Tech Check

Apple's Hot But RIMM and Palm Could Make News Too

Apple Inc.'s  iPhone may have a corner on the smart phone headlines, but Research in Motion  and Palm  will generate some news of their own when they release earnings after the bell today. This will shape up into a tale of three companies: One might be too hot, the other too cold, and the last might be just right.

If Apple is "too hot," let's start with what might "too cold." Palm is at a crossroads. The company just took a $300 million equity investment from Elevation Partners for a 25% stake, so clearly, Roger McNamee, U2's Bono and Apple's former CFO Fred Anderson see value here. Not to mention iPod pioneer John Rubenstein joining Palm as a non-executive chairman. But that success may be several quarters away, if at all.

This time around, the Street is looking for 15 cents a share $406.6 million in revenue. Pablo Perez-Fernandez at Global Crown Capital, who continues to be one of the Street's most thoughtful wireless analysts, is looking for a slight upside to the topline. But that's where the good news might end, and unlike the BlackBerry, Palm's news could get worse before it gets better. If it gets better.

In a note to clients, Perez-Fernandez says: "Our checks on unit shipments and sell-in ASPs suggests that PALM will beat by a few cents on the bottom line over the same level of revenues we are currently forecasting...". That's good.

He goes on to say that he expects that the company shipped 765,000 Treos on the quarter, generating $361 million in smart phone sales. But a lot of that activity may have come from Verizon and Sprint trying to clear Treo 700 inventory to make room for the 755.

But here's where iPhone might present a problem. AT&T is incredibly important to Palm. And AT&T is also Apple's partner on the iPhone.

Perez-Fernandez writes: "Strong sales of the Treo 680 and the 750 at AT&T have continued despite a wide variety of competing offerings. Unfortunately, we believe that AT&T will almost certainly report a sequential Treo sell-through decline in the August quarter due to the mania surrounding the introduction of the iPhone. We expect strong promotions and marketing by Sprint   and Verizon to partially offset weakness at AT&T, but we are uncertain about PALM's pricing strategy at AT&T and plan on monitoring the situation carefully."

In other words, the Apple steamroller is barrelling down and Palm is right in its path. As usual, the Street is looking for conservative guidance for August. EPS should be around 12 or 13 cents on revenue north of $400 million.

But therein lies more iPhone concern: "Our concern about the August quarter is due to our expectation of strong, initial iPhone demand and PALM’s response on pricing," Perez-Fernandez writes. "AT&T probably represents 10% to 15% of PALM's Treo shipments. If 10% to 30% of AT&T’s Treo sales were lost to the iPhone, PALM would have to make up anywhere between $3m and $16m in sell-through revenue through other channels."

Perez-Fernandez goes on: "We believe that the release of the iPhone will result in a short-term decline in Palm's stock price. Palm underestimated the impact of the (Motorola) Q when it was first released, and the company may once again be underestimating the marketing machinery and the amount of resources being allocated by AT&T/Apple to the iPhone."

With that in mind, RIMM might be "just right." The company's shares have continued to skyrocket even in the face of iPhone's release.

The conventional thinking is that iPhone will grab the high-end shopper, while RIMM will keep hold of the busy professional and value-concious consumer.

The Street anticipates $1.06 a share on RIMM's first billion-dollar revenue quarter. James Faucette at Pacific Crest says RIMM is "immune" from iPhone because of the expected market split. He also says RIMM is a far better buy than Palm. Perez-Fernandez is looking for a beat and raise quarter, expecting EPS of $1.08 on revenues of $1.05B.

Many on the Street think RIMM added well over a million new subscribers and shipped another 2 million or more Blackberrys, bringing RIMM's subscriber base to over 9 million users.

The consumer-oriented Pearl continues to shine, and the new Curve is generating extremely positive reviews. "We expect RIMM to guide for (second quarter) EPS of $1.13 on revenues of $1.11 billion. This should be ahead of the consensus $1.12 EPS on revenues of $1.10 billion due to strong consumer adoption of RIMM's Pearl and the 8800," says Perez-Fernandez.

So, a smart phone maker that should guide higher the day before iPhone hits store shelves? A bold prediction and pretty solid evidence that BlackBerry may be the steady-Eddy, while Apple could see a huge initial pop in sales, and then something that settles back down to earth afterwards. Seems the Street is betting on the company already in the smart phone pole position: RIMM, not Apple.

The numbers will come right at the close and I'll bring them to you, on the air. Stay tuned!

Questions?  Comments?