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Iomega not zipping along

Fourth-quarter profit falls 47 percent for the No. 1 maker of removable storage drives for PCs, and two execs are resigning.

    Despite the demise of its chief rival and overall growth in the sector, struggling removable storage maker Iomega today reported sinking earnings and the forthcoming departure of key executives.

    The Roy, Utah-based maker of Zip, Jaz, and Clik drives today reported earnings of $19 million, or 7 cents per share, for the fourth quarter, compared with $36.1 million for the same period in 1997.

    Although the company beat Wall Street analysts' expectations of earnings of 5 cents per share, quarterly income dropped 47 percent, year over year.

    Iomega lost money in the first three quarters of 1998, a company representative said. "The trend is the return to profitability, even if it is decreased over last year."

    Separately, Iomega announced a company-wide reorganization including the departures of two executives. Iomega will now be structured around centralized functions such as sales, marketing, operations, and product research, rather than separate business units for separate products.

    Fred Forsyth, president of professional products division, and Ted Briscoe, president of personal storage, are resigning in the wake of the changes.

    An Iomega spokesperson did not rule out layoffs as part of the reorganization, and predicted that more announcements would be forthcoming in the next few months. "From that standpoint it will be left up to functional heads," she said. "There could be some changes."

    Iomega said in a statement it does not expect to take a charge for the reorganization.

    "The new guy on the block has some new ideas on how to run the company," said Jim Porter, editor of industry newsletter DiskTrend, in reference to Jodie Glore, who was named CEO of Iomega last October.

    "If you're Kellogg's, you can have one guy running all the breakfast cereal, or have a brand manager for Bran Flakes...I wonder whether [the new management structure] is wise--they all seem like very different product areas and different markets," he said.

    "He's been there three months, presumably studying like crazy. He's jumped into this thing trying to figure out what's true--he clearly has different ideas on what works."

    Even if the reorganization is a success, Iomega has some significant obstacles to overcome. Although removable storage unit shipments increased by 55 percent last year to 12 million units, according to market research firm International Data Corporation, revenues only increased by 4 percent. Iomega and its partners account for 86 percent of the market, according to the study.

    Additionally, Iomega makes the bulk of its profits on sales of its disks, rather than drives, a business model Porter says is fundamentally flawed. Iomega's customer base has shifted from the professionals who bought several disks for project-oriented backup to consumers, who purchase far fewer disks and tend to come by their drives through their PC makers.

    "It's gone from dedicated professional users to consumers, who are more casual users of disks. It's a change in the nature of the market," Porter said.

    Iomega sold 59 percent of its Zip drives through PC makers last quarter, he noted, a distribution model which brings less revenue than selling directly to consumers.

    Iomega's quarter was not significantly affected by the bankruptcy of its onetime-rival SyQuest in early November. Sales of Iomega's Jaz drive, which competed against SyQuest's Spark drive, actually decreased 7 percent year over year.

    "Jaz has been declining in drive shipments all year," said Porter, noting that shipments did rise slightly after SyQuest's removal from the market. "The increase is nominal considering SyQuest being gone."

    Iomega can maintain its profitability by adjusting the pricing structure for its Zip drives and focusing on the digital camera market for its new Clik drives, Porter said.