Palm, RIM and the Red Hot Smartphone market

Both Palm and RIM released their earnings in early October. Here is a look on their results and latest developments since my last set of posts on these companies.

Palm (Nasdaq:PALM) reported total revenue of $360.8 million in the first quarter of fiscal year 2008, up 1% y-o-y. Net loss was $0.8 million, or $0.01 per diluted share compared to net income for Q1 2007 of $16.5 million, or $0.16 per diluted share. Gross margin decreased to 36.3% compared with 37.1% in the year-ago period and 38.3% sequentially.

Smartphone sell-through was 689,000 units, up 21% y-o-y. Revenue from smartphones was $302.2 million, a y-o-y increase of 12% which was offset by 33% decline in the handheld business. For the quarter, revenue mix was 84% Smartphones and 16% handhelds.

In September, it launched Palm Treo 500v with Vodafone and the Palm Centro with Sprint. The Centro, which offers enhanced web and media applications and support for 3G for just $99 has got rave reviews. Based on the Palm OS, it could be a step in the right direction to meet its turnaround challenges as discussed at length in my recently concluded interview with departing Chairman Eric Benhamou.

For Q2 2008, Palm expects revenues in the range of $370 to $380 million. It also expects a sequential decline in Smartphone ASPs of at least 10%, as these products were designed with new, lower price points in mind. Gross margin is expected to reduce to between 33.5% and 34% because of aggressive pricing of new products. The stock is trading around $9 after hitting a 52-week low of $8.28 on 25 Oct. I rate this stock a BUY.

Meanwhile, RIM (Nasdaq: RIMM) has also been busy with new products, BlackBerry 8820 WiFi with AT&T in US and Orange in UK, 8320 WiFi with T-Mobile, 8310 Curve, 8130 Pearl with support for 3G RTSP streaming protocol on CDMA and the 8120 WiFi Pearl with Telefonica, as well as the BlackBerry Unite.

BlackBerry Unite is a software that allows small groups to stay connected with each other and coordinate their activities and share data. An interesting feature is that you can remotely download stuff onto your desktop from the BlackBerry smartphone.

On the financial front, RIM reported revenue of $1.37 billion for the second quarter of fiscal 2008. This is a 108% y-o-y increase from $658.5 million and a sequential increase of 27% from $1.08 billion. The revenue mix was 78% devices, 15% service, 4% software and 3% other revenue. It shipped its 20 millionth Blackberry in the quarter. It shipped 3 million devices in the quarter and added 1.45 million BlackBerry® subscriber accounts. At the end of the quarter, there were around 10.5 million BlackBerry subscriber accounts.

Income for the quarter was $287.7 million, or $0.50 per share diluted, which reflects the effective 3-for-1 stock split implemented in the quarter. Net income was $223.2 million, or $0.39 per share diluted, in Q1 2008 and $140.2 million, or $0.25 per share diluted, in Q2 2007.

For Q3 2008, it expects revenue to be between $1.60-1.67 billion and EPS between $0.59-0.63 per share diluted. The stock is trading around $122 after hitting a 52-week high of $128.36 on 23 Oct. RIM is a great company, executing superbly in a gangbusters market. The stock, however, is overbought, so look for weakness to Buy.