Iomega Corporation Data Storage For The New Mellenium Essay, Research Paper

IOMEGA CORPORATION: DATA STORAGE FOR THE NEW MILLENIUM

Introduction

The purpose of this report is to examine the Iomega Corporation, based in Roy, Utah, for the BA 201 Survey of Business course at Birmingham-Southern College. The company manufactures computer storage devices: the ZipTM and JazTM drives, the Clik! Storage device, and the BuzTM audio and video drive. 1

The leading supplier of data storage devices in Europe, and the third largest supplier in the world, Iomega has now strengthened its line of products with the Ditto tape backup device.2 The industry s enthusiasm and public satisfaction with which these products were received is unprecedented in the computer industry, making Iomega an innovator among innovators.

This report will discuss the following components of the Iomega Corporation:

 History of the corporation and its products

 Marketing strategies and product offerings

 Management structure

 Finances

History

Iomega was founded in 1980 with its flagship removable storage device, the Bernoulli drive. Though its original efforts are now more than antiquated, Bernoulli Optical Systems remains a subsidiary of Iomega. In 1983 Iomega was made public, and for the next twelve years, the company would see a period of experimentation and growth. While Iomega remained behind the major industry names of Apple and IBM, the late eighties and early nineties were integral to Iomega s current success. The technical bases for the Zip and Jaz drives were built upon, leading to these products 1995 release.2

Public response to the release of the portable data storage devices was enormous. Orders clogged the production component of Iomega before the disks were even released to the public, and by April 1996, barely one year after its introduction, Sony Pictures Entertainment entered into an exclusive agreement with Iomega for use of its Jaz disks.3 June of that same year would bring even greater response; Iomega entered into marketing agreements with IBM, NEC Technologies, Gateway, and Unisys.4 By the end of the summer of 1996, Iomega had formed partnerships with every major computer manufacturer in the United States.

The media frenzy surrounding the release of the drives was further fueled by honors awarded by computing magazines PC Computing and Gadget Guru. The Jaz drive was named 1996 s Innovation of the Year and Most Valuable Product by PC. Gadget Guru named the Jaz drive the Best Computer Accessory of 1996. These and other accolades pushed public familiarity of Iomega products higher and higher, boosting production and sales.5

In response to this domestic success, Iomega began a complete expansion of its foreign production and marketing in early 1997. European headquarters were set up in both the Netherlands and Switzerland, and their production site in Malaysia was expanded and modified. While the base of the company remained in Roy, Utah, Iomega s presence in both Europe and Asia was fortified with a larger number of production jobs for Asians and Europeans. Coupled with a greater concentration of foreign marketing and advertising, Iomega emerged as the third largest producer of data storage devices in the world.6

The end of the 1996 fiscal year showed a 272% increase in revenue from the previous year.7 The introduction of the Jaz and Zip drives in 1995 was undoubtedly responsible for this success, which was followed in 1997 by new partnerships with Motorola, Apple, Kinko s, and Hewlett Packard.4 By June of 1997, Iomega s Zip drive shipments reached six million; it was then a standard in new Sony personal computers, Micron notebook computers, and in all Kinko s store computers nationwide.8

The success of the Iomega drives remained rampant when the company announced the introduction of the Buz multimedia producer in late 1997. The Buz producer would allow consumers to capture movies, music, and photographs on their personal computers. While the success of the Buz drive still remains far behind that of the Zip and Jaz drives, this diversification allowed the company to remain on the cutting edge of computer technology. The Jaz drive was marketed as a companion piece to the Buz drive, lightly forcing consumers to purchase two products with one goal in mind.9 The approach was successful, leading to 1997 fiscal year earnings of 77%.10

May 1998, in the wake of the Buz release, brought about another important computer modernization, the Clik! drive. The Clik! drive revolutionized methods by which consumers could store digital information from handheld video cameras, computers, and cameras.11 Marketed with special Clik! disks, the drive itself brought the portable storage efforts of Iomega full circle, now having storage products for virtually every major computer product on the market.

Products and Marketing

Iomega advertises in many different places. The web site www.iomega.com provides a simple way to find out about the company. It provides potential customers with many different sections geared towards answering their questions about Iomega and its products. The site allows potential customers the opportunity to gather information through press releases and news articles related to the company, and gives customers a chance to win free products in contests. More importantly, Iomega s web site allows customers the opportunity to order its products online via a virtual shopping mall. Customers can receive Iomega s products without ever stepping foot outside their front door.

Iomega also advertises its products through other companies. Having Iomega Zip drives already installed in computers, such as Apple, Dell, and Gateway, allows customers the option of buying a Zip drive already installed in a computer of a well-established personal computer (PC) manufacturer. About 40% of Dell computers already have Iomega Zip drives installed in them.12 Due to all of the positive responses Iomega has received from forming partnerships with these PC manufacturers, it has decided to form a new partnership with Fujifilm. Fuji Photo Film Company Ltd. has recently started marketing branded Clik! disks. Fuji already markets Fujifilm branded Zip drives and has now signed with the forty megabyte Clik! disks. Said Steven A. Solomon, senior vice president of Fuji Photo Film USA, Inc., “We’ve had great success branding Iomega’s popular Zip disks and we believe that we will have similar success with Clik! disks.” 12

Iomega offers customers a way to store large amounts of information on disks rather than saving them on the hard drive of their computer. The company offers 100MB Zip USB and now the new 250MB Zip drives. This option benefits both businesses and personal computer owners. Businesses profit from owning a Zip drive due to the convenience of saving large presentations or proposals on a disk and then carrying it to different places; for personal computer owners, the Zip drive allows everyone in the house to have their own disk, keeping children s games separate from parent s finances. The notebook Zip gives people with digital computers the ability to carry large amounts of information with them in a slim, low power design for easier storage and transportation.

Iomega recently lowered the price on their external Zip 100MB SCSI and their 100MB Zip USB; the new prices are $99.95 and $129.95, respectively. Reducing the prices was driven by the product s universal adoption by the users of more than twenty-two million Zip drives, said David J. Henry, vice-president and general manager of Zip/Jaz management at Iomega Corporation. 14 By lowering the price of the product, Iomega makes their products more affordable for their customers, attracting more potential buyers.

Management

Iomega Corporation announced in January 1999 that it is restructuring in hopes of increasing gross profit figures for the upcoming fiscal year. Although Iomega controls over 86% of the removable storage market, its gross profits have decreased to levels that have made public investors somewhat weary. Previously, Iomega s structure was that of three decentralized product units which included the Professional Products, Personal Storage, and Mobile Storage divisions. The new structure will focus on eight business functions that include sales and marketing, product development, manufacturing and operations, corporate marketing, finance, legal, human resources, and corporate development and strategy. In addition, top management created a new functional group known as customer service and development which combines the existing customer service organization with a new group of applications engineers.15 Iomega hopes that these changes will ease the rise-fall-and-rise-again impression that the company has acquired since its entry into the removable storage market in 1980, thus spurring improved gross profits, consumer confidence, and an increased interest on Wall Street.16

In 1983, Iomega was on top of the Wall Street world. The searing property raised $21.7 million in public offerings due to the interest drawn by IBM PC users who were amazed by Iomega s patented Bernoulli Box technology. The Bernoulli Box used a subsystem with stand-alone disk drives that rest beneath the monitor and provide unlimited data storage capability with removable cartridges. After several years of prosperity, the bottom fell out in 1986 and 1987 when computer makers began including relatively large storage hard drives as a standard part of the home PC. Demand for the Bernoulli Box technology waned, and Iomega experienced hard times that included an $8.5 million bank debt and enormous inventories. Michael Kucha took the reins as chief executive officer (CEO) and immediately made an impact on the struggling company. Kucha cut costs by trimming the workforce from 1,350 to 750 as well as utilizing substantial tax write-offs. In less then a year, Kucha helped Iomega gain an $18 million cash balance, cut the bank debt to zero, and slashed inventory by 50%.16 More importantly, Kucha stressed research and development during his leadership reign. The company was able to adapt its Bernoulli Box product for the Apple Macintosh computers and began benefiting from the increased demand for the Macintosh in the late 1980 s and early 1990 s.

After a few years of slightly above average success, 1993 proved to be a disastrous year for Iomega. CEO Fred Wenniger, who replaced Kucha in 1989, departed due to shrinking margins and increased competition. The removable storage market had recently been flooded with Iomega clones that caused prices to decline, thus increasing competition. Analysts wondered if the company would survive the year.17 Leon Staciokas was named acting CEO as the company restructured during 1993 and 1994. In January 1994, Staciokas advocated a staff cut in hopes of reducing overhead expenses and freeing up extra cash. Eight percent of salaried positions were cut as part of the corporate wide restructuring.18 Later in the year, Kim Edwards replaced Staciokas and became permanent CEO of Iomega. Edwards first task was freeing up more money to invest in updating and improving technology. In July, Iomega cut 100 salaried jobs in a bold management move that would free up $4 million in overhead annually.19

Edwards new management approach towards Iomega eventually transformed the company from a struggling business into the most successful removable storage manufacturer in the world. This approach was based on the idea of creating a product that the public would buy and use rather than simply admire. After meeting with top management and technical advisors in the early months of 1995, Edwards was able to lay the groundwork for the release of Iomega s new Zip drive that would revolutionize the industry and reestablish the company as a major player in removable storage software. The creation and release of the Zip drive in late 1995, as well as wise financial management by Edwards, helped to increase Iomega s operating budget from $141 million in 1995 to just over $1.2 billion in 1997. 20

Unfortunately, Iomega encountered more problems in late 1997 and early 1998. Edwards believed that opening a new product engineering and manufacturing plant in Milipitas, California, would yield greater productivity and allow for quicker response time to customer demands for new technology.21 And it did. However, in July 1998, Iomega acquired Nomai, another removable storage manufacturer, in hopes of shrinking competition and placing the company squarely in front of all competitors. This bold move hurt Iomega s finances and caused a significant increase in operating expenses when paired with the upkeep of a brand new factory. This poor management decision by Edwards cost him his job. 22

Presently, Jodie Glore serves as president and CEO of Iomega. Mr. Glore is the permanent replacement for Kim Edwards after James Sierk served a brief stint as interim CEO. Glore hopes to reorganize and restructure Iomega; he wants to focus on the areas that the company has been criticized for in the past such as customer service and unsatisfactory product performance. Glore has already taken steps to alleviate these problems by ordering internal restructuring that will overhaul the previous system. The new system of eight business functions is a more elaborate, yet organized hierarchy. Glore hopes that it will allow a quicker response to customers, placing their needs as a top priority.15

Finances

In 1997, Iomega Corporation enjoyed a 101% increase in net income over 1996 to obtain a total of $115 million. The company had working capital of $338.2 million and a current ratio of 1.76 to 1.23 Such a performance put Iomega among the top companies in its industry of computer storage devices. The computer industry had a relatively good year in 1998, and because of the high demand for their products, the next few years look promising.24 However, while Iomega s sales in 1998 were approximately equal with those in 1997, they experienced a net loss of $(54) million and a negative cash flow of $146 million. Most of this dramatic decrease in income can be explained by Iomega s acquisition of Nomai in July 1998 and its substantial increase in operating expenses over those in 1997. Despite such a loss, Glore said that as a result of their 1998 fourth quarter profitability, they exited the year with a strong balance sheet that will be critical to [their] future plans. They believe that additional new product announcements that are coming soon will help enhance Iomega s position at the top of its industry.25

Iomega s business strategy was to maximize sales of its Zip and Jaz drives since they generate the highest margins for the company. Markets for the company s products are seasonal, with a higher proportion of sales occurring in the fourth quarter and slower sales in the first quarter and summer months. The fluctuation in Iomega s common stock is evidence of this seasonality. In 1997, the 52-week low of $7.06 occurred in the first quarter and the high of $16.41 occurred in the fourth quarter. The company s stock is traded on the New York Stock Exchange under the symbol IOM. It has not paid cash dividends to common stockholders in the past and has no intention of doing so in the future.23 At closing on April 16, 1999, Iomega s stock price was 5 1/8.26

The gross margin of $139 million or 28% of sales that resulted in the fourth quarter of 1998 was an improvement over the $88 million or 22% of sales in the third quarter. This improvement can be attributed to cost reductions in the Zip and Jaz product lines and initial sales of the new Zip USB and Zip 250 drives. The fourth quarter also included record revenue of $313 million in the Americas, $154 million in Europe, and $34 million in Asia Pacific. In addition, the quarter generated over $100 million in positive cash flow and reduced inventory by 16% over the third quarter. While 1998 did result in a high amount of operating expenses, the fourth quarter operating expense total of $106 million was down 17% from the $128 million in the fourth quarter of 1997. Iomega is working to implement its Six Sigma quality initiatives to cut costs and expects significant cost reductions in 1999.25 The decrease in selling, general, and administrative expenses that occurred later in 1998 was the result of the company-wide initiative to lower costs by reducing the staff, decreasing marketing and advertising expenses, and decreasing other discretionary spending.27

Due to the first quarter seasonality and component constraints, Iomega expected its first quarter 1999 results to be approximately breakeven. However, the company did produce a first quarter profit of $569 thousand.28 In addition, on March 31, 1999, the company announced that it retired $40 million in senior subordinated notes that were used to finance Iomega s acquisition of Nomai S.A. in 1998. The notes had carried an interest rate of 12.7% since January 1, 1999.29 While Iomega s executives admit that the company still has work to do to increase its profitability, they are excited about the future and plan to focus on growth and asset management.25 On April 15, 1999, the company was recognized for its efforts and was awarded Dell Computer Company s Most Improved Supplier Award. 30

Conclusion

Iomega has not released a genuinely new product in two years, yet the corporation is spearheading the computer movement into the new millenium through product upgrades and acquisitions. The sacrifice of millions of dollars for the Nomai acquisition proves Iomega s commitment to be on the cutting edge of the computer industry, an industry already at the forefront of cutting edge technology. While the novelty of the original drive products has worn away, demand for Iomega products remains consistent, and aggressive marketing and advertising efforts keep sales and production above expected levels. Through continual product improvement and change, Iomega continues to give consumers data storage for the new millenium.