PalmInfocenter Holiday Break

Here's my contribution to PIC during the "Holiday Break"...

Troy Wolverton
PalmOne Backlog Has Investors Backing Out
By Troy Wolverton
TheStreet.com Staff Reporter
12/17/2004 12:37 PM EST
URL: http://www.thestreet.com/stocks/troywolverton/10199799.html

Shares of palmOne (PLMO:Nasdaq) plunged Friday after investors were unnerved by the company's earnings report.

The stock was recently down $8.57, or 20.1%, to $33.98.

Although the device maker met the Street's earnings expectations for its second quarter, it issued disappointing guidance for its current quarter. Perhaps more disturbingly, the company reported a sizable backlog in its inventory, particularly in its flagship Treo line of smartphones.

Following the report, the company's stock also was hit with a series of downbeat analyst reports, including at least two downgrades.

"PLMO faces multiple challenges ahead," wrote Andrew Neff, an analyst with Bear Stearns, in a report issued Friday. "Fundamentally, we are concerned about PLMO's device-only business model that is heavily dependent on the success of a single product."

Neff lowered his rating on palmOne shares from "peer perform" to "underperform" and decreased his price target range to $29 to $32 a share from $34 to $38 a share. (Bear Stearns has performed noninvestment banking business for palmOne in the last year.)

The handheld device and smartphone maker said after the bell Thursday that it earned $24.69 million, or 48 cents a share, in its just-completed quarter. That result was up from the second quarter last year, when the company lost $4.11 million, or 11 cents a share. Excluding discontinued operations, the company last year would have earned $2.63 million, or 7 cents a share.

The company's revenue rose 38% from the year earlier period to $376.2 million.

Excluding stock-based compensation and other noncash charges, the company would have earned $27.22 million, or 53 cents a share, in the just-completed quarter.

Wall Street had predicted the company would earn 53 cents a share on this basis on sales of $373.14 million. The company had predicted that it would earn 46 cents a share on a GAAP basis in the current quarter.

But while the company met the Street's estimates for its just-completed quarter, it gave disappointing guidance for its current period. The company now expects to earn 17 cents a share in its fiscal third quarter on sales of about $280 million.

In contrast, analysts had predicted the company would earn 30 cents a share on a GAAP basis on sales of $318.09 million in its third quarter.

PalmOne did offer an above-consensus forecast for its fourth-quarter outlook, and maintained full-year earnings guidance. For the fourth quarter, the company now expects to earn 45 cents to 55 cents a share on sales ranging from $360 million to $380 million.

The Street was predicting 40 cents a share in fourth-quarter earnings on sales of $343 million.

On a conference call on Thursday afternoon, company officials attributed their change in part to seasonality in the company's handheld business, and in part on a simple timing issue. Although the company still plans to roll out its new Treo 650 smartphone to its existing wireless carrier partners by the end of its fiscal year, the device won't be available on some of those networks until later than the company originally expected, company officials said.

"We would like to emphasize that our guidance for the full fiscal year remains unchanged, and we are comfortable with our plan," said Philippe Morali, the company's interim CFO.

But a number of analysts found themselves most uncomfortable with palmOne's plans.

The company's ability to meet its annual guidance is now heavily dependent on its fiscal fourth quarter, noted Pat Chiefalo, who covers the company for Merrill Lynch. That increases the risk that the company won't be able to meet its outlook, because one or more of its key carrier deals could be pushed back to its next fiscal year, he said. Chiefalo reduced his rating on palmOne shares to "neutral" from "buy."

"We believe the data points and expectations on Treo provided by management substantially increase the risk to our investment thesis regarding Treo uptake in the near term," Chiefalo wrote in a research note issued Friday. (Merrill Lynch has provided noninvestment banking services for palmOne in the last year.)

A related concern among analysts was the inventory position held by the company and its partners. At the end of the second quarter, palmOne and its carrier partners were holding nearly 21 weeks worth of Treo smartphones in inventory. Additionally, the company and its distribution partners held another 9.6 weeks worth of inventory in its handheld devices. Both of those figures are well above the company's targets, analysts noted.

Company officials played down the inventory swell. Handheld inventory was at a reasonable level considering that distributors and retailers were bulking up for holiday sales, Morali said. Meanwhile, the smartphone inventory had much to do with the transition from the older Treo 600 to its recently released Treo 650, he said.

"Carrier partners that are currently only selling the 600 have indicated that they are satisfied with their inventory position going into the holidays," said Morali. "Therefore we are comfortable with current channel inventory levels."

Again, the company's comfort didn't necessarily console Wall Street. In order to reduce its inventories to more normal levels, the company will have to double its market share in the smartphone market in its fourth quarter from its third quarter, wrote Needham analyst Charles Wolf in a note issued Friday.

"Given the Treo's $600 retail price point before carrier subsidies, we believe that such an increase in market share is highly unlikely," Wolf noted, maintaining his "hold" rating on palmOne shares. (Needham has provided investment banking business for palmOne in the last year.)

http://www.thestreet.com/_tscfoc/stocks/troywolverton/10199799.html

Ryan - Thanks for your hard work and efforts with this site. You're right - most of us don't have any idea how much work goes into it - so we don't always appreciate your efforts. I hope you feel better soon - watch out for the "strange" next time - lots of disease out there!

GG

Is PalmSource gone? When I try to access it says it is under construction...

Japanese PalmSouce route me to http://palmsource.palmgear.com

so now I guess the investors will be picked on for going "negative" on PalmOne...

If you are going to rely on only a few devices and their accessories to survive, they need to be stellar. The woefully undermemorized Treo650 - their "upgrade" to the wildly successful Treo 600 - should be enough to give people the jitters about where PalmOne is standing and heading.

Personally I hope the company gets it's act together soon and tests things in the "real world" before releasing them, as their performance of late has been extremely disappointing to those who are their most loyal customers. But it's not a good sign when so many buyers of last year's model return or avoid the "upgrade" in droves because it doesn't contain even enough memory to do what the Treo 600 could do.

Add up all the lost sales resulting from skimping $10 bucks of memory on a $600 device, and what could have been a wildly successful rollout becomes miserable PR from the people who were the most likely promoters of your product.

I'm very sorry to hear you've been under the weather. I also want to add my thanks for the really outstanding job you do with PIC. I'm just a novice in the world of Palm and I depend on your site for information and insight. So, thanks for all your hard work; it really helps and enjoy your recuperation and holidays!

Does anybody have any knowledge or input on the "other" problem with the flash RAM in the T5/650? Specifically, PalmOne's datamanager or program manager patch which causes inexplicable crashes. I couldn't make the 650 useable am am returning it. After a hard reset it crashed after I beamed a datebook event from my Z72 datebook. No 3rd party apps were involved. I haven't seen this addressed yet in PIC.