Iomega Bull's Rebuttal
by Pat Keeler (TMF Keeler)

I agree with Pauly in one sense -- at this time talking Zip is talking Iomega. However, I have to disagree with the notion that the Zip drive has to become a standard computer component for Iomega to be successful. Iomega earned $0.42 a share in FY 97. The idea that Iomega can't grow earnings from this point because Zips won't ship in every computer is putting the cart before the horse. I don't know if the Zip drive will "replace" the floppy; a lot of that is how you define "replace." I have no doubt that Iomega can continue to sell lots and lots of Zip drives and Zip disks and continue to grow revenues and earnings. It's not as if it has to grow gangbusters to justify its present valuation.

And Pauly, thanks for the channel checks. However, people who buy computers in places like Best Buy are more concerned with price than with functionality. The last place you will see Zips in a lot of computer models is in those stores. Go to the Dell or Micron websites and you will see Zips for sale as a computer component wherever practical. Micron has already replaced the floppy with the Zip in the A: drive slot. History has demonstrated that these companies lead and the others eventually follow. Remember, it took modems 10 years to start shipping in most PCs.

Iomega sold as many Zip drives in 1997 as it did in all of 1995 and 1996 combined! There are over 12 million Zip drives in use! Calling the market a niche is stretching the definition of the word beyond normal usage. If Zip sales in 1998 were flat with 1997, that would leave an installed base of 20+ million Zip drives worldwide at the end of 1998. If you just sold each one of those drives one Zip disk at a $10 unit price, with its approximately 65% gross margin, that would translate to $0.20 in EPS alone.

Competitor's prices might look attractive to a casual observer in a Best Buy, but how much is the fact that there could be 20-30 million drives out there worth? It's too easy to say, "You can e-mail any file." File sizes are getting bigger every day. More and more digital input is coming into computers. If I have 20 JPEG pictures of my trip to send to Mom, I can't e-mail those. I can’t mail her my hard drive either. When Karl Radke ([email protected]) had to see my 5-minute AVI file, South Park: The Spirit of Christmas, could I e-mail it? Its 52 MB and the funniest thing ever made (just ask Karl). If I had e-mailed it, the upload and download at 28.8 baud would have taken almost 10 hours.

Next: The Bear Responds