This is what I was thinking given the lowered guidance for Q2. A later launch date for the Pixi combined with ramping up of production and marketing. Being that Palm's Q2 ends on Nov. 30th, the full impact of sales from the Pixi wouldn't show up in this quarter while development and production, as well as marketing expenses for it would.
Originally Posted by :
Sent: Thursday, September 17, 2009 4:20 PM
Subject: Palm, Inc. (PALM): Strong results and FY10 guide; equity raise should help fund growth
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Palm, Inc. (PALM): Strong results and FY10 guide; equity raise should help fund growth
Goldman Sachs Global Investment Research September 17, 2009
COMPANY UPDATE Neutral
Palm, Inc. (PALM) [$14.66]
Strong results and FY10 guide; equity raise should help fund growth
What’s changed
Palm reported solid F1Q non-GAAP sales/EPS of $361mn/($0.10), above GS at $340mn/($0.20) and the Street at $291mn/($0.25) on much stronger than expected Pre shipments. We estimate Pre shipments of 670k, compared to GS/Consensus at 640k/550k. The company provided F2Q (Nov) sales guidance of $240-270mn, compared to GS/Consensus estimates of $424mn/$347mn, and FY10 (May) guidance of $1.6-1.8bn, compared to GS/Consensus of $1.9bn/$1.6bn. In addition, Palm announced an equity offering of 16mn shares for working capital & general corporate purposes.
Implications
On balance, we view Palm’s results and guidance positively, as solid F1Q results and FY10 guidance more than offset disappointing F2Q guidance. We think the significant QoQ sales decline expected in F2Q is due to the timing of the Pixi launch (which we now expect in November vs. October previously), and declining Palm Pre and Treo Pro sales as those product cycles mature.
However, Palm’s full year guidance implies a very significant ramp in the February and May quarters, likely driven by the ramp of Pixi at Sprint, Palm Pre at Verizon, and potentially other carriers. We are lowering our FY10 non-GAAP EPS to $0.09 from $0.28 given weak F2Q guidance, but leaving FY11 at $0.77 (Street $0.42) and FY11 at $1.10. Separately, we view Palm’s equity offering, in conjunction with its recent price cut of the Pre at Sprint to $149 from $199, as an indication that the company is aggressively targeting volume growth, as reaching scale in the smartphone business is more important at this stage than margins.
Valuation
There is no change to our 12-month price target of $15, based on 25X our non-GAAP CY10 EPS estimate (including ESOs) of $0.60.
Key risks
Downside risks relate to execution and competition, while upside risks stem from faster than expected WebOS adoption or a take-out.
Investment list memberships
Neutral
Coverage View: Attractive
United States. Communications Technology