[These are "raw" and unedited notes.]

Sanjay presented at the DB technology conference last night, and here are our notes from the webcast:

When asked about how it’s been in the last two years, he highlighted progress and reiterated that they are confident that they can be profitable in Q4 as a standalone business.

The focus is on the change in software development and the shift to “Internet style” methods. This is a big deal. Very different model. Much more work to do there. We think that means many more acquisitions.

The key markets are US, China and Latin America. Very strong brand recognition around the world. Intent to purchase is not great. It’s moving up rapidly though. [This is a key metric.]

Notes that they will “have to spend a lot of money to build the brand” which is a bit scary.

Variable data rates will start to create a mid-market for smartphones. Today it’s still all high end. Whether you pay $99 or $199 the data plans are the same and fairly expensive.

Wants to be in Europe by 2011. May make sense to do a deal there.

Motorola is a strong brand in China. Was early and strong there from the early days. Limitations on Google there make Motorola a key Android driver in China.

Lower end markets may be very accessible for Android-based phones in the near future. Probably more of a China, Latin American, South East Asia market. But still very large.

Usage model on tablets is very different than phones. Represents an incremental market. Probably a more natural evolution for a phone company like Motorola than for a computer company. See this as a threat to a computer manufacturers.

Question is how do you address the 20% of the time when the smartphone display and keypad is not enough but you still want to be able to take it with you. [If it is going to be in your pocket it will have to be projector based I guess. You can't put a 10-12 inch screen and a keyboard in a pocket.]

Q4 there is RIM V6, Microsoft Mobile Windows 7 with $400M in marketing behind it – what’s going to happen? Notes HTC has done well with devices.

[I'd be asking some better questions than these. What about the supply chain? MOT tends to be "sold out" at the beginning of a new cycle. Why? By the time supply catches up HTC seems to leapfrog. Doesn't seem like real leadership.]

Single component limiting supply is camera sensor modules! Interesting. Is it OVTI? Thinks that there has been somewhat limited investment in semiconductors. We need more capacity. It’s coming in the next few quarters.

If the iPhone comes to Verizon it could be an issue for Motorola volumes and profits. Nobody knows yet but it’s an issue to be aware of.

Will only deliver Android-based tablets when the experience is compelling. The hope is that is in early 2011.

How do they keep an edge over competition? Better physical design and software and services to make a better user experience. (2M motoblur users today.) Most consumer returns are over software rather than hardware.

60% of homes are HD already. More multi-room DVR equipment is being purchased. Wants to grow more outside the US. Lower cost set-tops that are more IP based is driving margins down a bit.

Might Motorola take advantage of converged devices in the home? Security? Other uses of those big screens? More powerful set top boxes with stronger processors and additional software could change the role of the “set top box” device.

You will need multi gigahertz processors to deliver performance in 2011 with dual and quad-core phones. (!)

In terms of spin off the company will have $3B+ in cash and the flexibility to do what they need to do.

Interesting question on balancing platform advance, compatibility and being able to differentiate.

12,000+ patents at Motorola Mobility is clearly an asset. Means they will generally pay lower royalties and also gives them more freedom.

The marketplace experience has to get a lot better. Unified marketplace may be coming. There are at least a dozen pieces of low-hanging fruit there.

Wants to create a media solution around the home but not clear where they are in terms of delivering it. There could be an ecosystems around the set-top box space as there is around mobile. Interesting idea. No idea where that’s going.

[Disclosure: Motorola shares are part of the R2 model portfolio and the author also has a long position in the stock at the time of this writing.]

Technology evolves all the time. Much of it goes on underneath the radar until there comes a point where commercial adoption patterns switch and money flows in a new direction. That flow is irresistible. That’s what happened in the mobile Internet. The market shifted to the iPhone first and the rest of the market is shifting to Android-based systems as an alternative.

Yes, it’s true that Research in Motion and Nokia were leaders in mobile phones before that happened, but it’s simply not true anymore. The market has moved underneath them.

And it’s clear that from the OS standpoint there are going to be two main ones, Apple iOS and Google Android. Android is going to get custom layers added to it by players like Motorola, so in time it will be hard to see the similarity in Android-based phones but for the fact that users will be able to tap the vast world of applications, content and solutions to meet their needs.

Both Research in Motion and Nokia are doing their best to respond but are sticking with what is called a walled garden approach. You can get in to develop applications and content but only on their own terms and for their increasingly-isolated markets. It’s not very attractive for any potential players in the ecosystem, including consumers.

People are voting with their feet. The shift to iPhone and Android is staggering. The idea that RIM or Nokia is going to launch some device that could even make a blip in that data curve is unlikely. So the die has been cast.

I’d say it’s impossible for a company like Nokia to think outside the box, let alone do something there. RIM, however, might be able to. Damning all the technology details and migration issues, if RIM simply issued a statement saying that they were going to migrate their proprietary email and messaging technologies for consumers and companies to run on top of the Android OS, their stock would shoot up dramatically.

All of a sudden RIM would be a very undervalued player in the Android-based smartphone market for investors. And they would have a shot at making the best (or at least one of the best) Android phone families out there.

I’m not sure RIM can do it but they might have a chance. I’ve spent hours talking to Nokia management and can only say: RIP Nokia.

[Disclosure: No positions in any stock mentioned.]

I was mildly surprised with the Intel purchase of McAfee, which is somewhat better than being bored by the Dell/3PAR deal. At least HP has come along and made the plain girl in the corner appear more interesting. Anyway, moving on to Intel/McAfee…

Nobody refutes the fact that security is an extremely important aspect of cloud infrastructure. All the enterprise systems players take it seriously and have been building on their solutions for years. Companies like Cisco, EMC, IBM and Microsoft have spent a small fortune on both development work and acquisitions in security.

Intel is always looking for ways to add more functionality and value around their core chipsets, so security algorithms and embedded processing make sense. But these are technologies and techniques that can be either licensed (probably for no money up front and a very small royalty) or acquired through what would really be technology acquisitions that are counted in the millions of dollars rather than billions.

In fact, we’ve found little companies like Zix Corp (ZIXI) that have embedded solutions that make email and messaging in applications within healthcare and financial services secure and encrypted, all in the background and at very low cost. This type of technology is available, deployed broadly, and not expensive.

So why buy what is really a large scale consumer and enterprise business to go after a slice of the embedded infrastructure that is needed for cloud and mobile computing?

Sadly, the answer I keep bumping into is “because they can,” and a company their size “needs to do something big” so that people believe they are “serious” about the space. These are lousy reasons from an investment standpoint. Furthermore, it’s also lousy from a business standpoint. One way to show how serious you are is to deliver outstanding solutions. Intel sold their anti-virus business to Symantec over a decade ago and certainly knew about putting security primitives into the core back then, but hasn’t pursued the security market with any gusto during this time.

To be fair, Intel, after many struggles, has managed to finally integrate and embed at least some level of core networking and graphics processing into their chipsets. I’d be willing to bet that this came at horrific costs looking back 10 years but it’s there today and memories are short.

It isn’t that security integration doesn’t make sense, it’s that Intel could have done it fairly easily already and licensed or acquired key technologies along the way easily and at much lower costs. That is what adding value is all about from a management standpoint, building and buying assets that you then make into something far more valuable. In this case Intel paid the premium for McAfee shareholders and took $3B+ out of their own shareholder pockets.

The example we see pointed to most often is EMC. EMC did diversify away from a pure storage company with a steady stream of purchases including RSA, Documentum and VMWare to name three (there were many more.) But then that asks for the question “Is that Intel really going to embark on a software infrastructure strategy?” That would suggest they might be interested in companies like Akamai (AKAM), Solar Winds (SWI), Progress (PRGS), Adobe (ADBE), BMC (BMC) etc.

The good news there is that these are some of the few technology businesses that have higher gross margins than the existing Intel business. The bad news is that Intel doesn’t know anything about running a software company. They might be able to learn (so far not so good…) but if they do it’s going to cost plenty.

McAfee will be disrupted by the acquisition, as is the case 99% of the time in acquisitions like this. What happens in the wake will be telling insofar as to whether Intel management is here to build shareholder value or serve their ego and succumb to laziness by acquiring big chunks of market position without wishing to do the work to build them or even keep them. Unfortunately for them, they started out with a 15 yard penalty right at the kickoff so they have that much more work to do.

On the margin this is also good news for a recovering Symantec, which has been making progress but can certainly use a bit of wind at their back which is what this deal is likely to do – at least for the next 12-18 months.

[Disclosure: No positions although an asset management partner of R2, Aberdeen Investment Management, owns shares in Zix Corp.]

It was just back in early March that Steve Ballmer gave his “for the cloud, we are all in” speech at the University of Washington and sent an email along those same lines to all Microsoft employees.

Like many, I had more or less given up on Microsoft but thought that maybe the release of Windows 7 and a realization by the company that they really needed to do something different might change things. In addition, many Microsoft executives that I spoke to or saw present were being very honest about their shortcomings and lack of answers in areas like mobile computing and security. (Even Ballmer admitted yesterday that Microsoft was now “number five” in the mobile race.) So for a time I was open to thinking that maybe Microsoft in general, and Steve Ballmer in particular, was waking up.

Ballmer is infamous for his ham-handed antics as a CEO in the past and some of these are documented on YouTube. His head-in-the-sand stubborn attitude was shown also in his home where he reportedly doesn’t allow his family to have devices like the iPhone or use Google search. But at his U of Washington speech he seemed like he had lost a few pounds, was wearing glasses that made him look smart and, well, I thought… maybe.

In just two short months Mr. Ballmer has made it clear that he is beyond repair or reform as a failing technology company CEO. His inability to see the changing technology world around him will drive Microsoft ever lower in the food chain.

Ballmer doesn’t seem to understand mobile computing and the fact that it is fundamentally part of the cloud. My guess is that this stems from a view that is still rooted in the idea of a PC that uses the cloud rather than being inside the cloud itself. This is a very big problem if you are a technologist and responsible for the direction of a company like Microsoft. It means you see everything through a lens that distorts what is going on in the market.

Even Ozzie, another ray of hope introduced into the Microsoft darkness some time ago, appears to have a mistaken view of Android versus Chrome because he underestimates the power and potential of the mobile platform when combined with the cloud.

What Microsoft will have left are updated versions and upgrades to their declining (but still very large) franchise like Office, enterprise development and productivity applications. The company will remain important by virtue of their size and its tendrils in areas including gaming and smart cars.

Steve Ballmer seems to be unable to strike out no matter how many large technology industry shifts the company misses. Ballmer was recently able to make the statement that Microsoft “missed the whole cycle” in mobile computing as if it was a minor thing. Ballmer goes so far back at Microsoft that he is unlikely to be replaced. But after so many profound misses, the only chance Microsoft has is to do something akin to what IBM did when they brought in Lou Gerstner.

On the plus side, this is very good news for Google and Apple, who will continue to be competing with a giant that can’t see.

[Disclosure: The R2 model portfolio has long positions in both Apple and Google at the time of this writing. The author has a position in Apple.]

Wait until you see the carriers.

At first I was optimistic that the carriers were going to seize an opportunity for a change and create their own, possibly quite good app stores. Part of the reason for that was when I sat down with some representatives of Orange and explained a new mobile application that one of our clients had developed (3D video ringtones) they were very helpful and seemed to grasp what it was all about and why users would love it. Ringtones and now video ringtones are known quantities already.

During the meeting they were practically apoplectic about me making sure that I got the client to submit the application to them so they could get it into their application catalog. (You can probably see where this is headed.)

Okay it was rejected. But that’s not really the point. Sure it actually took them three months to respond. But that’s not it either.

What really struck me was text of the rejection itself. One doesn’t feel very enlightened after reading it (text below) but fortunately we know that the carriers used Franz Kafka frequently as a consultant and I’ve included his original version below the Orange rejection note.

Hello,

Thank you for submitting your application to Orange.

We have reviewed your submission and, unfortunately, your application is not suitable for inclusion in the Orange Application Shop. We reject application submissions for a variety of reasons, including:

- Duplication with existing content
- It does not match current category requirements
- It is not a client-only mobile application
- The application requires IT integration
- Conflicts with existing Orange services and products or those under development
- It may conflict with Orange’s brand values

Your application has been rejected due to one or more of these reasons.

However, we thank you for your interest in working with Orange and please let us know of any future mobile applications that may be suitable.

Kind regards,

Content Acquisition Team
Orange Application Shop

In the original (paraphrased):

A man comes to the door of the Law, seeking admittance. The guard refuses to allow him to pass the door, but says that if he waits long enough, maybe, someday in the uncertain future, he might gain admittance. The man waits and waits and grows older; he tries to bribe the guard, who takes his money but still refuses to let him through the door; the man sells all his possessions to get money to offer more bribes, which the guard accepts — but still does not allow him to enter. The guard always explains, on taking each new bribe, “I only do this so that you will not abandon hope entirely.”

Eventually, the man becomes old and ill, and knows that he will soon die. In his last few moments he summons the energy to ask a question that has puzzled him over the years. “I have been told,” he says to the guard, “that the Law exists for all. Why the does it happen that, in all the years I have sat here waiting, nobody else has ever come to the door of the Law?”

“This door,” the guard says, “has been made only for you. And now I am going to close it forever.” And he slams the door as the man dies.

There is no way to say it better.

Suggests to me that both Apple and Android will be the two application models that work.

[Disclosure: none]

We’ve had ongoing coverage of the turnaround at Palm, first as a “special situation” back in late 2008 and into 2009. (See Nice short squeeze on PALM! which we posted back then.)

Back then we estimated the intrinsic value (IV) for Palm to be about $11. But the nature of computing IV for a turnaround story is tricky because it’s hard to forecast long-term operating margins of the reinvigorated business in the technology industry and that creates a fairly wide variation in probable scenarios. The range we provided at the time was $6 to $16.

The current situation was detailed more completely here last March when we posted PALM: Worries become more tangible and noted that take up rates and ultimately margins were very uncertain given the current landscape.

One point we made in the note was that for Palm to break out we needed to see other companies license the Palm WebOS. So far that hasn’t happened.

Despite our notes of caution the market and many sell-side analysts jumped on the Palm bandwagon and pushed the stock all the way to $15 which factored in what we saw as a best-case scenario. It’s not that Palm didn’t have a good device and a strong software offering, it was that in a massive, highly rivalrous industry, they were not going to be able to generate high margins at their size.

In the past year though the iPhone has only gotten stronger, Android has erupted on the scene and devices like the Motorola Droid have joined the ranks of “must have” that carriers are scrambling to add to their lineups.

Even Research In Motion is reinvigorated and has a slew of new models and OS upgrades coming this year.

So what can Palm do now? It’s actually not too late to change to a more successful plan. It was pretty clear before that Palm simply lacked the scale and resources to go head-to-head with what has become a very high stakes game in the Mobile Internet.

The key for Palm has to be WebOS and the potential for it in alternative mobile devices. Palm needs to be more than “a better iPhone” for carriers to care. The tablet space could be more open for Palm, especially thanks to WiFi and other broadband networks. We think areas like the connected car are going to be big and drive millions of units per year. That’s a space that Palm could compete in.

At the same time Palm needs to do it with parters and stop trying to go it alone. For example what about partnering with a company like Garmin for automobile cockpits that have both navigation, web and entertainment software?

Maybe they should buy Jolicloud? There’s also a huge set of opportunities in web-connected devices in the home, PalmOS could be a good choice for many of them.  We think the user interface on Jolicloud makes it a potential winner for consumer devices.

In short the company needs a total restart. They have quite a few resources and a decent product. Perhaps they got the dose of humility they needed to move to a new level of leadership. We are rooting for them.

Other Related Posts:

Is there any hope for Nokia? October 2009.

[Disclosure: None.]

Yesterday Motorola announced their plans to split the company into two businesses in 1Q2011. Essentially they will create a consumer-focused company with mobile devices and home networking and another company that handles enterprise and government products and services.

We published an analysis of Motorola positioning strategy that we had prepared for the company in advance of their January board meetings to resolve their long term plans for the company. (available via our research library but requires free registration and approval)

In the end the solution that they came up with looks like a it has real potential, especially in the consumer space given what is happening with 1) mobile Internet and 2) Internet TV.

We already can see strong success for MOT in the mobile Internet space thanks to their Android-based strategy and what will be a full stable of winning devices in the smartphone space set to roll out this year. We’ve been talking a bit about Internet TV (see this post from just yesterday) and will soon be rolling out coverage of the “connected car” as it too goes IP.

Motorola will be in a position to do drive some unique innovation in this new set of spaces. Cisco is strong in home networking but is at a disadvantage to Motorola in mobile. Motorola will have a strong and potentially improving position in both which will matter as consumers will expect to be able to do similar things between their mobile and home devices with their myriad content.

The enterprise business will appeal to investors who are looking more for stability rather than growth and should fit well into GARP type portfolios or perhaps value types depending on where it trades as a separate entity post the split. From a coverage standpoint this part of Motorola will not likely be “our cup of tea” so after the split we will focus our efforts on the mobility and home portion of the company.

It’s *way* too early to know enough detail to be precise but based on our very early and rough analysis we have an IV for the mobile/home division of $12.50 and an IV for the enterprise/networks division of $6.25. However even if we are only 1/2 right on the mobile/home division the stock is a double from here.

The gap between the current share price and what we expect exists for two major reasons: 1) Investors are very concerned about the profitability of the new mobile/home networks division based on the history of it at Motorola and the perceived untested nature of Sanjay Jha as the CEO. 2) Motorola has a history of bad management and poor execution during the last ten years or so and some are calling this just more “moving the deck chairs around on the Titanic.”

Our view on the risk reward is favorable due in part to the massive growth in mobile and home Internet which will put a strong wind at the back of Motorola management in this space and the strong net cash position that helps to limit downside from here.

[Disclosure: The R2 Model Portfolio has a long position in MOT as a "special situation."]

We’ve been on the Nvidia case for some time now. See some of our past research publications to get caught up.

Semiconductor specialists The Linley Group recently posted some details around the performance of the Nvidia Tegra 2 which we will see in numerous devices this year.

(There’s been plenty of coverage of what’s inside the A4 so I’m not sure why they are playing possum on that one. See other sources on the A4.)

There are so many races in the mobile Internet device space (smartphones, netbooks and now tablets) that it will be a free-for-all. Add to it the fact that even the TV in the living room is going Internet this year and the demand for new processor architectures and capabilities will be mushrooming.

These are interesting times not just for Nvidia but also for Intel, AMD, Qualcomm, and ARM. It’s hard to get excited about Intel here given the risks to their growth and margins unless they can change their stripes and embrace the idea there there is more to life than the CPU.

Our positive views on Nvidia are rooted in the fact that computing is shifting from processing words and numbers into not just video but games, rich content and interfaces that behave with physical properties and the deeper content that 3D provides.

It’s also true that consumers are expecting to be able to do many of these fairly complex things at once; all on a hand-held device with hours and hours of battery life that costs around $500.

Architecturally this suggests we move into a hyper-multi-core kind of processing to be able to parallelize the processing to meet the demands all this software has on the hardware.

Performance per watt remains a major issue in the mobile space and the one area where we think Nvidia still has some strides to make. This is an area where ARM shines and they are making some improvements in their graphics processing ability.

Our conclusion is that investors will want to play this disruption in computing architecture and we find Nvidia to be the most attractive in terms of execution, design wins and software momentum.

If Nvidia could understand and really consolidate their position in software the company and the stock would be a huge winner. However based on all our research we don’t quite see that happening. Our IV on NVDA leads us to expect a share price this year of $19-20 this year.

[Disclosure: The R2 Model Portfolio has a long position in the shares of Nvidia and Qualcomm.]

Back in December of 2008 we posted our conclusions on why Nokia would yet again fail to gain any traction in the smartphone market. (See Five Reasons why the new Nokia N97 doesn’t matter.) Since then the mobile Internet has continued to be dominated by Apple, Google Android, and Research in Motion.  Recently we added Motorola to our list of winners in this space because their Android-based strategy appears very solid to us.  Palm continues to be in the group but a high valuation coupled with concerns we have on long-term operating margin push it lower on our priority list.

The meta issue for Nokia seems to be the fact that they see the world through their own lens of “leadership” and believe they are actually ahead of companies like Apple and Research in Motion.  Obviously this isn’t a good place to start if you plan on improving.  Nokia measures things like their total number of different phones and their rank as a global brand.  So they can succeed on their terms and fail on ours at the same time.   Recently it came to light that the Nokia “Comes With Music” promotion has garnered just over 100,000 users after nine months in the market.  Given the vast resources Nokia can wield their abject failures in new markets are simply stunning.

We’ve commented here before that Nokia management has been hostile to us in the past if we simply mentioned products like the iPhone or Blackberry during discussions.  Based on the uselessness of this “exchanges” we haven’t had a briefing from them in the past 12 months or so but we haven’t felt that we were missing anything based on the publicly available information.

This month Nokia is launching their “Booklet 3G” in Best Buy stores in the US.  It’s a good quality small laptop what falls into the “netbook” category but will run Windows 7.  It will compare favorably to similar models offered by Asus, Dell, HP, Samsung, MSI, and others.  Nokia is offering it both with and without a 2-year data contract with AT&T.  At the time of this writing it seems that the price with the data plan will be $299 and the best guess on a price for the system without a data contract is $599.

Nothing about the Booklet or the current plan is going to change anything in the market.  (The same can be said of Dell deciding to enter the smartphone market.)  Nokia will have a product in the category and can add it to their “unrivaled breadth of devices” slide and draw another “so what” from the user and investment community.

The central problem with Nokia is that they have not aligned themselves to any significant segment of the smartphone market.  We hinted at this in our review of the N97 which noted that the devices “was neither sexy nor business like” which means it has modest appeal to many but great appeal to few.  Nokia has been abysmal in the consumer and entertainment space versus a device like the iPhone and similarly unable to come close to matching Research in Motion with business features and enterprise appeal.

We haven’t seen any evidence that this identity crisis is going to resolve itself soon.  At the same time Android promises to fill another gap for consumers and carriers looking for a robust but more open and customizable device.  Motorola, HTC and many application developers are focused on Android as a platform alternative to the proprietary iPhone.  This is yet another segment of the smartphone market that Nokia has not seized.

We have no axe to grind on Nokia and although we haven’t performed a full Intrinsic Value analysis on the company their valuation probably already reflects a good measure of despair for them.  At the same time we wonder if and when this giant might wake up and be felt in the mobile Internet / smart phone segment.  Is Nokia really going to leave it all for Apple, Research in Motion, Google and a host of Android suppliers?

[Disclosure: Neither the author nor Research 2.0 has any investment position in Nokia at the time of this writing.]

We published our last full update on PALM on January 12th and provided in the note a "few reasons to stay cool" in terms of buying the stock.   Here is the excerpt from the full note:

1. Pricing is yet to be announced. The end-user price is probably one of the most critical elements to the “take rate” for this phone. The speculation is that it will come in at $199 although Palm management has hinted that it could be higher. Our best guess is that in order to be successful they will have to be at the same price as a comparable iPhone or Blackberry model. Higher price points will cost Palm some critical momentum. If I were advising the company I’d say to figure out a way with Sprint to get the Pre to $99 or even free with a high-end plan. Palm needs to keep the excitement going enough for people to open their wallets. A $249 or higher phone from Sprint isn’t going to get anyone to cross the street.
2. Six months is a long time in the mobile Internet device market. Between now and May we expect more new devices to be announced and possibly shipping. There have been persistent rumors of Apple preparing low-cost models of the iPhone for introduction in 2009. We’d point out that already the 8GB iPhone price is well under $200 in many markets and there are fairly powerful smart phones that are sub-$100 or even free.
3. You can’t expect the big guys to play nice. Right now everyone seems to have a dance partner (Apple-AT&T, Android-T-Mobile, BlackBerry-Verizon and now Palm-Sprint) but as the market develops service provider exclusives will give way to a more open market. Larger players are likely to use terms and allocations to incent carriers to limit additional relationships wherever they can. We all know that it’s not always the best products that win out in the face of commercial realities.
4. We still face a margin mystery. Gross margins have been declining sharply and were only 20% last quarter. Even though the company has taken actions to lower operating expenses the longerterm run rate for gross and net margins is hard to pin down. Management has stated a long-term gross margin goal of 33-36% but it is based on a “great ASP” which is unknown and possibly not sustainable in the market. Long-term gross margins are a huge swing factor in terms of equity value. For example if we use 2013 revenues of $2.2B and operating expenses of $600M and use a gross margin of 36% we get to an intrinsic value of $16; if we use 30% we get to $5.

The other obvious reason to be careful with the stock was the fact that the company was already suffering from weak fundamentals in the business and the potential to be "saved" by the Pre would require two more quarters of acute weakness before investors could start to see a return of positive momentum.

Estimates for the February quarter settled into the $150M range and with a slightly better expectation for the May quarter of $160M or so the number for the year came in at $880M or so.  With the recent pre-announced result of $80-85M for February we can expect analysts to quickly reset figures.  Revenues for the current year should settle into the $700-750M range. Clearly the loss will widen and may again raise concerns of viability or at least clue investors in to the dilution they suffer from the recent Elevation Partners investment.

So enough about the short-term.  What about Palm post the Pre launch?  Unfortunately most of the unknowns above are still unknown. And since then the economic situation hasn’t brightened.  Looking at current estimates we can expect analysts will lower the bar again for the year ending May of 2010.  Right now estimates call for $1.28B in revenue.  At this point it probably makes sense to start to look at the business without any legacy products or revenues given their rate of decline.  Hence top-line figures come down to mostly a guessing game of how many units can they ship, at what price, at what gross margin and so on.

The major wildcard is whether Palm might be able to license the WebOS to anyone who thinks it can give Android or the iPhone a run.  We think any interested parties (Motorola?) are probably going to wait and see how well it does in the marketplace before making any decisions.  That puts the matter into Q3 or Q4 of this year as a guess.

So what to do with the stock?  PALM still has a sizable short position which helps limit downside unless the worst case scenario materializes.  We will rerun our intrinsic value model later this month but in the meantime expect the figures of $11-12 on a successful path are correct.  However given the unknowns we wouldn’t be aggressive unless share prices reflect real concern that Palm "won’t make it."  Last time that translated to $1.20 a share.  We may not see that again but sub-$5 the risk/reward looks reasonable.  Any price below the last round of $3.25 is compelling.

Some details of the Palm WebOS are emerging and the first book is out there already.  We have to do our own homework on the development model to render an opinion on it versus competition but would encourage any interested investor to do their own work on that too.  Unless an ecosystem forms around WebOS, the value will be limited.

Here is a link to the short report we published in January for those wanting to spend a few dollars to read it.

[UPDATE: S&P cuts Palm debt ratings to CCC from CCC+.  Still on negative watch. - March 5, 2009]

[Disclosure: At this time Research 2.0 has no position in PALM shares.]