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Palm's Q1FY09 Conference Call Highlights

Fri Sep 19, 2008 - 5:31 PM EDT - By Jennifer Chappell


Dieter reported on Palm's Q1 FY09 results yesterday. As he said, total revenue was $336.9 million. Palm lost $41.9 million on that revenue. Smartphone sell-through was just over a million units, up nearly 50% year over year, though revenue on smartphones was only up 10% over the same period last year.

Today we'll look at some highlights from the conference call that followed Palm's announcement of their Q1 FY09 results.

Before we delve into the conference call specifics, let's talk a bit about Palm's next generation platform. The best clues we have so far about the new Palm platform is that it will be web-connected, social-network-connected, and will still be good at being an organizer. The hardware and software will be well-integrated according to Palm.

Now let's see what clues there were about the new generation platform in the conference call. Ed Colligan said part of the way through the call:

We believe that a seamless, spectacular integration of software and hardware will emerge as the most important differentiator of smart phones and will ultimately determine who succeeds and who gets left behind. We think Palm excels in this field and we�ll be pressing this advantage in a big way with the release of Palm�s next generation devices on our new Palm platform. This platform development is firmly on track to be completed by the end of this calendar year, with next gen handsets to follow in the first half of calendar �09.

He also said that Palm has challenges to manage over the next two quarters given the maturing Centro lifecycle and the time it will take to ramp their Windows Mobile-based product sales worldwide. He also noted that revenues will still be under pressure and profits elusive, so Palm is managing expenses carefully and driving the company to keep their cash burn as low as possible through their transformation.

Colligan said that Palm's cash position was fortunately still sound and will allow them to navigate this period while still positioning Palm for a timely launch of future products. After that, they look forward to delivering consistent and growing revenue, profits and cash flow.

We are a company engaged in an exciting and challenging transformation amidst one of the most fundamental changes ever in our industry � a change we have played a seminal part in creating � the shift of the center of gravity of all personal computing and communications to the mobile device. We defined this era at Palm, and we intend to play a leading role in continuing to define it as it changes peoples� lives in the future. Even though this period is undeniably difficult in the short term, we�re excited to meet the future, and we are more committed than ever to building a company that represents the very best in the industry.

I would love to see Palm do well with their next generation platform. Palm certainly was a major part of the "shift of the center of gravity of all personal computing and communications to the mobile device". The Palm Treo really changed the cell phone. It was unfortunate that after Palm set the trend for smartphones, they became sort of stagnant in their OS development. Other companies began to forge ahead and pass them by in terms of upgrades. Palm's future has a lot riding on their upcoming next generation OS. They've got lots of competition out there in the likes of Apple, RIM, and HTC.


So, now let's move on to some highlights of the conference call. Ed Colligan began the call by saying that Palm is off to a good start in fiscal 2009. He said that the hard work of the team at Palm paid off with greatly improved performance versus Q4. Colligan said that Palm's August quarter was encouraging but they're still solidly in the midst of a transformation and have some significant hurdles to cross.As we reported about Palm's Q4 FY08 results back in June, Ed Colligan talked about each of the three major components in Palm's continuing transformation of the company; People, Products and Platforms. Colligan said during the conference call yesterday that Palm continued to see signs that they were making progress this quarter.

The continued popularity of the Centro drove record sell-through. Colligan said that Palm sold over 1 million smartphones in a single quarter for the first time.

This is an exciting milestone, but the real success story of the past few months is our execution on our commitments, as planned and on time.

Colligan noted that since the last earnings conference call, Palm has introduced some new phones:

  • The unlocked GSM version of the Centro and announced the availability of Google � Maps for mobile with My Location on the device
  • Centro with a number of new Latin American carriers and introduced it in Puerto Rico and New Zealand, making it available in approximately 30 countries around the world
  • Treo(TM) 800w for Sprint, which was the first business smartphone shipped by Sprint that supports their high-speed EV-DO Rev A network
  • And the Treo Pro to great acclaim in international markets

Both 02 and Vodafone in Europe will be carrying the Treo Pro. Colligan said that Vodafone in particular is providing some very effective pricing support and even offering the phones for free in some markets.

As I reported recently, Telstra will begin selling the Treo Pro this month in Australia. Telstra recently recognized the Treo Pro as the first smartphone on their Next G network to receive their Blue Tick mark of approval.

Colligan said:

We love the fact that the Treo Pro can keep our enterprise customers connected from the boardroom to the outback.
The Treo Pro is receiving great reviews in markets around the world, including the U.S., which doesn�t surprise us. We have great confidence in the quality of this product. The out-of-box experience is unprecedented for a Windows Mobile based product. We also brought significant Palm differentiation to this device. Not only does it have a beautiful, sleek design, but its market-leading form factor is packed with a high speed 3G radio that delivers outstanding voice and data capabilities, GPS location-based capabilities, and WiFi with a unique Palm �instant-on� design. And, it does all this while providing outstanding battery life even for the most demanding user.

Colligan went on to say that Palm plans to release an unlocked version of the Treo Pro in the U.S. before they release carrier supported versions. And he said that the unlocked Treo Pro will provide value for business users as well as the hard core international traveler who wants to use the phone globally and still control their usage costs. He notes that the total cost of ownership for a Treo Pro user is significantly less if they can switch to local carriers while traveling abroad. He said also that in addition, Palm is bundling the Treo Pro with significant value-add services for their key business customers.

Colligan said that with the launch of the Treo Pro and the 800w, Palm had refreshed the Treo line as they'd said they would. Plus he said that the Treo refresh will also be a critical driver of margin improvement � one of the financial metrics that Palm is most focused on.

Colligan talked about two new people who Palm has recruited. Palm hired Jeff Devine as Senior Vice President of Operations. Jeff joined Palm from Nokia where he was vice president of Global Customer Logistics. Jeff will be focusing his efforts on developing a best in class supply-chain model.Palm has also bolstered their Windows Mobile team with some great new hires from Microsoft and Motorola. Teri Klein has joined Palm as their Vice President of Investor Relations from Disney. Klein previously served as Sr Regional Mgr, Operations at Disney Regional Entertainment / Club Disney.

Our growing team knows we have a lot of work to do. But we also know that Palm is about to take a big step forward by capitalizing on our company�s competitive advantage as an innovator � in fact the first successful developer of mobile computing software.

So Palm continues to recruit some great talent. Remember we recently reported that Palm had hired Mike Abbot and Way Ting. So Palm continues to recruit talented people as they build what they believe to be the "best smartphone roadmap".

After Ed Colligan finished, Andy Brown talked numbers. That part always makes my eyes glaze over. It's not Andy's fault of course; it's my peabrain trying to comprehend all those numbers.

Brown said that in Q1 Palm made some notable progress toward their long range development goals, and saw some promising financial trends emerge in their financial results as well.

Brown said that in Palm's first fiscal quarter versus Q4 '08 they:

  • narrowed their bottom line loss
  • improved EBITDA and reduced Palm's use of cash
  • delivered revenue of $366.9 million � a more than 20% increase over Q4 as well as a modest gain versus Q1 of last year

Brown said that on the revenue front, it's worth noting that 90% of total revenue came from the U.S., as the product introductions at Verizon and Sprint gained momentum while international sales, particularly in Europe reflected the usual summer slow down.

During Brown's part of the conference call, he said:On the whole, our company had a promising August quarter but we will continue to face pressure on our operating results for the next couple of quarters until we introduce our new platform and next generation devices and add carriers to distribute our Treo products.

Conference Call Q&A

After Andy Brown concluded his portion of the conference call, the operator invited listeners to ask questions. Below are some of the questions asked and the answers that Colligan/Brown gave. I didn't write down the names of those asking the questions as I couldn't exactly hear what some of the names were and who they were representing. I tried to transcribe the questions and answers as best I could from what I heard. I'm sure I don't have them all correct so I apologize beforehand when they're not. And I didn't include each question asked by each individual.

Someone asked: "As you get closer to releasing your next generation platform, how do you expect those products to be differentiated from Apple, RIM and HTC or others are offering in the market?"

Ed: "We obviously don't want to go into great detail about what area the application focuses on and so forth, but Palm has millions of customers that love how we have helped them manage their lives. This is a key area where this platform being designed from the ground up is well integrated into the web, and we can extend that position into social networks and other services. Palm obviously has to compete in the marketplace as a whole around a range of applications that we need to deploy on the device. You can expect it to be very robust, and have well integrated capability in both hardware and software that will be quite compelling."

Another caller asked: "Regarding the new generation products, can you share any response from any carriers about those products?"

Ed: "We're not out showing it around to a bunch of carriers because of the confidentiality that's related to it, but we do have some key partners that we've communicated with and their response has been generally, overwhelmingly positive. We're excited about what we're working on."

Someone asked: "What is your best estimate as to when the 3 millionth Centro will ship?"

Ed: "We're not going to predict the 3 millionth yet."

A caller asked about the Treo Pro: "Regarding the Treo Pro, can you discuss the decision to go ahead without a carrier partner during the initial launch and what were the factors governing that decision?"

Ed: "I think in general we tend to be very U.S. centric in this country, and the reality is that we launched it with Vodafone, and 02, and Telstra, and we do have carrier partners and we're launching it globally. We didn't announce a U.S. partner. That wasn't ready at that point in time, we decided. I think it makes sense to still provide the product in an unlocked version to our customers. It's a great product that people love, it's getting great reviews. If they wanna buy it without a subsidy, let's let 'em. And I've seen some amazing statistics actually which show that the average business traveler who uses their phone on a US SIM and travels internationally with a smartphone can see bills upwards of $700, and I think this was on an average, which is amazing. This way, they can go to the UK and buy a Vodafone SIM and spend quite a bit less money than getting the roaming charges that they have. A lot of companies have become savvy to this and are interested in buying an unlocked product. We just decided, Hey, let's bring that product to our customers and enable them to have it, and as we get carrier relationships done and online, then that'll be launched as well."

And lastly, someone asked: "In terms of the new products, you indicated a first half launch. Can you just talk about what things have to happen to drive a Q1 launch versus a Q2 launch?"

Ed: "With respect to the next gen product launches, I think we're just basically giving a window of time. We didn't say Q1 or Q2. We said first half and that's what we're doing right now. These products are incredibly complex to put together. To design and develop a whole entire platform and the application suite and the hardware and everything else that goes around it, and I think allowing ourselves a little flexibility around that is exactly what we're doing right now. We don't want to over promise or under deliver; we want to do the opposite and so we're just giving a window there that we think makes sense at this time."

Well, that's it for the conference call highlights. Seems like it was a mixture of good news/bad news. For the first time in Palm's history, they sold over 1 million smartphones in a single quarter. Plus the execution on their commitments have been as planned and on time. They've introduced some great new smartphones recently, plus they've refreshed their Treo line as promised. Palm lost $41.9 million on their total revenue for Q1 FY09. And their revenue on smartphones was only up 10% over the same period last year. They've got many hurdles and challenges ahead, but it looks like they're well on their way to meeting those challenges and jumping the hurdles.

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