Can Palm's Multiple Product Launches Overcome the Intensifying Competition?

Bear Stearns analysts Andy Neff, Bill Hand and Ted Chung sent a note to clients on whether Palm's (PALM) targeting multiple device launches will be enough to stem the coming deluge of competitive products. Key excerpts:

While PALM did not comment on recent news reports of PALM as a potential acquisition target at its analyst meeting yesterday (4/10), it provided a positive outlook for the smartphone market (CAGR 2006-2009 of 28%) and its growth prospects, focusing the discussion on its plan to improve product development cycles, brand awareness, and ease of use. While PALM did not provide any financial update, it highlighted its long-term financial target model, underpinned by a significant revenue growth assumption, lower gross margin at 33%-36% (below current rate of 37%) but higher operating margin at over 10% (currently at 5.4%) through improved expense control --i.e., R&D at 8-9% (below current level of 12%), SG&A at 15%-16% (currently at 19%). Below we highlight other key takeaways from the meeting:

· Multiple platforms/ODMs. PALM noted that it is implementing a multiple platform/ODM strategy, which would enable it to introduce new devices much more quickly than before (i.e., 12-16 months vs. currently at 18-24 months).

· New form factors. In addition, while PALM did not provide any specific product roadmap, it plans to introduce new products with different form factors and OS (based on Linux) segmented by user segments (e.g., consumers) starting late 2007, although the current Treo design remains its core focus.

· Differentiation through better user experience. As for competition, PALM noted that its focus is on differentiation through better user experience (e.g., simplified web navigation, back-up and recovery over the web, etc), which may also lead to potential recurring revenue opportunities.

· Sees limited impact from iPhone. As for the pending launch of iPhone, PALM believes that there is little overlap since iPhone appears to be focused on multimedia rather than PALM's core segment of messaging/email market, although it considers iPhone as serious competition.

· ASP decline from product mix shift. While PALM expects Treo ASP to decline over time, it indicated that the decline is likely to come from product segmentation (i.e., launch of low-end smartphones for consumers) rather than competitive pressures.

Stock impact: mixed for PALM (quicker introduction of new products could enable broader product portfolio but competition intensifying).

Comments

[Tom B]

Palm OS had a LONG run with no serious competition. Their time is passed now; with the iPhone coming, I sure wouldn't want to bet on Palm, Windows Mobile, Symbian-- any of those legacy platforms.