Calling for a Palm - Dell Union

On Thursday, Palm (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 (S) 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 (AAPL) iPhone and Research in Motion’s (RIMM) 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.

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

Comments

[Yagottabe K...:]

You were totally wrong about the Pre delivery date in your last Palm "blog" and you're now (an again) wrong about the worth of the Pre and WebOS to anyone outside Palm.

An untested phone and an untested brand new operating system in an untested context - the web rather than phone resident - isn't worth billions of dollars to anyone.

And that's what it would require to acquire Palm. With outstanding shares of 110 million and, what?, 80-ish million shares hidden away in the Preferred shares PLUS another $400 million in debt, then at the current price you're already talking billions of dollars without any premium at all being paid.

If Dell or anyone else is stupid enough to fall for THAT, short their shares into the ground.

Mar 22 09:23 AM

[Zoltan L. K...:]

"Palm cannot take on Apple on its own", but they are not either likely to be one of the three biggest players on the smartphone market. And why partner with Palm, if any hardware manufacturer can have Android for free or let's say without any big initial investment.

Mar 22 09:36 AM

[User 368585:]

She can't do math apparently. The shares outstanding is now over 130MM shares (after the secondary Palm just executed). The author also convenient completely ignores the 80 millionish preferred stock and options. Either she can't do math or is ignoring it because her readers have pointed out the problem with her valuation assumptions and she keeps ignoring them.

Anyways, why bother with facts when they stand in the way of your thesis. Easier to claim that Dell should buy a $800MM company than it is to say that Dell should buy a $2.5 B company (includes a 30% premium on 210MM fully diluted shares and $400MM of debt). Again, why let facts stand in front of a "brilliant" thesis.


On Mar 22 09:23 AM Yagottabe Kidding wrote:

> You were totally wrong about the Pre delivery date in your last Palm
> "blog" and you're now (an again) wrong about the worth of the Pre
> and WebOS to anyone outside Palm.
>
> An untested phone and an untested brand new operating system in an
> untested context - the web rather than phone resident - isn't worth
> billions of dollars to anyone.
>
> And that's what it would require to acquire Palm. With outstanding
> shares of 110 million and, what?, 80-ish million shares hidden away
> in the Preferred shares PLUS another $400 million in debt, then at
> the current price you're already talking billions of dollars without
> any premium at all being paid.
>
> If Dell or anyone else is stupid enough to fall for THAT, short their
> shares into the ground.

Mar 22 11:37 AM

[hiram:]

"Now that the Palm Pre is being launched, Apple launches a new iPhone version that does have a keyboard."

Huh!!

Mar 22 11:39 AM

[another.ana...:]

Hiram has it exactly right!

"Now that the Palm Pre is being launched, Apple launches a new iPhone version that does have a keyboard."

Huh!!

Another Seeking Alpha nitwit who puts her fingers in gear before her brain.

Ayuh

Mar 22 12:00 PM

[User 163599:]

Poor poor article. Several errors:

"In fact, this is the first innovative operating system to be launched since the iPhone."
Incorrect statement. Google's Android can be considered as serious if not more serious a threat to iPhone.

"Apple launches a new iPhone version that does have a keyboard"
Not true. There has been no mention of a physical keyboard on the new iPhone. Its unlikely to happen. If you mean virtual keyboard, the iPhone has always had a virtual keyboard.

The title of this post is "Calling for a Palm - Dell Union", yet the only mention of Dell is the last line, "a Palm-Dell union would change the equation dramatically."

What does it take to write a blog that gets publicized by Yahoo?

This is a great example of horrible journalism.

Mar 22 12:15 PM

[Yagottabe K...:]

SeekingAlpha apparently has no standards - you write an "article" and get them to publish it. It's literally that simple.

seekingalpha.com/contr...

Mar 22 02:19 PM

[JamesApple:]

I am not nearly as interested with balance sheets as with innovative competitiveness.

1. How can a physical keyboard compete with a virtual keyboard? A vortual keyboard can assume any language, symbols and format whereas a QWERTY keyboard is just a piece of fixed furniture with no future.
2. WEB versus local processing. Interaction is only a very tiny portion of automated task, the most prominant aspect in using computers for performing tasks is the ability to perform automated tasks as evidenced by the immovable mainframes in our computing world. Apple has demonstrates it's ingenuity by putting as much memory on the iPhone as possible with the obvious direction of promoting CPU bound computing and discouraging of I/O bound computing utiliIng the Internet as the data communications side of application.
People at large have always failed to think with innovation as the primary force of the world, data communications is dumb, program logic is dynamic and constantly changing which drives innovation. My bet is program logic a la Apple iPhone OS, not data communications, whether Android or WebOS.

Mar 22 03:21 PM

[Hayweed:]

Dell please buy Palm. Once you waste 2.5 billion on that purchase, fail with the phones maybe Dell will finally kick the bucket. They are headed that way whether they buy Palm or not. Anyone can build a PC so generic PC's will all be built in 3rd world countries. The generic PC is going the way of the TV to soon all be made by the far east countries. No need for the Dell brand when you can get an asus or acer or the wok pc

Mar 22 03:45 PM

[typopolice:]

This one is even worse, two peas in a pod. How many short sentences can you fit into an online article, anyway? I think this guy's going for the record.

www.themarketguardian..../

Mar 22 04:06 PM

[davesmall:]

It is true that Dell has no future. It's probably also true that Palm has no future. Put them together and you have the algebraic sum of minus two.

However, Jon Rubenstein who leads Palm, has more engineering talent than anyone at Dell so such a union would be an enormous win for Dell. However, I can't imagine someone with Rubenstein's abilities wanting to align himself with Dell. That would be preposterous.

Mar 22 10:50 PM

[JamesApple:]

Final march of the dinosaurs? Big companies are failing left and right. It seems the bigger the companies get, the bigger the troubles are. The trouble is, the medium and small companies are not much better. The markets that were created were based on business models back in the '80s, like, how many computers running word processors do you need? Likewise for the cellular and smartphones.

Mar 22 10:57 PM

[Roger Knights:]

The iPhone 3.0 software enables hardware control via bluetooth communication. So a third-party keyboard could be offered--or even one by Apple--to persons who really want one.

Mar 23 01:17 AM

[marv08:]

This article is really odd... Where is the connect between Q3 results, Rubinstein (who has not been driving any of the currently shipping products), Jobs' stubbornness, keyboards and Dell? You do realize that all current Palm models do have physical keyboards and (according to the reported numbers) Palm achieved an ASP of approx. 161 USD during Q3, while Apple certainly achieves an ASP over 500 USD (we do not know the exact numbers, but for the US we assume 199 or 299 selling price plus 300-400 USD carrier subsidy). So, you suggest Apple should copy the competition to achieve a worse result? An ASP of 161 USD would be desirable for a "generic" mobile maker (mix of smart and non-smart phones), for a company making "only" smartphones, it is a disaster.

There is no indication that the next iPhone will have a keyboard, and it is not needed to compete at all. The BlackBerry Storm is selling more units at a higher ASP than the Pre might be able to sell in the entire first year. And, guess what, it does not have a keyboard either. So, obviously, you try to declare a feature a must have, that only a limited number of people care about at all. It makes the device bulkier, requires two hands for operation, it requires a localized version for each and every market and still the keys will not adjust for specific applications. This makes managing channel inventory a nightmare (as you have to predict the demand for each market several months ahead) and makes the device less flexible. I do type a lot faster (and with less errors) on my iPhone, than my wife can on her Bold; if I have to type in a different language, I get the right keyboard and spell-checking automatically; when I have to enter a phone number I get a numeric keyboard and one with all the "@", ":" and "/" characters when entering an URL. It is a huge time saver, something no physical micro-keyboard can provide. Another huge benefit of the iPhone/Storm approach is that everything can be added/fixed through software – each and every iPhone user since version one will benefit from the new OS version and get the landscape keyboard with bigger keys for free – try that with any model relying on physical keys... It cannot be done.

Of course, Dell acquiring Palm would solve the "empty pockets" problem for now, but it would add a bag of new problems. Dell's service reputation (outside of the enterprise) is as bad as it can possibly be and all their non-computer products failed miserably. The Dell brand is nothing people are willing to pay premium prices for either, and Dell's current cash flow does not really scream "buy something, now" at all. I do not see this as the obvious match you suggest it is. It would maybe make more sense for Apple or RIMM to buy Palm and wind it up (IF they consider it a threat at all, which I doubt – acquiring the patent portfolio might be the better argument for it, if Apple would hold its own and Palm's patents combined, almost nobody could build any smartphone without paying to them). For Dell it makes no sense, MSFT will not invest in a platform that does work with open standards and makes Windows Mobile look like an ancient joke, the only potential buyers I can see are maybe HP and other phone makers.

Mar 23 03:36 AM

[Tom B:]

It would be-- like McCain/Palin; the fossil (Dell) and the cute-ish dolt (Palm).


On Mar 22 03:45 PM Hayweed wrote:

> Dell please buy Palm. Once you waste 2.5 billion on that purchase,
> fail with the phones maybe Dell will finally kick the bucket. They
> are headed that way whether they buy Palm or not. Anyone can build
> a PC so generic PC's will all be built in 3rd world countries. The
> generic PC is going the way of the TV to soon all be made by the
> far east countries. No need for the Dell brand when you can get
> an asus or acer or the wok pc

Mar 23 10:04 AM

[M:P:R:]

Dell are axing jobs to save $4 billion. Can't see them buying into vapourware (until it ships - SHIPS - it is vapourware Palm Pre fans)

Mar 23 10:49 AM

[Yagottabe K...:]

Dell's CEO just said his own smartphone line is on schedule.

Can we leave this STUPID "Dell gonna pay billions for an untested Palm phone" rumor finally to rest?

Mar 24 06:51 AM

[PalmGuy:]

Dell has the wrong corporate culture. They are flat not creative.
To play on Apple's turf, Palm must leave behind the miserable experience that is anything windows and take some hairy risks.

Palm would need a buyer with some vision and risk-tolerance that would allow the current organic growth to continue.

Purchase by any windows pinheads would kill the magic and drive away the talent.

Mar 24 01:29 PM