Iomega Q3 Conference Call
A Fool Conference Call Synopsis^*
by Jeff Fischer ([email protected])

Iomega Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %>
1821 W. Iomega Way
Roy, UT 84067
Ph: 801-778-1000
Fx: 801-778-3190
http://www.iomega.com

ALEXANDRIA, VA, (Oct. 16, 1998) /FOOLWIRE/ -- Iomega announced third quarter revenue of $392 million, down 9% from the same quarter of last year. Zip drive revenue totaled $279 million, flat with last quarter and last year, while drive unit sales increased 39% and Zip disk sales rose 34% (compared to 44% last quarter). Over 50% of Zip drives sold were to original equipment manufacturers (OEMs). The company has now shipped over 18 million Zips, compared to 15 million at the end of last quarter.

For the third quarter, Iomega reported an operating loss of $19.7 million and a net loss of $7.6 million, or $0.03 per share, before special non-cash charges. As Zip drive sales shift toward the OEM market and as the retail pricing declines, Iomega continues to focus on cost cutting and improving inventory practices.

Geographically, sales in the Americas declined 7% from last year to $268 million (that's up from $258 million last quarter), European sales declined 19% from 1997 to $88 million (and down from $93 million last quarter), and Asia/Pacific sales dropped 11% to $33 million, down sharply from $43 million achieved just last quarter. Though unit volume grew in many instances, lower prices hurt revenues.

Business Summary from Mr. James Sierk, Iomega President and CEO. Promises were made in last quarter's conference call and those promises were met, including an improvement in Q3 results. Operating expenses were reduced by approximately 34%, or $49 million, compared to the second quarter. The promise was to reduce operating expenditures by over $50 million over the second half of this year. That promise should be topped.

The company reported a loss of $7.6 million, but it has made significant progress toward profit and does expect to be both profitable and cash flow positive in the fourth quarter, as promised. Also, inventory has been reduced, as promised. Inventory is down by $85 million, or 30% from the second quarter, and currently stands at $196 million. Improved supply chain management and initial efforts to move toward the Virtual Enterprise model are paying off, while liquidity has also improved. Iomega has $90 million in credit open and $46 million in cash. As expected, cash flow was negative by $66 million, but that included $45 million to purchase Nomai. The company expects to be cash flow positive in the fourth quarter, but negative for year.

Iomega has now shipped 18 million Zip drives and 100 million Zip disks. Demand for Zip disks is more elastic and a new price of $9.95 each in a ten pack has increased demand. External Zip drives are now $119 and internal are $99. Iomega knows it has pricing and product competition and believes it makes it a better company. It stuck with a strategy of making money on its Jaz drive and has now shipped two million Jaz drives and gross margin on Jaz has improved considerably. Iomega is now taking orders for Clik! drives and plans to ship Clik! and UBS drives this quarter. It also has plans for a new product(s) with expanded capacity that will keep Iomega at the forefront of its market and will exploit other technologies and opportunities, including CD-RW.

This quarter Iomega lowered prices on all products, including Zip disks. The company shipped 2.4 million Zip drives, up 39% from last year, and 24% from the second quarter. It also shipped a record number of Zip disks. Volume increased greatly with price cuts, but still Iomega is not happy with its revenue performance this quarter. It is working through creative marketing to improve sales further.

Quality continues to improve -- both Zip and Jaz drive return rates are at their lowest in history. And finally, the CEO search that on average takes six months is a few weeks beyond that time, but Iomega is happy with its progress.

The company is now singularly focused on returning Iomega to profitability, and is taking bold steps to get there. Cost-cutting plus a transition to a Virtual Enterprise model, plus new products, new pricing models, and new advertising will all help to return Iomega to profitability.

Mr. Dan Strong, Q3 Financials. Cash burn was reduced from $41 million to $21 million this quarter before the acquisition, and Iomega is ready to return to profitability and cash flow positive business this quarter. Third quarter revenue was down 9% year-over-year and 1% from last quarter, due mainly to lower average selling prices (ASPs) after price cuts and due to more OEM sales in the product mix, which are lower margin.

Zip drive sales were down 2% from last quarter due to lower ASPs and more OEM sales. Unit sales were up 39%. Total Zip disk revenue of $164 million was down 4% from last quarter driven by pricing action, and down 7% year-over-year.

Costs overall should continue to decline in the future, as currently Iomega has continued to invest in new products (Clik!) that should ship in the coming months. Gross margin dollars were down 8% from Q2 1998, and represent 22% of sales versus 24% of sales last quarter, again due to price cuts and reserves associated with price protection of channel inventory. Gross margin as a percentage of sales should continue to increase in future quarters as cost cutting exceeds price cuts. Going forward, Iomega expects to have gross margins in the mid-20% range and 20% operating expenses. The goal for gross margin was 30%, but OEM shipments change this mix and lower the target.

Receivables are at $225 million and represent days sales outstanding (DSOs) of 52 days vs. 33 days in Q2 98 and 55 days in Q2 97. Strong sales at the end of Q3 are typical as companies begin to stock for the holiday season. Inventory was down 30% to $196 million with inventory turns up from 4.3 to 6.2. Accounts payable were up from Q2 but down $72 million from a year ago. This number should increase in the future, improving cash flow.

Due to the typical seasonal increase, channel inventories are up. Zip drives are at 8.5 weeks vs. 6.5 weeks last quarter, and Zip disks are at approximately 7 weeks vs. 6 weeks. Remember, though, that Iomega doesn't recognize revenue on product in the channel in excess of four weeks of supply.

Mr. Scott Flaig, COO. Iomega is nine months into implementing a Virtual Enterprise model that has been popularized by companies like Dell Computer and Cisco Systems. The Virutal model has six essential operating principles: a focus on customers, enterprise wide scope, continuous material and manufacturing flow, an integrated and structured product development process, inclusion of business partners, and an overall focus on quality. As we've seen the past two quarters, this model is beginning to work well at Iomega, cutting costs, improving productivity and moving the company forward.

Marketing. Demand for product in the third quarter was strong (especially at the end) and marketing will be more creative in the fourth quarter. The fourth quarter is typically strong and Q3 ended strong. Inventory positions are strong going into the quarter. A couple of new products should generate customer excitement.

Answers to Questions

Jaz is profitable, strong niche markets, and nice improvements in disk purchase rates.

Licensees are building 11% of OEM units, up from 5%, and are adding incremental capacities.

Clik! serves multiple markets. It's a wonderful product for the PC world, for the digital camera and digital film replacement market, and for applications where the size of the media plays a significant role. Iomega doesn't expect Clik! to have significant impact on revenue in Q4, but it could be a large part of 1999. At this stage, management is looking at its ramp-up and licensee programs (they have MCI, NEC, and others as licensees, and NEC is announcing an UBS interface for Clik!, which should show at COMDEX).

In Europe, Zip units were up 29% quarter-to-quarter (despite lower revenues) due to pricing realignment.

Wrap-up. The company continues to cut costs, has cut products prices, should have new products in the next quarter that really ramp next year, and is in a good position for what should be a profitable fourth quarter.

Related Links:
Iomega Message Board.
Q3 Earnings Report.
Audio version of this call, available for 30 days.

(Iomega is a holding in the Motley Fool's real-money Fool Portfolio, which provides a daily column.)