Iomega
Q2 Call
| Iomega
Q2 Call
|
| (FOOL
CONFERENCE
CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh) Iomega Corp. (NASAQ: IOMG) Buffalo, NY., July 19, 1996/FOOLWIRE/--- Iomega reported record quarterly sales of $284 million and record net income of $14.1 million. (Mr. Edwards stated up-front that Iomega does not break out details of revenues, e.g. between Jaz and Zip sales). Sales for the quarter increased 440% year/year and 28% sequentially, from Q1 1996. Net income compares with a loss for Q2 1995 was $1.9 million and net income of $10.1 million in Q1 1996. The quarter's EPS came in at $0.11 [Q1 1996 EPS=$0.08 and Q2 1995=loss of $0.02]. Geographically, combined US/Far East sales were $227 million, a 480% increase from $39 million one year ago and up 42% from this segment's revenues last quarter. Some softness in Europe was expected but that weakness hit earlier and harder than anticipated. Iomega's European organization "was simply not well prepared to address it." While sales in this segment were up 320%, European sales were disappointing, coming in at $56 million, down from $63 million last quarter.
To address Iomega's inability to handle the European situation better, Edwards announced that the Vice-President in charge of sales for US/Far East will now become VP for global sales, including Europe. Edwards expressed his belief that this change, along with other personnel changes mentioned, "should allow us to be more responsive to market conditions, implement new programs faster, and provide clearer performance expectations by improving our speed and consistency of global communications and leadership."
On the financial front again, Edwards believes that it is more useful to compare year/year sales excluding Bernoullis as the company is focused only on new products. Sales for the new personal solutions, which only include Ditto, Zip, and Jazz, totalled $275 million for the quarter, up in excess of 600% year/year. Ditto sales were $28 million, up 67% over Q2 1995 but were essentially flat compared with last quarter. Zip and Jazz sales combined totalled $246 million, up 32% from $186 million last quarter and $19 million one year ago. Gross margins on these products were $75 million, up from $5 million one year ago and $58 million last quarter. [Q296=27.3%, Q295=26.3%, Q196=31.2%].
CFO's Address
Iomega's first half revenues surpassed the one-half billion dollar mark and represent a run rate of over $1 billion. Gross margin totalled $76 million, up from $60 million last quarter, both representing gross margins of 27%. Jaz start-up costs in Q1 negatively impacted margins. In the second quarter, Jaz growth, in both revenue and margin dollars, continues to impact the overall margin percent of the business. While Jaz is no longer in its start-up phase, gross margins are still below company expectations, which "is to be expected at this stage of a new product introduction." SG&A expenses were up $6 million from last quarter, coming in at $39 million, or 13.8% of revenues vs. 14.9% in Q1. Sales and marketing expense on a global basis continues to be the thrust of investment. R&D was up $4.6 million from Q1, to $11.5 million, or 4% of revenues vs. 3.1% of revenues in Q1. 47 people were hired in R&D during the quarter. Operating income advanced 29% from Q1 at $25.5 million at 9% of revenues. Net income was up 40% from Q1 at $14.1 million, or $0.11 EPS. Record net income for the first half of 1996 totals $24 million
Balance Sheet
Cash ended at $161 million. $159 represents the proceeds of their June, 1996 offering less the paydown of Wells Fargo debt. A/R improved to 57 days sales outstanding, down from 59 DSO at the end of Q1 and continues its downward trend from Q4 1995 DSO of 64 days. Bad debt contra reserves amounts to $6.6 million, 3.4% of gross A/R. "We continue to assess the risks inherent in a business growing as fast as we are in the channels we serve." Other receivables reserves 3.7% of gross receivables, up from 2.2% at the end of Q1 1996. Inventory, at $146 million, is up 38% from Q1. Inventory turns, at six times, is up from four turns in Q4 1995. The increase in inventories was comprised primarily of finished goods, growing $33 million from Q1, and represents 28% of total inventories as of Q2 1996. The majority of the $41 million in finished goods relates to the Zip product line. Production capabilities were more in-line with demand but the European softness caused the company to carry more finished goods inventories than they would have liked. However, they are encouraged that production is finally catching up with demand for the first time in 15 months, specifically for Zip products, and that they have finished goods available.
Capital expenditures were $22 million for the quarter and $46 million for the fiscal year to date. Jaz and Zip remain the main target of capacity investment. "In summary, the proceeds of our stock offering have allowed us to strengthen the over financial structure of the company." Key balance sheet ratios are: Current ratio: 1.87 up from 1.25 at Q1 end
1996 "We have put in place the solid foundation in our financials to position the company for future growth." Further review of fundamentals and positioning for H21996 (the second half) Kim Edwards
"In addition to the $43 million in net proceeds received from the bonds on March 7, our follow-up equity offering yielded $191 million in Iomega proceeds in June...[they provide the funds for future growth. On the downside, while the cash was certainly needed, I have to tell you that two road shows in a four month period have distracted the management team. Let me just say that it's good to have this behind us so that we can get back to running the business. To support retail and OEM deals, we signed an agreement to purchase a world-class 376,000 ft.2 manufacturing facility from Quantum in Penang. In addition to a fully outfitted facility which has a state-of-the-art 36,000 ft.2 clean room, the agreement included an existing management team and production work force. The location should lead to additional synergies with many of our vendors in that part of the world. While we will initially produce Jaz in Penang, we are also evaluating the possibility of adding other production to the facility. As a means of rapidly increasing our Jaz disk production capacity, we announced that Seagate has begun manufacturing Jaz disks. Seagate will enable us to supply large quantities of Jaz disks while utilizing their utilizing their high-volume manufacturing expertise and exceptional vertical integration capabilities. We expect this to be a very synergistic relationship that should benefit both companies. At PC Expo, we demonstrated working prototypes of the 15 mm. Zip drive; it was very well received by several of the major notebook manufacturers, including Toshiba and NEC, both of which showed it to their customers following our press announcement. Production is slated for Q1 1997.
Consistent with our stated strategy of [meeting] key consumer price points to expand the market for Zip drives, we announced a $50 rebate on the Zip at retail. This will allow the retailers to advertise Zip at an unprecedented $149.95. While the rebate officially expires on September 15, we will re-evaluate global demand at that time and then take appropriate actions. We have repeatedly stated we will continue to focus on hitting key consumer price points to broaden the market for Zip and other products. For the same reasons, in the beginning of July, we launched the external Jaz drive at retail for $499 and reduced the internal to $399. We believe that both of the moves are strategically important in building broad demand for all of our products. On the tape side, Gateway announced that they were shipping the Ditto 3200 as a tape backup option on their computers. Back to Zip, the number of computer manufacturers offering Zip has now been expanded to nine. This includes Power Computing, Micron, Hewlett-Packard, Packard-Bell, IBM [garbled] and Unisys offering Zip in traditional retail and commercial computer SKUs [stock or shelf keeping units], Bandai in more of an entertainment machine, and Acer in an internet-type box."
Operating costs were 18% of sales as Iomega added 100 salaried employees to the payroll this quarter with approximately half of those in R&D. Order backlog is $125 million, down from last quarter's $146 million as a result of normal seasonality and their ability to meet Zip demand.
Near-Term Focus
Edwards refuted as absolutely untrue rumors of return problems on Jaz and the possibility of a recall on Zip. Zip and Jaz drive and disk manufacturing yields and return rates continue to improve every month. Return rates on Zip drives and media have declined every month since August, 1995. "If we were aware on any material change in their returns, in accordance with GAAP [Generally Accepted Accounting Principles], our accounting policies would have required us to increase our warranty reserves accordingly."
Q3 Outlook
Their first priority remains getting more Zips into original equipment PCs. However, they are now shifting to a two-pronged approach. They still need additional computer manufacturers to offer Zip, but they also need to work with existing OEM partners to broaden the number of pre-configured Zip SKUs that they offer. Packard-Bell and NEC are already offering it in multiple SKUs. Given the high retail percentage of the business, they are also focusing on selling through the summer doldrums. Consistent with retail PC business in the summer, Edwards stated that they expect July and August to be seasonally soft, while September should rebound as they enter the Christmas season. To counter the summer softness, Iomega will continue to expand global demand generation and awareness building through advertising and promotion, hitting key consumer price points, and broadening distribution of products. Iomega continues to strengthen international operations; this activity has commenced in Asia/Pacific with the opening of the Singapore/Far Eastern HQ and in Europe with the organizational changes, with the addition key seasoned product and channel marketing professionals to position the company for Q4.
The addition of the Malaysian facility has presented a new challenge in ramping up production of Jaz by the end of Q3 to have supply for the Christmas season. Although the initial feedback from this management team was encouraging, it is too early for the company to address production progress in Malaysia. Edward repeated what other storage industry executive have been saying--that the summer has been soft for PC demand and that Europe softened earlier than the industry had expected. Many OEM partners are ramping or are just beginning production of Zip-equipped PCs. The number one business priority remains getting into more boxed with existing and future computer partners. Edwards was pleased with notebook Zip feedback and believes they can further differentiate their product offering from those of the competition. Manufacturing has strengthened with existing partners including Seiko-Epson, Sequel, FEP, MMC, and Sentinel; their new partner in Seagate for Jaz disks; and the new Malaysian facility. "The net of all of this is, we remain bullish on the future."
Q & A
OEM sales for the quarter were insignificant for Zip in the second quarter--Edwards re-stated that this is their number one priority and issued the reminder that many of the OEM contracts were not set to start shipping or ramping until Q3. Iomega expects a significant increase in OEM Zip drive sales next quarter. OEMs are not giving forecasts much beyond the August-September timeframe.
In realizing cost improvements, Jaz has become a larger component of total revenues but still shows a gross margin under company average--the company is still 3-6 months from the full production ramp-up, including start-up in Penang. The company expects that Zip hardware will remain profitable because of cost reduction as well as take-up of the rebate offer [not everyone sends in the rebate coupon]. Learning-curve effects exist with the level of production Iomega is turning out. In addition, the company continues to push for further chip integration, lower-cost components, and assembly line efficiency improvements. Ultimately, the company wants to get the Zip box down to $99 retail and the rebate is another step in that direction.
Ditto revenues: The majority of revenue comes from the 800 because it is the key consumer product in this segment. Gateway only started up in Q2. The typical OEM will want the higher-performing products although the 800 offers an attractive price/performance mix. Ditto sales were up 67% over Q2 1995. Edwards noted that year/year sales comparisons are more important with mature products like Ditto and sequential, quarter/quarter (i.e., Q1 1996 to Q2 1996) comparisons are more telling for newer products like Zip and Jaz.
Ingram Micro accounted for 17% of revenues while no other single customer accounted for more than 10%. Iomega SG&A expense activity will happen more in the fourth quarter, as Christmas activity will take place after September with store promotions and other promotional activity.
Inventory components
Raw material $94 million, 64% of total Work in process $11 million 8% Finished goods $41million 28%
The company wants to have good finished goods inventory going into the end of Q3 since the retailers don't want to tie up cash in inventory. They will thus be looking to Iomega to bear that responsibility; Edwards to be able to meet any eventuality with demand. They had not seen the Compaq LS-120 on the street although it has shipped in some of the higher-end Compaqs. Zip's speed is 2.5 times as fast as the LS-120 and Edwards believes that the LS-120 will not play back PC quality video at that slower output rate. They've only seen very early drives, though.
The company is specifically targeting PC audio/visual models for the Jaz right now in the OEM market and is looking forward to a marketplace where application-specific PCs will demand Jaz as opposed to the Zip, which is a broad line mass product. In adding an Iomega drive to an OEM's PC lineup, Edwards stated that cost is, without question, a factor, but that it becomes a marketing call, too. If the PC makers feel there is demand and that an Iomega product adds value and differentiates the PC, then they will make that call.
Edwards will be satisfied if much of the work is done on getting Penang into place by the end of Q3. The biggest issue on Jaz right now is not labor costs but component costs. Penang will definitely remove some of the labor costs associated with Jaz, but volume of components and further component integration is where they will be looking for efficiencies on the gross margin level in Penang.
Their 200 MB product is in the laboratory right now. There is no production planned right now as it is still in evaluation, but the company continues to monitor the market for application needs. They can get this product into production within 24 months, to use a general estimate.
Zip production takes place in Roy, UT as well as with Seiko-Epson in the Far East. The company builds disks in Roy and also with MMC in the Far East. Sentinel is ready to build drives in Belgium. Ditto is done in Roy and in the Far East with FEP. Jaz drives are done in San Jose with Sequel. Jaz disks are produced in Roy and will be doing them with Seagate, as announced this week. In the third quarter, Penang will come online with Jaz.
On the Compaq-JTS drive similar to the 15mm--Zip is a fixed-disk, hot swappable disk drive. It is not a removable drive and is not in the same category as the Zip. * 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. | |
Copyright 1996,
The Motley Fool |