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Vultures are circling over Iomega

Talk about a double whammy. First, Iomega Corp.'s stock received the "Kiss of Death" from financial analysts.

Then the company received the "Click of Death" from some Zip drive users.Bam! Bam! Just like that, the vultures started circling and its stock fell 27 percent.

Somebody call the paramedics. Or at least a spin doctor.

Here's what happened: Iomega reported its fourth-quarter earnings to analysts on Jan. 22.

Even though Iomega's revenue was up, its per-share earnings were 13 cents - 2 cents below what the financial wizards expected. Since analysts tend to be conservative in their forecasts, the shortcoming tolled disaster.

Performing as the whizzes expect you to is critical in Wall Street circles, even if what you're expected to do is lose money. That's why the stock of an Iomega competitor, Imation Corp., rose more than $2 a share last week after it reported a fourth-quarter loss of $157.8 million. Yeah, it promised to cut costs and jobs; the key was there were no surprises in the news.

Financial folks even have a name for this phenomenon. It's called the Cockroach Theory, says Chuck Hill, director of research at First Call Corp.

Where there's one surprise, there are probably more.

In fact, the two-penny shortfall didn't cause all of the twitter over Iomega. The money honchos didn't like what else they heard.

Iomega "jefe" Kim Edwards told them Iomega:

- lost money because of late shipment of new products and the Asian currency crisis;

- has $263 million in backlogged orders; it expects some orders to end up canceled since "we can barely meet demand on many of our products." And its inventory of some Zip and Jaz products increased;

- plans to "turn up the volume real, real loud" on a "demand creation campaign." Those are code words for "advertising blitz."

It will spend $100 million on print and TV in 1998 to expand the market for its products. Of course, that's a gamble. The money could be for naught "if volume doesn't materialize early enough or to a substantial degree."

So how did the analysts react to Iomega's plans? Many got hung up on Iomega's plans to increase advertising given the lag in product sales. Why spend on Super Bowl ads? "Why not drop prices to move product?" they asked.

And the inventory stockpile scared them.

Before the fourth-quarter report, First Call's consensus of analyst estimates on Iomega for 1998 pegged the company at earning 62 cents per share.

After the conference call, the consensus estimate fell to 50 cents per share for 1998. And Iomega's stock plunged 27 percent; it has since recovered a bit but is still sickly. And on Monday, a group of stockholders filed suit against the company for allegedly misrepresenting its condition.

Needless to say, given that pow in the kisser, Iomega doesn't need publicity about the "Click of Death" problem.

Apparently, some Zip drives and disks are malfunctioning, chewing up valuable data in the process. The drives and disks make a loud, clicking sound as they die - hence the name.

The problem is a topic of discussion on several news groups, and there is at least one Web page dedicated to it. But the problem appears fairly limited, judging from the Internet commentary.

Hey, they recall cars, don't they? Any company that ships millions of products is bound to hit quality problems once in a while.

George Meyer, director of marketing for Zip partnerships at Iomega, said the clicking noise is a "symptom, like a fever." It can mean several things, some of which are indeed bad, such as the actuator arm failing to read data.

"The bottom line here is our warranty rates are lower than industry averages," he said. "We shipped 12 million Zip drives. You'd have to assume you'd get some that don't work."

Yes, indeed. But when things get bad, they get horrid, don't they?