Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Teri Klein - Vice President, Investor Relations

Douglas C. Jeffries - Chief Financial Officer

Edward T. Colligan – President and Chief Executive Officer

Analysts

Jim Suva - Citigroup

Michael Abramsky - RBC Capital Markets

Paul Coster - J.P. Morgan

Phil Cusick - Macquarie

Vivek Arya - Banc of America

Michael Walkley – Piper Jaffray

Tavis McCourt - Morgan Keegan

James Faucette - Pacific Crest Securities

Matthew Thornton - Avian Securities

Deepak Sitaraman - Credit Suisse

Amir Rozwadowski - Barclays Capital

Ilya Grozovsky - Morgan Joseph & Co Inc.

Pablo Perez-Fernandez - Global Crown Capital

Matthew Sheerin - Thomas Weisel Partners

Palm, Inc. (PALM) F3Q09 Earnings Call March 19, 2009 4:30 PM ET

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2009 Palm Inc. earnings conference call. (Operator Instructions) I would now like to turn your presentation over to Ms. Teri Klein, Vice President of Investor Relations.

Teri Klein

Thank you and good afternoon everyone. I would like to welcome you to Palm's fiscal 2009 third quarter financial results conference call. On the call today are Ed Colligan, CEO and President, and Doug Jeffries, Chief Financial Officer. Today’s call is being recorded and will be available for replay on our investor relations website at www.palm.com.

I would like to remind everyone that today’s comments, including the question-and-answer session, will include forward-looking statements, including but not limited to guidance on future financial and business activity. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in Palm's filings with the Securities and Exchange Commission, including its quarterly report on Form 10-Q for the fiscal quarter ended November 28, 2008 and its current report on Form 8-K filed on March 9, 2009. Palm undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after this call.

Please note that today’s results will be reported on a non-GAAP basis except where specifically noted in the commentary as GAAP results or estimates. Non-GAAP reporting is provided to help you better understand our business. However, non-GAAP financial results are not meant to be considered in isolation or as a substitute for, or superior to, GAAP results. You should be aware that non-GAAP measures have inherent limitations and should be used only in conjunction with Palm's consolidated financial statements prepared in accordance with GAAP. Our press release includes a table detailing the non-GAAP measures together with the corresponding GAAP numbers and a reconciliation to GAAP. You can also find this information posted on our Investor Relations website.

Today I would also like to note that slides will no longer accompany Palm's audio webcast. Information previously provided in slides is now available in our earnings press release, SEC filings, and call scripts. These items can be accessed on Palm's Investor Relations website. We encourage listeners to review these items.

And with that, I would like to turn the call over to Doug.

Douglas C. Jeffries

Good afternoon everyone. Thank you for joining us. It is a pleasure to be on my first quarterly earnings call at Palm. I joined the company in January, just prior to CES and the introduction of the Palm Pre and Palm webOS. It is a very exciting time to be at Palm and part of a team that is energized, dedicated, and completely focused on fulfilling Palm's mission to re-emerge as a leader in the Smartphone marketplace.

Before we discuss the quarterly results I would like to cover a couple of recent announcements. First, an important aspect of the company’s strategy is putting in place the capital resources to support Palm's longer-term initiatives. We made good progress in this regard last week with the completion of a successful public offering of 26.6 million common shares. I would like to start the call with a quick review of that transaction.

As many of you know, in January 2009 Elevation Partners purchased 100.0 million in Palm's series C preferred stock and related warrants. As part of this transaction Palm retained the option through the end of March to remarket to other investors 49% of Elevation’s investment with Palm retraining any proceeds over and above Elevation’s original cost.

Two weeks ago we announced our intention to exercise the remarketing option and we launched a public offering to sell the 18.5 million common shares underlying 49% of Elevation Partners’ investment. Because of the high demand for the offering, we were able to sell an additional 8.1 million shares beyond the original Elevation shares, which brought the total number of shares sold to approximately 26.6 million.

We priced the offering at $6 per share and closed last Friday receiving net proceeds of $103.6 million. Overall a very successful outcome in a very challenging equity market.

Before I move to third quarter results I would like to mention the recent announcement we made regarding the accounting treatment for webOS products. As part of the webOS user experience we plan to periodically provide new software features free of charge to customers of webOS products. Accordingly, as required under GAAP, we will use subscription accounting for all webOS products starting with the Pre.

We will recognize revenues and cost of revenues associated with those products on a straight-line basis over the product’s economic life, which is currently 24 months. This accounting treatment has no impact on cash flow and does not change how we account for Palm OS products like the Centro or our Treo line.

We posted a more detailed discussion of this accounting treatment on our Investor Relations website.

Now, let me turn to results for our February quarter which was, as expected, a difficult one. As a reminder, unless otherwise noted, my discussion will be based on non-GAAP information.

Total revenues for the quarter came in at $90.6 million, representing a 53% decline versus our November quarter. Smartphone revenue for the quarter was $77.5 million on shipments of 330,000 units versus Smartphone revenue of $171.0 million and shipments of 556,000 units in our November quarter.

Lower revenues in the quarter were due to pricing concessions and volume declines for our older product lines. Revenue performance in the quarter was also negatively impacted by the later-than-expected shipment of the Treo Pro and by declines in consumer spending related to a difficult economic environment.

Smartphone sell through during the February quarter was 482,000 units, down 19% versus Q2. Consistent with our plan to reduce channel inventories of legacy products prior to the launch of Pre, channel inventories decreased by 152,000 units during Q3.

Our handheld business generated approximately $13.1 million in revenue for the quarter on shipments of 40,000 units. Handheld sell through fell to 100,000 units, representing a 37% decline versus Q2 and a 65% year-over-year drop off. As we look ahead, we expect this decline in handheld demand to continue.

Gross margins for Q3 came in at 5.0% versus 20.1% in Q2. Contributing to the decline in gross margins were lower selling prices on our older product lines and the delay in the shipment of the Treo Pro. We expect our gross margins to improve in the future as we introduce our next generation of products and we begin to realize the results of our efforts to improve the efficiency of our supply chain and reverse logistics. We continue to believe that over time our business should post non-GAAP gross margins above 30%.

On the expense side, we continue to carefully manage spending while investing in the product development and marketing efforts for our next generation of products. In Q3 lower marketing spend during the quarter along with the cost reduction activities initiated earlier this year contributed to quarterly non-GAAP operating expenses coming in just below $90.0 million.

On a GAAP basis we recorded a $5.7 million charge for restructuring activities in Q3 and expect additional charges in Q4 as we complete the cost-reduction activities we began in November.

Our GAAP reporting also reflects a $5.0 million casualty loss in Q3 from a theft which occurred at one of our third-party operated warehouses. This loss is covered by insurance and we will recognize a recovery when we receive the insurance proceeds.

Also under GAAP, the re-marketing options related to the elevation series C investment discussed earlier is considered a derivative instrument for accounting purposes with a fair market value determined using Black-Scholes. The company recognized a non-cash gain of $20.6 million in Q3 related to the increase of the value of the series C derivative from the time of the elevation investment on January 2, 2009, through the end of our third quarter.

The derivative increased in value primarily because the value of Palm stock increased over the period and the stock price is a key determinant of its value.

In total, non-GAAP net loss for the third quarter was $94.7 million and a loss per share of $0.86. This compares to a non-GAAP net loss in the second quarter of $80.2 million and a loss per share of $0.73.

Adjusted EBITDA for the third quarter totaled negative $78.6 million versus Q2 adjusted EBITDA of negative $55.8 million.

On the balance sheet, Q3 inventory decreased to $15.3 million from $28.5 million in Q2, primarily due to lower inventory levels for our older product lines.

Accounts receivable at the end of the quarter was $52.7 million versus $98.2 million at the end of Q2.

And Q3 DSOs came in at 52 days versus 46 days in Q2.

On liquidity, cash used in operations during our February quarter was $92.1 million and our cash, cash equivalents, and short-term investments balance at the end of the quarter was $219.4 million. Since our recent equity offering closed in our May quarter, this figure does not reflect the $103.6 million of proceeds from the offering.

Like Q3, our fourth quarter will be challenging as we continue to transition from our legacy devices to our next generation of Smartphones. We expect to see continued pricing pressure on our older product lines and we expect the revenue and gross margins from these product lines will continue to decline in Q4.

While our near-term situation remains challenging, our confidence in Palm's long-term prospects and the potential of our next generation product line continues to grow as we progress toward the launch of the Palm Pre.

We believe the combination of the cost actions taken during the past few quarters, along with the introduction of our new Palm webOS products will allow us to achieve significantly improved operating performance.

With that, let me turn the call over to Ed to give you a broader business update.

Edward T. Colligan

As our third quarter performance shows, Palm is proceeding through a challenging transitional period as we usher in a new era for our company and, we believe, for the entire Smartphone market.

With these financial results, it’s easy to forget the tremendous progress Palm has made over the past several months. We are meeting, or exceeding, our strategic objectives relative to developing innovative products, building global carrier and manufacturing relationships, and laying groundwork for a strong third-party software-developer community and with the very successful equity offering we completed last week, we have strengthened our working capital position and gained additional flexibility to put greater resources behind product initiatives like the upcoming launch of the Palm Pre.

Since the January debut of the Palm Pre and the Palm webOS the response and critical acclaim has been tremendous. It confirms our belief that Palm is bringing an exciting and truly innovative product to market.

Even so, we are under no illusions about the hard work that remains to deliver this product into the hands of consumers within the next 15 weeks. We know that seamless execution is critical and we are taking nothing for granted as we prepare to launch the Palm Pre as planned.

Our development efforts are in high gear as we polish the user interface and finish up key applications, complete carrier certification and field testing, and prepare to ramp manufacturing.

In addition, we are working hard with key developers to ready their applications to be available at launch and partnering with Sprint to ensure our marketing efforts are well-aligned.

Our leadership team is an essential part of our ability to execute well and we have continued to recruit the best people in the industry to drive Palm's success. Jeff Devine, who leads our operations team, joined Palm less than a year ago. Jeff has drawn on his prior experience directing global distribution for Nokia to strengthen Palm's operations team. He has brought on board new leadership in sourcing and reverse logistics and has fortified Palm's relationships with suppliers and new world-class ODM partners.

I have never had more confidence in Palm's ability to deliver an outstanding, reliable product on time and at scale.

We also recently welcomed Dave Whelan to our leadership team as our new head of global sales. Like Doug Jeffries, Dave joined us right before CES and he has hit the ground running. He brings with him over 20 years of industry sales experience selling both wireless devices and services. Dave has long-standing relationships with carriers around the world, including Europe.

During World Mobile Congress we met with some of the largest and most successful carriers in that region and the reaction to Palm webOS and the Pre showed that anticipation for our launch is certainly not limited to the U.S.

While we are not yet prepared to announce anything specific with regard to a European partner, you can be assured that we have excellent options available to us. Our goal is to work with partners that can help us make the Palm brand as recognizable in Europe as it is in the U.S. and in turn, drive long-term customer loyalty and growth in the markets we enter.

Our partner, Sprint, is as committed to driving growth through quality and reliability as we are and we are proud to have them alongside us for the introduction of our first webOS-based Smartphone. Sprint has 35.5 million subscribers on its CDMA network, which has been recognized as the most dependable 3G network in the U.S.

As part of Sprint’s ongoing efforts to enhance customer service, consumers will be able to take advantage of their ready-now program which provides in-store training and set up assistance with the Palm Pre before a customer leaves the store. We believe this hands-on resource will help make the amazing features of the Palm Pre and the innovative Palm webOS easy to learn and easy to love.

Perhaps most compelling is Sprint’s $99 a month Simply Everything Plan, which can save Smartphone customers hundreds of dollars a year, compared to competitors’ plans, especially important in this economic climate.

All of these factors will make Sprint an outstanding service provider for the customers waiting to find out for themselves all the that Palm Pre has to offer.

Our efforts over the past quarter also extend to our third-party developer program. We understand the role that a robust and mutually advantageous developer ecosystem will play in the sustained success of Palm's next generation of products. Palm already has an established base of loyal, Palm OS developers, many of which have already agreed to migrate to webOS.

In addition, we are confident we can establish a webOS ecosystem that goes well beyond this base. Our new Palm Mojo application framework is based on the HTML5, CSS, and JavaScript, standards familiar to millions of web developers. As a result, the base of developers that we expect to write for Palm webOS is squarely aligned with the organic exponential growth of the Web.

The Mojo SCK is currently in private pre-release and will be available in the future as a free download from the Palm developer network. In the meantime, we are already working with a number of initial developer partners who are creating great new applications for the Palm webOS.

I would also like to highlight the strides Palm recently made on the enterprise side with our Treo Pro on Windows mobile. Two weeks ago we launched the Treo Pro with three new carriers, Sprint, Alltel, and Bell Mobility in Canada, and just recently made the device available through the Palm store and Palm's B2B sales organization.

The Treo Pro is a great product and in our opinion the best Windows mobile product on the market and we are excited to get more carrier support which we believe will result in significantly increased sell through.

The delivery of a high quality business product like the Treo Pro and the ongoing march to launch the Palm Pre and webOS signals the start of a new era at Palm. With Palm webOS we believe that Palm will be well positioned to offer unparalleled user experience and differentiated functionality to consumers around the world.

The Palm Pre is our first webOS product and after that we look forward to introducing a road map of Smartphones running on newer, constantly evolving versions of the Palm webOS.

We view our platform as an important competitive advantage that will help us build lasting shareholder value for years to come.

With that, I would like to turn the call over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Suva – Citigroup.

Jim Suva - Citigroup

On your commentary about next quarter will be difficult, I think we can all understand that, but can you help us quantify a little bit about the cash burn rate. Should we expect the burn rate to be more than what it was this quarter?

And in line with that, can you also talk about the amount of cash you need for day-to-day operations and for launching the Pre. I assume it’s something like $100.0 million, but I’m not sure.

And finally, when are you going to recognize the actual cash in the sell through? Is it going to be upon selling to Sprint or to the carrier? I believe you have always recognized revenues on selling into the carrier as opposed to selling through.

Douglas C. Jeffries

In terms of Q4, we wanted to call out that some of the trends we were seeing in Q3 would continue as it relates to the older products but we really aren’t giving out guidance in terms of specifics for cash burn for the quarter.

You were referring to the deferral accounting, the subscription accounting? On the subscription accounting, the sales transaction is the same as it is today so we will bill and collect the cash in the same form and the same transaction type we do today. It’s just the bookkeeping, where it will sort of actually push out the revenues and the cost of sales over a 24-month period.

But from a cash perspective it’s exactly the type of business we’re doing today.

Edward T. Colligan

And today we do recognize sales on sell-in to the carrier, which is Sprint in this instance.

Operator

Your next question comes from Michael Abramsky - RBC Capital Markets.

Michael Abramsky - RBC Capital Markets

If you’re not giving specific cash guidance, do you feel you have adequate capital or access to capital to launch the Pre or will you need to retap capital markets or other sources to get there?

And also there has been a lot of talk about the crowded Smartphone market right now. Could you possibly give us a sense of where you feel the Pre’s strongest differentiator in penetrating the market as you enter it is going to be? Software, hardware, the Cloud, however you would like to respond.

Edward T. Colligan

I think we have adequate capital. You know, this latest raise really, I think, put us in a position to be able to launch the Pre very successfully. We wanted to do that to make sure that we optimized our capital structure but we think we are in a great position at this point.

Crowded market, absolutely competitive space. Amazing. Fun in a lot of ways. A lot of new announcements and certainly us being in the mix of some of the leading products in the market is fun.

There are expected to be about 180.0 million new customers who buy Smartphones over the next few years, so really big growth market, too, so I think a lot of room for us to have a big opportunity here.

Our strongest differentiators, there are just so many. The hardware is absolutely beautiful. Every time I have put it in anybody’s hand the first thing they say is, “Wow!” The fact that it has a beautiful touch screen and the keyboard in the single device, as a design, I think is very compelling and differentiated, in its total makeup.

And then the multi-tasking nature of our software really is something that is quite compelling and differentiating in the sense of letting things run all the time and in the background and being able to switch seamlessly between applications. I think that’s something that people will find quite differentiating and the developers will take advantage of it in really compelling ways.

So there is a long list of other things I could list that we’re very proud of and I’m excited about relative to the product, but I would say those are some of the key ones.

Operator

Your next question comes from Paul Coster - J.P. Morgan.

Paul Coster - J.P. Morgan

I have two questions for Doug. I’m sorry I missed it, but what was the Smartphone unit shipments for fiscal third quarter?

And the second question is, if you port the webOS to the Centro platform, at that point would we expect to see the same accrual accounting kicking in for that product line?

Douglas C. Jeffries

On your first question, for the quarter we had sell through of 482,000 units and sell in of 330,000 units for Smartphones.

Edward T. Colligan

We’re not announcing any future products, but all future webOS-based products will be under subscription accounting. So anything new on that platform will take that structure.

Douglas C. Jeffries

The accounting is driven by our intent to continue to provide software updates to webOS so any hardware that is running webOS, the accounting would follow it.

Operator

Your next question comes from Phil Cusick – Macquarie.

Phil Cusick - Macquarie

One, just a follow-up on a question that Jim asked earlier. I’m not sure if you meant to skip it, but what is the minimum cash level to run the business?

Second, in terms of distribution on the device, is that going to go through all of the Sprint channels—Best Buy, Radio Shack, etc.—or is that going to be more limited?

And then, are you going to be expecting your marketing budget to be ramping up or is most of the marketing for the device going to be done by the carriers?

And finally, if you could just talk about where we are in the process for the Pre and what are the hurdles from here to the launch. Is it really just getting everything through the process? Is it software development? Is it Sprint labs? If you could give us any kind of color on that it would be great.

Douglas C. Jeffries

Let me take the first one. In terms of minimum cash, we’re really not talking about minimum cash requirements. I think Ed said it earlier. We’re very comfortable at this point with having enough capital to drive forward with our road map and be very successful with the launches we have on the product list.

Edward T. Colligan

On the distribution, Sprint channels, I’m not going to lay out exactly what channels we’re going to be in or where it’s going to go, but we have access to Sprint’s entire network of distribution, including third-party partners. We’re not going to talk about exactly how we’re going to roll it out but you can expect it to be broadly distributed across Sprint’s network in short order.

On the marketing side, it’s really a combination of Palm spend and Sprint spend. We are working incredibly well together to line up our marketing efforts, from in-channel to web-based, communications to advertising and everything. We’re trying to be really efficient about—we’re working together closely so we can be incredibly efficient about media spends and so forth. We have a long history of doing it.

I think this is probably the most focused launch effort and seamless working relationship I’ve seen in my many years now of working with Sprint on various launches, so the teams are working really well together. I think we will be very efficient with our spend.

You’re probably thinking about it from a budgeting and expense structure standpoint. Some of that spend is baked into our plan and what we’ve laid out and then in addition we will have some upside for launch spending as we go throughout the rest of the fiscal year. And Sprint will do the same.

And then finally, on Pre, where is it. Well, product is coming along great. As I said in my comments, we do have to polish things up. That’s the way all these things come at the end. We have to get our certification done with our carrier partner and those types of things are still underway. And then we have to ramp manufacturing and do that aggressively. So there’s no show-stoppers to the product. As I said, we’re proceeding as planned towards our launch commitment and we plan on delivering within the time frame that we said we would.

Operator

Your next question comes from Vivek Arya - Banc of America.

Vivek Arya - Banc of America

Two questions, first for Doug. You mentioned that 30%+ is your long-term gross margin target. Is that a necessary condition for you to break even or can you break even even if gross margins stay in the mid-20%s.

And Ed, you mentioned that Sprint would promote the Pre possibly with its $99 monthly pricing plan. But that $99 plan is almost $30 above what AT&T charges as its minimum plan for the 3G iPhone. I realize these plans are not comparable in terms of minutes and texting but do you think that $99 minimum monthly plan constrains your presales in effect?

Douglas C. Jeffries

In terms of the break-even point, it’s not the sort of information we have given out. And 30% as a long-term goal, we feel good about it based on what we know so far but it’s early days. We have yet to even launch the product, so again, the data is encouraging from what we can see now but it is a long-term goal and we feel pretty good about getting there.

Edward T. Colligan

When I mention the $99 plan, I’m just putting that out there as that plan is a great value and it’s a great example of what Sprint brings to the table, which is pricing. That’s an all-you-can-eat plan, all the texting, all the voice, all the Web, all the minutes, and they’re doing that at $99 and if you do look at that plan comparative to other high-end plans, including the cost of the devices and the plans you need to sign up for, you will find that it is significantly a better value than the high-end plans that are offered for other devices.

It doesn’t mean it’s the only plan. I’m not announcing what the plans will be with Sprint. They will be the people announcing that. But I do look at that as an example of a great value and in combination with this device, I think it will be the best value in the marketplace.

Operator

Your next question comes from Michael Walkley – Piper Jaffray.

Michael Walkley – Piper Jaffray

Ed, I just wanted to build on your comments from the successful showing of the WC [inaudible] Pre at the Mobile Congress. Could you elaborate? Have you signed up any WC carriers and you can’t announce them yet because of the carriers don’t want you to announce them?

And if you have not signed deals with carriers in Europe yet, how quickly do you think you need to sign them in order to launch the Pre before the holiday season?

Edward T. Colligan

I am not going to get into the specific details about signing or not signing or anything like that. I will say, there is an enormous amount of interest from carriers globally in this product. We have had an unprecedented amount of incoming interest and we are responding to that as quickly as we can and as appropriately as we can. We have to scale this thing. We have to scale manufacturing, we have to scale our ability to serve those customers in-market, and so we want to be thoughtful about how we bring on new partners.

And I think we could have a great success, first starting with Sprint and then bringing on, a step at a time, other partners around the world.

But that being said, in Europe in particular, we have very strong interest from major global players and we will announce those relationships in reasonably short order. Right now we are 100% focused internally on getting the Pre launched and the Sprint product out the door.

Operator

Your next question comes from Tavis McCourt - Morgan Keegan.

Tavis McCourt - Morgan Keegan

I have two questions for Doug and one for Ed. Doug, I know you don’t want to give any financial guidance for Q4, but in terms of opex, finishing this quarter with a little less than $90.0 million, are there still benefits that you will have in terms of the cost structure in May versus the February quarter.

And also if you could answer the same question as it relates to working capital. Working capital wasn’t much during this quarter obviously, but should we start to see the strains from the Pre launch in the May quarter on working capital, inventory specifically.

And Ed, just as we kind of get through this trough period and with the launch of the Pre and so forth, will all of the channel inventory drain of the legacy devices? Will that be effectively behind us in the May quarter? Is that the last quarter or there will still be some channel inventory drain of legacy Centros and Treos after that?

Douglas C. Jeffries

In terms of the opex, I think we talked about in Q2 when we announced the cost reduction initiatives it was getting to kind of the mid-$90.0 million in terms of opex on a non-GAAP basis. And I think the target was for Q4 and at this point we are tracking to that, in terms of the kind of core opex. But just keep in mind, that doesn’t include spending we would undertake for R&D acceleration or launch spending. This is kind of looking at our core opex and getting it down to a level of kind low-to-mid $90.0 million.

Edward T. Colligan

And on the channel inventory of legacy products, first, I don’t put Treos into that category, at least not all Treos. We just announced the Treo Pro and it’s not a legacy product and there will be channel inventory and we believe sell through will continue to ramp on that product.

Clearly, the handhelds are legacy and we are managing that channel inventory down to bare minimum. It’s minimum at this point and the products that are in the channel will sell through and we don’t believe there is any issue there with regard to channel inventory.

And then Centros, Centro is continuing to sell. Centro is a product that is continuing to be promoted by the carriers. It’s doing quite well and in fact, there are opportunities that are popping up here and there, especially around the world, for additional Centro product sales. So Centro is not over yet. We are going to keep pushing it. But again, with regard to Centro, we don’t think there is a channel inventory problem there at all. We do believe what we have put in the channel and what we will continue to sell will sell through.

Operator

Your next question comes from James Faucette - Pacific Crest Securities.

James Faucette - Pacific Crest Securities

Ed, I think you talked about you’re polishing the software. Earlier this week competitor Apple raised questions about battery life and data usage and those kinds of things, so I just wanted to get a handle on where we’re at in terms of the battery life development for the Pre and if we’re comfortable yet with where that is or if there is still work to be done there.

And then also, as it relates to development, give a little more color as to where we are in terms of signing up third-party developers, SDK distribution, etc.

And finally, looking at the webOS more specifically, is the webOS an operating system that is appropriate for not only the high tier where we assume the Pre is going to be targeted, but also for low- or mid-tier phones, or how should we think about its adaptability to the different market segments?

Edward T. Colligan

I am not going to talk about specific features on the product or where they’re coming in. I will say I think it’s at a point of polishing is a good word. I use the product day in and day out for my own device and it’s performing incredibly well and we will not ship a product that will not meet the battery life criteria of our standards, days of real use to get through a day. Clearly there are very powerful devices that have a lot of capabilities and there are a lot of different usage patterns, so we test against a lot of different usage patterns.

We really want it to perform really well, not only from an application performance perspective but also a great battery life. It’s also got to be a great phone and we want it to be a great phone and it will be a great phone, from both battery life and call performance and voice handling. So I am really pleased with how the product is coming together.

On the developer SDK side, we are working early with key developers that we wanted to bring in early. Some Palm OS, some web developers, some big web brands, to get them in early, get them access to the SDK. We are, of course, using the SDK ourselves, all the apps on the Palm Pre were developed using the tools that we have developed. So there is a combination of third parties and others.

We’re not prepared to name everybody yet. We shared some of them at our various launch events. But we think we will have a significant amount of developer support when we come out with the product and then we will do kind of a private release of the SDK, maybe an open beta release at some point, and then really have a full release of the SDK at some point for all developers to take advantage of it.

And then finally, on the webOS, from what I can see I think it’s really well architected to span market segments and we believe that we will build a very robust product line on top of this platform. The Palm Pre is our first shot at a great integrated product, kind of the all-in-one, do-everything, incredible product. But there are certainly opportunities for going downstream and taking functionality out or building better cost hardware around it. We have that opportunity and clearly there are things we could do going upscale to bring an even more experience on different form factors.

When we looked at the Palm Pre we really tried to design a product that would meet the needs of both hard core business customers and the personal use with your home life and your personal life, try to span both of those with something that fits seamlessly in your hand and your pocket and is a great phone that you want to carry around. And that’s a start. But you will see a whole product line come from Palm bases on the webOS.

Operator

Your next question comes from Matthew Thornton - Avian Securities.

Matthew Thornton - Avian Securities

On the mix during the quarter, could you supply any color in terms of what the mix was Centro versus Treo?

And then as you go forward to the main quarter, the current quarter, Doug, I know you said it was going to be a tough quarter. I think we were expecting that. But is there any reason we shouldn’t expect a pickup in gross margin and in ASP as the mix shifts more towards the Treo Pro and away from the Centro.

In terms of expense lead time ahead of the Pre launch, what does the lead time look like as you start to ramp up support and ramp up promotion for that product? Is it two weeks, three weeks, four weeks?

And do you need additional headcount to support the launch or is it just at this point sales and marketing and promotion dollars going forward?

And in terms of the timing of the app store launch, as well as some of the accessories, particularly the touch tone that you have talked about, will this be a simultaneous launch with the Pre and will the touch tone and some of these new accessories be available at the carrier stores or is it only going to be available over the Palm website?

Douglas C. Jeffries

On the mix question, pretty heavy central volume this quarter. We just finished about 70% you 75% in terms of unit volumes for the quarter.

And then the kind of follow-up question on Q4, yeah, we’re hopeful about the outlook for Pro and if it performs as we hope it will, then we would expect to see gross margins improve in Q4.

Edward T. Colligan

And on the expenses lead time, as Doug said, we’re trying to drive to that kind of low $90.0 million relative to core expense structure and I think in that was the blocking and tackling expenses of getting this product out the door and trying to really—whatever things had to happen early on. I think we will see some ramp in marketing expenses as the product really hits the street and we start seeing some volume in stores.

Of course, I can’t say an exact timing on that but I think the lead time on that kind of spending, starting to ramp a month in advance, something like that, would probably be a reasonable thing and then through that.

Expenses, do we think we have what we need in the way of headcount, my sense is stay very lean and mean here is what we’re going to try to do and really hold the reins on any headcount growth in a big way until we see the fruits of our labor really start to be verified and then you could imagine the growth would be related to expanding outside the U.S., first and foremost, and potentially some support on sales and marketing side.

But trying to keep G&A very tight and really create a very leveraged position from a financial model standpoint, that we could see some significant top line growth and then off of a lean expense base, could really get into a positive cash flow position quickly. And that’s our goal.

On the app store, we will have ability to deliver applications to the device over the air and that’s all we’re really saying right now. We haven’t gotten into a lot of details about that. You can expect it to be at or near launch time frame but we haven’t given final details on that. But we will have that core capability and we are excited about it; so are our developer partners that we’re already communicating about those capabilities.

Operator

Your next question comes from Deepak Sitaraman - Credit Suisse.

Deepak Sitaraman - Credit Suisse

Ed, in terms of the upcoming launch, could you remind us of the typical carrier certification process and give us a sense of where you are in that process?

And also, given the delays that we’ve seen most recently with the Treo Pro, what gives you the confidence the launch will happen as planned in the first half of the year?

And then, just following-up to a comment that Ed made earlier on next-gen products, can you talk a little about the processes that you put into place to develop a steady pipeline of products and essentially avoid going through the product transition period that we are in now again in the future.

Edward T. Colligan

It’s a great question on the upcoming launch. It’s one of the things that clearly we’re driving hard to make sure we execute extremely well on this.

There is no typical process, I’ll start with that, relative to getting these products out. The good news is we’ve gone through this process and in a very collaborative way with Sprint 15 times at least over the last few years and so we are very familiar with it, the teams know each other, they work really well together, and so I am confident we can make it happen.

The Treo Pro issues, some of those were driven off the fact that we’re getting pieces of that product from different elements and we don’t control every element of how that product is going out the door. We don’t control every element of the Pre either but a heck of a lot more of it. The OS and the applications and a lot of the fundamental functionality we are designing and developing here, we know where those are, we know where issues are around them and we understand the system more.

So I think that gives me more confidence going into the certification we will have a better chance of executing more seamlessly. But it’s never a slam dunk and you’ve got to go through the process before you know for sure but I’m as confident as I’ve ever been that we will nail it and a big part of that is using the product day in and day out now, it’s performing today.

On the next-gen products, how do we ensure we don’t have a trough in the future, let’s say. Well, we knew when we went into this process, when we went into the transformation and we really did the original elevation investment and John came on board, we knew, we predicted that we would go through this because we needed to really get the OS done, get this next-generation platform out.

But as we have been executing against that, and as we saw the end in sight of delivering that, we have clearly also driven a broad-based road map that will have a number of products coming down the pipeline as we go forward. And so we think we’ve got a road map that we’re very excited about. We certainly have shared some things with our key carrier partners and they say to me that it’s one of the best road maps they’ve seen, if not the best.

And so we’re excited to get Pre out the door and then keep executing. You’re only as good as your latest innovation and we are excited about this one. But we’ve got to keep driving the platform, keep developing really compelling applications and services on that, keep pushing those outdoor customers, and keep delivering next-generation hardware products that can take integration to another level. Those are the things we will do.

Operator

Your next question comes from Amir Rozwadowski - Barclays Capital.

Amir Rozwadowski - Barclays Capital

Ed, you had mentioned a lot of positive discussions with folks at the 3G SM trade show. In terms of internal resources in order to support a European launch, do you need to invest in building out your infrastructure to support carriers in other geographies or are you comfortable at current levels? Any color to that would be extremely helpful.

Edward T. Colligan

Great, great question. We have got a lot of interest. We are going to take that a step at a time. We think we have the resources, in Europe in particular, Canada, Latin America, to launch with one or two carrier partners in each one of those regions. We might have to augment them some but it’s not a wholesale addition of a new team.

As we start ramping in Europe, to really be successful there, I do believe we will need additional resources on the ground, both marketing and sales resources. We have a strong certification position there already so we can get the product prepared and be ready to go but as we start doing channel marketing or bringing up the product in store or working with the PR groups there and serving the customer from a sales perspective, I do think we will need some additional resources.

It’s not a huge number so I don’t think it’s going to drive the expense structure a lot but it will be something and we will need to add that.

And that’s where we’re focused first. We’re really very focused on North America, Latin America, Europe, less so today in Asia. We want to really focus our efforts as much as possible in those three regions and then as we come up with next-generation products and build on our success we can certainly turn our sights to the rest of the world.

Operator

Your next question comes from Ilya Grozovsky - Morgan Joseph & Co Inc.

Ilya Grozovsky - Morgan Joseph & Co Inc.

Can you talk about the linearity in the quarter? How did you see that trending?

And on the patents, on the Pre, have you filed for any patents? And I know there was some noise obviously a few weeks back about possible competitors who feel that the Pre is a little bit too close to what they do and if you could comment on that that would be great.

Douglas C. Jeffries

Linearity for Q3, I think the quarter we actually had a lot of shipments that landed toward the end of the quarter.

Edward T. Colligan

I’ll take the patent question. Of course, we’re doing everything we can to protect our intellectual property. We are filing patents on the Pre and webOS and other elements of that and we will continue to do that for eternity. That’s a core part of being in the technology business is really being sure that you have a strong patent position. You build it. We have more than 1,500 patents today and we have been working on these for the last 15 years in the mobile space and we think there are a lot of really valuable patents there.

There has been media speculation and other speculation and comments made in the media about patents and patent infringement and so forth. It’s just that; it’s speculation at this point and we’re not going to comment anything beyond what’s been said out there and set out there.

We are really focused on building our patent position, making sure it’s as strong as possible, and that’s what we’re focused on today.

Operator

Your next question comes from Pablo Perez-Fernandez - Global Crown Capital.

Pablo Perez-Fernandez - Global Crown Capital

I did not see the Smartphone-related revenue in the quarter. Usually you call it out but I think I may have missed it.

Douglas C. Jeffries

In the quarter Smartphone revenue was $77.5 million of the $90.6 million.

Pablo Perez-Fernandez - Global Crown Capital

I know you’re not giving guidance. Part of the problem is whether or not the Pre ships before the quarter ends and a lot of other issues, but is there any way you can give us some indication for the non-Pre part of the revenue? What should we expect?

Douglas C. Jeffries

We’re just not giving guidance.

Pablo Perez-Fernandez - Global Crown Capital

Let me ask you a question on logistics that is kind of important to me. If you say that the Pre is going to launch before the end of the first half, how soon before you launch the Pre do you have to ship it into the carrier? Is it 2 to 3 weeks, 4 to 6?

Edward T. Colligan

It really depends on how many you want to have in the store when you announce it. And in the distribution channels. But it’s safe to say that a couple of weeks is a reasonable lead time.

Pablo Perez-Fernandez - Global Crown Capital

You mentioned that you have been working on optimizing certain aspects of the operating system and the applications, polishing it. Is this all stuff that you’re working on software? In other words, I am wondering if any of the things you are doing are also in hardware, and if they’re in software, is it something that you could have pre-ordered devices made and this could be a brief flash rather quickly, if you had to ask the factory before they ship to you?

Edward T. Colligan

Wow, you’re really trying to triangulate here. [laugh] The reality is, we’re polishing the product all around, hardware and software. And we are not going to get into specifics about flashing or re-flashing or whatever. We are going to hit the dates. We strongly believe we will hit the dates we set out in front of us and that’s as far as we’re going with that.

Operator

Your next question comes from Matthew Sheerin - Thomas Weisel Partners.

Matthew Sheerin - Thomas Weisel Partners

My first question is regarding gross margin but focusing on the Pre. Are you expecting margins to be around the level of the Treo or at the 30% or plus range initially or will it be much below that, and what are the puts and takes there?

And regarding the launch, do you plan to announce the launch date before it happens or will you just launch the product?

Edward T. Colligan

I would say the gross margins are in the traditional range of the Treo is what we would expect.

I don’t think I understood the last question. Are we just going to announce it when it’s in stores?

Matthew Sheerin - Thomas Weisel Partners

Yes, will there be advance notice?

Edward T. Colligan

I’m just not going to get into details on that. We have said before the middle of the year and we have said as soon as possible and those are the two things we’re going to stick with. So we want to obviously get the announcement out and get the product into customers’ hands as soon as we can.

Matthew Sheerin - Thomas Weisel Partners

Just regarding the gross margin on the Pre, how long is it going to take to ramp to get to the normalized margins that you’re forecasting internally?

Edward T. Colligan

Day one. On the product we will get to Treo-like gross margins in very short order. There will still be the mix in the product line and whatever we have sold or continue to sell, which may not get the gross margins of the average in that range into the 30%+ range, but as far as Pre is concerned it’s a high-value product that we believe will deliver nice margins.

Teri Klein

Everyone, thank you very much. That’s concludes Palm's Q3 fiscal 2009 earnings conference call.

Operator

This concludes today’s conference call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Palm, Inc. F3Q09 (Qtr End 02/27/09) Earnings Call Transcript
This Transcript
All Transcripts