Getting a Hold on Palm's Licensing Numbers:
By Carolyn Koo
Staff Reporter
12/19/00 5:58 PM ET
URL: thestreet.com
Judging by its market share, you'd think Palm had the world in the palm of its hand. But you'd be looking at the wrong numbers.
So investors watching the handheld-device maker's postclose earnings report Wednesday will focus on what the Santa Clara, Calif., company has to say about its licensing business. That's because while Palm holds a huge edge in device sales, it has pinned its growth plans on the nascent business of licensing its operating system. Also important: any plans Palm may offer for its wireless Internet business.
Palm shareholders could use some good news, having seen their holdings lose a third of their value over the last month and a half. Palm shares dropped $2.44, or 5.3%, to $43.62 Tuesday as the Nasdaq plunged following the Fed's midafternoon policy statement, but still carry a hefty 460 price-to-earnings multiple. That means that Wednesday's report, strong as it is expected to be, will be hugely important to a heavily traded stock.
Guide Me
Licensing revenue will "not be significantly up this quarter, but I am looking for new guidance," says Tom Sepenzis, an analyst at CIBC World Markets, who rates Palm a strong buy and whose firm hasn't underwritten for Palm. In the recent first quarter, licensing revenue totaled $4.6 million, or 1% of total revenue.
The bulk of revenue for the second quarter ended Nov. 30 will come from sales of the company's hardware, especially the Palm V, which continues to lead handheld organizers in sales, according to Sepenzis. Last quarter, for instance, device sales accounted for 97% of total revenue.
But rivals like Handspring (started by two Palm refugees), with its Visor products, and Microsoft, with its Pocket PC, are eating into Palm's market share, which stands at around 71%, against Handspring's 27% and Microsoft's 2%.
So Palm can't afford to rest on its laurels. "Handspring will steal significant Palm market share, as will the Pocket PC, which will present a greater threat than it has over the last few years due to wireless opportunities," notes Donald Longueuil, an analyst at Yankee Group.
License to Thrill?
The answer to this threat: the licensing business. Ten companies now license Palm's OS software, with cell-phone makers Samsung Electronics, Kyocera Wireless and Motorola all signing on in the past six months. (Palm is included in the licensee total.)
As a result, Palm now has a commanding 88% share of the operating system market, while privately held Symbian's Epoc system and Microsoft's Windows CE (used on its Pocket PC) both have 6% of the market, according to Yankee. (Symbian's shareholders include Psion and wireless heavyweights Ericsson, Motorola and Nokia.)
Longueuil estimates that Windows CE will double its market share within two years, but that Palm will "expand its partnerships in the handset industry, licensing its OS to virtually every tier 1 and tier 2 handset manufacturer."
In addition, Sepenzis is hoping for the company to give more information on its strategy for creating wireless products that will help users access the Internet. "The competition has a pretty big edge right now," he observes, citing BlackBerry manufacturer Research In Motion (RIMM:Nasdaq) and the VisorPhone product, which Handspring started shipping on Monday. The Palm VII and Palm VIIx handhelds are the company's offerings to date in the wireless arena.
Solidity
Overall, analysts expect the company to have a strong quarter, based on early holiday sales, the introduction of new products and higher margins from its premium models. "They're doing quite well, and there might even be a little bit of upside on revenue and possibly gross margins," says Sepenzis. He expects revenue of $505 million.
For the second quarter of fiscal 2001, the company is expected to earn 4 cents a share, before special items, and pull in revenue of $519.8 million, according to the consensus estimate of analysts polled by First Call/Thomson Financial. In the year-ago second quarter, Palm earned 2 cents a share on revenue of $258.6 million.
Sepenzis also expects gross margins of 36.4% and is waiting to see if Palm sold enough Palm V's, a higher-end product, to balance the lower gross margins from the lower-end m100 handheld that it introduced in August. A Palm Vx typically retails for $399, while the m100 sells for $149.
Also, this quarter should be less affected by component shortages, which hurt Palm's first quarter. They are still "a bit of a problem, but much, much less than before," Sepenzis explains. "Palm should be free and clear of component shortages now." |
