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Executives

John Shandler - IR

Ed Colligan - President and CEO

Andrew J. Brown - Chief Financial Officer

Analysts

Vivek Arya - Merrill Lynch

Michael Ounjian -Credit Suisse

Tavis McCourt -Morgan Keegan & Co. Inc.

Hasan Imam - ThomasWeisel Partners

Mike Walkley - PiperJaffray

Jim Suva - Citigroup

Jonathan Goldberg -Deutsche Bank

Michael Abramsky - RBC Capital Markets

Lawrence Harris - Oppenheimer

Maynard Um - UBS

Jeff Kvaal - LehmanBrothers

James Faucette -Pacific Crest

Palm, Inc. (PALM) Q2 FY08 Earnings Call December 18, 2007 4:30 PM ET

Operator

Good day ladies andgentlemen and welcome to the second quarter fiscal year 2008 Palm,Incorporated earnings conference call. (Operator Instructions) As a reminder, this conference is being recordedfor replay purposes. I will now turn the presentation over to your host for today’scall, Mr. John Shandler. Pleaseproceed.

John Shandler

Thank you. Good afternoon, everyone. I would like to welcome you to Palm’s fiscalyear 2008 second quarter financial results conference call. On the call today are Ed Colligan, CEO and President, and AndyBrown, Chief Financial Officer. Today’scall is being recorded and will be available for replay on our InvestorRelations website at www.palm.com. I’d like to remind everyone that today’scomments, including the question and answer session, will include forward-looking statements,including but not limited to a forecast of future revenue and earnings andother financial and business activity. These statements are subject to risks and uncertainties that maycause actual results and events to differ materially. These risks and uncertainties are detailed in Palm’s filings with the Securities and Exchange Commission, including its quarterly reporton form 10-Q for the fiscal quarter ended August 31st , 2007 and its definitive proxy filed on August 10th, 2007.

Palm undertakes no obligation to update forward-looking statements to reflectevents or circumstances occurring after this call. Please note that today’s results will be reported on a non-GAAP basis except where specificallynoted in the commentary as GAAP results or estimates. Non-GAAP reporting is provided to help you better understand ourbusiness. However, non-GAAP financialresults are not meant to be considered in isolation or as a substitute for or superior to GAAPresults. You should be aware that non-GAAP measures have inherentlimitations and should be used only in conjunction with Palm’s consolidatedfinancial statements prepared in accordance with GAAP. Our press release includes a table detailing the non-GAAP measures together with the corresponding GAAP numbers and a reconciliation to GAAP. You can also find this information posted onour Investor Relations website. The slides that accompany this call include bothGAAP and non-GAAP measures and are also available on our Investor Relationswebsite. We encourage listeners toreview these items.

Now I’d like to turnthe call over to Ed Colligan.

Ed Colligan

Thank you,John. Good afternoon, everyone, andthank you for joining us. Today I willaddress the Q2 results, talk about some accomplishments for the quarter, and give you an update on our progress in the transformation of Palm.

Q2 did not meet ourexpectations. We did not execute as wellas we need to. Andy will provide detailson the quarter during his remarks, but I willaddress the biggest issue, which was the delivery of the Treo 755P. The Treo 755P which is now shipping to Verizon was gated by certificationissues. The time required to run every quality issue toground before release pushed delivery of the product out of the quarter and was the primary reason we did not meet our revenueexpectations. As you know, we haveexperienced quality issues on Legacy products that have affected customersatisfaction and driven up warranty costs. While we can’t change the past, we are determined now and in the future to deliver only products that topindustry standards for quality. We have the mandate from our shareholders to transformthis company and world-class quality is the first stop on our drive to operationalexcellence.

As we transformPalm, we are thinking about OpEx differently than in the past. We are working on next generation products that will eventually require us toinvest in all aspects of the business, but during the development period, we have an opportunity to right size many of our activities. We have cut costs through greaterefficiencies and some through focus on fewer projects and reducedstaffing. We will continue to drive hardon costs until we lower our break even point.

These are the kinds of things we need to do to operate the business more effectively day to day, butwhen we agreed to the Elevation Partners investment, we also agreed to a more fundamental transformation focused onbuilding long-term value in our company. To realize that transformation, my first priority was to strengthen the team, specifically the Product Development team into a world-class force. To do this, I knew I had to attract a great new technology and developmentpartner. I have found that partner in Jon Rubenstein. Jon has made a profound impact on Palm in very short order and I expect him tocontinue to strengthen our team and drive them to deliver breakthrough productsand underlying technology platforms.

My second objectivewas to identify an investment partner who believes in our vision and understands the scale of the market opportunity. I also looked for a partner who had a passion for our market space and relevantoperating expertise to bring to the table and I have found that partner in Elevation Partners, which today is ourlargest shareholder and totally focused on the long-term opportunity at Palm

Over the last six months we have revamped our road map,strengthened our team, boosted the standard of execution on our products,reviewed and solidified our strategy, and continued to execute against core platform technologies that will be the cornerstone of some of our futureproducts. We are not done, but we have made substantialprogress. Some of that progress is in business processes you cannot see, but someof it is in products you can buy today. The Palm Centro is a hit. It has delivered record sell through rates beyondany Smartphone Palm has delivered to date and as we expand distribution with a wider range of partners this quarter, weexpect those sell through rates to expand significantly. The Centro is also a high-quality product that has been recognized by many as beautiful in design and breakthrough from a value and functionality standpoint. We will invest in our marketing efforts to maximize the success of the Centro and we believe the imminent launch of a number of additional global markets willcontinue its momentum.

In addition, we have recently upgraded the Treo 750 to Windows Mobile 6.0 and we willwork with Microsoft to drive more adoption of exchange active synch in the enterprise. Our customers are expanding their deployments of Windows Mobile-enabled Treos. They are making the decision to switch two Palm solutions on a Microsoft-based platform and away fromBlackberrys because of the superior industry standard solution andlower total cost of ownership. We intend tocontinue to develop a compelling array of Windows Mobile solutions through next year and as wesee our combined solution gaining momentum in the enterprise.

We still have a lot of work to do to deliver our road map. Two things are clear, however. First, there are huge opportunities for us on both our core platforms, Windows Mobile and Palm System Software. Second, the Smartphone market has never been more open to new design centers,which will enable us to innovate without having to imitate any othervendor. We intend to lead on design,ease of use, and functionality and serve a broad range of customers with productsfocused on their needs.

Our two-prongedapproach is to 1) leverage Windows Mobile and our ODM partners backed by Palm designed expertise to serve our businesscustomers, and 2) build our Palm System Software products for end-to-endseamless consumer solutions. We are leveraging the market advantage of Microsoft’s brand andmarket support, the cost advantages and design manufacturing expertise of our ODM partners, aswell as our own deep design and engineering bench to address the market for Smartphones. We recognize we need to build a larger array of offerings and re-take the mantel of design and innovation leadershipand that work is underway. The result of our two-pronged strategy should be a very vibrant diversified business capable ofserving a broad range of customers.

We are in the beginnings of one of the largest growth markets in the history of technology. Billions of cell phones will be replaced by billions of devices thatintegrate computing functionality with voice and data communications. We are working on building key platform technologies and breakthroughproduct designs. There is a huge market opportunity and it will continue to expand in segment leaving a lot of room for innovation.

In summary, we are working today to build our business and drive for operationalexcellence. The market we are poised to exploit is huge and growingrapidly. We have key shareholders and partners who believe in us, our plan, and our vision. We continue to make substantial progresstowards our breakthrough product and platform goals and yet we know this is a major transformation and it is going to take time. Fortunately we have a team and an investment group that is committed to makingit happen.

One more thing I’dlike to mention before I turn the call over to Andy to give you more detailson the just-finished quarter and some guidance fornext quarter. Since this transition isfocused on the long-term, we are going to suspend specific financial guidance after this quarter. We will of course continue to provide generalbusiness guidance and comment on trends in our business and the industry. We believe this is the right thing to do for the company at this time and I appreciate yourunderstanding.

I’ll now turn the call over to Andy for his comments.

Andrew J. Brown

Thanks, Ed, and good afternoon, everyone. Before I start, I would like to reiteratethat all thecommentary today is based on non-GAAP financial measures except wherespecifically identified as GAAP. Iencourage you to refer to thereconciliation of GAAP to non-GAAP financial results that is posted to thePalm website andincluded with thepress release.

Reiterating Ed’s comments, we areclearly disappointed with our performance for fiscal Q2 as revenue came inat $349.6 million,declining both sequentially and year over year. Thelower-than-expected revenue performance was mainly attributable to ourinability to ship theTreo 755P to Verizon before quarter’s end. During thequarter we saw Smartphone revenue essentially flat with theprior year and continued declines of 39% year over year inthe handheld business.

Gross margin for thequarter decreased to 29.9% compared with 35.6% inthe year agoperiod and 36.3% sequentially and was driven by two factors. We experienced inefficiencies inour repair logistics operation that increased our warranty costs for our olderproducts. Inaddition, the successof the Centro atSprint and thepreviously announced delay inthe launch of theTreo 755P resulted in aproduct mixed margin profile that was lower than anticipated atthe beginning of thequarter.

Operating expenses for thequarter were $121.6 million inthe range we hadexpected at thebeginning of thequarter. This resulted inan operating loss of4.9% of revenue and aloss per common shareof $0.07. Inaddition, for Q2 theadjusted EBITDA was negative $8.7 million. Smartphone revenue for thesecond quarter was $282.4 million on shipments of 777,00o units. ASPs for Smartphones declined more thanexpected during thequarter to $359 perunit or a 17% declinesequentially. This was theresult of the higherthan anticipated demand for Centros and thedelayed certification of theTreo 755P atVerizon. Smartphone sell throughincreased 11% year over year to 686,000 units.

Handheld revenue for thequarter was $67.2 million reflecting sales of 372,000 units. Handheld sell through for thequarter was 323,000 units, a35% decline year over year. Inventoryheld by our channel partners was nineweeks at theend of the quarterwhich is typical inadvance of the holidayselling season.

InQ2 fiscal 2008, we generated 73% of our revenues from theUS and 27%internationally. Thelower proportion of USrevenue in thesecond quarter was attributable to thedelayed shipment of theTreo 755P and thelaunch of the Treo 500 inEurope. Inaddition, inconnection with our recapitalization transaction completed within thequarter on a GAAPbasis the loss percommon share calculation includes abeneficial conversion feature associated with thesale of the preferredstock to Elevation and therelated issuance costs. Thebeneficial conversion feature is theresult of the stockprice being higher at theclose of thetransaction and theeffective conversion price underlying thetransaction. Thedifference between these prices are$1.68 multiplied by 38.2 million shares. Elevation will receive upon conversion results ina beneficialconversion feature of approximately 65 million. The total of theissuance costs in abeneficial conversion feature areamortized over theterm of the agreementor of seven years, resulting ina projected non-cashcharge to our quarterly percommon share calculation of approximately $2.4 million or approximately $0.02 pershare. Q2 fiscal 2008 included one monthof amortization.

Looking atthe balance sheet, ourcash and short-term investment balance decreased approximately $334 millionfrom the prior quarterto approximately $293 million. Thedecrease came mainly from theimpact of therecapitalization transaction inwhich we received approximately $696 million intotal net proceeds from thesale of preferred stock and debt borrowings and paid aone-time distribution to shareholders of approximately $949 million. Cash flowused for operating activities was $13.5 million, much of this beingattributable to theincrease in inventoryduring the quarterresulting from a buildup of Treo 755P inventory for theVerizon launch which occurred after thequarter end.

We also reclassified approximately 75 million of ourinvestments to non-current. These areAAA and AA ratedauction ratesecurities that currently have alimited market and arenot needed to meet allliquidity needs for atleast the next twelvemonths. As aresult, they have been reclassified to non-current.

Accounts receivable decreased sequentially by $6.8 millionto $172.2 million and DSOs were 44 days inour expected range. Inventoriesincreased sequentially by $15.6 million to $49.8 million and terms decreased to23 times, this theresult of the Treo755P inventory build up mentioned earlier. We expect inventory to return to normal levels as we exit Q3.

As Ed mentioned earlier, we areproviding guidance for Q3 but will besuspending specific financial guidance after this quarter. Looking to Q3 fiscal 2008, we currentlyexpect revenues to bebetween $310 and $320 million. While weexpect Smartphone shipment volumes to increase as aresult of continued Centro demand, we areanticipating tight component supply, which we expect will constrain ourshipments during thequarter. As aresult, we expect overall Smartphone revenue will beflat or slightly down on aquarter to quarter basis. Inaddition, we expect handheld revenue to experience anormal season decline. We anticipategross margin for Q3 will bein therange of 30l5 to 31% which is below our target model. This is being driven by high Centrodemand. Inaddition, we expect thetighter component supply environment anticipated inQ3 to result in higherproduct costs than we planned just afew months ago.

To align our expenses with our current operating model, wehave taken actions to reduce our operating expenses. This includes consolidating our operations inEMEA and APAC to better align with thenear term revenue opportunities and reducing complexity of our USoperations, allowing us to put more resources behind fewer activities. We believe this will result inoperating expenses that by Q4 will be10% less than thelevel in Q2. Inthe interim, as weimplement these changes,we anticipate Q3 operating expenses will bein therange of $112 to $115 million. We alsoexpect a restructuringcharge on a GAAP basisin therange of $16 to $18 million associated with employee terminations, facilitiesclosures, and other project eliminations.

Adjusted EBITDA inQ3 is expected to bebetween negative $7 and negative $10 million and theloss per common shareof $0.14 to $0.16. Our goal over thenext several quarters is to drive improved profitability by returning grossmargins to the 32-34%range and reduce operating expenses to below $110 million. I will now turn thecall over to theOperator for your questions.

Question-and-AnswerSession

Operator

(Operator Instructions) Your first question comes from theline of Vivek Arya representing Merrill Lynch. Please proceed.

Vivek Arya - MerrillLynch

Hello. Acouple of questions. Ed, first of all,I’m just curious to know when is theearliest we will start to seethe impact of JonRubinstein joining thecompany? I know that hewas involved with Centro but what is thenext product that we can look forward to? How soon should we start to seean impact? What I’m really trying to geta sense for is what doyou do different in2008 than what you have done in2007?

Andrew J. Brown

I think you’ll seeJon’s impact throughout theyear and for years to come. I think whatwe’ll do different in2008 than we did in2007 as we mentioned was really strengthening theteam in awhole host of areas. We’re hiring newtalent. Also setting adifferent bar of expectations inexecution. I’d saythat the impact onCentro was really towards thevery end of that development. Thatdevelopment was well underway and was going to happen but I would saythat Jon’s positive influence atthe end was reallyrelated mostly to just setting higher standards and holding theteam accountable. Sosome of it is justfundamental management ata differentlevel. Someone who is really experiencedin that area and willsettle for nothing less than thebest and that’s thekind of impact that itwill have in thelong-term.

Vivek Arya - MerrillLynch

And also when you look atthe stock prices,actually they’re below where Elevation first got involved init, are you continuingto look at thecurrent capital structure and areyou considering other potential investors atthis point?

Andrew J. Brown

We don’t eliminate anything, as you know. It’s apublic company, but it’s not something we’re looking atday in and day out.With Elevation, obviously they seethe stock price toobut the only thingthat has beencommunicated to mefrom their perspective is acontinued very strong commitment to thelong-term outcome of Palm, that they believe themarket opportunity is huge, that we execute better on anumber of fronts and continue to deliver theproducts that we have inthe pipeline and theplatforms that we have inthe pipeline that theywill get asignificant return on their investment and that’s what we’ll allshooting for.

Vivek Arya - MerrillLynch

And one last question. Andy, the grossmargin, is 30-31% of thenew level, what I’m trying to seeis perhaps look forward and saythat once your component costs arebetter under control, once you aredone with these excess warranty charges, areyou saying, do youexpect a return tothis 33-36% range that you had second quarter and how soon can we start to seethat kind of gross margin range?

Andrew J. Brown

Yeah, I think over thenext several quarters that 32-34% is realistic. I think there’s acouple of factors impacting that. One isthe mix of productswith clearly seeing afairly significant mix recently towards the... Given thesuccess of the Centro,that is driving some, as far as product costs go, we think we can dobetter. Itmay take more than acouple of quarters. I think that’s onearea, and the otherarea is we continue to want to drive down our overall warranty costs soI think a realistictarget certainly in therelatively short-term, the33-36% was a long-termbut in theshort-term it’s probably inthat 32-34% range given themix of products that we believe is going to occur over thenext several quarters.

Vivek Arya - MerrillLynch

Thank you.

Operator

Your next question comes from theline of Michael Ounjian representingCredit Suisse. Pleaseproceed.

Michael Ounjian - Credit Suisse

Thanks. Andy, iffirst you could give alittle more color regarding thecomponent constraints as to just where you’re seeing theshortages and just how you think we should think about it, thetimeframe for addressing that? Is thatsomething that’s likely to continue into May? How should we expect to seethat proceed over thenext few quarters?

Andrew J. Brown

It’s apretty fluid situation right now. Thisis something that we’re clearly working daily. It’s not something that we’re saying we’re giving up but as we read thetea leaves right now, we think we’ll beconstrained at leastthrough this quarter. ITcould continue into May but we’re hopeful that as we moveinto the May quarter,some of it willlighten up. Abig part of what’sdriving this is just thehigh demand for Centros. We got ahit product on our hands and we’re allhands on deck tryingto make sure that we can getthe supply that weneed. Like I said, it‘s a day to daysituation.

Michael Ounjian - Credit Suisse

And interms of the source ofthe shortage, is thissomething custom, is this specific to theCentro, or is it this amatter of just strong industry demands out there and it’s harder than youexpected it to beafter the product andit’s just a morestandard product you’re seeing issues with?

Andrew J. Brown

I think thefirst thing is it’s really strong demand for our product and thesecond thing, I think that ingeneral the strongerdemand of theindustry, and these arenot custom products, they’re commercially available products to anymanufacturer.

Michael Ounjian - Credit Suisse

Now looking into thenext few quarters, obviously Centro is strong this quarter, abig part of themix, but you only had half aquarter obviously with one carrier. Aswe look forward obviously afull quarter going forward and I would assume there’s more carriers tocome. Itseems reasonable to think Centro may actually become abigger piece of themix over the next fewquarters. I guess why... How doyou offset thepotential margin pressure there inthe short-term and whywouldn’t we see even alittle more pressure before things start to moveback towards your 32-34% target?

Andrew J. Brown

You know there’s acouple of things there. Thefirst thing is we dobelieve we can getbetter costs, be ina better costposition as we look out two or three quarters. We’re still working on driving costs out of some of our other operationslike our repair logistics operation. Wethink in general if welook at itthe mix will somewhatstabilize once we getbeyond Q3. That’s kind of what we’reseeing at this point,but it’s a prettydynamic market at thispoint.

Michael Ounjian - Credit Suisse

Okay, thanks and then lastly, Ed, you’re obviously making alot of changes, asyou said transforming thebusiness for theposition the companybetter for the longterm. That takes some time and there’slikely to be somevolatility in resultsnear term. How should we betracking thebusiness? What metrics doyou think we should really befocused on to bemeasuring sort of theprogress of thetransformation?

Andrew J. Brown

I think one of thethings is continuing to see, and some of this is less visible, assuming we canstrengthen the team,we just added some additional talent atthe senior level thatwe’re excited about. You’re going to seeus continue to deliver products throughout theyear and those products will meet thehighest quality standards we can possibly deliver. You’ll continue to seethat. You’ll continue to seemilestones around our next generation platforms. As we start rolling that out, it’s likelythat we make certain developer announcements or other partnership announcementsalong the way, sothere will bemilestones but I think atthe end of theday we intend to continue to execute as best we can short term. We think, as we said, we have ahit product in Centro,we will have some other products coming out this year that we’re excited about,so I expect thebusiness to continue to grow. You’reright, it is atransformational time, sothings could be alittle lumpy, but we’re going to doour best to manage through that and you’ll seeI think some long termmilestones being hit that will show that we’re continuing to execute. Inthe end, ultimately wehave to deliver. As I said, re-take themantle of leadership for both thedesign and innovation and that’ll bereally on next generation products and those will bethe place that I thinkJon and the retoolteam will have thebiggest impact on.

Michael Ounjian - Credit Suisse

Allright, thanks for taking thequestions.

Andrew J. Brown

Thank you.

Operator

Your next question comes from theline of Tavis McCourt representingMorgan Keegan. Pleaseproceed.

Tavis McCourt -Morgan Keegan & Co. Inc.

Hey guys. Acouple of detailed ones and abigger picture question. Interms of theinefficiencies and logistics and repair, is that part of thegross margins deterioration and fixor is that still in themix for the Februaryquarter?

Andrew J. Brown

Sothat is mostly being fixed atthis point. Basically you know what thatwas our inability to turn around products and our carrier customersunfortunately have to use new product to satisfy their warranty returns. For themost part that is being fixed. There’s avery minimal amount of that inthe Q3 timeframe.

Tavis McCourt -Morgan Keegan & Co. Inc.

And I think I got this from theanswer to your other question but I just wanted to confirm. Thecomponent tightness you’re seeing is purely on theCentro line at thispoint?

Andrew J. Brown

Itis mostly on theCentro line. There is one component thatdoes impact all CDMAproducts but it’s mostly on theCentro line.

Tavis McCourt -Morgan Keegan & Co. Inc.

Gotcha and Andy, I think you said for theguidance Smartphones shipment should beup sequentially. Is that correct or didyou mean sell through?

Andrew J. Brown

No, I meant unit shipments will beup sequentially, that is correct.

Tavis McCourt -Morgan Keegan & Co. Inc.

Okay, and should there bea significant shift interms of channel inventory, I know shipment hasexceeded sell through by quite abit this quarter?

Andrew J. Brown

Part of what happened this quarter clearly is thebuild up of Centro sothat was pretty normal and ordinary and we continue to bevery comfortable with our channel inventory. That will depend upon what products areout there and which products we’re potentially introducing. That’s as much as I can sayabout that.

Tavis McCourt -Morgan Keegan & Co. Inc.

And I know one of thefrustrating things about giving guidance from your guys’ point of view is kindof the timing ofgetting the newproduct out the door,but as evidenced by the755 this quarter, but inyour guidance for February, can you give us some hint of is that betting on acertain product, new product launch this quarter or is that basically with theproducts that are inthe market assuming the755 is shipped?

Andrew J. Brown

There is anexpectation that we will deliver one more carrier on theCentro line but we... Sofar, so good, andwe’re confident that’ll happen.

Tavis McCourt -Morgan Keegan & Co. Inc.

Okay and from your commentary before on gross margin goingback up hopefully later inthe year and I thinkyou mentioned something about themix of Centros stabilizing abit, can we take aminute? Should we expect some kind ofupdated higher end Treo lines this year?

Andrew J. Brown

Yes. You will seeadditional products inthe Treo line thisyear that we’re excited about.

Tavis McCourt -Morgan Keegan & Co. Inc.

But not based inthe Februaryguidance.

Andrew J. Brown

Not inthe February guidance,no.

Tavis McCourt -Morgan Keegan & Co. Inc.

Thank you very much.

Operator

Your next question comes from theline of Hasan Imam representing Thomas Weisel Partners. Please proceed.

Hasan Imam - Thomas Weisel Partners

Thank you. I just hada couple ofquestions. First of all, interms of thesequential decline inrevenues according to your guidance, should we take that to mean that allof the weakness is inhandheld?

Andrew J. Brown

What I said was that theflat to slight sequential decline inSmartPhone revenues and then we’d seethe normal seasonaldeclines in thehandheld, so yes,you’ll see theseasonal declines areusually fairly significant inthe February quarterfor handhelds, yes.

Hasan Imam - Thomas Weisel Partners

Got itand then in terms of thecomponent constraint, if you can’t ship enough, doyou think there will beorders spill over into Q4 or is this lost business?

Andrew J. Brown

I think that there’s definitely lost business when you don’tship during theholiday season. There’s no questionabout that. Theimpact of 755 not getting out this quarter was definitely hurt ongoing sellthrough. I think as far as theCentro is concerned, it’s growing very quickly. There is somewhat minimal lost revenue during those out quarters and weshould be able to makeit up. We have ahigher probability of getting more component supply obviously thefurther out you go but we’re trying to movethat in as much as wepossibly can to deliver as many as we can as early as possible becauseobviously theproduct’s quite exciting right now.

Hasan Imam - Thomas Weisel Partners

And then one question on themacro environment. There’s alot of concern particularly on theenterprise front and also maybe retail that there will beweakening demand for discretionary products like SmartPhones. Areyou seeing any of that from some of your enterprise customers or your talk withoperators et cetera?

Andrew J. Brown

Not really. I mean, Iwould argue that there is ahuge shift going on. What I hear morefrom our carrier partners is for instance high end clamshells arenot selling and people arelooking for products with QWERTY keyboards and more functionality soI think you’re likely to seea bigger dropoff onother kind of more fashion-oriented standard handsets than things that reallydeliver the kind offunctionality that we have. Then thesecond thing is on theenterprise side, you can practically issue one of our devices to anend user rather than a$2500 laptop to gettheir email, so ifwe’re cutting costs, we may actually bein areasonably good position relative to that and our integration with WindowsMobile and the costof deployment of that which is essentially no costfor the server side ofthat could help us in theenterprise as far as deployment, soso far not seeing anyor had any communication about that, I think ingeneral we’ve seen thecategory growing quite abit and we expect that to continue.

Hasan Imam - Thomas Weisel Partners

One last question. Interms of going forward and not providing specific guidance, I’m just wonderingwhat the realphilosophy behind that is because you would think that during times of stressor change morerather than less color would beuseful or do you feelthat there’s something fundamentally impaired interms of your ability to forecast thebusiness on aquarterly basis?

Andrew J. Brown

I think thebigger thing is staying focused on thelong term. That’s what we’re really trying to do, iskeep the organizationand ourselves focused on thelong term. That doesn’t mean we don’t want to executeday to day and itdoesn’t mean we won’t give color. Wewill, we will absolutely talk about thebusiness. It’s really we’re talkingabout specific financial guidance. There’s clearly atransformational time we’re making longer term decisions and we’re trying notto be too driven byhow that’s going to necessarily impact that next quarter and sowe’ve decided itprobably makes themost sense from both our organizational standpoint and our own focus to stickwith focus on the longterm.

Hasan Imam - Thomas Weisel Partners

Thank you.

Andrew J. Brown

You’re welcome.

Operator

Your next question comes from theline of Mike Walkley representing PiperJaffray Please proceed.

Mike Walkley - Piper Jaffray

Thank you. I waswondering if you could share with us now that Centro haslaunched and been avery strong launch for you guys, did itcannibalize more of theTreo sales than you thought? Is thereany color you could give us on how your Treo sales have done now that Centro isout there?

Andrew J. Brown

I’d saya little more than wethought but not much. We’d anticipated areasonably significant cannibalization and it’s probably done better, frankly,than we thought, theCentro when we were first coming out. Sothat kind of has anatural cannibalization atsome level just because it’s just broader demand overall. It’s hard to tell alittle bit because of thelack of the 755P beingout at Verizon. We don’t getthat data point relative to other carriers but atSprint where the onlyplace it is shipping,we still have some cannibalization but we expected that. Itwas expected.

Mike Walkley - Piper Jaffray

I know you expected it, I was just trying to getthe incremental, sinceit was out.

Andrew J. Brown

Not really much more. I think it’s really pretty much inthe planning horizon.

Mike Walkley - Piper Jaffray

Andy, I might have missed this, but can you give us on kindof the offsets comingdown your longer term targets? I knowyou gave it for thenext quarter but maybe what’s thebreak even level or what level doyou think you’re going to take itdown to in theinterim here?

Andrew J. Brown

Sowhat we expect is that we getour offsets down about 10% from theQ2 level in Q4. We’ll seesome transitional this quarter. We’vetaken some actions and like I said, our goal is to get10% out which will getyou to about $110 million inoffsets for Q4. I should reiterate thatmost of those actions have been taken and atthis point it wouldreally be focused on additionalefficiencies within how we operate thecompany and the majoractions they just will play out over thenext two quarters as we’re closing certain facilities or whatever, some ofthose things just take time to have them settle out.

Mike Walkley - Piper Jaffray

Okay great. Just onelast question on your guidance since it’s thelast time we’ll getspecific guidance in theshort term. As you look into theyear-end here, can you maybe just talk about inventory levels and what yourthoughts are forseasonalities? Just theslightest SmartPhone guidance. Is itmore than just component constraints or areyou assuming kind of anormal seasonal slow down inthe January - Februarymonths? Thanks.

Andrew J. Brown

I think we’d loved to bemore bullish here on guidance. We just arebeing prudent relative to thecomponent situation we’re seeing. Centrois definitely something that’s moving ingreat volume. We know we could domore and we’re just trying to make sure that we put anumber out there that itseems reasonable atthis point and it’s really not aseasonal issue at all,certainly on theSmartPhone side.

Mike Walkley - Piper Jaffray

Great, thank you and good luck with your transition.

Andrew J. Brown

Thank you.

Operator

Your next question comes from theline of Jim Suva representingCitigroup. Please proceed.

Jim Suva - Citigroup

Great. Thank you very much. This is Jim Suva from Citigroup. You alluded to during your prepared commentsmaking progress towards a break even point. Can you give us in your mind there internally what Palm views that break even point to be?

Andrew J. Brown

Yeah Jim, this is Andy. We think it’s pretty important inthis transition phase to getthat break even point down as lowas possible. We’d like to getthe break even point, theEBITDA break even point below $300 million inrevenue. We’re certainly not expectingrevenue of $300 million but that’s what we’re driving theorganization to which kind of correlates to what I had mentioned when we talkabout driving thegross margin into the32-34% range and getting our operating expenses below $110 million.

Jim Suva - Citigroup

Okay great and as afollow up I also cover theentire EMSand supply chain. I haven’t heard of component shortagesespecially for acommodity off theproduct type of products and with theCentro being launched inOctober and you were saying about efficiencies or shortages being workedthrough kind of through February, can you help meunderstand what exactly kind of arethe problems? Is itlike supply chain,ordering type of items? Is itinefficiencies? I guess I just don’t understand why ittakes so longto get that productresult.

Andrew J. Brown

We had one particular component that is affecting us morethan others and it wasan issue that hasdeveloped at thatparticular supplier and itis affecting other CDMA based products. I’m not going to getinto specifically what itis but it is notrelated to our demand planning or anything like that. Itis a hiccup out ata supplier and sothat’s where that is. There areother components I think inthe area of displays inparticular where there’s just alot of demand and much of thesupply has beenswallowed up and we’re obviously areasonably small vendor inthe grand scheme ofhandset manufacturers, small factory displays. So that’s notcustom necessarily but it’s anoverall kind of capacity issue around that and itreally depends on which suppliers you’re using and soforth so anyway those aretwo big areas. I think theone component inparticular is the onethat is the biggestconstraining factor on this quarter. That supplier feels like they will beout of that issue in theFebruary time frame and we’re just tying to getas much allocation as we can inthe meantime.

Jim Suva - Citigroup

Great, thank you very much.

Operator

Your next question comes from theline of Jonathan Goldberg representing Deutsche Bank. Please proceed.

Jonathan Goldberg -Deutsche Bank

Hi guys. Thanks fortaking my call. I just have aquestion about handsets. Thehandset market ingeneral is always very volatile and you guys have had, I think this is thesecond quarter this year inwhich product delays ata single carrier ordelays with a singleproduct have hipped you into loss-making territory. SoI just want to know, now that you have apretty significant debt load, how comfortable areyour banks with this, what kind of covenants areon the debt that younow have? If you miss aproduct shipment again ayear from now, are yougoing to start having your banks calling you worried about bankruptcy? Things like that.

Andrew J. Brown

Sojust so you know on thedebt itself, there areno financial maintenance covenants on thedebt. Sothat’s one thing that you need to beaware of. As far as thebusiness, I think this is arelatively short-term transition where we’re clearly taking some actions todrive more profitability. Therecent actions we’ve taken that we think will bring our overall burn ratedown and we think that will allow us to drive sufficient cash flowto maintain the debtover the next severalquarters.

Jonathan Goldberg -Deutsche Bank

Okay, and then with thecuts in operatingexpense, are you stillgoing to be able tohit your deadline and getthe new operatingsystem finished by theend of this year? End of calendarreally.

Andrew J. Brown

With regard to theoperating system work we’re doing, we arenot cutting anything inrelation to strategic investments. Infact, we’re actually maintaining or increasing, for instance advertising onCentro and investments inour R&D areas, specifically atthose strategic product development areas. So what we’rereally doing right now is allocating our resources as effectively as possiblefor the maximumlong-term outcome and that’s how we’re looking atthe expensemanagement. We want to bring downoverall expenses but doso ina way that we don’taffect the strategicinvestments.

Jonathan Goldberg -Deutsche Bank

Soyou’re still on target for theend of ’08 in theoperating system?

Andrew J. Brown

As far as theoperating system is concerned, I don’t like to getinto specific dates, but I think theanswer is as far as theoperating system is concerned, yes.

Jonathan Goldberg -Deutsche Bank

Okay, thank you.

Operator

Your next question comes from theline of Michael Abramsky representing RBCCapital Markets. Please proceed.

Michael Abramsky - RBCCapital Markets

Thanks very much. Themanufacturing and product qualification issues that you talked about, they seema little surprising inview of the fact thatyou have already been inthe game servingcarriers, making SmartPhones, for some time, particularly since theproduct qualifications related to 755P and not theCentro which is more of anewer, seems to be abit of a newerdesign. Soshouldn’t these beresolved by now? How significant arethe problems behindthose issues and what is your effort underway to resolve them?

Ed Colligan

Well Mike, I think they should beresolved by now. I’m as disappointed asyou are innot being able to deliver this product. There’s nothing inmy mind that’s anacceptable excuse for it. We should havedone it. Thereality is one of thethings we’re dealing with that I think is reasonably unique relative to atleast the SmartPhonesuppliers is we have anolder operating system here that is sometimes incertain multi-tasking situations is challenged relative to standard networkperformance issues. Itis not challenged from thestandpoint of end-user functionality and what end-users seein theproduct. Infact the Centro thatruns the PalmOS is an incrediblystable, well-received, well-liked product. But when you getinto the networkcertification area, and you’re testing against standard devices that thecarriers use as kind of reference devices or benchmark devices, some of those dohave real time operating systems and multi-tasking situations that allow themto perform certain network operations more efficiently. We’ve gotten caught up on that. We should beover the top ofdealing with those issues. We doeverything we can to work with thecertification houses atthe carriers to makesure that it doesn’thappen, that we don’t miss deadlines. Inthis particular instance we weren’t able to getover the top onthat. Now there arereal issues that exist that arestill in bug databasesand things that aregoing on that we have to come through and make sure they’re not real issuesbefore we’re going to ship theproduct and that’s really what happened here. There were things that were reported towards theend. Itturned out that they were not issues and theproduct and thequality product is shipping and itis something that could have inhindsight shipped earlier, but that’s not what we were able to dowithout chasing and bringing allthose things to ground. I think one of theissues is we have areasonably narrow product line today and soone miss with one carrier hasa bigimpact on us. We have to build abroader array of products. We have to getmore consistent about it. We have to getto the next generationoperating system sothat we don’t have some of those underlying issues from anetwork performance perspective and that’s what we’re doing.

Michael Abramsky - RBCCapital Markets

Thanks. How dramatic doyou think the changesare now needed inyour product lineup to reverse thefortunes that you’re in. I imaginethere’s some rumors you have some WiFi and GPSbased designs coming and what you’ve been issuing sofar perhaps other than Centro is adjustments to thecurrent formfactor. Doyou see amajor need for new revolutionary designs, slimmer formfactors, and perhaps apermanent move downmarket to $199 level pricing inorder to get where youwant to go?

Ed Colligan

Absolutely. We’redone with adjustments. That’s nothappening anymore. Theproducts we’re working on areall breakthrough formfactors and designs. There arecertain areas where you areextending a productline or there’s existing product line and we’re taking itto the next step. You don’t want to throw out thebaby with thebathwater and we’re going “We’ll extend that design center.” But we’re working on absolutely breakthroughdesigns, breakthrough user experience, breakthrough UI and other functionalityon next generation systems, sowe’re as I said we’re not stopping atanything short of revolutionary and fantastic design on atleast our next generation platform products and inaddition to that we will continue to deliver products on theWindows Mobile platform again that we’re driving towards world-class design onand nothing short of that sothat’s what we’re working on and you’ll have to seethose things and make that judgment when they come out. We also feel like we’ve set avery compelling price point with Centro. It hasbeen really well-received inthe marketplace. That’s innovation ina different way,taking a lot offunctionality and packaging itin acompelling package at agreat price point. We will continue to dothat as well.

Michael Abramsky - RBCCapital Markets

Okay, thanks very much Ed.

Ed Colligan

Allright Mike.

Operator

Your next question comes from theline of Larry Harris representing Oppenheimer. Please proceed.

Larry Harris -Oppenheimer

Thank you. Aquestion about theTreo 500 that’s available with Vodafone ininternational markets. I just want tounderstand. Right now that’s atriband phone and am Icorrect in assumingthat there are noplans to make it aquad band that could make itavailable here in theUS.

Ed Colligan

Itis a triband phone andthere are no plans atthis stage to make it aquad band available inthe US.We are taking itto other markets internationally but itwill not be available inthe US.

Larry Harris - Oppenheimer

I understand but you areworking in terms ofnew hardware products for calendar 2008 inadvance of theintroduction of thenew version of the PalmOS by year end?

Ed Colligan

Absolutely. We’reworking on a number ofnew designs.

Larry Harris - Oppenheimer

Okay, thank you.

Ed Colligan

Thank you.

Operator

Your next question comes from theline of Maynard Um representing UBS. Please proceed.

Maynard Um - UBS

Hi, thank you. Sowe can see theimpact from one operator slipping inany given quarter. Is there any changein your strategy to goafter more operators given your reliance and theimpact from a slipfrom this one carrier?

Andrew J. Brown

I don’t think that would bethe answer. That’s just adding more complexity and morepossible areas where you have failure points. I think our strategy is to narrow thetotal focus on fewer operators and execute more effectively against them. There’s no way we can not dothe best we can and beas effective as possible with apartner like Verizon. We just have to doit and somy answer to that is more focus on those guys, make sure those thingshappen. We have relationships with 100different operators around theworld. It’s not for lack of totalnumbers. It’s really missing atany point on one of thebig ones is where we getthe biggest impact, somy answer to that is let’s focus more and make sure we nail those.

Maynard Um - UBS

Okay, and then in terms of the restructuring and the head count reduction, where have most ofthose cuts been? Is that RD, sales andmarketing, retail stores? Can you justgive us a little more granular detail?

Ed Colligan

It’s reallythroughout the organization. We really looked at every specific area, tried to take zerobased budgeting approach to it and say based on a revenue target that we think, “Okay, what’sour worst case scenario break even point? Let’s try to get expenses in line with that” and do the best we can to preserve strategicinvestments that are absolutely critical for the long term transformation and cut back on anythingthat is just non-essential and that’s what we’ve done. It certainly hurts when you end up having to cut back on the organization as well but we made somedecisions on that in particular areas of the company that we thought, “Okay, we’re justnot going to focus as much right now there as much as we were in the past or that we had plans to, let’s cut backon that today. We can rebuild it in the future as we have new products or moreproducts for those regions in particular or maybe those segments of the market, so that’s how we looked at it, but it ends up being I think pretty broadly spreadacross the board.

Maynard Um - UBS

Great, and then lastquestion, how do you think about pricing for these new products that are coming out? Are they on a lower cost structure product which you’ve talked about you’ve been working on andparticularly given in light of the fact that the Centro is so attractively priced as well as the 500B, how do you think about the pricing for these new products that the price differential doesn’t cause any type ofcannibalization?

Andrew J. Brown

Well I think the Centro is a product that the $99 price point is a fantastic value. We’d like to continue to hold that pricepoint going forward and we also believe we can bring new and more sophisticatedfunctionality out in the future that would allow us to charge more premium prices from there so I think in the end we’d really like to have a broader product line. Today we have products in the $99, $199, $299 price points. I think you’ll see us continue to kind of be in that range from a standpoint of end user pricing and a mix of technical capabilities andfunctionalities that will allow those different price points to coexist.

Maynard Um - UBS

But given the similarities in the operating system itself across your devices,what new functionality would you be able to layer in on top of these new devices that would be different from the capabilities of a Centro?

Andrew J. Brown

Well Centro doesn’thave WiFi. It doesn’t have GPS. The Centro doesn’t have certain other softwareapplications that may demand premium pricing or functionality. There’s a whole host of things that we can do. Memory, storage capacity, display technology,a whole range of things that could appeal toend users and demand different price points so we’ll keep working on that but the key thing that we’re focusing on is having a range of products at those price points and I think we can do that. We certainly see our way to doing that.

Maynard Um - UBS

Perfect. Thank you.

Andrew J. Brown

Okay.

Operator

Your next question comes from theline of Jeff Kvaal representing Lehman Brothers. Please proceed.

Jeff Kvaal - Lehman Brothers

Thanks very much. Ed,I was wondering, it soundsas though you areplanning to get backinto Europe alittle bit. Certainly that would seem acost call. Could you give us alittle sense of visibility and theconfidence that you have inyour re-entry to Europe? Thank you.

Ed Colligan

There-entry to Europe isn’t really are-entry. Let’s just sayour continued performance inEurope. I thinkwe’ve struggled. There’s no questionthat we don’t have thebrand presence there that we have here. We don’t have thescale there that we have here. We’ve hada bit of starts andstops in some of thoseproduct launches and we could dobetter there. We’re going to continue totry. I’m not satisfied with what hashappened there. I think one of thethings we see therethat is quite different than here is pretty broadly different demand for thetypes of products that sell there. Ifyou look for abroad-based QWERTY product, forward-facing QWERTY products like ours, weactually do quitewell. Unfortunately thetotal volume is about 5% of what itis in theUS. TheQWERTY products doincredibly well here and just less sothere. That business is more driven bytablet kind of design products or 12-T products, things we don’t have inour line, and so wehave to continue to figure out what’s theright design center and formfactor to besuccessful in Europe, soI think some of its been product related, some of ithas been execution,some of it’s our scale, but I think thefirst thing we have to dois get theright product for that market and that’s something we’re working on.

Jeff Kvaal - Lehman Brothers

You had said earlier I think that you expect your sellthrough to expand as distribution improves globally soI think your statement there that suggests that Europe is not top of line foryou in terms of wherethat global distribution expands or --

Ed Colligan

We have very strong position inLatin America and inCanada and Europeis part of it. There’s certainlydistribution and carrier partners inAsiaas well so there’s anumber of opportunities out there and we expect Europeto continue to growfor us but has itbeen as big as I’dlike it to be? Theanswer is no.

Jeff Kvaal - Lehman Brothers

Okay and then I may have missed this flash by when you guyslaunched recently but itseems as though that thewholesale prices of the755 at Verizonsuggested a limitedsubsidy? Is that afair assessment?

Andrew J. Brown

I wouldn’t make that assessment atall.

Jeff Kvaal - Lehman Brothers

Thestandard is supposed to bethere?

Andrew J. Brown

Yes, standard subsidy.

Jeff Kvaal - Lehman Brothers

Okay. Thank you both very much.

Ed Colligan

TheOperator will take one more question.

Operator

Thank you, gentlemen. Your final question comes from theline of James Faucette representing Pacific Crest. Please proceed.

James Faucette - Pacific Crest

Thank you. Most of myquestions have been answered. I did havejust a couple offollow up questions though, first as itrelates to the 755being late atVerizon. Can you help us understand whatyou think were thelost volume opportunities that were maybe permanently lost by thedelay in that productversus how much was just pushed from one quarter to thenext?

Ed Colligan

I think because of thetime of the year, wedefinitely lost some sell though volume, there’s no question about that. Now this is more of abusiness product and it’s focused on that small or medium business toenterprise customer. That’s whereVerizon is positioning itso my sense is atleast from a sellthrough standpoint from here going forward we’re going to capture as much as wepossibly can. We missed some number ofmonths, and during that time frame people bought other products. I’m sure there’s some demand that willevaporate.

James Faucette - Pacific Crest

Okay and then finally interms of your guidance for theFebruary quarter, what portion of that is dependent on aproduct that has yetto be qualified atcarriers where you intend to ship it?

Andrew J. Brown

James, this is Andy. Theanswer is that although it’s inthe guidance, it’s arelatively small component of theguidance for the Q3time frame.

James Faucette - Pacific Crest

And then I guess thequestion then would beso if theproduct fails to bequalified, that would obviously represent apotential risk. On theother hand, are thereopportunities to getadditional products qualified ina route that wouldrepresent upside opportunities for theFebruary quarter or would theupside to your guidance come primarily through better than expected demand atplaces where you already have product?

Ed Colligan

I don’t think somuch the betterdemand. We’ve got some great demand on theCentro. I’d saythe bigger upside forQ3 is really getting thesupply that we need for theCentros. I’d saythat is the biggerupside opportunity for us inQ3.

James Faucette - Pacific Crest

Great. Thank you verymuch.

Andrew J. Brown

Thank you and thanks to allof you for joining us for thecall today. We appreciate you continuingto stay focused on our longterm transformation atPalm and we willcontinue to perform thebest we can and we wish you happy holidays to allof you. Goodbye.

Operator

Ladies and gentlemen, thank you for your participation intoday’s conference. This concludes yourpresentation.

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Source: PALM Q2 FY08 (Qtr End 11/30/07) Earnings Call Transcript

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