HP execs: Fate of Palm's R&D team, iPaq, Pre, and Pixi still undecided

If financial analysts had concerns about Hewlett-Packard's ability to resurrect Palm's flailing fortunes, those concerns may have actually deepened following HP's announcement call with analysts Wednesday afternoon.

During the call, which lasted under 20 minutes, Executive Vice President Todd Bradley told analysts that he expects HP's track record for building out communications infrastructure with eight of the world's ten largest telecom carriers will earn HP points when making its case for carrying Palm products.

"Today, HP provides the infrastructure for eight of the ten top carriers in the world, and as we build our execution plans, we focused on leveraging several large carriers instead of large numbers of small carriers. So we think that leverage and that focus will provide a very significant growth platform for these products as we go forward."

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Those top 10 carriers, as reported by The Wall Street Journal last month, are: China Mobile, Vodafone Group (UK, co-owner with Verizon of Verizon Wireless in the US), Telefónica SA (Spain), América Móvil (South America), Telenor (Norway), Deutsche Telecom AG, China Unicom, TeliaSonera AB (Sweden), France Télécom SA (a.k.a. Orange), and Bharti Airtel (India).

HP's Bradley acknowledged that building out Palm's developer network for webOS will be a key priority, and VP for Investor Relations Jim Burns confirmed that HP plans to invest in developers above and beyond what Palm has done so far. No numbers yet, but the key direction here is up.

The Personal Systems Group (PSG) accounted for over one-third of HP's revenue in fiscal 2009, with $10.6 billion. With quite a bit of costs involved, it eked out $530 million in revenue for that year. Palm issued guidance just this morning, warning investors that its numbers for fiscal Q4 2010 (three months ending in May) could come in below its early estimates. It could reap as little as $90 million in revenue for this quarter, on account of "slow sales of the Company's products, which has resulted in low order volumes from carriers. Palm also expects to close its fourth fiscal quarter with a cash, cash equivalents, and short-term investments balance between $350 million and $400 million," as Palm disclosed to the SEC this morning.

That's a staggering plummet from $350 million in revenue in the previous quarter, certainly due to more than just "seasonality." Palm lost $22 million for that quarter. Current R&D costs for Palm were estimated by a JP Morgan analyst at $190 million annually -- a figure which HP's Jim Burns promised would increase. So with HP's PSG earning upwards of $134 million per quarter, and increased R&D costs to come, one can imagine Palm draining PSG's entire profit for at least the remainder of this year.

That's why it's so important to determine just who will be responsible for providing that R&D. Among the few questions that analysts were allowed today were a few that probed into the fate of Palm's current R&D team. The fact that HP execs responded by saying Palm's executives' careers were safe, was a bit ominous.

Speaking on behalf of Palm CEO Jon Rubinstein, HP's Bradley passed on his excitement. "He's very excited about staying and building out, actually executing his vision for the webOS into a broader market," he said, "and I think HP brings those capabilities to him to do that. And I think it's fair to say his team is excited as well."

When pressed by an RDC analyst as to whether HP intends to acquire Palm's R&D team whole, and then keep it whole or integrate its members into the company, Bradley was forced to concede that his plan appears to be to maintain one and only one R&D team. "We intend to operate [Palm] as a business unit, which is in line with the way we're structured today," he responded, before reiterating Rubinstein's and Palm executives' desire to stay on.

"Palm's operating at a loss right now," added Burns at one point, "so we got work to do."

At one point, Bradley said HP could not go into specifics as to its future roadmap for Palm OS until it completed the deal and received the necessary regulatory approval. Estimates as to when that could take place were all over the map, extending into the beginning of HP's fiscal 2011 (this December). Only when the final signatures are affixed to the paper will we start to see guidance about such important issues as: the fate of HP's existing iPaq line (some may recall it actually has one -- it consists of Windows Mobile phones at the moment); integration of webOS with existing HP hardware such as its Slate tablet; and just how HP plans to expand Palm's presence, as Bradley promised at one point, into the commercial space to compete against RIM.

"I think you have to break it up along [different] product categories. While Palm currently has the Pre and the Pixi smartphones, we see that as one space that is very consumer-oriented, and we'll look at how we leverage both our retail and commercial channels to broaden the distribution of those sets of products," HP's Todd Bradley told Cross Research. "I think the tablet/slate products are such new markets, we see opportunities broadly for consumers. But at the same time, having just finished up our partner conference, enormous interest on behalf of channel partners with specific vertical deployments in things like health care and education. So I think you'll see these products deployed in both segments, consumer and commercial. Again, we'll talk about that time line as we get closer to completion."

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