Friday, December 15, 2006

Calls of Note Part 1

Bank of America is previewing Palm (NASDAQ:PALM) and Research in Motion (NASDAQ:RIMM), both due to report the next week.

Firm notes that on 11/27, Palm lowered F2Q rev and EPS guid because of new product delays. Unfort, while Palm stated that it expected the 3G Treo '750' US launch to occur in early F3Q - implying Dec. Firm's checks indicate that the launch could now be in late Jan or Feb. Further, the new mid-range Treo '680' is selling well, but colors are out of stock for ~1-2 wks, which is disappointing given the peak holiday season and new Treo mktg campaign.

Based on firm's checks, they see some risk to F3Q guid that may not be in the stock yet. While they think downside risk to shares is limited from current levels, if ests come down again, we may get a better entry point after this one last piece of bad news gets digested. However, firm remains confident that Palm's smartphone Treo unit shipments will begin accelerating Y/Y in F3Q/F4Q. As a result, they believe there is more of an opportunity for PALM shares post report because they think the stock will react favorably before units move higher.

For RIMM, firm has mostly heard positive feedback from both consumer and enterprise users, including first-time users. The positive response makes them believe BlackBerry units could surprise in coming quarters, although they believe their model adequately reflects the best case enterprise BlackBerry upgrade cycle, which implies that further increases will need to come from better traction in the more competitive consumer market.

Some cannibalization and phone only sales. Firm thinks early Pearl trends are pos, although they think a good portion of purchases may be upgrade units and persons buying merely as a phone without activating email. In this case, the Pearl may not drive big net add upside, which they think remains the key variable for the stock.

Notablecalls: Want to be long in PALM going into the earnings? Me neither. The mgmt is misexecuting perhaps worse then ever. Dont want to be short either as the downside looks limited. As for RIMM, Pearl users not activating email is alarming given the model's dependence on monthly service revenue. However, not sure how much credibility the note has - it looks to be based on something heard in the elevator of Manhatten skyscraper rather than actual research.

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