Yesterday, Palm reported a dismal Q3 as losses widened and revenue plunged 71% due to pricing concessions and weak sales of its aging portfolio. The much-awaited Palm Pre, which is expected to bring the company back to profitability, is on track to be launched on Sprint in the first half of the year.
Q309 revenue was down 71% y-o-y and 53% q-o-q to $90.6 million, much less than analyst estimates of $150 million. Decline in revenue is also due to the late shipment of the Treo Pro and weak spending in the tough economy. Net loss was $98 million or $0.89 per share compared to $57 million or $0.53 per share in Q308. Non-GAAP net loss was $94.7 million or $0.86 per share.
Smartphone revenue was down 72% to $77.5 million. Smartphone sell-through for the quarter was 482,000 units, down 42%. Palm’s handheld business revenue was $13.1 million on shipment of 40,000 units. Handheld sell-through declined 65% y-o-y and 37% q-o-q to 100,000 units.
Gross margin for Q3 was 5.0% versus 20.1% in Q2, mainly due to lower selling prices for the older product lines and the delay in the shipment of the Treo Pro. Palm expects non-GAAP gross margins to improve to above 30% after it introduces its next generation of products and improves the efficiency of its supply chain. Despite spending on product development and marketing for the Pre, Palm reigned in its operating expenses to $106.4 million compared to $130.1 million last year.
During the quarter, Palm used $92.1 million cash in operations and it ended the quarter with $219.4 million in cash, cash equivalents, and short-term investments. Palm recently sold 26.6 million shares in a public offering at the rate of $6 per share. It received $103.6 million of proceeds from the offering after deducting underwriting discounts and commissions, estimated offering expenses and $49 million in the original purchase price of Elevation Partners’ units.
In recent years, Palm’s sales have dwindled due to fierce competition from Apple’s iPhone and Research in Motion’s BlackBerry and lack of any ammunition in its own portfolio. The Pre, with its new web OS and touchscreen controls, is expected to fill this gap. In fact, this is the first innovative operating system to be launched since the iPhone. Palm has planned a wide range of products based on the new web OS.
Palm is currently trading around $8 with a market cap of about $850 million. It hit a 52-week high of $9.51 on February 13 after a 52-week low of $1.14 on December 2. Its shares have jumped nearly eight times on anticipation of the Palm Pre and web OS.
However, some of the attention that the Palm Pre had been receiving has now been diverted to the launch of the iPhone 3.0 that comes with the much needed cut-and-paste and a landscape keyboard. When he was with Apple, Jon Rubinstein, who is now the Executive Chairman of Palm’s board, could not agree on the iPhone’s strategy for the keyboard.
Now that the Palm Pre is being launched, Apple launches a new iPhone version that does have a keyboard. It has really come to a face-off between Rubinstein’s vision and that of the brilliantly stubborn Steve Jobs. The industry is eagerly waiting for a challenger to Apple’s iPhone.
But Palm cannot take on Apple on its own, and a Palm-Dell union would change the equation dramatically.