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Palm Inc: Will Investors See Beyond The Numbers?

PALM
PALM

Some snap reaction to the first quarter earnings numbers from handset maker Palm ; the good, the bad, and the ugly.

Palm's report was essentially right in line with expectations: The company reporting 9 cents in adjusted profits, or a penny per share loss if you take out the stock-based compensation charges. Palm also reported $361 million in revenue, just slightly ahead of Street estimates. Handset sales were also essentially in line with the company selling 689,000 units last quarter. Smart phone revenue reached $302 million; again, right in line with estimates.

Even though Palm met EPS expectations, you have to remember that this company did 4-times this number in the same quarter last year. And the bad news continues with guidance, sorely missing what Wall Street was looking for.

Palm is now looking for a 1 to 3-cent loss, or a 6 to 8-cent profit on an adjusted basis, on revenue of $370 million to $380 million. Analysts anticipated a 12 cent adjusted profit on nearly $400 million in revenue.

Pablo Perez-Fernandez at Global Crown Capital tells me that this is a one to two-year turnaround project, thanks to the big cash infusion and executive shuffling brought about by the Elevation Partners investment. And that if investors are patient, they should be rewarded--and maybe handsomely. However, he does caution that investors want to wait for the instant reaction and stock plummet that will likely ensue because of today's report to settle down before jumping in to maximize their return. He re-affirms his $21 target on the company.

My take: Pablo is right on the money; but I'm not sure how patient investors will be, especially when Palm competitors like Apple and Research in Motion(RIM reports Thursday) continue to soar. Palm's strategy surrounding the Centro will either be a wild success or a brutal failure. There's not a lot of room for in-betweens here. Centro hits a portion of the smart-phone market that RIM and Apple seem to be abandoning. And if 157 million handsets sell this year, but only 7 or 8% are so-called smart phones, then Palm's $99 model may be coming to market right at the right time.

Profit margins are razor thin, but the company could make that up in volume. If Palm gets some good service-provider cooperation.

Palm's CEO Ed Colligan told me last week before earnings: "Seems like everybody's going after the very small piece of a market, which is termed as smart phone, a small sliver, about 5% of the market. This year, 157 million phones will be sold in the U.S., about 5% of those will be Treos and BlackBerrys and iPhones and things like that. We see the other 157 million phones and say, 'Geez! There is an opportunity to really go after that. People want to step up from standard-feature phones." It's got the potential as a compelling strategy.

In the meantime, Palm shares are taking a 5% hit in after-market right now as investors digest today's numbers. The question now: will they be patient enough to listen to a strategy that still might be a year away from paying off?

Questions? Comments? TechCheck@cnbc.com

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