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New Faces And Lower Prices As Palm Continues to Challenge Apple

Posted on Monday, Sep 21st 2009

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.

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You’re kidding, right?

If a company exceeded their sales goals (or even met them) they’d be crowing about how many were sold, not refusing to release details as Palm is doing. Their massive losses point to a company that is barely one step away from dissolution, not a challenger to Apple or RIM. Palm’s only hope of surviving in some form is to be purchased by another company such as Dell or even Microsoft.

Sorry, Ms. Mitra, but the smell of death hangs in the air over Palm.

Don Monday, September 21, 2009 at 7:44 AM PT

Don, I have said all along, that Palm is an acquisition target for Dell or Nokia. So, the way I assess Palm is how they’re doing in terms of producing a quality product and a quality OS, how the developer network is ramping up, etc. Indicators that give me cues to whether the acquisition is likely to happen or not.

I don’t believe Palm is on the verge of death. But I do agree with you that the only way Palm will be able to really challenge Apple and Rim is from within a company with larger clout.

There are advantages to Nokia buying Palm in terms of distribution, but the conflict with their Symbian strategy is significant.

Dell is probably the most likely acquirer for Palm, and if you look through my prior writings on Palm, you’d see that theme echoing consistently.

I think, so far, Palm has continued to establish themselves as a credible target, and the stock price reflects that.

I happen to have a fair bit of experience with turnarounds. It takes time to turn a company around, and milestones and expectations are commensurately low. But if you look at how the stock price has moved this year, I would say it is quite remarkable, and the investors look at the company the way I do.

Sramana Monday, September 21, 2009 at 8:37 AM PT

“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.”

Other than price, which you also mentioned, what else is there? Oh yes, industrial design and tech support.

Simone Monday, September 21, 2009 at 8:44 AM PT

“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.”

How about the fact that Apple has 75,000 apps (and continuing to grow) and that the features (ease of use, connectivity, and a great) product ARE what sells the iPod Touch/ iPhone. Brand and marketing come after sales (the sales define brand and the marketing increases validity after sales defy the slumping market.

Alan Smith Monday, September 21, 2009 at 10:37 AM PT

I am sorry Alan, I have to disagree with you completely. Sales are a result of Brand and Product Marketing. Sales don’t happen automatically. They happen as a result of certain other functions, and those two are two essential pieces of that process. Other pieces of marketing are strategic marketing, marcomm/PR, advertising, partnerships, etc.

Sramana Monday, September 21, 2009 at 1:51 PM PT

OMG! Palm is going to try to compete against Apple’s iPhone/Touch ecosystem (hardware/software/content).

Has anyone ever spent more than a couple of hours in the iTunes Store to just peruse some of the multimedia content offered? Not even just the regular TV and movie videos, but just spend some time at the iTunes University section. There is such a wealth of knowledge to be downloaded, forget about the hardware itself. The iPhone is good, but it’s the content available that makes it great. Once Apple gets books, newspapers and magazines in the iTunes Store for the imminent iPad, the game will be over for the competition. It’s taken years for Apple to get this huge amount of content delivery in place and someone thinks another company is going to come along and do it overnight. You’re crazy. Take a glance at the Zune Marketplace and you’ll wonder why you even bothered. That place is barren.

The iPhone/iPod application and game development plan is totally on fire. Likely to have 90,000 apps by the end of the year. You should see some of the latest games running on GS models. They look awesome and play very well (except for those people that need buttons for everything).

Most of the people that I know that got iPhones say they just love to go back to the Apple Retail Stores to talk to the support staff there if they have any problems. They are not dreaming of jumping brands because they are very satisfied with what Apple has to offer. You ever been to a Palm Retail Store? I doubt it, because they don’t exist and probably never will.

Apple can take their $31 billion cash reserve and throw whatever it takes to just grind most competition into the ground. Palm, forget it. They’re just about running that company on fumes. Do you know how complacent they were over the years when users wanted simple OS updates? Despicable.

It’s almost ridiculous to talk about Apple and Palm in the same sentence. They’re going in entirely different directions. Any company that’s too lazy to develop their own device synching software and complaining about Apple’s unfairness will never amount to very much.

Constable Odo Monday, September 21, 2009 at 4:44 PM PT

I don’t think you read what I said. I said, that Palm will a bigger player’s (Nokia, Dell, may be even HP or Cisco) smartphone strategy. So all the analysis is based on that assumption, and how they’re doing in order to make progress towards that goal.

I have always said that Palm, on its own, cannot compete with Apple’s $31 billion cash, marketing muscle, etc. But as a stock, in the last 9 months, Palm has gone up 3x. They’re doing a decent turnaround.

You are arguing a moot point, and missing all the nuances.

Sramana Monday, September 21, 2009 at 5:22 PM PT

The problem with most of you is that you are so enamored to the iPhone that it blinds you from reality. Amazon and numerous other sites offer everything plus more than iTunes has in its repertoire. Yes, the applications available to the iPhone are innumerate, however that is 30 + Months after the iPhone’s launch. Why don’t be give the Pre or for that matter any new device a little time, such as 12 months before we come to any premature conclusions. In case you didn’t know over 99% of the applications available on the iPhone were produced by 3rd party developers, Not Apple programers. These same developers will have no problem replicating the same programs for the WebOS and as a betting man I would wager that most of them will just do that. Lets see how well the iPhone continues to do in the future, when the Smartphone manufacturers are all replete with Applications. I say this will be the case in less than 12 months. Unfortunately for Apple Palm’s WebOS appears to have taken them by surprise and it is going to be difficult for their Spin masters to promulgate anything cogent enough to convince the developers otherwise.

Ringo Monday, September 21, 2009 at 8:23 PM PT