New Faces And Lower Prices As Palm Continues to Challenge Apple

Last week Palm (NASDAQ:PALM) reported its first quarter results that included the first full quarter of Palm Pre sales. Although the company would not give out the number of Palm Pre sales, it is expected to have sold about 500,000 units. Palm Pre sales are riding the uniqueness of its operating system, webOS, which is in some respects even better than that of the iPhone. Palm has announced another phone based on the webOS. Let’s take a closer look.

According to iSuppli’s teardown, the Palm Pre’s leading component suppliers are Texas Instruments (TI), Qualcomm, Sony, and Samsung. As per iSuppli, it costs about $170to manufacture the Palm Pre with the faster and higher resolution LTPS LCD display from Sony, accounting for about 23% of the cost. The phone also comes with a multi-touch screen whose controller is provided by Cypress. It has 8Gb of NAND flash memory from Samsung, a baseband processor and RF transmitter from Qualcomm, and an OMAP application processor and companion power management/audio codec device from TI. The Pre’s 3.2MP camera comes from Elpida, which also provides an SDRAM of 2Gb. Smartphones usually use about 1Gb of memory, but the webOS’s multitasking function requires more memory.

The webOS uses intuitive swiping gestures for navigation, a feature inspired by the iPhone. But it also has a set of differentiating features, including a revolutionary multitasking feature seen for the first time in handsets. Users can switch from calls to applications, SMS, Pandora and the web. They can run about eight applications at a time; some say they have even taken it to 12. Another attraction of the webOS is the use of widgets to access data and applications. The webOS has also received a favorable response from the developer community; its development cycle is supposed to be easy and fast. Engadget has a detailed review.

In all, the Palm Pre is one of the few devices to effectively combine a physical QWERTY keyboard with a touchscreen interface and web browsing. Its webOS competes with the iPhone on most fronts and is a notch above the iPhone in multitasking. However, the Palm Pre, which sells for $199, lost the initial momentum of its launch when the iPhone 3G was reduced to $99 and the iPhone 3GS was launched at $299. But now Palm has announced a new webOS model, Pixie, and cut the Pre’s price to $150. Will it be able to regain momentum, or will it be thwarted by another move from Apple?

Apart from their features and applications, what really sells the iPhone and other Apple products is the company’s brand following and product marketing strategy. Palm’s new CEO, Jon Rubinstein, who was behind the development of the iPod at Apple, is trying to replicate Apple’s success mantra at Palm. Palm has reorganized its marketing organization into two separate functions, product marketing and brand design. Kay Mitic joined as Head of Product Marketing in June after leading several global businesses at Yahoo!, and Jeff Zwerner, the founder and principal of the brand strategy and design agency Factor Design, joined Palm in July.

As for Plam’s financials, Q1 revenue was down 81% to $68.0 million. GAAP revenue doesn’t reflect Palm Pre sales as that revenue is deferred over the contract period. Excluding this deferred revenue, non-GAAP revenue increased to $360.7 million. Net loss increased to $161.1 million or $1.17 per share from loss of $39.5 million or $0.39 per share last year. Non-GAAP net loss was $13.6 million or $0.10 per share. Analysts expected loss of $0.25 per share on revenue (adjusted) of $291 million. Q4 coverage is available here.

Adjusted gross margin was 27.9%, a 1.1% increase over 26.8% in Q4. Palm believes that with time, as it achieves larger production volumes and works with more carriers, it will be able to increase gross margin to over 30%. The company ended the quarter with $211.8 million in cash, down from $255.1 million last quarter. Palm plans to sell 16 million shares of common stock to strengthen its cash reserve.

Palm shipped 823,000 smartphones, up 134% q-o-q and down 30% y-o-y. The quarterly increase was driven by the successful launch of the Palm Pre on Sprint. Palm would not disclose further details on the number of Palm Pre units sold but said that a majority of its sales were from the Pre. Smartphone sell-through for the quarter was 810,000 units, up 76% q-o-q and down 21% y-o-y.

During the first quarter, sales and marketing expenses increased by slightly over $22 million over last quarter due to increased marketing for the Palm Pre launch. The company expects marketing expenses in Q2 to increase sequentially as it markets two new launches, the Palm Pre with Telefonica in Europe and the Palm Pixie with Sprint.

For the second quarter, Palm expects revenue to be between $240 million and $270 million, versus analyst estimates of $344 million. It expects to launch products with other carriers in the second half of fiscal 2010, which could lead to non-GAAP adjusted revenue for fiscal year 2010 in the range of $1.6 billion to $1.8 billion. The stock is currently trading around $14 with market cap of about $2 billion. It hit a 52-week high of $16.80 on July 1.