When Iomega launched its Zip disk drive in 1995, the internet era was just dawning; the first investor message boards and chatrooms just starting to evolve. ‘There was a ton of internet chat about Iomega,’ says Tyler Thatcher, IR director, recalling that retail investors would drive to Iomega’s parking lot on a Saturday, count cars, then post the number on a Motley Fool message board to show other investors how busy the company was. ‘Then internet chatter was an unheard-of phenomenon. Now it’s commonplace and a lot of net stocks and others in high-flying segments have to find ways to deal with it.’
Web gossip about Iomega has dissipated since then, but its saga helps define IR in the computer hardware sector. ‘Typically our investors are technically savvy, and oftentimes our customers,’ notes Thatcher. ‘People who are comfortable with technology and investing in it are often the ones using it. And more and more they’re beginning to expect information on a level equal to what the pros are getting.’
Now Iomega is taking the web to the next level, using web chatter to inform management. ‘It’s good focus group information,’ Thatcher says. ‘Since many of our shareholders are also our customers, reading internet chat is a great way to collect data.’
Direct contact
At Gateway, South Dakota’s direct-selling PC maker, IRO Marlys Johnson is focused instead on the institutional investors who hold 30 percent of Gateway’s shares (half are held by the chairman and his family). ‘The computer industry is very volatile and risky from the investment point of view. So we have a lot of direct contact with the investment community. They keep pretty close tabs on companies because of the volatility.’
That means an extensive program of one-to-one meetings. After all, this is a sector teeming with analysts – sell and buy-side. Gateway has an audience of 24 sell-side analysts publishing recommendations (and still growing), with 50 more following the company closely. Johnson says she has seen a lot more institutional investors developing in-house research. ‘They try to get as well-rounded a picture as they can, using multiple sources in the search for information.’
Nancy Paxton, director of corporate finance and IR at Apple Computer, agrees that technology tends to be a fast-moving industry, and may be more challenging because of it. The mix between institutions and individuals can fluctuate a lot. ‘A few years ago, when we went through some pretty tough times, institutions found the stock to be extremely risky. Many of them may have preferred to invest elsewhere. In the last three to four years, the high water mark for individual ownership was around 75 percent. Today institutional ownership is around 68 percent.’
Measures used to value computer hardware stocks are much the same as in any sector: EPS, unit sales, SG&A, revenue sales, other income beyond PC sales. Today, however, it’s all about margins: the key computer hardware issue, says Johnson, is declining average selling prices.
‘There’s a lot of pricing pressure right now,’ concurs Thatcher. ‘Eighteen months or two years ago, no-one expected PC prices to do what they’ve done. That means pressure on the box [PC] makers as well as their component suppliers. We’ve seen that we need to be very competitive on pricing to get into the boxes.’
One dynamic change Thatcher has observed in 1999 is an increase in value-oriented investors looking to computer stocks. ‘Many are trading well off their highs. But it’s definitely a sector that’s not going to go away, so we’ve been speaking a lot more to value players rather than those looking for hyper-growth.’
The industry is bouncing back from a listless first half during which investors worried about a Y2K-related slowdown resulting from deferred equipment spending. In his annual spring showdown with analysts and investors in May, IBM chief Louis Gerstner said IT managers are bowing to pressure to get their businesses onto the internet now – laying to rest gloomy forecasts of a spending slowdown in 1999. Optimistic reports have also been coming from players like Cisco and Unisys.
Price pressure
Y2K may be fading in importance but all the hardware makers are battling the specter of declining prices. Johnson sums up the industry response: ‘We’re diversifying our revenue stream,’ she says, pointing to financing and warranty programs and software bundles. In 1997 Gateway launched an internet service, Gateway.com, which should have 400,000 subscribers by mid-year, around 1 mn by year-end.
Apple is not immune to price pressure, admits Paxton, but then it hasn’t aimed to be a low-cost provider. The company has taken a different tack to engineer a turnaround: ‘A big key to our recent success has been focus rather than diversification,’ she explains. ‘We’ve taken a good hard look at who our core customers are, our core competencies, and reduced our product offering.’
No-one has done the diversification dance better than IBM. In fact, Big Blue can no longer really be seen as a computer hardware player – not even as ‘the world’s biggest computer company’. ‘That’s a misrepresentation and a dated view,’ says IBM’s head of IR, Hervey Parke. Instead, IBM must be considered ‘an information technology company.’
‘Our challenge is helping investors understand not only the parts of our business, but how we can help customers with solutions,’ says Parke. ‘More and more customers are interested in not just pure feeds and speeds of individual components. They’re asking what they can do with the technology, how they can integrate it into their strategy, and how IBM can help get this done quickly and with great assurance.’
Parke sums up the change sweeping the Street: ‘Because most companies the investment community follows are pure plays, it comes down to How good is your product versus somebody else’s? We’ve got to be competitive in that arena, but we also have to make sure they understand our somewhat unique ability to glue all these piece parts together.’
Evidently the message is getting through, with IBM trading at record highs and analysts predicting still more upside. In terms of valuation, Gerstner offered up a dramatic comparison in the May analyst meeting: the 25 largest internet companies, including the likes of Yahoo and Amazon.com, had 1998 revenue of about $5 bn and $1 bn of net loss. IBM, meanwhile, had $80 bn in revenue and a huge profit. Yet these 25 internet companies had a market capitalization 50 percent larger than IBM’s.
Still, IBM is ‘not an internet company,’ Parke concludes. ‘But what we’re about is helping our customers take advantage of what they can do with the internet. A lot of our investors are starting to understand what these trends are and how we participate in them. So they’re now seeing the value of our services, software and our base technology business, and not thinking of us quite so much – although it’s still a transition for investors – as a hardware company.’
