Iomega warns of layoffs, losses

The storage maker's stock drops more than 14 percent after it says it will take special charges and cut hundreds of jobs.

Jeff Pelline Staff Writer, CNET News.com
Jeff Pelline is editor of CNET News.com. Jeff promises to buy a Toyota Prius once hybrid cars are allowed in the carpool lane with solo drivers.
Jeff Pelline
2 min read
In another dose of bad news, Iomega said yesterday that it will record special charges of between $5 million and $10 million as part of a cost-cutting plan that includes eliminating 600 to 700 jobs, or more than 12 percent of the company's workforce.

The company also warned of a Iomega stock chart second-quarter net loss that would be larger than expected, excluding the charges, in the range of $25 million to $35 million, or between 10 cents and 13 cents a share. It expects second-quarter revenue to be "roughly in line" with first-quarter revenue of $408 million.

In afternoon trading today, Iomega shares had dropped .9375, or more than 14 percent, to 5.375. The stock has traded as high as 16.75 and as low as 5.5 during the past 52 weeks.

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Key to the losses is the company's partial transition to a business model in which it markets its high-capacity storage devices to PC makers as well as consumers. Products sold on an OEM (original equipment manufacturer) basis carry lower gross margins.

The company also cited "softer-than-expected" aftermarket, or consumer, sales.

Iomega's second quarter ends June 27 and will report its results July 16.

"We are disappointed with our financial performance during the quarter," chief executive James Sierk said in a statement.

Iomega's stock has been on a downward slide since the end of last year. The company has faced increased competition, suffered a big loss in its most recent quarter, and watched its margins shrink. In March, chief executive Kim Edwards resigned and was replaced temporarily by Sierk, an Iomega director. Earlier this month, Iomega sought to revitalize sales on some of its removable storage drives by cutting prices.

To get back on track, the disk drive maker's goal is to generate cost savings totaling more than $50 million during the second half of the year and return to profitability during the fourth quarter. It does not expect to be profitable, however, for the full fiscal year.

Iomega expects approximately 50 percent of its flagship Zip drives to be shipped to PC makers this quarter, a huge change from the consumer sales model that catapulted the Utah company to prominence. Its recent agreement to provide Compaq Computer with Zip drives for the high-volume Presario line demonstrates Iomega's new direction.

Almost all of the some 12 million Zip drives the company says it has sold were purchased on a retail basis. Consumer PCs of all makes increasingly are including the high-capacity drives, which accommodate 100MB disks as compared to the traditional 1.44MB floppy drives, and in many ways large-scale but lower-margin sales to manufacturers are better than high-margin aftermarket sales.

The change is partly responsible for the coming layoffs, according to Sierk. "Unfortunately, the reality is that we need to adjust our business model in order to become profitable as an OEM supplier of Zip drives," he added.=""> The storage maker said the expected loss for the quarter could result in "noncompliance with certain covenants under its existing $200 million senior credit facility" and said it is in "active discussions" with lenders to address the issue.

The company expects cash flow to be negative--in the $60 million to $70 million range--during the second quarter. It expects being cash flow to move into the black during the second half of the year.

Iomega also noted it expects the number of its Zip drive units shipped to increase by 40 percent over second quarter of 1997 and by about 5 percent over the first quarter of 1998.