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Calling For a Palm-Dell Union

Posted on Friday, Mar 20th 2009

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.

Chart for Palm, Inc. (PALM)

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It is Q3-08 revenue was down, not Q3-09.

balaji Friday, March 20, 2009 at 10:09 AM PT

I consider the Palm technology some of the best work being done in the smart phone space outside of Apple. I gave Palm an enthusiastic endorsement back in December (including here on this very site), prior to the official Pre announcement and the resulting increase in share price. Anyone buying back then, would be holding a position 300% to 900%.

Because of their great technology, and recognizable (although sliding brand), there will be a play with Palm. Back then I considered Palm a risky but potentially extremely rewarding investment opportunity. They have good technology. They will either get their act together and start selling product, or they’ll get acquired. They are bleeding cash much faster than projected just months ago. That’s what worried me, and why I considered them risky. Elevation Partners has too much invested in them to let them fold with so much good technology. Either the Pre and subsequent Palm products will have a respectful showing in the marketplace, or Elevation will arrange a shotgun wedding with Dell or up to a dozen different potential acquirers of Palm. Anyone purchasing Palm prior to New Year’s and the Pre announcement can comfortably sell enough of their position to cover their acquisition cost and tax liabilities, and leave the rest on the table as a crap shoot to see what comes of Palm. Either Rub will work out a Jobsonian reversal, or more likely, Palm and its’ technology will be sold off to the highest bidder. If however, a non-Elevation Partners investor in Palm has a better investment opportunity, they can lock in their profits and sell their position entirely.

You keep pushing Dell as the acquirer, which is one great potential hook-up. However, Elevation will want to consider as many potential suitors as possible to make sure they get the highest return on their investment.

Palm’s story has not finished, but it’ll be a roller coaster ride.

Realtosh Friday, March 20, 2009 at 12:02 PM PT

………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………

Did I read that correctly? A new iPhone that DOES have a keyboard? Did Tim Cook let you in on Apple’s product plans?

……..But Palm cannot take on Apple on its own, and a Palm-Dell union would change the equation dramatically………

A Palm-Dell union would change the equation NOT one iota. The strength of the iPhone comes from its software, the App store, and MobileMe integration. The iPhone ecosystem is so far ahead of any other smartphone maker (including those using the Android), that I can confidently say that the Pre will fail. As a product, the Pre is terrific, and second only to the iPhone. But, Palm is too late. And Dell does not know what an ecosystem is.

And one more thing…. Microsoft is a more natural buyer, not Dell. Windows mobile is pretty much dead anyway.

Jack Saturday, March 21, 2009 at 7:42 PM PT

I think Palm will have some options in terms of acquirers, and Microsoft may be in that pile. I do think that Dell needs Palm the most, and will be willing to pay the maximum.

Microsoft is busy / focused elsewhere, trying to dig into the Search pie, and I somehow do not see them making a big push for Palm.

I may be wrong, of course. You seem to be so confident about predicting Microsoft’s future move – did someone whisper something in your ear? I tend to stick to suggesting what people ought to do, rather than what people will do.

A Palm-Dell union, in that vein, will change the equation significantly. I would position Palm in the Prosumer space, not the Consumer space, which is where Dell’s relationships are, and which is where Apple’s have never been.

If I were advising Dell, that’s what I would focus on.

Like every other company, Apple too has its strengths and weaknesses.

Sramana Mitra Sunday, March 22, 2009 at 11:31 AM PT

Jack, Also, we made a mistake on the keyboard info. There is a landscape version of the iPhone’s current portrait keyboard coming, but we know nothing to the effect that they have any other major change in the keyboard strategy yet. Thanks for challenging that.

Sramana Mitra Monday, March 23, 2009 at 9:23 AM PT

I see Palm as a good match for any of the major cell manufactures, who may need Palm’s technology to have a chance of challenging Apple in the near to mid-term. Not that Dell couldn’t find value in a Palm acquisition. Being as large as they are, Dell needs to find large growth opportunities. Using Palm to get into cellular telecommunications would in fact be a wise move for them, and would provide them an opening into the cell and portable communication device arena. However, the cell phone manufactures have much more to lose than Dell. Dell loses only the opportunity.

However, the major cell phone manufacturers will be losing real sales, especially on the higher end to Apple’s continued assault on their industry. Even Blackberry has been trying hard to imitate Apple, but lack the modern technology that Palm could provide them. Pairing Palm with Nokia’s distribution would not be a bad match either. And as your article today shows, Motorola is failing apart and needs Palm technology more desperately than Dell. They should be willing to pay more than Dell. That is not to say that they would be able to pay as much as Dell, but if they have a clue and want to continue as an ongoing concern for more than the next few years, Motorola should be considering approaching Elevation about acquiring Palm. Motorola, Nokia and the bunch have much more to lose than Dell.

Although I acknowledge that Dell could make good use of Palm, certainly more than Motorola seems to be able to execute or lately not. Nokia could make good use of Palm if they were able to unify all their divergent platforms under the newer, better Palm technology.

One can dream, but most of these foot draggers will continue to do just that — drag their feet — and lose one of the biggest opportunities in tech M&A this side of Yahoo, save one. Somebody will play. That is if Palm doesn’t find huge success and start selling product like hot cakes.

Then it would be Apple and Palm and RIM, and even Nokia will eventually exercise some discipline and make a coherent whole out of that mess of theirs. Nokia executes on distribution; if only they could herd al those R&D cats of theirs, they would have a chance to not slide into the cheapo feature phone maker specialist, as the newer entrants solidify their dominance in the smart phone market, particularly Apple. Many believed that Nokia was untouchable because of their impressive market share, precision distribution, and efficiency. I think many are finally starting to realize what was clear when Apple first announced iPhone 1.0. Apple will eat their high-end lunch and there is little Nokia or anyone else can do about in the first five years. We are now nearly 2 1/2 years in, and only Google and Palm have seemed to been able to come up with anything that could have a hope of challenging iPhone, at least on paper.

Apple won’t be standing still waiting for anyone to catch up. Palm and Google seem to be the two best options to challenge iPhone. Google is available for all takers, so Palm seems the only best opportunity for anyone to differentiate their technology — be it a DELL or a Nokia or a Motorola, or even HP or Microsoft. Although I agree with you that a manufacturer would make the best match be it a PC maker like DELL or HP or a cell phone maker like RIM, Motorola, Samsung, or Nokia.

Realtosh Tuesday, March 24, 2009 at 4:45 PM PT