No Pixi dust for Palm?

Palm’s second webOS phone, the Pixi, looks like a good follow up to the Pre, but analysts aren’t expecting any Pixi dust for the company’s financials.
Written by Larry Dignan, Contributor on

Palm's second webOS phone, the Pixi, looks like a good follow up to the Pre, but analysts aren't expecting any Pixi dust for the company's financials.

The Pixi, which is expected to retail for $99 or so after rebates, will arrive for the holidays. Palm will talk the Pixi as a fashion accessory (nevermind it may not be much of a looker). Sprint landed the exclusive.

So what's the financial picture here? Analysts are mixed on the Pixi (see gallery).

For starters, the Pixi will replace Palm's Centro. Palm is thinking that the Pixi and a Pre price cut to $150 after rebates will push more webOS-based smartphones in the market.

Piper Jaffray analyst Michael Walkley writes:

Consumers overwhelmingly choose smartphones at the $100 - $200 level and we believe the Pre at $150 and the Pixi at potentially $99 should help drive strong sales of webOS smartphones.

Walkley thinks that Palm margins will hold (that's not so certain given the Centro was a profit killer):

We were modeling proforma gross margins for webOS based products at roughly 26-28% and ramping to 30%+ as webOS units ramp in volume in 2HFY10. As such, we believe the Pre at $150 and the lower priced Pixi at potentially $99 after rebates will not impact our current estimates. In fact, with a lower priced device at Sprint and additional product launches in Western Europe and Verizon over the next 6 months, we anticipate improving profitability for Palm, and we maintain our view Palm will be cash flow positive by 2HFY10.

Other analysts don't quite buy it. Indeed, the Pixi could cannibalize sales of the Pre. Why pay $150 for a Pre when you can get mostly the same features for $99?

Morgan Joseph analyst Ilya Grozovsky notes:

We believe the Pixi is a nice device but threatens to cannibalize Pre sales given a large number of overlapping features and the expected lower price point. Like the Pre, the Pixi runs on the webOS and boasts similar features such as a touch-screen, full integration of information from web-based applications such as Facebook, Outlook, and Google, and has now added Yahoo! and LinkedIn integration capabilities. Pricing on the Pixi is currently unknown but we do not expect this to be a game-changer for Palm given a similar phone on the same Sprint network.

Morgan Keegan analyst Tavis McCourt says that Palm is likely to ship 200,000 Pixi phones in the November quarter and 500,000 for the February quarter. The big question is whether Palm can hold a premium price point. McCourt writes:

The Pixi looks like another solid device from Palm, and we suspect it will be successful at a $99 price point, which we assume will ultimately be the retail price. The Pre price cut may help in the near term offset increasing competition at Sprint in the smartphone category, but does raise some long term questions about Palm's ability to hold that premium price point.

The stakes are high. Palm shares have had a torrid run and bulls on the stock are hoping the company can grow into its valuation. We'll know more on Palm's prospects next Thursday when the company is expected to report a fiscal first quarter loss of 25 cents a share on revenue of $304.9 million.

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