad and that the OEM volume could jump up that rapidly, so they don't see it happening.

JAZ AS AN OEM PRODUCT. They were asked if Jaz could be a successful OEM product and to what rate as a percent of mix. They responded that they believe that Jaz as we know it today is unlikely to be an OEM product in terms of providing a lot of high volume. It can fit into niches that could be tens or hundreds of thousands. But, not in the sense that they think about Zip being an OEM product. They think the parameters to be an OEM product would require the cost to be way down, maybe to a level that is unattainable.

MAINTAINING GROSS MARGINS. They were asked how they got the gross margins to stay in the 29% range given that they had price cuts across the board, Zip OEM shipments going up significantly in the quarter, and the tie ratios flat to down. They responded that they also said that Zip drive shipments were up 26% in the quarter and that is part of the answer. The second part of the answer is that they did reduce cost on both the Zip and Jaz drive in Q2. Their accounting policy is that when they know they are going to reduce prices, they account for part of that price reduction in the preceding quarter. So they accounted for some of the price in Q1 that occurred in Q2. They price protect the channel, so once they make a pricing decision they have to take that into the books, which they did in Q1, just like they have done in the past in anticipation of price reductions.

EUROPE. The company was asked to comment on the environment in Europe and whether they were ready to transport some of the demand creation techniques they have used there and in the US to Latin America or parts of Asia. They responded that the Pacific in Q2 was actually one of their highlights, up 66% over Q1. They put in a lot of infrastructure for the last 6-9 months and have learned a lot from Europe. They believe the most significant piece of Europe's growth was total infrastructure build which includes getting broad distribution. They didn't have that a year ago. They don't think Europe's economy as a whole is dramatically better, but the distribution network they have built and the brand awareness will better carry them through the typical Summer doldrums in Europe this year compared to last year.

INVENTORY MANAGEMENT RELATIVE TO DIRECT MODEL OEMS. They were asked if they have received any pressure from the direct model OEMs to "carry their inventory" for them and, if so, to what extent they might have an ongoing inventory pressure as part of their business model given that. They responded that all of the PC manufacturers want you doing that and to some degree they already do some of it, so some of it is already in their inventories. But, the real solution is that they need to have production lines that are flexible enough to not bring in the product until it comes off the end of the production line. In other words, build a production line that is a generic drive and put a faceplate on it at the end to make it a Dell, Apple, Compaq, or whatever. They are not good at doing that today but believe they can get very good at doing that in the future. They feel that is the only way you can manage the inventory problem.

OPERATING MARGIN OUTLOOK. They were asked if operating margins in the 10% range are sustainable. They responded that the higher the OEM drive percentage is, the bigger the impact is going to be on the contribution margin and Iomega's fundamental strategy is to get into more and more OEM drives. They have also stated that the tie ratios to an OEM drive are lower than the tie ratios to an aftermarket drive. So, if everything stayed the same, they think they could probably improve margins, but their whole strategy is to increase the percentage of OEMs as fast as they can which will put pressure on margins. Things like chip integration take their cost down on the OEM drives, but this is a difficult model as they try to balance things. They have to become the standard and the way to do that is through the OEM model. They will favor OEMs over retail if they can't meet demands of both.

NOTEBOOK DRIVES. They were asked what size notebook drive they will be shipping in Q4 and responded that it would be 15mm drives. They will have prototypes of 12.7mm drives in Q4 but will be selling 15mm drives in Q4. They were asked about potential revenues and responded that the real purpose of the drives was to promote disk sales, not for the purpose of selling drive units.

RETURN RATES ON JAZ. The company was asked again about return rates on Zip and Jaz. The company responded that they will stand behind the quality of every product they build. They do not consider Jaz to have abnormal return rates. A lot of the returns are incompatibility issues, and they don't mean just with a particular BIOS, but where an individual's PC may not be equipped to work with the drive or vice versa. They think it is more significant that they now have an installed base of 1 million Jaz drives.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.