Iomega says the quest to have its Zip drive replace the floppy disk will continue and the company will be profitable once again before the end of the year.
Analysts are more skeptical, especially about the computer storage maker's short-term profitability. Observers agree that several key issues will play a major role in Iomega's future success:
- The company's goal to have its Zip drive become the industry standard - and replacement for the floppy - needs to be realized before expenses, including marketing tools like a $100 million advertising campaign, become an irreversible financial tailspin.
- New-computer buyers need to buy a lot of Zip disks to put in the Zip drives Iomega is shipping by the millions to computer manufacturers at little or no profit.
- The company has used the razor-and-blade analogy to its marketing with profits dependent on continued sales of the blades - or disks, in this case. Iomega has to keep competitors from selling knock-off disks for Zip drives or it recoups nothing from the drives it wholesales to manufacturers.
Iomega reported a first-quarter loss of $18.6 million, or 7 cents per share. The disappointing quarterly financial announcement followed the surprise resignation of CEO Kim Edwards.
"Our stock is somewhat depressed today," Board Chairman David J. Dunn said at the company's annual shareholder meeting in Salt Lake City on Tuesday, "but it's 10 times the value it was when Kim arrived."
President and interim CEO James E. Sierk followed: "We let the market know we're committed to returning to profitability by the end of the year, if not sooner," he said. "We expect a positive cash flow in the next three quarters."
Responding to questions from shareholders, Dunn called the company's fall stock split a mistake based on predictions the post-split price wouldn't dip into single digits, and said the company wouldn't soon be paying dividends to shareholders. "Iomega has been and hopefully will be a strong growth company. When we decide that isn't the case, we'll pay dividends or buy some stock back."
Iomega has a reputation for shipping new products late. "We're going to be a dependable supplier," Sierk said.
Analyst Howard Rosencrans of HD Brous & Co. Inc. in New York predicts that "Iomega will register a loss from operations for the full year and disappointments in 1998 will likely be commonplace."
Longer-term profits will depend on the success of Iomega's emerging Clik! disk and its acceptance in the market success and the possibility that "unfavorable court rulings could possibly open the door for competitors to legally `knock off' the company's disks and thereby sharply reduce potential future profitably," Rosencrans said.
Stan Corker, director of technology research for Pennsylvania-based Emerald Research believes Iomega has the jump on competitors making high-capacity removable storage devices and has an "excellent chance" of seeing its 100 megabyte Zip drive become the industry-standard replacement for the 1.44 megabyte floppy in the long term. "But the verdict is still out."
Corker also believes Zip-drive penetration in the new-computer market has to be accompanied by a boost in disk sales for Iomega to be successful. "I believe they're losing money on (drive) sales to (computer manufacturers)," Corker said. "What Iomega needs to do is increase its marketing to reach existing drive owners and encourage them to go out and buy more disks."