iPhone Competitors: Palm

In my previous posts, I have talked extensively about Palm’s future in the face of competition from iPhone. In a nutshell, I’ve maintained that Palm either needs to come up with something impressive in the enterprise space, or go for a lower-priced emerging market killer app strategy.

Post iPhone launch, Foleo still remains Palm’s only response so far.

Palm, Inc. (Nasdaq:PALM) is a leading mobile computing solutions provider with revenue of $1.56 billion and 1,247 employees in fiscal 2007. Palm’s revenues for fiscal year 2007 declined 1% from fiscal year 2006. Revenue for smartphones was $1.3 billion, a 15% increase from $1.1 billion in fiscal year 2006. Revenue for handheld devices was $310.5 million, a year-on-year decrease of 37%. A major investment in fiscal 2006 was the purchase of the Palm OS Garnet license from ACCESS Systems Americas, Inc. (formerly PalmSource, Inc.) for $44.0 million. For Q4 fiscal 2007, net income was $15.4 million, or $0.15 per diluted share compared to net income of $27.2 million, or $0.25 per diluted share in Q4 fiscal 2006.

Year on year, Palm was able to raise its average selling price per unit from $316 to $354. The shift in the product mix favoring smartphones was one of the reasons for this trend. The average selling price might go even higher if Foleo (priced at $499) sales kick in, but there is a giant question mark about this device’s success prospects.

For Q1 fiscal 2008, the company expects its revenue to be between $355 million and $365 million but handheld business is expected to continue its decline.

The hype around iPhones has put the spotlight on smartphones and Palm seems to have benefited from it as shown by the record high sales in the Q4 2007 of 750,000 units, a 43% increase compared to the previous year. But since the launch of the iPhone, its stock is on a downward trend and it is currently trading around $14.

To be fair, however, Palm has recently introduced Elevation Partners and John Rubenstein, with the hopes of a turnaround, and it would take at least 3-4 quarters for any impact from these changes to be felt. Overall, I am bullish on the convergence device market, and if Palm can get a couple of Linux based hit products out with Rubenstein’s strong execution orientation, (something Palm has consistently lacked so far), it still has a great brand to market them under.

Remember, Private Equity firms generally don’t buy into assets unless they think that they can leverage them. Elevation’s purchase of the 25% stake in Palm is definitely not without an investment thesis, and I suspect it if not very different from what I see in the laptop replacement device space overall.

This segment is a part in the series : iPhone Competitors