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PalmOne Q4 Notes

Mon Jun 28, 2004 - 11:43 PM EDT - By Michael Ducker

The fourth quarter earnings report for PalmOne last week brought a much larger than expected profit and gave an optimistic future, thanks to strong sales and interest in the Treo 600. With every earnings report is a conference call, where interesting tidbits of information can be learned. Of course, not many readers have the time to listen to this hour long call, and the transcript doesn't give the question and answer period. So better late than never, here are my Treo specific notes from the PalmOne 4th Quarter earnings conference call.

In this quarter, Treo 600 shipments increased to 151,000 units. Treos accounted for $75.4 million, or 28% of PalmOne's sales. The United States accounted for 60% of Treo sales; it also has the best market penetration with every major carrier except for Verizon currently carrying the Treo 600. However, PalmOne launched two new carrier relationships this quarter to help encourage the strong overseas growth opportunity: KPN in Belgium and Holland and Rogers Wireless in Canada.

Treo sales were so strong this quarter, that again PalmOne was unable to meet demand. Today, and for the previous quarter, there is a 4-6 week wait to receive a Treo 600 from any carrier when purchased through PalmOne. The main problem constraining Treo 600 production was a lack of LCD screens. PalmOne expanded their supply base for Treo 600 displays this quarter, adding two more vendors. They previously relied on a sole vendor of displays.

Email proved to be a killer feature of the Treo 600 this quarter. PalmOne stated that 75% of users say that email was a key factor in their purchase decision. PalmOne continued to work with many email providers to supply a solution to every subset of users. PalmOne provides a POP3 client for individual users, Seven and Visto provide email solutions for small and medium business users, and Extended Systems and Good provide enterprise email solutions. Good has had much success with the Treo 600; more than 1400 corporations are now using or testing GoodLink running on Treo 600. This is an increase of 40% over the last quarter.

PalmOne has some broad goals for the future, and some specific goals that I will go through later on. PalmOne's overall strategy was outlined by Todd Bradley in four points:

First: Develop great products that deliver a great user experience. These products are to provide new functionality, yet keep a simple user experience. PalmOne claims that no other company has this simple of a user experience.

Second: Capitalize on industry trends. PalmOne would like to utilize new high speed data networks with always on connectivity in new devices. A few examples of high speed networks are the current Sprint Vision network, and also the future EVDO and EDGE technologies. PalmOne wants to continue to develop devices that allow the use of digital content, whether it is office documents, mp3s, photos, or movies. PalmOne is seeing a shifting change of PDAs being connected organizers to handheld computers with a rich multimedia experience.

Third: Maintain strategic contribution from handheld computing. PalmOne's market dominance gives them a leg up on it's competitors and it is important that they maintain this lead. PalmOne also has an advantage in the smartphone market, as they have created, and will continue to create a compelling user experience. PalmOne also has a vast channel base of all types of users, from the consumer to the enterprise. Bradley later on stated that carrier relationships are a real barrier to entry in the smartphone market, however many new smartphone makers already have these carrier relationships.

Fourth: Increase smartphone adoption. This is the strategy that is most important for Treo users, so I'll go ahead and quote Bradley here:

"To achieve this we will focus on creating a family of smartphones, developing carrier partnerships and leveraging our loyal customer base. Our design approach to Treo 600, which provides equal emphasis to voice and data capability, allows us to appeal to the largest set of potential customers in the smartphone space. Also, with our computing heritage, we are able to work closely with carriers to deliver applications that make the advantages of high-speed wireless data networks available to customers. Finally, palmOne is the only player in the smartphone space that is able to capitalize on a large, and growing, installed base of PDA users to bring new users into the smartphone space."

PalmOne has great hopes for the Treo, and have increased their engineering resources to create a family of smartphones, and advanced applications for smartphones. In the immediate future, they will continue to ramp Treo 600 production to fill the backlog of orders. That said, strong demand could out do the supply again in the current quarter. In quarter 1, 2005, PalmOne predicts that they will sell 240,000-260,000 smartphones. This is a 66% predicted growth in unit shipments - huge, except that maybe this will include unannounced Treos; PalmOne did word this using "smartphones", not "Treo 600s". In Q4 2004, smartphones made up 28% of revenue for PalmOne. In Q4 2005, PalmOne is predicting that smartphones will make up 50% of its revenue.

An investor asked about the status of a RIM client for Treo 600: PalmSource is currently creating a RIM client for Palm OS, and when PalmSource provides it, PalmOne will evaluate it for adoption. This joint effort was announced last December, with an expected ship date oflate 2004.

PalmOne will continue to develop and strengthen their carrier relationships, and will add new carriers this quarter. However, the vast majority of growth will come from existing carriers. The status of the Treo on Verizon was asked about in this call, and as always, it "remains in testing".

PalmOne had a very successful quarter; this conference call gave some general guidance to their philosophy. The Treo smartphone is key to their growth efforts, and they are devoting much time and resources to the effort. They even have switched leadership around, recently promoting Ed Colligan to President; putting a smartphone guy in charge of all of PalmOne's marketing and engineering efforts. The future holds some great innovations for the Treo line, and we will be here on to follow them.

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