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Table of Contents
EXECUTIVE
SUMMARY____________________________________________________________ 2
HISTORY OF PALM________________________________________________________________ 3
PALM'S PRODUCT LINE____________________________________________________________ 4
PALM PILOTS___________________________________________________________________ 4
PALM OS®_____________________________________________________________________ 5
INDUSTRY ANALYSIS_______________________________________________________________ 6
MARKETSHARE_________________________________________________________________ 6
STOCK PRICE___________________________________________________________________ 8
FINANCIAL RATIO ANALYSIS_______________________________________________________ 9
LIQUIDITY______________________________________________________________________ 9
ASSET UTILIZATION_____________________________________________________________ 9
PROFITABILITY________________________________________________________________ 10
PALM'S FUTURE PLANS___________________________________________________________ 10
PALM PILOT'S STRATEGIC
RELATIONSHIPS________________________________________ 11
PALM OS® STRATEGIC
RELATIONSHIPS___________________________________________ 11
PALM'S PRESENCE IN
EDUCATION________________________________________________ 13
RESEARCH METHODOLOGY_______________________________________________________ 13
RESEARCH DESIGN_____________________________________________________________ 13
DATA COLLECTION AND
PRESENTATION__________________________________________ 13
DATA ANALYSIS__________________________________________________________________ 14
TIME SERIES PLOT______________________________________________________________ 14
CORRELOGRAM________________________________________________________________ 15
ARIMA - USING LAG 4___________________________________________________________ 15
ARIMA - USING LAG 1___________________________________________________________ 16
LIMITATIONS__________________________________________________________________ 17
PALM’S STOCK PRICE VERSE
NASDAQ____________________________________________ 18
STATISTICAL SUMMARY________________________________________________________ 19
ANOVA_______________________________________________________________________ 20
CONCLUSION____________________________________________________________________ 22
WORKS CITED___________________________________________________________________ 23
The objective of this paper
is to analyze Palm, Inc., a leader in the handheld computing field. I will analyze and attempt to forecast the
future revenue and stock price of the company.
I will begin by presenting information regarding the history of the
company, Palm's product line, analysis of the industry including marketshare
data, and Palm's future plans.
Upon providing background
information about the company, I will present and discuss the financial status
of the company. Next, I will analyze
Palm’s liquidity, asset utilization, and profitability.
Finally, my research
methodology will be discussed and the sales data will be presented. The data will be thoroughly analyzed and
findings will be presented. I will also
introduce a model to depict a correlation between Palm’s stock price and the
NASDAQ index.
INTRODUCTION
Computers and technological
products have changed the world.
Technological devices have altered the ways in which information is
processed. These products, as well as
the development of the Internet, have changed the ways in which humans interact
with one another. "The growth of
the handheld computing market is, in part, being driven by the transformation
of the corporate environment into an extended, virtual enterprise supported by
a highly mobile, geographically dispersed workhouse requiring fast, easy remote
access to networked resources and electronic communications" (www.palm.com).
I intend to solve the
problem of forecasting revenue for Palm in future periods through the use of
time series regression analysis. I will
collect sales data for the past 8 quarters and will utilize that information to
make predictions about the future.
Palm
Inc. was founded in 1992 and was acquired by U.S. Robotics Corporation in
1995. In 1997, U.S. Robotics Corp. was
acquired by 3Com, making Palm 3Com's subsidiary. "In September 1999, 3Com
announced plans to make the Palm subsidiary an independent, publicly traded
company. The company became independent on March 2, 2000, and is traded on the
NASDAQ under the ticker symbol PALM. Palm became a part of the NASDAQ 100 on
Nov. 6, 2000, and the S&P 500 on July 27, 2000" (www.palm.com).
PALM'S MISSION
STATEMENT
To be the global
leader in mobile information management by:
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Providing
innovative handheld computing solutions to businesses and consumers, |
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Working
with world-class licensees and 175,000-plus software developers to create the
industry-standard platform for handheld information management; and |
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Putting
the power of the Internet into every Palm™ handheld. |
There are two main types of
products that Palm offers. The first is
the Palm Pilot handheld personal digital assistant/mobile device, and the
second is the Palm OS® operating system that Palm developed to run on handheld
devices.
"In 1996, Palm
introduced the Pilot 1000 and Pilot 5000 products that led the resurgence of
handheld computing" (www.palm.com). Today, Palm has developed a variety of Palm
Pilot product lines, or 'product families' as the company refers to them.
The product family consists
of the Palm IIIc, Palm Vx and the Palm VIIx handhelds, and the Palm m100 and,
Palm m500 series handheld. These Palm products are equipped with a
comprehensive suite of Personal Information Management (PIM) software,
including Date Book, Address, To Do List and Memo Pad; infrared beaming
capabilities; expense management software; calculator; note-taking
applications; games; and a back lit screen. They also come with the Palm
Desktop software, a companion desktop PIM; and HotSync® technology, Palm's
innovative local and remote synchronization software (www.palm.com).
The need for new products came from technological
and software developments, improved mobile communication and changing aesthetic
demands from the target market.
The original Palm Pilot 1000
and 5000, which were the first to be introduced, were not much more than
monochrome digital organizers. However,
today the Palm m500 series is considerably thinner than previous models, some
offer color screens, provide new expansion slots for add-ons, and offer
wireless Internet access. New products
from all companies in this arena are being developed at enormous speed.
Now Palm Pilots contain 8-16
megabytes of memory as a standard. It
would have been difficult to find a desktop that contained so much memory when
Palm's first Pilots were introduced, let alone to have that kind of power in
your hand! Palm had been using Motorola
Dragonball processors until they recently decided to utilize Texas Instrument's
OMAP processors going forward in the development of their future products.
Palm OS®, the operating
system that runs Palm PDAs, is licensed out to other PDA manufacturers for use
on their handheld devices. Palm
currently licenses Palm OS® out to companies such as: Sony, Handspring, Acer,
ISM, Nokia, and others. Some of the
products that run using the Palm OS® (Palm likes to call them 'Palm Powered')
are direct competitors, such as Handspring's Visor™ and Sony's Clie.
Palm had software developers
in mind when they designed the Palm OS® (unlike some other software companies
we know). "As an open architecture
for handheld computing, the Palm OS platform provides an ideal basis for
third-party developers and original equipment manufacturers (OEMs) to create
and deliver successful mobile computing solutions. The platform consists of
five primary components:
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reference
hardware design; |
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operating
system (Palm OS® software); |
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conduit
data synchronization (HotSync® technology); |
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platform
component tools, including an applications programming interface (API) that
enables developers to write applications; and |
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software
interface capabilities to support hardware add-ons" (www.palm.com). |
Palm invites software
developers to form a community and promotes the sharing of information in order
to facilitate the development of new software.
This business tactic is in the best interest of Palm Inc. as well as
developers and consumers alike.
"The Palm Economy -- a community of Palm OS® licensees, 170,000-plus
registered developers and others committed to advancing the platform and its
offerings - has created more than 12,000 software applications and more than
100 add-on devices" (www.palm.com).
"Companies that primarily design, manufacture, support, and
market computer-related systems, including computing platforms, network
computers, personal digital assistants, real-time computing systems, terminal
display products, and other computer related devices," (Hoovers.com) fall
into the industry category known as 'computer hardware miscellaneous
computer-based systems' (SIC = 3571).
Several companies that fit this industry category include: Palm,
Handspring, as well as divisions of Sony, Compaq, Toshiba, and Research in
Motion (RIM).
There is a lot going on in
this industry right now. New companies
are cropping up and long-standing companies are entering the market by creating
their own handheld devices. Marketshare
is changing hands quickly as well and reflects the competitiveness within the
industry.
In the second quarter of
2001, "overall PDA shipments were down 21 per cent, falling from Q1's 3.55
million units to 2.8 million"
(Smith). For the first time
since it's inception, the future was beginning to look bleak for Palm. During this quarter, Gartner Dataquest's
June 2001 data revealed that, "not only did Palm's own marketshare fall,
from 50.4 per cent in Q1 to 32.1 per cent in Q2, but arch-rival Compaq bucked
the downward trend by more than doubling its marketshare, from 7.8 per cent to
16.1 per cent" (Smith). Also
during this quarter, "Handspring retained the number two position in the
US, however, with a 17.3 per cent share of the market, compared to Compaq's 16
per cent. Palm took 40 per cent of the US market during Q2, down from 54.2 per
cent in Q1" (Smith). The results during this period reflect that Palm was
just not prepared for the combination of the slowing economy with the
introduction of competitors' products.
There were other factors involved as well. “Demand for handhelds fell sharply in
the spring as the economy slowed. Prices also fell precipitously -- thanks in
large part to inventory problems at Palm and a glut in components. According to
NPD Intellect, the average price of a handheld computer fell from $260 in 2000
to $218 in 2001. Discounting quickly ate into margins” (Black).
Though
the economy has not recovered since the second quarter of 2001, and in fact has
recessed further, PDA sales have actually increased and the market for these
devices has been growing. According to
International Data Corporation, a market intelligence and forecasting company,
"Palm Inc.'s share of the worldwide handheld market surged in the fourth
quarter of 2001. Palm has long held the top spot in handheld sales and last
quarter it widened the gap." It
seems that Palm has adjusted to the influx of competition, repaired inventory
problems, and has been remodeling their business plan to better serve the needs
of the target market.
Marketshare in the PDA
market worldwide according to IDC as of the end of the forth quarter of 2001
(based on the number of handhelds shipped worldwide from manufacturers) is
illustrated in the graph below. Note:
Hi Tech Wealth is successful in China.
The
chart below depicts the stock price of Palm and their strongest competitor,
Handspring, for the past two years.
Palm’s
liquidity compared to the industry and the market as a whole, gathered through
Hoovers.com (based on the fiscal year ending May 2001) is depicted below:
Palm’s current and quick
ratios are above the industry average, which illustrates that much of their
assets can be liquidated easily. Palm
has better than average inventory turnover, which suggests that they have corrected
the aforementioned inventory problems they had previously been suffering
from.
Palm’s asset utilization compared to the
industry and the market as a whole, gathered through Hoovers.com (based on the
fiscal year ending May 2001) is depicted below:
The leverage ratio, though
lower than industry and market average, combined with the debt to equity ratio
of 0, implies that Palm is using their debt profitably.
Palm’s profitability compared to the industry and the market as a whole, gathered through Hoovers.com (based on the fiscal year ending May 2001) is depicted below:
Palm’s gross profit margin
is considerably lower than both the industry and market average. This can be due to the aforementioned
increase in competition, which led to price discounting. Of those in the industry, Palm appears to be
focusing on the cost-conscience consumer as a significant segment of their
primary audience. Palm’s lower end
product line draws particular attention to the cost-conscience consumer. The result is a lower profit margin, as
illustrated in the profitability data.
The net profit margin; their bottom line, is negative. This reflects the fierce competition in the
industry. Of course the negative profit
ratios must change in order for Palm to be a successful company. As aforementioned, the demand for handhelds
has been increasing since the forth quarter in the year 2001. This should have a major impact on the
profitability of Palm, yet is not reflected in the data provided above.
As
I’ve mentioned earlier, the market for handheld devices is growing. The industry is extremely competitive but
Palm feels as though they have the edge.
"Palm has a larger installed base in businesses, educational
institutions and governments than any other handheld platform. Palm expects to
extend that lead by delivering more compelling enterprise mobile
information-management solutions, consisting of enterprise-focused hardware and
software products, more robust service and support capabilities, and more
innovative market-leading alliances with developers and solutions providers
than the competition" (www.palm.com).
Palm is working with
companies such as: Oracle, Sybase, SAP, Remedy, Computer Associates, Tivoli,
IBM, and Siebel to deliver mobile extensions to their business solutions. "Palm handhelds are growing
increasingly pervasive as information management becomes ever more mobile. Palm
believes that handheld computing is the next wave in individual productivity
tools for the global work force" (www.palm.com). By providing employees with Palm products,
these companies intend to increase the speed at which information is delivered
to various departments, increasing productivity by improving business aspects
such as: logistics, inventory control, quality control, and the like. "Eighty percent of Palm handhelds are
synchronized in a work environment; 40 percent are either paid for directly or
reimbursed by companies; and Palm handhelds are already on the standards lists
of hundreds of companies worldwide" (www.palm.com).
Palm is also working with
several technology companies to further handheld computing technology. For example, Palm is cooperating with Sun
Microsystems to integrate Java into the Palm OS platform.
Palm's strategic partners
and licensees include:
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"Acer,
which will use the Palm OS platform to deliver its first Acer Mobile Device,
expected in 2001 in China and other Asia Pacific markets; |
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AlphaSmart,
which has licensed the Palm OS technology for use in expanding its product
offerings to new segments within the education market; |
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Franklin
Covey, whose expertise takes Palm OS products into the training and time
management system fields; |
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Garmin
International, the leader in Global Positioning System (GPS) technology,
which will use the Palm OS platform for a new line of handheld products with
GPS capability; |
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HandEra
(formerly TRG), which manufactures the expandable, Palm Powered HandEra 330
handheld computer with a memory expansion slot; |
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Handspring,
which uses the Palm OS platform in its Visor™ family of handheld computers
with Springboard expansion module technology, as well as in its recently
announced Treo family of communicators (expected in 2002); |
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IBM,
whose Palm OS platform-based IBM WorkPad PC Companion is sold into the
enterprise market; |
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Kyocera
Wireless, which manufactures the Palm Powered QCP 6035 all-in-one smartphone
with voice, browsing, email and personal information management capabilities; |
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Nokia,
which has licensed the Palm OS platform for use in future product lines of
its best-selling mobile phones; |
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Palm,
Inc., the world's leader in handheld computing, which offers the Palm IIIc,
Palm Vx and Palm VIIx handhelds, and the Palm m100 and Palm m500 series
handhelds for advanced users in enterprises and for consumers; |
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Samsung,
a global leader in wireless telecommunications, which has introduced a Palm
Powered color smartphone -- the Samsung SPH-I300; |
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Sony,
which produces the Palm Powered Clie, family personal entertainment handhelds
that include Sony's own Jog Dial and Memory Stick technologies; and |
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Symbol
Technologies, Inc., a world leader in mobile data solutions, which develops
Palm Powered handheld computers with built-in wireless LAN and WAN
communications and bar-code scanning for mass enterprise deployment (www.palm.com) |
Palm Pilots are becoming
popular among students and teachers on college campuses and in primary and
secondary schools around the world.
"With a Palm handheld computer, a teacher or student can do amazing
things: access the Internet wirelessly, take notes, read books, calculate,
sketch ideas, collect data, access resources, manage activities and courses and
instantly beam information" (www.palm.com). Palm has made efforts to contribute to
educational institutions within the United States. "As part of its commitment to education, Palm provides
technology grants to schools and colleges, and professional development courses
for faculty members and administrators" (www.palm.com).
Assuming
that the factors which influenced the past and present will continue in the
future, I can use time series regression to make forecasts about future
revenue.
I
began gathering data by utilizing Hoovers.com to collect the past 5 quarters
revenue. For information prior to the
quarter ending November of 2000, I went directly to the source, SEC filings
through Edgar Online. The data is
illustrated below:
It is difficult to draw any
conclusions with respect to seasonal patterns based upon a visual inspection,
due to insufficient data. While there
does appear to be some behavior that could be seasonal, it is far more likely
to be cyclical influences. The decline
in revenue that begins in late 2001 corresponds to a slowing economy as well as
the other factors that I mentioned earlier (introduction of competitors into
the market, and inventory problems).
The time series graph depicted on the previous page reveals that revenue over this time period of 8 quarters, or 2 years, fluctuated quite a bit. It would be difficult to accurately predict sales for future quarters due to the data’s instability.
The correlogram depicted above shows
no significant lags, though lag 1 and 3 are close to the upper and lower
confidence intervals respectively.
Since the data is quarterly, I will use a lag of 4 to conduct
autocorrelation using the ARIMA model.
The results of the
autoregressive integrated moving-average model (ARIMA) follows.
In this
case:
HO:
Our model is not a good model (the slope is equal to zero)
Ha:
The slope is not equal to zero
Analysis of Variance:
DF Adj.
Sum of Squares Residual Variance
Variables in the Model:
B SEB T-RATIO APPROX.
PROB.
AR1
.15395 .322414 .477495 .66564107
AR2 -.72385
.248264 -2.915652 .06171314
AR3
.02866 .328067 .087368 .93588428
AR4 -.82711
.188696 -4.383278 .02198596
CONSTANT
348.96901 16.213613 21.523210 .00021947
According to the AR(4) data, we
would use the following model to forecast sales for Palm’s 9th
quarter:
Revenue in the 9th
Quarter = 348.97 + .15395(Revenue in 8th Quarter) +
-.72385(Revenue
in 7th Quarter) + .02866(Revenue in 6th Quarter) +
-.82711(Revenue in 5th Quarter)
In my case, revenue for Quarter 9 would be predicted at a confidence of 95% to be:
348.97+(0.15395*290.6)+(-0.72385*214.3)+(0.02866*165.3)+(-0.82711*470.8)
= $-146.079 million
The low p-value at lag 4 (.02198596) indicates that we should reject the null hypothesis, suggesting that this model is a good one.
The
results of the autoregressive integrated moving-average model (ARIMA0 using Lag
1 are depicted below.
In this
case:
HO:
Our model is not a good model (the slope is equal to zero)
Ha:
The slope is not equal to zero
Analysis of
Variance:
DF Adj. Sum
of Squares Residual Variance
Residuals 6 92697.261 15186.120
Variables in the Model:
B SEB T-RATIO APPROX.
PROB.
AR1 .35852 .378910 .9461861 .38058323
CONSTANT 329.14797 63.620232
5.1736368 .00206709
According to the AR(1) data, we would use the following model to
forecast sales for Palm’s 9th quarter:
Revenue in the 9th
Quarter = 329.15 + .325852(Revenue in 8th Quarter)
In my case, revenue for Quarter 9 would be predicted at a confidence of 95% to be:
329.15 + (.325852*290.6) = $423.84 million
P-value at lag 1 is .38, suggesting that we should accept the null hypothesis. This model is not good (the slope is equal to zero).
The major limitation in the case of predicting Palm's revenue is the fact that financial data is only available for the past 8 quarters (since Palm became independent from 3Com in March of 2000). The limited data makes it difficult to develop substantial correlations, further, making it nearly impossible to come up with reliable revenue forecasts from the models.
Additionally, my predictions have been far from actual because the data does not fit the equations very well. It is likely that other variables may have provided better correlation and generated equations with greater prediction power.
This portion of the paper
will analyze Palm’s stock price compared to the NASDAQ index. The graph on the next page depicts Palm’s
stock price as well as the NASDAQ index over the past 2 years.
The graph on the previous
page provides a general idea of the correlation and depicts the data to have a
positive slope.
The adjusted R Square illustrates that the NASDAQ
can explain 73.2% of the variance in Palm’s stock price. This is a high proportion and is evidence
that the model is good.
In this case:
HO:
Our model is not a good model (the slope is equal to zero)
Ha:
The slope is not equal to zero
The
ANOVA table depicts a p-value of .000, and indicating that we should reject the
null hypothesis. Therefore, the model
is a good model; Palm’s stock price is related to the NASDAQ index.
According to the coefficients data, we would use the following model to forecast stock price for Palm on March 15, 2002 (the day following the date of our latest data):
Stock Price on
3/15/02 = -25.591 + .01744(NASDAQ)
On March 15,
2002, the NASDAQ index closed at: 1868.30
Thus, we would
predict Palm’s stock price to be: $6.99
Palm’s actual
stock price on 3/15/02 was much lower: $3.07
On March 22,
2002, the NASDAQ closed at: 1851.39
Thus, we would
predict Palm’s stock price to be: $6.70
On 3/22/02
Palm’s stock price was again much lower: $3.86
The regression model indicates a value for Palm of -25.591 if the NASDAQ were at zero. However, logic dictates that a stock price can never be negative. Therefore, a more appropriate regression might have been one that forced the intercept term (B0) to be zero. While I did not do such a regression, the effect would have been to lower the slope (B1), thus predicting a lower price for Palm as was actually experienced.
According to the residuals statistics, the errors seem to be a bit left-skewed. While the minimum predicted value is -.7681, the minimum error is -18.5582.
According to the Durbin-Watson figure, a measure of model efficiency, a result of 1.5 through 2.5 is within the normal range. Our Durbin-Watson figure is .045, suggesting that there is a problem with the model's stability. The low result further suggests that the residuals are left-skewed.
As this example depicts, any
statistical model has its flaws and cannot be used for an exact
prediction. If for nothing else, our
model tells us that when the NASDAQ index goes up, we can expect Palm’s stock
to increase as well.
Palm
has been a leader in the handheld computer market. Though perhaps a cyclical company, the increasing sales of PDAs
during a recessing economy is a strong indicator that there is potential for
increasing revenues in this market.
Palm has an advantage over competition due to their creation and
ownership of the most popular handheld operating system, Palm OS®. I believe that Palm's brand has become
synonymous with PDAs, providing them with a marketing edge over competition as
well.
In
my opinion, Palm should continue to focus much of their attention on the
lower-end cost-conscience consumer.
Competitors seem to be focusing on higher-end models, and consumers who
purchase expensive high-tech toys tend to fit into a category known to
marketers as 'innovators'. The PDA
market is no longer in its initial stages of development, so the increasing
customer segment would logically be those who are more cost-conscience. Additionally, some of the higher-end
handheld computing devices are reaching the declining price range for
laptops. Since laptops have much more
computing power than handhelds will ever have, a consumer may be more likely to
purchase a laptop if it is in the same price range as a PDA.
In
conclusion, I find Palm to be a successful company and one which has made
efforts to seek out and correct operating problems in the past. Palm stands to survive in this competitive
market, and may even flourish. I would suggest,
and actually have invested in shares of Palm stock.
Black, Jane.
“Will Investors Spring for Handspring?”
Business Week. March 14,
2002.
Smith, Tony.
“Palm Retains World Marketshare Lead – Just Barely” The Register.
June 8, 2001.