Stakes are high for Palm at CES in Vegas

Some deep-winter intrigue is due at the Consumer Electronics Show in Las Vegas, if only because Palm Inc. is expected to unveil a new operating system, dubbed Nova, on Jan. 8 at The Venetian Hotel.
Given Palm’s dire straits – analysts are talking in terms of “cash burn” at the company, a metric that typically points to a near-term turnaround or fiery death – many analysts plan to attend to see for themselves.
But the practicalities of Palm’s current market and product predicament – revenue and earnings have been dismal, the Centro phenomenon is over, the Treo is tired, carrier interest is waning – puts almost too heavy a load on the long-awaited OS and any handset that goes with it.
“How they manage the hype cycle is important,” said Matt Thornton, analyst at Avian Securities L.L.C. “This has been a long time coming – and it has got to be good. But the bar has been set pretty high for the ‘wow’ factor.”
A new OS in this environment has to take advantage of an impressive, large display and offer a really sleek user experience, Thornton said. But the larger challenge remains attracting the application developer community that can offer differentiated services. Palm’s competitors are well ahead on that score, the analyst said.
Practicalities intrude
Given competitive pressures and Palm’s faltering position on carriers’ shelves, the OS and its first handset will have to be “amazing,” agreed analyst Pablo Perez-Fernandez at Global Crown Capital L.L.C. But, he added, the presentation at CES will be irrelevant to Palm’s ultimate fortunes.
Palm faces an extremely difficult time in a crowded U.S. smartphone market, Perez-Fernandez said.
“U.S. carriers, Palm’s biggest customers, no longer depend on the company for appealing BlackBerry alternatives,” the analyst said.
Nowhere to go
And aggressive smartphone pricing makes it harder to regain market share and become profitable at the same time. Where $200 smartphones were the “new frontier” only months ago, that price now looks “a bit steep,” the analyst said. “Price is a minefield,” he added.
Perez-Fernandez said he does not see Palm pursuing a successful software-and-services strategy, the bigger game afoot.
“We wonder how, exactly, Palm will beat RIM at e-mail, Apple at music, Nokia or Garmin at GPS, Nokia or HTC on cost, and Apple or HTC on the user interface or industrial design,” Perez-Fernandez said.
“We believe this begs the question of how amazing the first Nova-based handset must be to recover the shelf share that Palm has lost at U.S. carrier stores,” the analyst concluded.
The CES factor
Palm has said its latest handiwork will reach carrier shelves in the first half of the year, but Perez-Fernandez said last week that the second half of 2009 is more likely. Thornton pointed out that to make a debut within six months means that carrier testing will have to be underway soon – thus he thinks that a device and OS is likely to be presented at CES.
Even if Palm’s offering is impressive, Thornton said, analysts will continue to have concerns about the company’s ability to execute on its innovations and management’s credibility after the company has lost so much ground in the market.
“In 2009, Palm’s success is predicated on this OS and its hardware being a hit,” Thornton added.
How big a hit is needed?
Thornton’s model called for 2.5 million units of Palm’s new device to be sold between May 2009 and May 2010.
Tavis McCourt, an analyst who follows Palm for Morgan Keegan, said that Palm now sells a little under 1 million units per quarter across its entire portfolio and needs to ramp that volume up to between 1.5 million and 2 million devices per quarter for sustainable profitability.
Though McCourt said the top-tier U.S. carriers could conceivably provide Palm with enough volumes to thrive, Thornton pointed out that greater than 45% of Palm’s revenue now comes from Sprint Nextel Corp., which has been bleeding subscribers and having financial challenges of its own.
Honey, the cash is burning
“Cash burn is definitely an issue in Palm’s transformation process,” McCourt said. “By the time they launch the new OS and device around mid-year, the company will have less than $100 million in cash, which is not horrible, but it doesn’t leave room for error.”
Even if the new software and hardware take off in the market, the company still faces two to three quarters of cash burn before earnings breathe new life into the company, McCourt said. And if the new OS and device are competitive, the analyst said, shareholders may see the value of their holdings diluted due to Palm’s need to raise additional capital for a global marketing effort.
Thus Palm has a lot at stake at CES to generate positive buzz for its latest efforts, according to McCourt.
The image of cash actually burning may have prompted last week’s news that Andy Brown, Palm’s current chief financial officer since late 2004, will step down Jan. 7, the day before Palm’s presentation at CES. Douglas Jeffries, former chief accounting officer at eBay, becomes Palm’s new CFO that day.