Worst May be Over for Palm; Reiterate Outperform

6/5 - "We expect Palm to report its fiscal Q4:08 results (May 2008) in late June, with revenues of $284 million (5% below consensus) and non-GAAP EPS of ($0.24), 6 pennies below consensus...May will likely be another ugly quarter financially for Palm, but trends should only improve going forward. We believe a very low number of Treos were likely sold into the carrier channel in May as carriers drained legacy Treo inventory ahead of the refresh. We believe Centro growth continued unabated, and that a number of significant product launches are forthcoming."

"Our thesis on Palm has been that the company is only selling one compelling product currently (Centro) and that this product still has significant distribution that it has not yet tapped. As Centro distribution increases, and new Treos are introduced in the August quarter, revenues and profitability should improve. As this new Treo refresh continues in November, revenues and profitability should improve again. Finally, as a new high-end consumer platform, new operating system, and refreshed Centros are launched in 1H:09 (calendar), revenues and profitability should continue to improve yet again."

"We assume investors have largely written-off near term results for Palm, so we are not especially worried about our estimates being below consensus expectations as long as the timing of the new product launches remains consistent. We continue to view PALM shares as having an extremely compelling risk/reward profile, especially now that the worst of the financial results should be behind the company. The smarthpone market is just now becoming mainstream in the U.S., and it is clear that Palm has the brand and distribution to capture a much greater share of the handset market as its product portfolio expands and improves. We continue to rate shares of PALM at Outperform/Speculative."