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Problems persist for Iomega

While trying to revitalize sales by cutting prices, Iomega faces many challenges in going for profitability and growth.

While trying to revitalize sales on some of its removable storage drives by cutting prices, Iomega is facing many challenges in its attempt to get back to profitability and growth.

The company has had a rough couple of quarters. It is seeing increased competition from a variety of companies, it reported a big loss in its most recent quarter, and its margins are shrinking. It has lost some top executives, its stock has sunk to its year low, and it also has been in court trying to protect its hold on the disk market.

Iomega cut prices yesterday by up to $150 on its 2GB Jaz drives, as much as $50 on 2GB disk cartridges, and as much as $25 on 1GB disks.

Cutting prices may not make sense for a company whose margins are shrinking. In the most recent quarter, Iomega's overall gross margin was 25 percent, compared to 30 percent in the first quarter of 1997. But this is a necessary reaction to weaker-than-expected demand for its new products, according to Stan Corker, director of technology research at Emerald Research.

"The company lowered prices in order to provide some short-term increase in demand," he said.

The company could not be reached for comment today.

Corker explained that demand for the 2GB product was strong when the product first started shipping, but once the early buyers satisfied their needs, demand fell off. The company even had delayed the shipment of its 2GB storage products until the first quarter of 1998 from late 1997 for additional testing.

The Iomega Jaz did exceptionally well in becoming the de facto standard in the professional marketplace, replacing SyQuest, added Corker. Still, it is a niche market, and once that is saturated, Iomega faces the challenge of tapping new customers.

The next step in doing that is targeting the "power user," a nonprofessional who doesn't need to exchange data and is much more conscious about price. Right now, SyQuest is doing well in that expanding market with its SparQ drive.

SyQuest's SparQ 1GB removable drive is priced as low as $199 retail, with 1GB cartridges running as low as $33 each.

"The Jaz is one part of [Iomega's recovery], but they need a drive that is more competitive with SparQ drive at the $200 price level," noted Corker.

Although profit margins on drives are much lower than the margins on disks, Iomega can compensate for weak sales of disk drives if they can maintain high sales of the disks.

"They need to rebalance to higher-margin products and put a lot of emphasis on sales of the disks," and the key to doing that is innovative marketing, elaborated Corker.

Iomega pioneered the $200 drive space before anyone else. "They essentially created the market that is the Zip market today," he said. "The sub-$200 disk drive market did not exist before Iomega. Users didn't know that they needed a Zip drive, and they created that need mostly through print advertising and PR."

Besides combating the lower-end market and SyQuest, big brands such as Sony, Fuji, and Compaq Computer are getting into the removable hard drive and disk space.

"[Those developments] present a great cloud over Iomega's stock price," added Corker, noting that they do not present any real threat to the company in the near term.

Indeed, the company stock closed yesterday at 5.75, only a notch above the 52-week low of 5.5. The stock traded as high as 16.75 in the past year.

Other issues hovering over the company include its long legal battle with French disk maker Nomai.

The company scored a victory in its battle against Iomega in February when a U.S. district court lifted a temporary restraining order that had prevented Nomai from selling its Zip-compatible disks in the United States.

At that time, Jim Porter, president of market research firm Disk Trend, said the fact that the court order against Nomai was lifted will not translate into an immediate U.S. presence for the French company. Rather, it would take Nomai a long time to build up distribution, noting that it takes a lot of time and effort.

Corker predicted that the Iomega will report break-even to slightly negative results for the June and September quarters. Analysts are expecting a loss of 1 cent a share for the June quarter, according to First Call.

In the March 1998 quarter, Iomega reported revenue of $407.5 million, compared with revenue of $36.13 million a year earlier. The net loss was $18.6 million or 7 cents a share, compared with profits of $23 million or 9 cents a share in the March 1997 quarter.

Iomega also has lost some of its top executives in recent months. Leonard Purkis, senior vice president, finance, and chief financial officer, told the company last month that he would resign effective June 5 to take another position. That followed CEO Kim Edwards's resignation in March. James Sierk, an Iomega director, is serving as interim chief executive.

On the bright side, Iomega's Clik drive is ahead of the schedule and should ship next quarter, said Corker, adding that he expects the company to reannounce the product with a "big fanfare" at PC Expo. "If they are able to ramp up quickly in September and December, it is possible that Clik could contribute [to revenue] in the December quarter."