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

Executives

Teri Klein - Vice President, Investor Relations

Jonathan J. Rubinstein - Chairman of the Board, President, Chief Executive Officer

Douglas C. Jeffries - Chief Financial Officer, Senior Vice President

Analysts

Mike Abramsky - RBC Capital Markets

Philip Cusick - Macquarie

Simona Jankowksi - Goldman Sachs

Deepak Thidarani - Credit Suisse

Richard Kramer - ARIT

Vivek Arya - Banc of America

Maynard Um - UBS

T. Michael Walkley - Piper Jaffray

Edward Snyder - Charter Equity Research

Jim Suva - Citigroup

Jonathan Goldberg - Deutsche Bank

Amir Rozwadowski - Barclays Capital

James Faucette - Pacific Crest Securities

Paul Coster - J.P. Morgan

Justin Patterson - Morgan Keegan

Palm, Inc. (PALM) F4Q09 Earnings Call June 25, 2009 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2009 Palm Incorporated earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today, Ms. Teri Klein, Vice President of Investor Relations. Please proceed.

Teri Klein

Thank you and good afternoon, everyone. I would like to welcome you to Palm's fiscal 2009 fourth quarter and year-end financial results conference call. On the call today are John Rubinstein, Palm's Chairman and new CEO; and Doug Jefferies, our 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 Q&A 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 February 27, 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 discussed 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 tables detailing non-GAAP measures together with the corresponding GAAP numbers and a reconciliation to GAAP. You can also find this information on our IR website. We encourage listeners to review these items.

And now I would like to turn the call over to John.

Jonathan J. Rubinstein

Thanks, Teri and thanks to everyone for joining us on the call today. After almost two years as Executive Chairman helping to lead Palm's transformation, I am very excited by the opportunity to take the company forward as CEO. I am especially honored to succeed Ed Colligan and want to thank him for his many contributions to Palm, particularly for his work over the past two years.

The progress we have made during this time has been remarkable. We have put in place a world-class leadership team, adding six new senior vice presidents to Palm's executive lineup -- all industry veterans with Blue Chip experience; recruited hundreds of talented engineers; rebuilt our product development capabilities and made real progress reestablishing our culture of innovation; strengthened our partnerships with key manufacturers, suppliers, and carriers; and of course, brought to market the revolutionary Palm Web OS and the Pre, a critical milestone for us and a direct result of the incredible talent at our company.

We think the Palm Pre is by far the best product we’ve ever shipped and I am very happy with how we are managing the launch. We are successfully ramping supply to meet demand that is strong and growing. Our Web OS updates have been seamlessly downloaded, two of them since launch, and the number of applications downloaded from the Palm App catalog has grown from 150,000 at launch to over 1 million as of yesterday. This last stat is especially impressive when you consider that our App catalog is still in beta preview only phase.

But the most important indicator of our success is that customer response has been simply great, especially to Palm Web OS. Just as Palm pioneered PDAs in the 90s and Treo smartphones earlier this decade, we believe we have now pioneered the mobile operating platform for the next 10 years and beyond. Palm Web OS integrates information and services from the cloud, offers a true multi-tasking environment, and we believe takes better advantage of the benefits of Web 3.0 than any other mobile platform out there today.

The capabilities of Palm Web OS will become increasingly important over the next several years as the smartphone market shifts towards software-driven devices. Today, smartphone penetration is just 11% globally and 19% in the U.S., and these numbers are expected to almost double by 2013.

This means that hundreds of millions of users will replace their old-fashioned cell phones with smartphones and will demand innovative functionality that delivers fast, reliable performance, access to the web and applications, and most importantly, ease of use.

Only a handful of companies have the software and product design capabilities necessary to exploit this enormous market share, and such significant growth means there’s room for three to five players to win in this space. We don’t have to beat each other to prosper.

At Palm, we plan to capitalize on this opportunity by focusing on three strategic objectives. First, bringing products to market that people love will always be our primary measure of success. We need to develop quality devices known for innovative design and a delightful user experience which consumers associate with Palm. If we accomplish this, everything else will follow.

Second, we are working hard to ensure that Palm Web OS becomes a world-class platform for application development. Web OS has a web-centric development model, so anyone who creates software for the web already knows how to build for us. The feedback we’re getting from developers in our early access program confirms that developing for Web OS is easy and fast compared to other platforms.

We are eager to grant wider access to our SDK but we need to do so in a measured and methodical fashion, so we can be sure we are providing a great development experience and attentive developer support.

Over the next few weeks, we expect the program to grow from hundreds to thousands of developers and our goal from there is to make our SDK available to everyone by the end of this summer.

We are confident that before too long, we’ll narrow the gap with competitive App offerings and deliver a discovery and download experience that reflects the overall seamlessness of a Palm Web OS device.

Finally, we need to turn consumer preferences for our products into sustained loyalty and make Palm once again synonymous with easy-to-use cutting edge and indispensable products. With the re-introduction of Palm through our new Web OS products, we have a great opportunity to revitalize the brand in the U.S. and to expand our footprint in international markets. Coupled with superior service and support, we think the Palm user experience can generate the long-term loyalty and repeat purchases that iconic brands are known for.

Overall, I couldn’t be more pleased with the progress we are making but we’ve still got work to do to complete our transformation and roll out future products. We face vigorous competition and high consumer expectations and we need to step up to meet both.

My highest priority is very straightforward -- execution. That means delivering world-class products and customer support. Operational excellence in our supply chain management and reverse logistics. Strong carrier relationships. Superior sales and marketing, and efficient back-office functions.

With excellent execution comes greater efficiency and cost effectiveness, which in turn makes our business model more scaleable as we translate great innovation into financial success.

Palm already has a foundation in all of these areas. We’ve been in this business for years. We have long established industry relationships and we’ve successfully brought mobile products to market for over a decade. This footing can create a real advantage for us if managed well.

Let me close today by saying Palm Web OS represents a breakthrough in mobile product design that we believe with our continued investment will provide enhanced capabilities for a decade of innovative devices and applications. The Palm Pre is just the first product in our pipeline that will show customers how much more a Palm smartphone can do.

I am proud to be leading a company working so hard to deliver such amazing technology to consumers, efforts which we think will also deliver long-term growth, profitability, and value to our investors.

Many of you on the call today have been long-term shareholders of Palm and I would like to personally thank you for your support and patience over the past two years.

Now I’ll turn the call over to Doug and then I’ll join him for your questions.

Douglas C. Jeffries

Thanks, Jon. Before I talk about fourth quarter results, I would like to provide a little more information on our Palm Web OS direction and our accounting for products such as the Palm Pre.

As Jon discussed, we believe that the innovative architecture and ease of development offered by Palm Web OS will attract a robust offering of software products and services from third-party developers. To further enhance the Web OS platform for application developers, and to help build an engaged and enthusiastic community of customers, we will continue to develop new software features and applications, many of which we expect to deliver to our customers at no additional charge.

Since we may be periodically providing software enhancements free of charge, GAAP requires that we use subscription accounting for our Web OS products. Under subscription accounting, we are recognizing Palm Pre revenues and cost of revenues over the product’s economic life.

So while cash is due to Palm at the time of sale, we are recording deferred revenues and cost of revenues on our balance sheet for Palm Pre and then amortizing them into our operating results over 24 months.

To facilitate comparisons to our historical results, we have included in our press release non-GAAP adjusted measures which exclude the impact of subscription accounting, stock-based compensation, and other items which are detailed in the release. We think this will help you better evaluate our current period performance and trends in our business.

Unless otherwise noted, my discussion today will be based on this non-GAAP adjusted information.

Now let me turn to May quarter results. Our notable progress toward our transformational goals was especially evident in our May quarter. We shipped the Palm Pre and as Jon mentioned, we are successfully scaling production to meet the strong demand. We announced Bell Mobility in Canada as our next carrier for the Palm Pre. We continue to see strong domestic and international carrier interest in the Web OS platform, and we saw a nice ramp in Treo Pro sales after the product launched with Sprint. We also saw improving financial performance versus the February quarter. We narrowed our bottom line loss, reduced our use of cash, and delivered adjusted revenues of $113.2 million, a 25% increase over Q3.

Adjusted smartphone revenues for the quarter was $110.5 million on shipments of 351,000 units versus smartphone revenues of $77.5 million an shipments of 330,000 units in our February quarter. This revenue improvement was due to our initial shipments of Palm Pre and higher Treo Pro volumes, offset somewhat by slowing sales of our Centro product line.

Smartphone sell-through during the May quarter was 460,000 units versus 482,000 units in Q2. The May quarter did not include Palm Pre sell-through as Sprint did not begin selling this product until after our fourth quarter ended.

Smartphones channel inventories decreased by 109,000 units during the quarter, primarily as a result of sell-through incentives for our Centro product line.

We recognized modest revenues from handheld devices during the quarter and while inventory is still available for sale through retail channels and distributors, we are no longer manufacturing handhelds and are focusing all of our resources on smartphone products.

Adjusted gross margin for the May quarter came in at 26.8% versus 5% in the February quarter. Initial shipments of Palm Pre and increased Treo Pro volume contributed to the gross margin improvement, offset by lower Centro margins from sales incentives to reduce inventories.

Gross margins in the quarter also benefited from reductions in our warranty liabilities as we continue to see favorable trends in our repair service costs and from unexpected demand for inventory that had been previously written down. Excluding these items, gross margin in the quarter would have been roughly 16% to 17%.

Looking ahead, as we build our portfolio of Web OS products, we expect our gross margin on an adjusted basis will over time be above 30%.

On operating expenses, relatively low marketing spend during the quarter, along with the cost reduction activities initiated earlier this fiscal year, contributed to adjusted operating expense coming in at $81.3 million. This number excludes several one-time items, a few of which I would like to briefly touch on.

First, on a GAAP basis, we recorded $23.1 million non-cash loss from derivative accounting related to our Series C preferred stock. For financial reporting purposes, [the re-marketing] option related to our Series C preferred stock is considered a derivative instrument with a fair market value determined using [black shoals]. In March, we exercised the re-marketing option and since the option terminated, we recorded the associated loss in the May quarter.

On a GAAP basis, we also recorded $2.6 million charge in Q4 for restructuring actions we began in November and we received insurance proceeds of $5.3 million related to a theft which occurred in our February quarter at one of our third-party warehouses.

One additional note as it relates to our GAAP reporting in the coming quarters -- under accounting requirements effective for Palm in Q1 of fiscal year 2010, anti-dilutive provisions of our Series C preferred shares and related warrants will be treated as derivatives for financial recording purposes. Under this accounting treatment, a liability will be established at the beginning of the year for the fair value of the derivative.

Going forward, the fair value of the derivative liability will be mark-to-market on a quarterly basis with any change in value reflected in the company’s operating results for the period.

Going back to Q4 results, our adjusted net loss for the fourth quarter was $53.4 million and a loss per share of $0.40. This compares to an adjusted net loss in the third quarter of $94.7 million, and a loss per share of $0.86.

Looking ahead, we expect operating expense to increase from Q4 levels as we begin more aggressively marketing the Palm Pre and as we expand our product development and sales and marketing capabilities.

Turning to the balance sheet, Q4 inventory increased to $19.7 million from $15.3 million in Q3, as we built up supply levels for the Palm Pre launch. Accounts receivable at the end of the quarter was $66.5 million versus $52.7 million at the end of Q3.

On liquidity, our cash, cash equivalents, and short-term investments balance at the end of the quarter was $255.1 million, including $103.5 million in net proceeds from a recent equity offering, which we closed during our May quarter.

Cash used in operations in Q4 was $72.4 million. We continue to expect to use cash through at least the first half of fiscal year 2010 as we implement our product road map and continue our expansion. We believe, however, that we have sufficient capital to support our current operating plan and to make the necessary investments in marketing, product development, and operations to drive long-term success.

Looking ahead, we see the potential of turning cash flow positive in the second half of fiscal 2010.

Our confidence in Palm's long-term prospects, and the potential of our Web OS platform, continues to grow. Jon talked about execution and translating innovation into financial performance and we are focused on doing just that -- improving margins and carefully controlling costs while making investments to secure long-term success and improving returns to our shareholders.

With that, let me turn the call over to the Operator and Jon and I will take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mike Abramsky with RBC. Please proceed.

Mike Abramsky - RBC Capital Markets

Thanks very much. Just a housekeeping question first -- are you willing to provide the number of Pre shipped in the quarter? And it looks like the Pre GMs preliminary are fairly healthy, somewhere in the high 30s. Is that accurate or are there any other adjustments we should take into account?

Douglas C. Jeffries

No, actually, we are going to continue with our past practice, which has been not to break out specific revenue or unit volumes for individual products.

Mike Abramsky - RBC Capital Markets

And on the margins?

Douglas C. Jeffries

Same goes with the margins in terms of specific performance for the product.

Mike Abramsky - RBC Capital Markets

Okay. Jon, you talked earlier about execution of software, particularly for [inaudible] with the rollout of the way people are going to be able to access applications and your SDK. How do you see differentiating the user experience using Web 3.0 for things like that?

Jonathan J. Rubinstein

Well, one of our views is that as you get large numbers of applications, you know, discovery and finding applications that are interesting to you becomes more and more difficult, and so we hope to use much more of a community approach to solving that problem and so not to get into specifics of what we are doing, you’ll have to stay tuned for that but we are pretty excited about the things we’ve got coming in this area.

Mike Abramsky - RBC Capital Markets

And do you think that will help stimulate the interest in the platform from a development point of view?

Jonathan J. Rubinstein

You know, we have tremendous interest already. We approached this very methodically, as I said, and we started off with somewhere around 30 developers in the beginning and we got tremendous feedback from them. With their feedback, we evolved the SDK and evolved the toolset and then we let hundreds of developers into the program and that’s what we have going right now. We are feeling very good about it and so we are about to open it up to thousands. We’ve got a lot of people in the queue and so I don’t think we’ve had a real issue as of yet with interest out there.

Mike Abramsky - RBC Capital Markets

Thanks, Jon.

Operator

Your next question comes from the line of Philip Cusick with Macquarie.

Philip Cusick - Macquarie

Thanks. Just again a housekeeping question -- can you give us a handheld number rather than a smartphone breakout?

Douglas C. Jeffries

Actually, we are not providing any further data on the handheld business because --

Philip Cusick - Macquarie

I realize it’s getting pretty tiny.

Douglas C. Jeffries

Yeah, it’s actually just really de minimis at this point.

Philip Cusick - Macquarie

Okay. And then can you talk about the exclusivity that you have with Sprint in the U.S.? Is that something that it’s all Web OS devices or is that just specifically of the Pre? And can you update us on what that may be over? We’ve had some comments from other carriers as to when they may launch the device. I wonder if you could help us with that.

Jonathan J. Rubinstein

Sprint is our exclusive launch partner for the Pre. They are a great partner. They have done a phenomenal job with this launch. We are extremely happy. I personally went out to visit a bunch of the stores in the first week. The customer service was phenomenal. As you know, their data network is terrific and by using Sprint, you actually save a lot of money, something on the order of $800 to a $1000, over a two-year period.

So we couldn’t be happier -- as far as how long the exclusive goes, that’s not something that we talk about.

Philip Cusick - Macquarie

Okay. Thanks, guys.

Operator

Your next question comes from the line of Simona Jankowksi of Goldman Sachs.

Simona Jankowksi - Goldman Sachs

Thank you very much. I was just wondering if you can comment at what point you think your supply is going to be matching demand, so that some of the wait lists at the stores can diminish.

And somewhat related to that, it seemed that inventory on the balance sheet was about $20 million. If I remember correctly, ahead of the Centro launch last year you had inventories in the high 60s. So I was just wondering if that would be the level we’d expect you to exit the August quarter.

Jonathan J. Rubinstein

I’ll take the first part of that. Again, we’re approaching this very methodically. The factory is ramping really well and remember that Sprint has somewhere around 2,000 places you can go buy products and so we’ve gotten very wide distribution on the product. I know there’s been a short wait for products and we are working as quickly as we can to catch up with demand.

If demand keeps increasing, then we are going to have to chase it a bit but we are doing the best we can to ramp as quickly as possible and it’s going very smoothly.

Douglas C. Jeffries

On the question about inventory levels, at this point we’ve tried to put in place a supply chain that’s as efficient as we can make it. I think it will get better over time but we are going to do our best to kind of keep inventory levels to as low a level as possible.

Simona Jankowksi - Goldman Sachs

But in terms of what is fundamentally causing the slight mismatch right now between the supply and demand side, is the demand doing better than what you had expected or is it that yields are not coming up as high as you had expected, or are there some constraints of certain components?

Douglas C. Jeffries

You know, we work closely with Sprint to forecast demand and our idea would be to exactly match forecast with -- or demand with supply. And we have a nice situation now, at least for us, where we are a little bit short. The demand is exceeding our expectations, so we are working as hard as we can to catch up to demand.

Simona Jankowksi - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of [Deepak Thidarani] with Credit Suisse.

Deepak Thidarani - Credit Suisse

Great. Thanks very much. I guess on the last call, I think Ed had mentioned that you expect gross margins for the Pre to ramp to structural levels in very short order. I guess how has that expectation changed, if at all, given the initial supply constraints? And also Doug, the 16% to 17% gross margin that you provided, is that GAAP or pro forma?

Douglas C. Jeffries

Let me take the second question first -- the 16% to 17% is non-GAAP, so pro forma is the presentation for that.

In terms of the -- can you repeat the question again, the first question? I’m sorry.

Deepak Thidarani - Credit Suisse

Sure. I guess on the last call, I think Ed had made the comment that gross margins for the Pre should ramp up to I think structural levels in very short order, notwithstanding early yield issues and things like that. So has that expectation changed at all?

Douglas C. Jeffries

Thank you for repeating that. The expectation is unchanged at this point. As we’ve said kind of consistently along the way and we repeated again today, we look at our business on a portfolio basis in terms of products making a portfolio at different price points, different margin levels. But in the business as a whole, we’re looking to a business here that will yield a gross margin above 30% over time.

Operator

Your next question comes from the line of Richard Kramer with [ARIT].

Richard Kramer - ARIT

Thank you very much. Could you talk at all about when you might have a WCDMA version of the Pre available, and maybe talk through what you think of as the optimal range of devices?

And then maybe just to clarify something else, with the Web OS platform, would there be any thoughts or possibility of licensing it to other vendors, or is this something that you expect to remain exclusive to Palm over time. Thanks.

Douglas C. Jeffries

So to answer your first question, we’re not talking about unannounced products at this point in time. We do have a really great product pipeline which I am not going to tell you about, sorry. And as far as licensing Web OS, it’s not a religious issue for us but we have no plans at this time to even talk about it.

Richard Kramer - ARIT

Okay, thanks.

Operator

Your next question comes from the line of Vivek Arya with Banc of America.

Vivek Arya - Banc of America

Thank you. Two questions -- Doug, first one for you; can you please explain again this gross margin thing? Again, everything on a non-GAAP basis but when you look at the numbers that you actually reported, it appears that the non-GAAP gross margins on the Pre shipments are in the high 30s, but then you are saying that they would have been 16%, 17% and I just want to understand that linkage.

And for Jon, my question is that longer term, do you think you need to strengthen your balance sheet? Because as you start launching at these other domestic carriers, I assume that every carrier will need a fair bit of marketing and promotional support from Palm to help advertise these products. So I understand that you have a good balance sheet for perhaps the Sprint launch but as you start launching at other carriers, how do you think about your balance sheet and what you might need to do in terms of raising more capital, et cetera? Thank you.

Douglas C. Jeffries

On the first question, keep in mind there’s some complexities in applying the accounting for Web OS. The subscription accounting, we defer essentially the standard margin, so revenues and cost of revenues get deferred and then what’s left behind though in our cost of sales are some of the period costs that don’t get captured. So for example, the cost of our operations group to create the products.

So you get some distortion, margins that appear unusually high and that’s because you’re not getting a complete picture of gross margins when you look at just the deferral amount. You’ve got to consider the fact that our gross margins at any point in time include both the direct product costs and also some period costs.

Vivek Arya - Banc of America

So if you had included all of the costs and non-GAAP gross margins would have been 17%? Because if non-GAAP was 17%, then that means the Pre gross margins, right, incremental gross margins were below the 23% that you reported on just the Treo Pro and everything else. I’m just trying to understand -- you know, get a better sense for what are specifically normalized gross margins for your Web OS products.

Douglas C. Jeffries

Vivek, we really gave you the kind of guidance where we haven’t in terms of the [inaudible] for the gross margins, so we -- 30% is the long-term outlook. We highlighted this quarter that we had shipments of Pre and we had shipments of Pro that helped move our margins up from what we saw in Q3 but we also had lower margins on Centro as it declines, so that’s the mix in terms of the product side.

Also -- contribute to margins were a couple of adjustments we made on some of our reserves as we worked through some of the old inventories, and so that benefited margins and we tried to isolate the margins from our product line, from those adjustments. And so when you isolate those adjustments, we’re about 16% to 17%.

Teri Klein

We’ll take your second question.

Vivek Arya - Banc of America

So on the balance sheet, how do you think about the balance sheet? Do you think you have enough there to support launches with other carriers or do you think you will need to raise more money?

Jonathan J. Rubinstein

I am just going to repeat what we had in the script -- and we’ve been saying this for a while now -- we have capital available to us today on our balance sheet that is absolutely sufficient to execute our operating plan and so at this point, there are no plans to raise additional capital. But that said, if the opportunity came up for us to accelerate the business and create value, we will be open to raising capital but at this point, we have no plans in that regard.

Teri Klein

Great, thanks. Operator, we’re ready for the next question.

Operator

Your next question comes from the line of Maynard Um with UBS.

Maynard Um - UBS

Thanks. A question first for Jon -- can you just talk a little bit about your operator strategy and in particular in terms of how many operators you think you can have by year-end? And then sort of related to that, the launch costs per operator?

And then one for Doug -- can you just give us anymore color on the OpEx increase, any kind of ranges that -- I presume that revenues could potentially decrease, you know, if you are selling less Centros and less Pros in the quarter and more Pres, but -- just so that we can get a sense of what the OpEx number might increase on a sequentially basis? Thanks.

Jonathan J. Rubinstein

So as you know, we’ve launched with Sprint and we’ve announced Bell Mo up in Canada. You’ve heard a lot of interest out there and we are very flattered that lots of carriers are interested in Web OS and the Pre and we are obviously working on expanding our distribution but we have nothing to announce at this point in time.

Douglas C. Jeffries

On your second question, really no guidance to offer you in terms of OpEx as it relates to 2010. We are staying with our policy of not providing guidance. But I would offer that the company has been in this business for a while now and the business model is relatively consistent with what it was over time, so I think the reference points you have in the company’s historical results would be a good guide to use in terms of looking at 2010.

Operator

Your next question comes from the line of T. Michael Walkley with Piper Jaffray.

T. Michael Walkley - Piper Jaffray

Thank you. A couple of questions -- Doug, just on the non-GAAP tax rate, can you help us with what that was or what we are supposed to use going forward for that? And then just building on your last comment there on guidance, what is the thoughts on guidance longer term? Is it the second half of 2010 when you become cash flow positive? Is that when you might start giving quarterly guidance, when you have more than one carrier for the Pre? Or any thoughts on just how we should think about your future plans for giving guidance?

Douglas C. Jeffries

In terms of the tax rate, at this point in time we are not booking, for GAAP basis, we’re not booking a tax provision and so what you see in our GAAP results is really the cash taxes payable at a point in time, primarily from state taxes and some foreign jurisdictions. And for non-GAAP, as long as we are at a loss position, we’ll continue a consistent practice, which is to show really just cash taxes and foreign taxes [with our] cash taxes as the provision for our non-GAAP.

And our guidance, at this point, I don’t have visibility to a point in time when we would offer guidance, so I think as far as I can see at this point, our practice will stay consistent in terms of not providing specific guidance about upcoming periods.

T. Michael Walkley - Piper Jaffray

Okay, great and then just I guess another longer term question -- in terms of launching outside of the United States, would you guys need to hire resources to grow the carriers outside of North and South America? I’m just trying to think of an OpEx longer term, if you start shipping say a WCDMA version into Europe?

Jonathan J. Rubinstein

Right now we have a small team in some of the locations where we are exploring future business and -- I mean, the answer is of course we would have to ramp up support for the carriers in those regions as we bring them online.

T. Michael Walkley - Piper Jaffray

Great. Thank you very much and good luck with the launches.

Operator

Your next question comes from the line of Edward Snyder with Charter Equity Research.

Edward Snyder - Charter Equity Research

Thank you. First to clarify, a question for Doug -- I just want to be clear. Your deferred revenue is specifically Pre because you are not deferring on Pro or any of the other ones, is that correct?

Douglas C. Jeffries

Yeah, Edward, absolutely correct. It’s triggered by the Web OS product offering and really specifically our intent to continue to provide updated software over the life of the product. That’s what causes the accounting.

Edward Snyder - Charter Equity Research

Yeah, I just wanted to be sure of what we were dealing with. Okay, and then Jon, I mean, there’s been a lot of speculation with you coming back in the market with Web OS but most specifically Pre about where that would fit. I know you fielded a lot of questions about the competitive environment. It’s been said that Pre is targeted at consumers with a job. You’ve got a month of sales now at Sprint. I am very sure that you spent a lot of time looking at positioning the product before you even got going into development and you probably studied the results from Sprint’s early returns and who is buying this. What can you say about that at this point? Are you hitting your target audience or is it more of a fashion play? I’m just trying to get an idea of who you are rubbing up against in the market or if you are not, if you are hitting this kind of greenfield area that you’ve spoken about before to get an idea, and then I have a follow-up for Doug, please, thanks.

Jonathan J. Rubinstein

I think we are exactly where we hoped we would be. Remember that these are right now a lot of early adopters and you know, we don’t have a lot of data yet on all of this but one of the interesting things we are seeing is a lot of interest out of the enterprise right now, and so we are very happy with sort of how things are going right now and obviously we are going to track as, you know, the questions you have pretty carefully as we go forward.

Edward Snyder - Charter Equity Research

But more so -- when you mentioned the enterprise, more so than you had anticipated in the initial jump?

Jonathan J. Rubinstein

You know, I don’t think we can quite characterize it as we had certain objectives as far as specific numbers or anything goes, but just sort of the general feel -- there’s a lot of enterprise interest.

Edward Snyder - Charter Equity Research

Okay, and then for Doug, I mean, everybody is trying to get at obviously here how things are going with the Pre. You are going to have fits and starts at manufacturing, everybody does -- Nokia, Apple, everybody. The question I think is really on investors’ minds is you are a small company, you’ve had financial issues in the past. You’ve got a hit product, it looks like, and more importantly a hit operating system that is going to require a lot of follow-on investment. If you had to pick one thing that you were limited by, I mean, you are ramping working capital, you are going to have to ramp R&D and marketing to support other carriers. If you could, you would release all over the world instantaneously like Nokia tends to do. Can you tell me what is limiting the release of more Web OS enabled phones? Is it working capital? Is it R&D? Is it just carrier relationships? So we can kind of key on the one metric to watch to see how this channel opens up for Palm?

Douglas C. Jeffries

I guess I don’t really look at it that way. You know, what we are trying to do is approach this very methodically. We have a brand new OS, a brand new product, and brand new services and what we want to do is make sure that the customers are really happy. That’s our primary objective and we really want to delight them. And so as a company, we are approaching this methodically and working our way through, and you will see us continue the roll out of Pre and continue the roll out of future products and we’ve got this great over-the-air update mechanism, which allows us to roll out new features and fix any issues we have. You know, it’s all going according to the plan we put in place a couple of years ago and so we’re pretty happy with things.

Operator

Your next question comes from the line of Jim Suva with Citigroup.

Jim Suva - Citigroup

Thank you. A question for Doug, and then I have a question for Jon as my follow-up -- Doug, can you just help us out a little bit about when you mention second half of fiscal ’10 positive cash flow, should that also be the time when we expect earnings per share to be positive, or is there something with the math and financial model that may make that a little unique?

Douglas C. Jeffries

Yeah, Jim, great question. I think in terms of non-GAAP, I guess I want to be specific here, because if you look at our GAAP results, the impact of subscription accounting will cause us to be in a loss situation for quite a period of time. So when we talk about 2010 and the outlook for 2010, profitability on a non-GAAP basis is probably around the time that we reach cash flow break even.

Jim Suva - Citigroup

And then quickly, a clarification for when you start to turn profitable, the diluted share count base that we should use at say the stock price, you know, at these levels or what they are trading at?

Douglas C. Jeffries

Jim, probably a good number to use is right around $200 million.

Jim Suva - Citigroup

$200 million, okay. And then a question for Jon -- Jon, could you let us a little bit -- you made some comments about the SDK being widely available the end of this summer. What is the strategy or thought as far as having it come out the end of the summer as to say next week or sooner? Are you still tweaking some things or why isn’t it as widely deployable right now?

Jonathan J. Rubinstein

The answer is yes, we are still tweaking some things and primarily around the tools and the processes around that. And like I said, we wanted to get feedback from the developer community, which has worked really, really well and the developers, as you’ve probably noticed in the press and on the blogs, the developers are pretty happy with the SDK and with what they are seeing in Web OS. And so I think this is one of those things where I would much rather have really happy developers and have a very efficient process for delivering applications on the App catalog than rush this out to the marketplace.

Jim Suva - Citigroup

Okay, and is summer defined as before Labor Day or how do you think of summertime?

Jonathan J. Rubinstein

I would look it up in Wikipedia. Go on your Pre, type in summer and search on Wikipedia.

Jim Suva - Citigroup

September 21st, gotcha.

Operator

Your next question comes from the line of Jonathan Goldberg with Deutsche Bank.

Jonathan Goldberg - Deutsche Bank

Two quick questions, one housekeeping -- what is your true share count? Everything all in, all the derivatives, all the different share classes were converted, what would the share count be?

Douglas C. Jeffries

Let me get that for you and we can take your next question and come back to you.

Jonathan Goldberg - Deutsche Bank

Okay. My next question is for Jon -- we’ve already seen a lot of apps created out there for mobiles, especially -- you know, we all know the 50,000 on iPhone but when you are looking at the queue of developers who are signing up for the SDK now, are you seeing any applications that are really truly unique and are you also sort of, in a similar vein, getting interest from people who are also new to mobile? And are they getting interested because of the Web OS -- are there things in Web OS that are drawing in new applicants and new participants into the fold?

Jonathan J. Rubinstein

Well, you know, I can’t give you a good feeling for how -- all the different developers. We have a lot of really great developers that are already developing and that are in the queue.

You know, we did design Web OS to be extremely easy to develop apps for. It’s based on JavaScript, CSS, and HTML, so like I said -- if you can program a website, you can program for Web OS and people are finding that to be really true. Our SDK gives you great access to the layers down below and -- so you can do fairly sophisticated things. All of our own apps are developed in our SDK and you’ve seen a variety of apps already released that are sophisticated, such as Pandora, et cetera. And so -- I think that you are just going to have to wait and see and you are -- I think you are going to be impressed with some of the applications that get delivered on the platform.

Jonathan Goldberg - Deutsche Bank

Okay, thanks. The share count?

Douglas C. Jeffries

Yeah, back to your share question, as of the end of the quarter, we had 134 million shares outstanding.

Jonathan Goldberg - Deutsche Bank

And is that everything --

Douglas C. Jeffries

Common shares outstanding.

Teri Klein

I’m going to jump in, just because I get this question quite often and that 134 million share count is the number from the P&L, so that’s a weighted average share count from the quarter. But the 200 million shares that Doug referred to earlier is that -- that is the fully diluted share count you are looking for. That includes all the elevations, investments converted, it includes equity-based compensation and that would kick in when we were profitable.

Jonathan Goldberg - Deutsche Bank

Got it.

Operator

Your next question comes from the line of Amir Rozwadowski with Barclays Capital.

Amir Rozwadowski - Barclays Capital

Thank you very much and good afternoon. In terms of -- Doug, you had mentioned sort of longer term strategic outlook in terms of your gross margins. Have you given any thought in terms of operating margins as to where you see sort of longer term targets from that perspective that you would be willing to share with us?

Douglas C. Jeffries

At this point, no, we’re not ready to talk in terms of things below the gross margin line but it is something that we’ll get to down the road.

Amir Rozwadowski - Barclays Capital

Perfect. And then Jon, perhaps a question for you -- in terms of your carrier discussions, I mean, obviously we are not quite into a month into the new device at Sprint but I was wondering if you could talk to us a bit about the tenor of those conversations you have with other carriers at the moment? Now that the device is available and there is buzz in the marketplace, of course, and you know, they are able to get their hands on the device a bit more, I wanted to know if that has changed some of the tenor of the conversations with the carriers that you’ve been speaking to?

Douglas C. Jeffries

You know, we can’t talk about carriers specifically but there’s clearly -- you know, just read out there in the press, there’s clearly a lot of interest and like I said, we are very flattered by everyone’s interest in that.

Operator

Your next question comes from the line of James Faucette with Pacific Crest.

James Faucette - Pacific Crest Securities

Thank you very much. I wanted to, I guess, Jon, parse a comment that you made a couple of times that on the Pre that you had seen initially strong and growing demand and I just wanted to get a little bit of color as to what’s characterizing in your mind growing demand for the product, especially since it did seem to have such a strong start? Are you seeing even improving sell-through as availability improves?

And then I guess I also wanted to ask how we should think about the Windows Mobile product lineup going forward. Is that something that we should continue to expect to be refreshed? I know you are not talking specifically about products but I’m just wondering about [inaudible] the Windows Mobile platform.

Jonathan J. Rubinstein

Let me do your second one first, and that’s we’re not talking about future products. The Treo Pro we think is one of the best Win Mo 6.1 products out there. It’s -- people really, really like it and you know, it continues to sell, so we’re pretty happy with that.

And again, on the launch of the Pre, it couldn’t have gone better. We had a very successful launch and we continue to drive to meet demand on it. As far as specific numbers, we’re not going to get into that.

James Faucette - Pacific Crest Securities

Yeah, I understand but I’m just wondering in terms of your comments that you are seeing growing demand for the product, I’m just wondering kind of what your inputs are that make you feel that you are seeing growing demand because sometimes you see products launch and they peak right around their -- their interest really peaks right around the time that they launch.

Jonathan J. Rubinstein

You know, I think we’re just cranking along and I think time will tell. It’s very early in this process.

James Faucette - Pacific Crest Securities

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Paul Coster with J.P. Morgan.

Paul Coster - J.P. Morgan

Thanks. A quick question for Doug and then two quick questions for Jon -- Doug, I assume that the Pre ships very late in the quarter, so the delta between the pro forma and GAAP, we can just simply divide that by the analysts assumption around ASPs and that probably gives you the pre-unit volume?

Douglas C. Jeffries

Yeah, Paul -- as we’ve done historically here, I’m just not going to give you any specific information on a product line.

Paul Coster - J.P. Morgan

Well, I’m not asking for product information -- I’m just saying that the Pre shipped late in the quarter. Is that a correct assumption?

Douglas C. Jeffries

Correct.

Paul Coster - J.P. Morgan

Right, okay. The Centro, how should we think about this, Jon? It seems to be in decline at the moment. Presumably it’s going to be revived. What’s the nature of the revival and what kind of margins do you think it can achieve in the context of the target of over 30%?

Jonathan J. Rubinstein

You know, the Centro has been a great product. It’s getting towards the end of its life and I can’t really talk about what comes after that.

Paul Coster - J.P. Morgan

Okay, and then on the enterprise comment, does this originate from the feedback you are getting through the Sprint channel or has Palm reached out directly to the enterprise to sort of garner the [inaudible] levels there?

Douglas C. Jeffries

I would say it’s just sort of general feedback we’ve gotten.

Paul Coster - J.P. Morgan

Okay. Thank you.

Teri Klein

Thanks, Paul. Operator, we’re ready for the next question and this will be our last question.

Operator

Your next question comes from the line of Tavis McCourt with Morgan Keegan.

Justin Patterson - Morgan Keegan

Great, thanks. This is Justin Patterson on behalf of Tavis. Just to approach the App catalog from a different angle, your competitors, most notably Apple with the iPhone OS 3.0 release, haven’t really been standing still and are rolling out a lot of new features like push notifications and in-App purchases. How should we think about the App catalog going forward? Should it have some of these new features at some point in time? And what type of investments will this require? Thanks.

Jonathan J. Rubinstein

Again, we’re not going to talk about where the future products are going at this point in time and so you’ll just sort of have to stay tuned and see how it all -- when it all rolls out.

Justin Patterson - Morgan Keegan

Okay, fair enough. Thanks.

Teri Klein

Well, thanks, everyone. That concludes our Q&A session for today and we look forward to seeing you again next quarter. Take care.

Operator

We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

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 F4Q09 (Qtr End 5/29/09) Earnings Call Transcript
This Transcript
All Transcripts