March 17, 1997 6:30 PM ET
Analysts say Iomega's roller coaster still in gear
By Margaret Kane

With the introduction of the Zip drive in 1994, Iomega Corp.'s fortunes enjoyed a renaissance. The company, which had fallen out of favor on Wall Street after a prolonged period of trouble, became the darling of individual investors as demand for the hot-selling drive soared. In recent months, however, it has been anything but Fat City as Iomega's shares have plunged to 14.62 from their 52-week high of 55.12. What happened? The same grass roots investors who were the company's biggest fans now include some of its biggest enemies. On Internet bulletin boards, they now outdo each other with complaints about the quality of Iomega's products and bad-mouth the company for poor customer service. The roller coaster ride hasn't spooked everyone, and some analysts who track Iomega say the stock fluctuations disguise the bigger picture. "We have a buy recommended on the stock, and I stand by that rating. The stock has come down, whereas performance of the company has continued to improve," said Daniel Kunstler, an analyst at J.P. Morgan in San Francisco. "We think at this price it's definitely undervalued. The company is performing well strategically and tactically. They're doing a very good job." Analysts also brush aside complaints about Iomega's rebate program, saying the offer drew in first-time buyers and helped turn the drive into a consumer product. Indeed, most top 10 computer vendors now include a Zip drive in their consumer models. Job No. 1 for Iomega, say analysts, is to cut costs and push the Zip drive into the corporate market. "The business model [is] razor blades," said Joe Besecker, an analyst at Emerald Research in Lancaster, Pa. "The more drives they get out there, the more media they sell. And that's where the big margins are." Robert Simmons, treasurer of Iomega, acknowledges the criticism and says the company plans to accelerate its cost-cutting moves. In fact, Simmons said, Iomega eventually plans to sell its Zip drive for $99 on the retail market. "That's a key price point that will make the Zip so compelling that it will become the de facto standard," he said. "The way I see the Zip happening is very similar to what happened when the 3.5-inch floppy [was introduced]. Eventually, we'd like to see the floppy go away." How quickly the company reduces costs will depend on how quickly it can integrate chip functions and reduce expenses at its manufacturing site. The recent move from the company's headquarters in Roy, Utah, to Penang, Philippines, shortening the supply line to its manufacturing operations, should help. "I think that the move to Penang has helped them greatly," Emerald Research's Besecker said. "Not only will costs be driven down dramatically, but Iomega should also see benefit on a tax basis, and as a stock that's important. It brings more money to the bottom line." But in pushing into the corporate market, Iomega will face competition from new technologies such as the LS-120, writable CDs and digital video disks. These relatively young technologies are still relatively expensive, but analysts nonetheless believe it will not be long before they will be ready for prime time. The prospect does not phase Simmons, who says Iomega still enjoys a price and performance advantage over the LS-120. "The backward compatibility is what degrades performance level," he said. "Someone trying to play PC video on an LS-120 will be unhappy. We'll be able to have a better product at the consumer mass market [price level] as well as better performance specs." In the meantime, Iomega is counting on its ability to handle high-performance functions such as multimedia to push demand. Todd Bakar, an analyst at Hambrecht & Quist in San Francisco, offered qualified praise for the company's success infiltrating the top tier of computer makers. "They've surprised everybody in their ability to capture all of the top 10 PC manufacturers into at least one SKU," Bakar said. "Now the key is to get it across the product lines. They've probably sold 5 million this year, but given something like 80 million PCs sold ... in the grand scheme that's very little penetration." For Iomega, however, that numerical imbalance simply hints at the existence of a large pool of potential customers. In 1996, OEM shipments accounted for about 10 percent of the company's sales. "We'd like to do a much better job going into 1997 and beyond," Simmons said. "We've looked at some forecasts that say by the year 2000, 100 million PCs will ship per year. We'd like to capture a nice chunk of the market." "We rolled out and marketed [the drives] in a way that no one has done for peripherals," he continued. "We've been as willing to break marketing rules the way Intel has done." Copyright(c) 1997 Ziff-Davis Publishing Company. All rights reserved. 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