Palm's Poor Quarter Raises Concerns About Its Survival

The 2009 Consumer Electronics seems so far away now. At that show, Palm wowed the crowd with a new smartphone and operating system, the Palm Pre and its webOS software, respectively. There was talk that both would help Palm (NASDAQ: PALM) would reverse its years of declining fortunes.

That was 14 months ago. A lot has happened since then, little of it good. In its third fiscal quarter ended Feb. 26, Palm reported revenue of $349.9 million, well above the company's previous estimate of $300 million to $320 million. Non-GAAP revenue totaled $366 million, well above Wall Street's average estimate for sales of $316.2 million. The company reported a GAAP net loss of $22 million, or $0.13 per diluted common share. This compares favorably to a consensus analyst estimate by Thomson Reuters of $305.7 million in revenue and a loss of $0.43 per share.

But that good showing came in part because the company changed the timing of when it booked sales. Average selling price in the third quarter was $367, compared with $375 in the previous period. Sales on a per-unit basis were way down: Palm shipped 960,000 Pre and Pixi phones to carriers, but the carriers only sold 408,000 devices, down 29 percent from the second fiscal quarter. Cash on hand totaled $376 million exiting the quarter, while operating expenses clocked in at around $164 million.

Even worse, Palm sees fourth-quarter revenue coming in at less than $150 million, half of the $358 million expected by analysts surveyed by Thomson Reuters. As it is, last month Palm lowered this quarter's estimates by $100 million on weak Pre and Pixi sales.

The result was a downgrade from Kaufman Bros. analyst Shaw Wu to a Sell, and a fairly dire warning from Canaccord Adams analyst Peter Misek, who also has a Sell rating on Palm. "We believe Palm's troubles will only accelerate as carriers and suppliers increasingly question the company's solvency and withdraw their support. With what appears to be roughly 12 months of cash on hand, an accelerating burn rate, a complete lack of earnings visibility, and substantial debt and preferred equity, we no longer see any value in the company's common equity," Misek wrote in a research note.

Palm CEO Jon Rubenstein tried to put a brave face on the situation.

"Our recent under performance has been extremely disappointing to me personally and to the entire Palm team. But we are more committed than never to delivering truly innovative mobile experiences to propel our company forward and build value for our stakeholders," he said during a conference call with financial analysts on Thursday.

Rubenstein outlined a few scenarios, one of which was increasing training at retail outlets. Palm reps are visiting retail outlets to help train and educate sales reps on the phones, something Will Stofega, program manager for mobile device technology and trends at IDC, thinks is needed.

"I've walked into Verizon stores and have not seen the level of salesmanship from the reps devoted to the Palm device. Obviously some of that is due to the [focus on Motorola's] Droid, and some of that is it's a second re-appearance of the devices with not a lot of difference compared with that model and what appeared on Sprint," he toldInternetNews.com.

It's always a questionable situation for a vendor when they have the same device with two different carriers. A sales rep could make the case for the device, but the customer may go elsewhere to get a better deal. Now, more than a year after its big CES splash with the Palm, Palm still hasn't produced a strong second act -- the Pixi notwithstanding as a lower-end take on the Pre.

Mobile Device Wars Not Cooling Off Anytime Soon

Palm is getting it coming and going from both Verizon Wireless and S print. Verizon's attention is on the heavily marketed, Android-based Motorola Droid, while Sprint, the No. 3 mobile network in the U.S., held the Pre/Pixi exclusive deals for too long, causing Palm to miss the holiday selling season from a larger partner like Verizon, which is the top U.S. carrier.

"That had to be a little disappointing," said Stofega.

He also thinks Palm is not marketing the device well, either. For example, it never played up the magnetic charge pad unique to the phone: You don't plug the Pre/Pixi into a charger, you simply sit it on a magnetic base to recharge. Doing so also turns the phone into a speakerphone.

"I tried that device and thought it was one of the niftiest features going," said Stofega.

On the conference call, Rubenstein dismissed questions about the firm being acquired. Stofega said the firm would be severely challenged to remain independent, but said it could be done. "I think that it's going to be very, very difficult for them to claw their way back as an independent company. But I think there is a place in the market for a smaller company that can fulfill a need and has the talent to produce a certain product. That is a possibility," he said.

Andy Patrizio is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.