Wednesday, December 20, 2006

Color on results: Palm (NASDAQ:PALM)

Several firms are commenting on Palm (NASDAQ:PALM) this AM after the co released its FQ3 results last night:

- UBS notes they continue to believe the Palm story is one of execution in terms of product
shipments, further cost efficiencies, and new product introductions. Although management delivered a license agreement with Access (for its operating system) that will improve gross margins by ~100bps, improvements will be offset by higher operating expenses to drive the Palm brand and awareness to consumers as well as accelerated R&D for new product development. While the firm views the strategy as the right investment to make given heightened competition, they do not believe the benefits and leverage in the model from these investments will materialize for the next several quarters.

UBS believes management clearly feels a sense of urgency to "right the ship" and execute. They believe success will hinge on the company's ability to raise consumer awareness of the value in its Treo products as well as bring more compelling product to market - both key elements in the increase in operating expenses over the next two quarters.

Firm's forecasts assume new product introductions in time for the 2008 holiday selling season to help accelerate unit shipments, ASP declines with fairly stable gross margins, and a leveling
off of operating expenses. They view new carrier wins as a key element to driving units, as sell-in on a per carrier basis has been decelerating due, in part, to the company's customers carrying less inventory. Lowering our pro forma FY07 EPS estimate (ex options) to $0.62 from $0.74 and pro forma FY08 EPS (ex options) to $0.76 from $0.81 reflecting higher than anticipated operating expenses.Tgt goes to $15 from $15.50. Maintains Neutral.

- Banc of America is more bullish calling the results good and guid okay incl Treo 750 delay. Palm posted in-line rev but better-than-expected F2Q product mix, margins, and EPS vs lowered guid. Mgmt acknowledged that Treo 750 certif. is running behind plan, in-line with ABC's checks, but F3Q rev guid was okay and is prob conservative. Palm's new mktg campaign leads to lower OMs and EPS, but firm's unit acceleration thesis holds.

Despite concerns about competition and pricing, Nov qtr smartphone unit sell-through was a record at 617K (+8% Q/Q, +42% Y/Y). Also, Palm's GM of 35.6% beat by 200bps and smartphone rev, units, and ASP of $283M, 603K, and $469 all beat BAC's ests. Handheld seg rev/units missed.

Palm's new deal with ACCESS for Palm OS is expected to boost F3Q's GM by 100bps and further improve mrgns over time. However, non-GAAP EPS guid of $0.11-0.13 missed firm's $0.17 est (cons $0.16) as Palm is ramping its $25M mktg campaign.

Firm is increasing FY07/08E rev from $1.23B/$1.49B to $1.27B/$1.58B, but non-GAAP EPS moves lower from $0.79/$1.00 to $0.68/$0.78 on higher opex. PT remains unchanged at $18.00, although they're moving from 20x CY07 EPS est to 20x CY08E EPS of $0.90 (non-GAAP) since they see CY07 EPS as temporarily depressed.

BAC thinks strong sell-through, GMs, and ASPs (all favorite bear topics) trump lower near-term OM/EPS and think increased mktg should lead to better future results, esp as units ramp.

Reits Buy.

Notablecalls: I suspect PALM didn't come in as bad as market participants generally feared. That's also the reason why we initially saw a positive reaction in after hrs trade. The GM side was impressive and in my book shows management can still execute. The $25 mln advertising campaign will eat into the bottom line s-t but coupled with new products expected over the next 6 months it may prove to be a step in the right direction. I also think that considering all the missteps made by management over the past 9 months Feb qtr guidance was kept low enough to avoid any futher stumbles. While I have no view on what the stock will do in the s-t things are starting to look somewhat better for PALM.

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